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Drivers of Philippine SME Competitiveness: Results of the 2018 SME Survey
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DOI: 10.2139/ssrn.3299885
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AIM RSN PCC Working Paper 2018-03
Drivers of Philippine
SME Competitiveness
Results of the 2018 SME Survey
Drivers of Philippine SME Competitiveness:
Results of the 2018 SME survey
AIM Rizalino S. Navarro Policy Center for Competitiveness
3/F Eugenio Lopez Foundation Bldg., Joseph R.
McMicking Campus, Asian Institute of Management,
123 Paseo de Roxas, 1260 Makati City, Philippines
Telephone: +63 2 892 4011 | +63 2 403 9498
Email: policycenter@aim.edu
This report is a product of the 2018 AIM RSN PCC SME Survey project. It was written by Maribel
Daño-Luna, with inputs from Jamil Paolo Francisco and Tristan Canare. The other team members
who contributed to the report or to the survey implementation –Stephanie Rose Flores, Christopher
Ed Caboverde, Rose Ann Camille Caliso, Joshua Uel Abad, Emmanuel Garcia, and Shiela Se – are
gratefully acknowledged. For comments, please e-mail policycenter@aim.edu.
The AIM Rizalino S. Navarro Policy Center for Competitiveness would like to thank Konrad-AdenauerStiftung Philippines for funding the 2018 AIM RSN PCC SME Survey project.
The views expressed herein do not necessarily reflect the views of Asian Institute of Management.
Citation: Daño-Luna, Maribel, Tristan Canare, and Jamil Paolo Francisco (2018). “Drivers of Philippine
SME Competitiveness: Results of the 2018 SME Survey.” AIM Rizalino S. Navarro Policy Center for
Competitiveness Working Paper Series 2018-003.
Table of Contents
1
Executive Summary
7
I. Introduction and Objectives
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II. Issues, Challenges, and Drivers of SME Competitiveness
A. Concept of firm competitiveness
B. Literatures on the drivers of SME Competitiveness
C. Conceptual framework
D. SMEs in the Philippines: Issues, Challenges, and Policy Environment
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III. Methodology and Analytical Framework
A. Survey methodology
B. Analytical framework
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IV. Survey Results
A. Profile of SME respondents
B. Entrepreneur
C. Environment
D. Enterprise: Capacity to access, link, and upgrade
1. Capacity to Access
2. Capacity to Link
3. Capacity to Upgrade
85
V. Summary, Concluding Remarks, and Policy Implications
89
References
List of figures
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Figure 1. Conceptual framework
Figure 2. MSME density across the world as of 2014
Figure 3. Philippine firms, by firm size (n=915,716 firms), 2016
Figure 4. Philippine employment, by firm size (n=7,710,908 jobs), 2016
Figure 5. SMEs in the Philippines (2016) versus GRDP (2017)
Figure 6. SMEs in the Philippines and SME jobs generated, 2016
Figure 7. Share of SMEs, by industry sector, 2016
Figure 8. Share of GRDP, by industry sector, 2017
Figure 9. Sectoral distribution of SMEs, 2016
Figure 10. Respondents distribution, by location
Figure 11. Analytical framework
Figure 12. Respondents firms, by firm size
Figure 13. Respondents firms, by sector composition
Figure 14. Firm age
Figure 15. Respondents’ role in the company
Figure 16. Respondents’ skills proficiency (scores)
Figure 17. Respondents’ skills proficiency (percent)
Figure 18. Entrepreneurs’ reason for starting a business (score)
Figure 19. Entrepreneurs’ reason for starting a business (percent)
Figure 20. Entrepreneurs’ risk aversion
Figure 21. Overall obstacles (scores)
Figure 22. Overall obstacles (percent)
Figure 23. Overall enablers (scores)
Figure 24. Overall enablers (percent)
Figure 25. Share of SMEs with competitors, overall
Figure 26. Self-perception of SMEs versus main competitors (mean score),
overall
Figure 27. Self-perception of SMEs versus main competitors (percent), overall
Figure 28. If competition becomes tight such that profit and market share of your
company becomes lower, how likely will you do the following? (On a scale
of 1 to 3, 1=unlikely and 3=very likely) (mean score)
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Figure 29. If competition becomes tight such that profit and market share of your
company becomes lower, how likely will you do the following? (percent)
Figure 30. Share of SME respondents that accessed government programs
(percent), overall
Figure 31. Importance of government programs to SMEs (scores), overall
Figure 32. Importance of government programs to SMEs (percent), overall
Figure 33. To what degree are the following government regulations obstacles in
the success of your business? (scores)
Figure 34. To what degree are the following government regulations obstacles in
the success of your business? (percent)
Figure 35. Sometimes businesses are asked to give gifts, or tokens to
government officials to process necessary requirements in customs,
taxes, licenses, regulations, services, etc. (overall)
Figure 36. Businesses like yours usually have an idea how much this “informal
payment” is, (overall)
Figure 37. Share of SMEs which spent on informal payments, overall
Figure 38. Amount spent on informal payments as percentage of total annual
expenses, overall
Figure 39. Reasons for making informal payments (score), overall
Figure 40. Reasons for making informal payments (percent), overall
Figure 41. Amount set aside for future informal payments as percentage of
annual expenses, 60 respondents
Figure 42. Share of SMEs which set aside amount for future informal
payments, overall
Figure 43. Share of SMEs with women employees, overall
Figure 44. Manager’s perception of employees (score), overall
Figure 45. Manager’s perception of employees (percent), overall
Figure 46. Difficulty in finding an employee, by skill level (score), overall
Figure 47. Difficulty in finding an employee, by skill level (percent), overall
Figure 48. Access to inputs and supplies, local and abroad (percent), overall
Figure 49. Reasons for importing raw materials and inputs, 19 respondents
Figure 50. Access to markets, local and abroad, overall
Figure 51. Actively searching for new markets?
Figure 52. Barriers in terms of access to markets (score)
Figure 53. Barriers in terms of access to markets (percent)
Figure 54. Share of SMEs that applied for a loan, overall
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Figure 55. Share of SMEs that applied for a loan (percent), by size and sector
Figure 56. Purpose of loan (percent), 114 respondents
Figure 57. Purpose of loan, 114 respondents, by size (percent)
Figure 58. Sources of loan acquired (percent), 103 respondents
Figure 59. Sources of loan acquired (percent), 103 respondents, by size
Figure 60. Reasons for not borrowing, 366 respondents, scale of 1 (weakest
reason) to 5 (strongest reason)
Figure 61. Share of SMEs that use technology, overall
Figure 62. Level of usage of technology (score), overall
Figure 63. Level of usage of technology (percent), overall
Figure 64. Importance of technology in business operations (score), overall
Figure 65. Importance of technology in business operations (percent), overall
Figure 66. Sources of sales or revenues in the previous year (percent), overall
Figure 67. Share of SMEs that sell to various revenue sources in the previous
year (percent)
Figure 68. Sources of supplies and materials in the previous year (percent),
overall
Figure 69. Share of SMEs that buy supplies and materials from various sources
(percent), overall
Figure 70. Partnerships with large and foreign firms (percent), overall
Figure 71. Types of linkages by firms (percent), overall
Figure 72. Share of SME respondents currently exporting (percent), overall
Figure 73. Share of SME respondents planning to export (percent), overall
Figure 74. Motivation for exporting (score), current exporters and planning to
export
Figure 75. Motivation for exporting (percent), current exporters and planning to
export
Figure 76. Reasons for not exporting or lack of plans to export (score), overall
Figure 77. Reasons for not exporting or lack of plans to export (percent), overall
Figure 78. Share of SMEs that are members of business organizations (percent),
overall
Figure 79. Share of SMEs in terms of level of activity in organizations (percent),
overall
Figure 80. Benefits of membership in business organizations (score),
27 respondents
Figure 81. Benefits of membership in business organizations (percent),
27 respondents
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Figure 82. Share of SMEs in terms of growth of market share (percent), overall
Figure 83. Share of SMEs that added fixed assets or employees (percent),
overall
Figure 84. Share of SMEs that expanded and did not expand (percent), overall
Figure 85. Share of SMEs that engaged in expansion (percent), overall
Figure 86. Reasons for not expanding (score), 82 respondents
Figure 87. Reasons for not expanding (percent), 82 respondents
Figure 88. Sources of financing for the business expansion (percent),
398 respondents
Figure 89. How much has the business grown in the past two years (percent),
overall
Figure 90. Share of SMEs that reported a decline or increase in sales or
revenue (percent), overall
Figure 91. Share of SMEs that reported a decline or increase in profit (percent),
overall
Figure 92. Share of SMEs that expect an increase in sales or revenues in the
next two years (percent), overall
Figure 93. Share of SMEs that expect an increase in profit in the next two years
(percent), overall
Figure 94. Engaged in innovation, overall
Figure 95. Types of innovation, overall
Figure 96. Innovation activities, 425 SME respondents
Figure 97. Innovation activity by firm size, 425 SME respondents
Figure 98. Innovation activity by region, 425 SME respondents
Figure 99. Innovation activity by industry, 425 SME respondents
Figure 100. Innovation spending by firm size, 425 SME respondents
Figure 101. Plans to innovate, overall
Figure 102. Reasons for not innovating, overall
List of tables
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Table 1. Sections of the AIM RSN PCC SME Competitiveness 2018
Survey Questionnaire
Table 2. Profile of respondent firms
Table 3. Entrepreneur profile
Table 4. Average share of employees, by skill, formal education, and training
Table 5. ASEAN countries source of inputs and supplies, 19 respondents
Table 6. Non-ASEAN countries source of inputs and supplies, 19 respondents
Table 7. Access to markets outside the Philippines
Table 8. Kind or brand of software currently used in the business
Table 9. Membership in business organizations
Drivers of Philippine SME Competitiveness:
Results of the 2018 SME survey
Executive
Summary
S
mall and medium enterprises are the
backbone of the country’s economy.
While the crucial role played by SMEs
as a means towards shared prosperity
is widely recognized, governments and
business leaders continue to grapple with
how to effectively address the challenges
hampering
SME
development
and
competitiveness. In 2018, the AIM RSN PCC
conducted a survey among 480 randomlyselected SMEs from various sectors in the
Metro Manila and CALABARZON regions.
The survey instrument included questions
pertaining to factors affecting SME
competitiveness in terms of their capacity
to access, link, and upgrade as well as
entrepreneurial characteristics and the
business environment. This report presents
the findings of the study.
Our three primary objectives for the study
are the following:
1. To determine the obstacles and
enablers in day-to-day operations and
to overall success of SMEs. This includes
factors at the firm-level, immediate
business environment, and national level
(government policies, regulations, and
macroeconomic indicators).
2. To describe SME competitiveness in
terms of entrepreneurial characteristics
and firm-level capacity to access
resources, link with value chain partners,
and upgrade capabilities. This also
includes their perception on competition,
quantitative and qualitative measures of
performance, and plans for innovation and
expansion.
3. To make recommendations on policy
aimed at promoting SME competitiveness.
2
Philippine SMEs contribute significantly
to regional economic activity and provide
needed jobs, but they are concentrated in
low productivity sectors. In comparison
with the rest of the world, Philippines has a
very low MSME density of only less than 10
MSMEs per 1,000 population. Despite this,
Philippine MSMEs comprise 99.6 percent
of total firms and contribute to more than
60 percent of jobs in the country as well
as a third of Philippine Gross Value Added
(GVA). Specifically, SMEs contribute a third
of the country’s total employment. Regions
with higher economic activity also tends
to have higher number of SMEs. However,
SMEs are concentrated in less productive
sectors such as services and agriculture.
For these reasons, increasing productivity
and competitiveness of SMEs has gained
traction as an important policy focus.
Below are the key takeaways from this report
together with several policy implications:
1. Survey results show that skills and
product quality are the top enablers of
SME success, alongside opportunityseeking
entrepreneurial
mindset.
The top three overall enablers – “good
management skills of the owners and
managers”, “good employee skills”,
and “good quality of product” – are all
factors at the enterprise level. Indeed,
strengthening policies on capacitating the
owners, managers, and employees as well
as training for improving product quality
can enable SME success. In addition, as
positive entrepreneurial mindset – starting
a business for seeking opportunities – is
positively linked to expansion, training
for potential entrepreneurs can include
visioning exercises to promote more
opportunity-seeking motivations behind
entrepreneurship.
3
2. On the other hand, hostile business
environment and low product quality are
the top obstacles to SME competitiveness.
Survey respondents identified “tight
competition”, “low quality of products”
and “corruption” as the top three overall
obstacles to SME success. This suggests
that the business environment at various
levels of the economy can provide barriers
for SMEs to grow and develop. While tight
competition can lead to either positive
or negative outcomes for the business –
either SMEs become more competitive or
shrink its operation to cope and survive –
the two other obstacles are only associated
with negative outcomes. Low quality of
products prevents SMEs to access markets
which is an important factor in scalingup. Corruption, the third overall obstacle
for SMEs is the third top reason for not
exporting alongside too much bureaucracy
in government agencies regulating exports.
Strengthening government institutions
can address corruption and informal
payments, especially in areas with
low business activity or poor business
growth. Corruption flourishes because
of weak checks and balances. Curbing
this malpractice can allow resources
spent on informal payments and market
inefficiencies to be spent more productively
on SME growth and development instead.
3. On average, SMEs have access to basic
technology, inputs, and supplies. But SMEs
have limited usage of more sophisticated
technology for business (e.g. cloud-based,
digital payments, credit and debit card
transactions, and website). More efficient
use of technology, inputs, and supplies lead
to increased firm productivity. In the case of
SMEs, although they use basic technology
in their daily operations for financial,
accounting, operations, customer service,
and inventory management, majority
have limited usage of more sophisticated
technology. SME productivity can benefit
more from levelling-up their usage of more
advanced technologies such as cloudbased, digital payments, credit and debit
card transactions, and company website.
Increasing awareness on the benefits of
these technologies, even the use of social
media for business, can influence SMEs to
use these technologies to increase their
productivity.
4. Majority of SMEs do not search for
new markets and do not export. These
results suggest that the capacity of SMEs
to access resources and markets affect
its competitiveness. The results highlight
the relevance of access to finance, as this
can allow SMEs to fund its expansion and
increase its productivity. Moreover, access
to finance can also influence SMEs to
innovate and improve their product quality
allowing them better chances to compete
in local and international markets.
However, formal financial institutions face
information problems in assessing the
credit-worthiness of SMEs due to lack of
financial documents and credit history. One
way to address this is to encourage and
capacitate SMEs, especially small firms,
to maintain reliable and accurate financial
statements. This and financial literacy
training can help qualify them for formal
lending.
5. The business environment influence
SMEs inclination or aversion to export.
One of the goals for many businesses as
well as nations is to introduce and sell their
products and services offshore. Although
top reasons for not exporting are linked
to entrepreneurs being content with the
current business state and perception
of exporting as too risky, the business
environment influence SMEs propensity to
export or not. Only few SMEs export or plan
to export; and they are motivated by the
possibility of having new markets and as a
response to positive global demand for their
product or service – a reaction to a positive
development in the business environment.
On the other hand, majority of SMEs did not
export or do not plan to export at all because
of the business environment. High tariff
rates in the export market, complicated
process for exporting, corruption, much
bureaucracy in government agencies
regulating exports, and government
policies and procedures on exporting and
importing are among the top impediments
to exporting for SMEs. This suggests that
although the top reasons to not exporting
are linked to entrepreneurial mindset, the
business environment impact the decision
of owners to export or not. To encourage
more SME owners to export, it is important
for the government to streamline the
exporting procedures to encourage more
SMEs to export.
6. Although majority of SMEs hired
additional workers in the last two years,
they find it difficult to hire skilled workers.
Skill intensity of employees impact daily
business operation and productivity. In
the survey, although additional workers
were hired in the last two years, majority
of SMEs expressed difficulty in hiring
skilled managers and workers. Availability
of skilled workers and managers may
vary depending on the number of college
graduates and those who were able to
undergo technical vocational training. On
the supply side, one way to address this is
through education and training programs
to address worker skills needed in the
business which is also identified by SME
respondents as one of the most important
government programs.
4
7. SME respondents do not borrow due to
debt and risk aversion as well as perception
of “not needing it”. Majority of SMEs
that applied for a loan did so to survive
rather than to thrive. As emphasized in the
previous sections, access to finance can
propel business growth and development.
However, apart from the owner not wanting
to have debt thinking that it is too risky, one
of the reasons why SMEs do not apply for a
loan is they “did not need to borrow”. This
could suggest that SMEs may not be aware
of the benefits and proper uses of loans
such as those pertaining to expansion,
innovation, and research and development.
Although majority of SMEs engaged in
expansion, these were largely funded by
business savings; while small firms are
less likely to loan from banks to finance
their expansion. Results also show that
most of those who applied for a loan used
portion of the funds as working capital for
day-to-day operations. This points to the
mindset of using loans to survive rather
than to thrive and expand. SMEs can be
capacitated in preparing expansion plans
and business plans to be submitted to
banks as a supporting document for
loan applications. The government in
partnership with financial institutions can
increase its information dissemination
on the benefits of loans to SME owners.
Moreover, the Philippine government can
maintain a credit information registry or
a credit-scoring platform that will help
gauge the borrowing potential of SMEs.
8. Capacity to link with value chain
partners such as large and foreign firms is
a crucial driver for SME competitiveness
but is not maximized by majority of SME
respondents. While more than half of SME
respondents have large firm linkages, only a
sizeable minority has foreign firm linkages.
Only 4.4 percent of SMEs currently export
5
and only 5.6 percent of SMEs are members
of business organizations. Survey results
show that SMEs with linkages either with
large firms, foreign businesses, or both
are more likely to export. Moreover, results
show that SMEs which are members of
business organizations are more likely to
plan to export. Therefore, it is important
for policies to encourage more SMEs to
pursue the path of creating linkages with
large and foreign firms as well as joining
business
organizations.
Information
drive on the benefits of firm linkages and
memberships in business organizations
can be heightened.
9. SME respondents grew moderately
in the last two years - but their market
share remained the same. One of the
determinants of business growth is the
firm’s market share. In the survey, SME
respondents reported that they grew
moderately in the last two years - majority
acquired new fixed asset and hired additional
employees. However, their market share
remained the same; and majority of SMEs
do not search for new markets. Access to
markets, locally or abroad, is impeded by
low quality of products and services, lack
of information on potential customers and
clients, and poor quality of infrastructure.
While the first impediment can be
addressed by internal firm capacitation;
the latter two are incumbent upon
improvement in the business environment.
Improvement in infrastructure, such as
roads and telecommunications, can allow
SMEs to better connect to the market
from their production site as well as use
technologies more extensively for gaining
more information on potential customer
and client.
10. Older and medium-sized SME
respondents are more likely to respond
to tight competition in ways that are
conducive to growth compared to younger
and smaller firms. How firms respond
to tight competition can contribute to its
growth and competitiveness. Responding
to tight competition by reducing prices or
decreasing costs can be counterproductive
– the former can substantially reduce
revenues and profit while the latter can limit
product quality, innovation, and expansion.
Responses to competition that are more
conducive to growth include improving the
firm’s products and services and looking
for new markets. Survey results show that
smaller, younger, and Services firms are
more likely to respond to tight competition
by reducing prices or reducing costs and
are less likely to improve their products or
to look for new markets. Competition policy
can promote competition in industries
providing SME inputs to help SMEs survive
and thrive even during tight competition.
6
Introduction and
Objectives
G
lobally, there is a wide recognition of
small and medium enterprises’ (SMEs)
crucial role as drivers of economic
growth. Technological progress and
institutional improvements in the business
environment have made positive impact to
how SMEs do business today (World Bank,
2018). However, with this recognition is an
admission of SMEs’ vulnerability to distinct
challenges affecting their development and
competitiveness. From age-old issues such
as access to credit, inputs, and supplies, to
emerging concerns on access to technology
and inclusion in the global value chains,
SMEs face barriers to grow and further
expand. With SMEs’ potential to provide
massive jobs and investments towards
inclusive growth, it is in the interest of
countries to enable SMEs to scale up and
develop (OECD, 2018).
In the Philippines, majority (99.6%) of firms
belong to the micro, small, and medium
enterprises (MSME) sector accounting
for 63.3 percent of jobs in the country
(DTI, 2016). Comparable statistics can be
observed at the regional level with SMEs’
dominance (95%) in Asian businesses in
developing economies where they account
for more than 50 percent of employment
(ADB, 2017). The same is true for European
Union economies where SMEs comprise
99.8 percent of enterprises contributing 67
percent of total employment in the EU-28
non-financial business sector (European
Commission, 2017).
The integral role played by SMEs is evident
in its diverse economic and societal impact.
On the one hand, SMEs contribute in
maintaining the social-political stability in a
country enabling the attainment of inclusive
and sustainable national development (UN,
2017; OECD, 2017). On the other hand,
SMEs have the potential to link to large
8
and foreign firms and global value chains
effectively contributing to regional and
global development (ADB, 2017; UNCTAD,
2010).
However, despite their big number and
relevant contribution to the economy, SMEs
face challenges in its productivity, growth,
and development. In terms of productivity,
there is a more evident gap between
SMEs and large enterprises in developing
countries than industrialized countries
(ITC, 2015). For instance, while MSMEs in
the Philippines account for 63.3 percent of
employment, it only contributes 35.7 percent
of Gross Value Added (GVA), indicating
that SMEs are less productive than large
enterprises. Due to lower productivity,
SMEs pay lower wages (ITC, 2017) and in
turn negatively affect their access to skilled
labor since workers prefer jobs with higher
productivity and higher wages.
Slow growth is one of the numerous issues
faced by SMEs. Pioneering studies show
that across developed and developing
economies, most micro and small
enterprises are stagnating with only a few
able to grow to more than 20 employees
(Mead, 1994 as cited in Hampel-Milagrosa
et. al, 2014; Mead and Liedholm, 1998;
Arnold, Liedholm, Mead, and Townson,
1994). In a more recent study, the identified
major reasons to slow growth of Asian SMEs
are lack of finance, lack of comprehensive
databases, low level of R&D expenditures,
and insufficient use of technology (Yoshino
and Taghizadeh-Hesary, 2016). In the
Philippines, 40-50 percent of businesses
close (Lazo, 2015). Even business creation of
SMEs can be challenging. From 2016 to 2017,
the Philippines slipped from 99th to 113th
in overall ranking in the World Bank Ease
of Doing Business 2018 Report, specifically
ranking only 173rd in the indicator starting a
9
business. Indeed, both formal and informal
institutions of the business environment
significantly affect the development of
SMEs (Roxas, et. al, 2008) with evidence
showing the moderating effect of external
environment on market orientation and
business performance (Jabeen, Aliyu, and
Mahmood, 2017). Due to these challenges,
SME competitiveness is greatly affected
wherein they react differently to competition
- positive results point to more SMEs
innovating and improving their products
while negative outcomes include shrinking
of SMEs (OECD, 2018).
The concept of firm competitiveness has
been widely studied in the literature, but it is
only in the recent decade that the focus was
on SME competitiveness. The International
Trade Center (ITC), in its flagship report
‘SME Competitiveness Outlook 2015’,
defines SME competitiveness as driven by
the capacity of SMEs to compete, connect,
and change at various levels of the
environment (firm, immediate, and national
environment). SME competitiveness as
an enterprise-level concept refers to the
relative performance of SMEs in various
levels of the economy. Some of the
various paths in promoting productivity
and competitiveness of SMEs suggested
in literatures are: improving access to
finance (Aldaba, 2014; Falciola, Jansen,
and Rollo, 2017; Hampel-Milagrosa, 2014;
Wang, 2016); promoting entrepreneurial
orientation and managerial competence
(Falciola, Jansen, and Rollo, 2017; HampelMilagrosa, Loewe, and Reeg, 2014); scaling
up of SMEs and improving innovation (Mead,
1994; Mead and Liedholm, 1998; APEC,
2017; OECD, 2018); promoting SME linkages
with other SMEs and large and foreign firms
(Berry, 1997; Canare, Francisco, and Price,
2017; Cusolito, Safadi, and Taglioni, 2017);
and internationalization of SMEs through
linkage to global value chains (UNCTAD,
2005; ADB, 2017; Cusolito, Safadi, and
Taglioni, 2017; APEC, 2016).
Overall, restrictive business environment
and internal challenges hinder SME
growth and development resulting in low
productivity, slow growth, and difficulty
in business creation. Meanwhile, various
paths to SME growth and development in
the context of competition can have both
positive and negative outcomes. Therefore,
addressing these external and internal
constraints and supporting enabling
factors are imperative to promote SME
competitiveness.
As a contribution to the study of SME
competitiveness, the AIM RSN PCC
implemented a survey among 480 randomlyselected SMEs from different sectors
from the Metro Manila and CALABARZON
regions. The survey instrument includes
questions pertaining to factors affecting
SME competitiveness in terms of their
capacity to access, link, and upgrade. This
report aims to present the findings of this
survey.
Specifically, it has three primary objectives.
1. To determine the obstacles and
enablers in day-to-day operations and
to overall success of SMEs. This include
factors at the firm-level, immediate
business environment, and national level
(government policies, regulations, and
macroeconomic indicators).
2. To describe SME competitiveness in
terms of entrepreneurial characteristics
and firm-level capacity to access resources,
link with value chain partners, and upgrade
capabilities. This also includes their
perception on competition, quantitative and
qualitative measures of performance, and
plans for innovation and expansion.
3. To make recommendations on policy
aimed at promoting SME competitiveness.
To achieve these objectives, the report
utilizes the results of the survey. It
covered 12 cities in Metro Manila and
5 cities in Cavite, Laguna, Batangas,
Rizal, and Quezon provinces. The survey
questionnaire was developed based on a
review of earlier studies on the obstacles
and enablers of SME competitiveness; and
on the results of key informant interviews
of four SMEs in Metro Manila. Survey
results were triangulated with roundtable
discussions with relevant stakeholders and
policymakers.
The report has five sections and is arranged
as follows. The first section on introduction
and objectives is followed by the second
section on literature review on issues,
challenges, and prospects of SMEs in
the Philippines, SME policy environment,
and drivers of SME competitiveness as
well as conceptual framework. The third
section is the presentation of methodology
and analytical framework followed by the
fourth section on survey results and data
analysis. The last section presents the key
takeaways, concluding remarks, and policy
implications.
10
Issues, Challenges,
and Drivers of SME
Competitiveness
A
s small and medium enterprises’
(SMEs)
competitiveness
and
development are affected by its
internal capacity as well as external
business environment, it is important to
look at 1) concept of firm competitiveness;
2) literature on the challenges and drivers
of SME competitiveness; 3) conceptual
framework of firm-level competitiveness of
SMEs; and 4) issues and challenges of SME
competitiveness in the Philippines as well
as SME policy environment.
II. A. Concept of firm competitiveness
Emerging in the 1980s, the concept of
competitiveness was studied by Buckley,
Pass, and Prescott (1988) by examining
extant literature which reveals the difficulty
in measuring competitiveness in various
levels (country, industry, firm, and product).
The concept of competitiveness applies
differently according to the level of analysis
but may have similar measures and
indicators.
Michael Porter (1990) in his landmark book
The Competitive Advantage of Nations
developed a framework on analyzing and
understanding competitiveness. At the
country or national level, Porter (1990)
forwarded that productivity is the only
meaningful concept of competitiveness.
He expounded that the goal of nations is to
increase citizens’ standard of living through
productivity emanating from application
of labor and capital. As such, Gross
Domestic Product (GDP) per capita is one
of the measures of a nation’s productivity.
Moreover, national competitiveness is
also captured by how its human resources
determine employee wages and how
capital employed returns to its holders. At
the industry level, Porter (1990) defined
a nation’s industry as internationally
successful if it possessed competitive
12
advantages relative to the best worldwide
competitors. Moreover, McGahan and
Porter (1997) argue that industry structure
affects firm performance. Measures
of industry competitiveness, according
to Porter (1990), are the presence of
substantial and sustained exports as well
as outbound foreign investment based
on skills and assets created in the home
country. More recent study by Alexandros
and Metaxas (2016) highlights that clusters
- which are interlinked industries and other
entities (Porter, 2000 as cited by Alexandros
and Metaxas, 2016) - is a more apt unit of
analysis than industry as it is better aligned
with competition and government roles.
Nevertheless, as industry classification is
widely used instead of cluster classification,
industry competitiveness remains a
relevant unit of analysis. At the firm level,
competitive advantage is linked with acts of
innovation. Porter (1990) asserted that the
only way to sustain a competitive advantage
in a company is to upgrade it – to move
to more sophisticated types of innovation
similar to Japanese innovation. He also
cautioned that competitors will eventually
overtake a company that stops improving
and innovating. Lastly, product level
competitiveness is closely linked with firm
competitiveness where product quality,
product technology, and product safety are
regarded as a result of innovation.
Overall, the nation’s competitiveness
depends on the capacity of its industry to
innovate and upgrade, the positive effect of
competition, and the overall contribution
of a nation’s values, culture, economic
structures, institutions, and histories
to competitive success. Pioneering
study by Buckley, Pass, and Prescott
(1988) highlighted that various levels of
competitiveness – national, industry, firm,
and product – can be measured in terms
13
of performance, potential, and process
indicators. In terms of performance,
common indicators for all levels are
export market share, export growth, and
profitability. Common measures of potential
are cost competitiveness, productivity, price
competitiveness, and technology indicators.
While there are no common indicators
for process competitiveness for all levels,
most indicators are related to business
environment. Up to this day, studies like
the World Competitiveness Yearbook and
Global Competitiveness Report confirm the
role of government and policies in creating
a favorable environment for businesses
towards national competitiveness.
Although there were criticisms on the
concept of competitiveness, notably of
Krugman (1994) arguing that nations do not
compete in the same way that corporations
do and that macro-level obsession on
competitiveness can be detrimental to
domestic policies, the extant literature
review of Alexandros and Metaxas (2016)
showed that there is a wide recognition
of competitiveness as an enterprise-level
concept. Firm competitiveness, as earlier
defined in the Aldington report (1985; as
cited by Buckley et. al, 1988) is “synonymous
with a firm’s long-run profit performance
and its ability to compensate its employees
and provide superior returns to its owners”.
There are several proxies or indicators
used in measuring firm competitiveness.
Chaudhuri and Ray (1997) noted that early
streams of literature primarily focus their
inquiry on three aspects of competitiveness
– the national environment of firms
competing in global markets to explain
their competitiveness, industry challenges
and regulations affecting level and sources
of competitiveness, and the individual
firm’s strategies to identify real sources of
competitiveness. On the firm-level proxies
for competitiveness, recent studies concur
that the usual measures are related to
labor productivity, profitability, market
share, probability to export, percentage of
inputs of foreign origin, and the share of
total sales exported (Depperu and Cerrato,
2005; Lalinsky, 2013; and Falciola, Jansen,
and Rollo, 2017).
Various approaches in measuring SME
competitiveness emerged with focus on
marrying the internal firm competitiveness
with the external business environment.
For instance, empirical analysis of US
companies reveals that Industry has the most
significant effect to profitability (McGahan
and Porter, 1997). Notwithstanding the
organizational effect espoused by the
resource-based view and its influence on
an enterprise’ strategic orientation (Nasir
et. al, 2017), it would be misguided to
disconnect the influence of organization
from the industry and competitive contexts
in which firms operate (McGahan and
Porter, 1997). More recent studies on SMEs
agree with these findings indicating the
relevance of the various layers surrounding
business’ capacity to upgrade placing
higher importance to entrepreneurial
capacity (Kreeg, 2013 as cited by HampelMilagrosa, 2014) and looking at the firmlevel, immediate business environment,
and national environment’s effect to SME
competitiveness (ITC, 2015; Falciola,
Jansen, and Rollo, 2017).
II. B. Literature on the challenges and
drivers of SME competitiveness
Rich literature looks at both the internal
and external environment when looking at
challenges and drivers for SMEs growth
and competitiveness. While there have
been critique by some scholars on the
validity of accepting the existence of an
“SME issue” (Castel-Blanco, 2003) and
risks of SME internationalization (Wright,
Westhead, Ucbasaran, 2010), there is a
wide recognition in the literature of SME
development as a means to promote
shared prosperity. This section presents
the review on literature discussing the
drivers, barriers, and enablers for SME
competitiveness - enterprise capacity,
entrepreneurial orientation, and the
business environment.
Pioneering research studies (Arnold,
Leidholm, Mead, and Townson, 1994; Mead
and Liedholm, 1998; Mead 1994 as cited
in Hampel-Milagrosa, 2014) investigated
the growth of micro and small enterprises
(MSEs) and its contribution to employment.
Through panel survey, tracer studies, and
one-shot surveys, in various countries
in Africa and Latin America, it was found
out that most MSEs are stagnating in
their growth to more than 20 employees.
This led to the phenomenon known as
the “missing middle” (Krueger, 2013 as
cited in ADB, 2017) or lack of mediumsized enterprises, which are deemed to
have greater contribution to employment,
output, and exports. Recognizing the
important contribution of SMEs to social
and economic development, attention is
given to constraints and enablers of its
growth and competitiveness.
On enterprise-level capacity, in terms
of international competitiveness of a
firm, three components suggested by
Depperu and Cerrato (2005) are degree
of
internationalization,
international
economic and market performance,
and nature and sources of competitive
advantage which determines sustainability.
In a more recent study by Wang (2016) using
data on SMEs in 119 developing countries
from the World Enterprise Survey, key
determinants of competitiveness among
14
firm’s characteristics are size, age, and
growth of firms. Noting that competitiveness
is a multidimensional concept, Ambastha
and Momaya (2004) found that weakness
in understanding competitiveness at the
firm-level may be a root cause of low
competitiveness of Indian firms. This is
similar to the finding of Lalinsky (2013)
in his panel survey study on Slovak firm
competitiveness determinants where he
noted that appropriate policy measures
aiming at higher overall competitiveness
may vary depending on preferred definition
of competitiveness. Kogut and Zander
(1991), one of the early researchers on firm
competitiveness, contrasts the reasoning
that firms exist because of market
incentives but rather because of the history
of capabilities which determines what they
can do in the future.
Some literatures focus on entrepreneurial
orientation as a relevant driver of SME
competitiveness. Entrepreneurs and their
businesses are crucial in the development
and well-being of society where their
ability to seize opportunities spell out how
their businesses can contribute to national
growth (Global Entrepreneurship Monitor,
2017/18). In a three-country study by Loewe,
Kreeg, and Hampel-Milagrosa (2014), it was
concluded that the entrepreneur is the more
relevant factor, as compared to business
environment, in defining micro and small
enterprises (MSEs) upgrading in India,
Egypt, and the Philippines. Their findings
contrast with the Doing Business indicators
where they noted that even if governments
make regulatory improvements, it will
not automatically translate to upgrading
of MSEs. The success factors for MSEs
to upgrade are those with entrepreneurs
possessing
higher
human
capital,
higher motivation and risk-taking ability,
willingness to invest in human resource and
15
development, R&D, and market research,
and personal wealth or ease of access to
family finance. However, it is important to
note that the study focuses on micro and
small-sized businesses.
In a separate study by Scheepers,
Verreynne, and Meyer (2013) focusing on
entrepreneurial configuration of 320 small
firms in New Zealand, it was found that there
are three clusters of SMEs , namely, young
corporates, young simple, and mature
consolidators. Young corporates are young
formal firms with high entrepreneurial
orientation. Young simple cluster is
consisting of young informal firms with
moderate entrepreneurial orientation.
Lastly, mature consolidators are older firms
with moderate entrepreneurial orientation
and a mix of more informal and more formal
firms. Their findings show that young simple
firms would not perform well but young
corporates would. The study reveals that
early formalization of entrepreneurs (i.e.
young corporates) aligned with generative
strategy-making
and
entrepreneurial
orientation enable young firms to grow or
mature quickly. The findings of the study
are relevant consideration in looking at
how entrepreneurial orientation influence
success of firms.
The effect of business environment to SME
competitiveness is widely studied in various
literature. Business regulation can enable
new ideas of entrepreneurs (World Bank
Ease of Doing Business Report, 2018) and
can influence behavior of firms. In earlier
research on SMEs in several developing
countries by Mead and Liedholm (1998), they
concluded that the state of macroeconomy
and policies influence the birth, closure, and
expansion of micro and small enterprises.
It was also demonstrated in a study of SMEs
in Pakistan (Rabeen, Aliyu, and Mahmood,
2016) that external environment moderates
the relationship between market orientation
and business performance. This means that
strategies must be aligned with external
environmental factors for the business to
achieve higher performance. In a crosscountry comparison study by Rocha (2012),
it was found that business regulations
resulting in low entry costs, easy access
to finance, and good levels of business
sophistication and innovation predict a larger
SME sector. The regulatory environment
also impacts export performance in various
countries. The results of the International
Trade Centre’s Non-Tariff Measures
Business Survey and World Bank Exporters
Dynamic Datasets show that perceived
burdensome technical regulations in the
business environment are characterized
by a lower number of exporters, a lower
value of exports, a higher exit rate, higher
concentration rate, and higher freight
on board price (Rollo, 2016). Apart from
regulations, technological progress can
also impact SME competitiveness. Liu
(2017) used an ecosystematic approach in
examining firm competitiveness in the new
era of the Fourth Industrial Revolution (4IR).
The study utilized a systematic literature
review which shows that 4IR could impact
firms either by changing the dynamics
within its cluster such as increasing role of
research-oriented universities; or adding
new players such as cloud-based big data
providers. Thus, firm strategies and cluster
dynamics should improve productivity
but may need to do so at the cost of
employment with threat of automation.
Recognizing the age of transformation
surrounding the business environment of
SMEs, the study recommended looking at
firm competitiveness indicators under the
context of technological advancement.
II. C. Conceptual Framework
Aldington report of 1985 (as cited by Buckley
et. al, 1988) defined firm competitiveness
as the firm’s capacity “to produce products
and services of superior quality and lower
costs than its domestic and international
competitors.”
“Competitiveness
is
synonymous with a firm’s long-run profit
performance and its ability to compensate
its employees and provide superior returns
to its owners.” Similarly, Porter (1990)
described competitiveness of firms as
closely linked with innovation capabilities
which translates to improved product quality,
product safety, and product technology. He
also highlighted exporting capabilities of
a company as an important aspect in its
success. These definitions suggest that
firm competitiveness can be measured in
terms of quantitative indicators such as
costs and profitability as well as qualitative
indicators (Buckley et. al, 1988).
This report adopts the conceptual
framework developed by Buckley, Pass,
and Prescott (1988) in their pioneering
research on critical survey of measures of
competitiveness at various levels. In their
study, they emphasized that the analysis
of competitiveness differs on what level
it occurs (i.e. firm, industry, and national
level) but shares common indicators
depending on the perspective of analysis.
They noted that various scholars defined
competitiveness in terms of performance
– or the ability to perform well; potential –
generation and maintenance of competitive
advantages; and process – process of
managing decisions and processes in the
right way. They have categorized measures
of competitiveness in 3Ps and thus describe
different stages in the competitive process.
Although the framework (Figure 1) applies
to competitiveness at various levels, only
measures related to firm competitiveness
16
Figure 1. Conceptual framework
Source: Buckley, Pass, and Prescot (1988), p. 178
Figure 2. MSME density across the world as of 2014
Source: International Finance Corporation. (2014). MSME Country Indicators 2014. Accessed 21
September 2018 from https://www.smefinanceforum.org/sites/default/files/analysis%20note.pdf
17
for each category were adopted in this
report.
II. D. SMEs in the Philippines: Issues,
Challenges, and Policy Environment
1. SMEs in the Philippines. In the
Philippines, small and medium enterprises
or SMEs are defined as those businesses
with asset size of PHP 3 million to PHP 100
million and employee number of 10 to 199
(Magna Carta for SMEs or Republic Act 9501
Series of 2008). Out of the total number of
firms in the country, 99.6 percent belong to
micro, small, and medium enterprises or
MSMEs and they account for 63.3 percent
of employment (DTI, 2016). Although this
number may seem big, 2014 IFC data of
global MSMEs shows that the Philippines
has an extremely low MSME density of
only less than 10 MSMEs per 1,000 people
(Figure 2). While comparability of MSMEs
is problematic (Castel-Branco, 2003) as
there exists no single universal definition,
in general, low and middle-income
economies tend to use lower threshold
values for defining an MSME than highincome economies (IFC, 2014). As shown
in Figure 2, the MSME density in the
Philippines is extremely low as compared
to its neighboring middle-income countries
in the Southeast Asian subregion.
Nevertheless, the distribution within
the MSME sector shows that although
SMEs comprise only 10 percent of total
Philippines firms, it contributes a third
(32.9 percent) of jobs in the country. It
should be noted that 7.2 percent of jobs
from SMEs are contributed by medium
enterprises comprising only 0.4 percent of
all firms. The figures on the right show the
distribution of all Philippine firms as well
as the share of employment provided by
micro, SMEs, and large enterprises.
Figure 3. Philippine firms,
by firm size (n=915,716 firms), 2016
SMEs,
9.9%
Large,
0.4%
Micro,
89.6%
Source: Department of Trade and Industry
MSME Statistics 2016
Figure 4. Philippine employment,
by firm size (n=7,710,908 jobs), 2016
SMEs,
32.9%
Large,
36.7%
Micro,
30.4%
Source: Department of Trade and Industry
MSME Statistics 2016
18
Figure 5. SMEs in the Philippines (2016) versus GRDP (2017)
Source: DTI MSME Statistics, 2016 and Philippine Statistical Authority, 2017
Despite the significant contribution of
Philippine SMEs to job creation and
regional GDP, regions with lower economic
activity tend to have lower SMEs. It can be
noted that regions with higher economic
activity in terms of higher Gross Regional
Domestic Product or GRDP (Figure 5) have
higher number of SMEs in the region. As
more SMEs also mean more jobs generated
(Figure 6), drivers of business creation and
renewals among SMEs in all the regions
is an important focus for the government.
Figure 6 shows the distribution of SMEs in
the Philippines and the jobs they generate
by region.
SMEs tend to be concentrated in less
productive sectors such as in the agriculture
and services sectors. Majority of SMEs in
the Philippines come from the services
19
sector (79.6%) followed by industry (17.9%)
and agribusiness (2.5%) (Figure 7). While
this is consistent for all regional groupings,
the GRDP from each industry sector shows
that agriculture is least productive (Figure
8). Notably, although SMEs in the services
sector is four times more than in the industry
sector, the latter is more productive with a
higher sectoral contribution to GDP. This
merit looking at how to increase productivity
of SMEs especially in Visayas and Mindanao
where 56.1 percent of agriculture SMEs
operate (Figure 9).
Empirically probing deeper on the issues
of SMEs in the Philippines is affected by
inadequacy of relevant data. As indicated
in the Philippine Development Plan 20172022, “statistics on industry and services,
including those for MSMEs, are inadequate”
Figure 6. SMEs in the Philippines and SME jobs generated, 2016
Source: DTI MSME Statistics 2016
Note: a. n=90,973 SMEs in the Philippines; b. n=2,533,187 jobs from SMEs in the Philippines
Figure 7. Share of SMEs,
by industry sector, 2016
Figure 8. Share of GRDP,
by industry sector, 2017
Agriculture,
9.7%
Agriculture,
2.5%
Industry,
17.9%
Industry,
30.5%
Services,
79.6%
Sources: DTI MSME Statistics, 2016
and PSA, 2017
Services,
59.9%
Sources: DTI MSME Statistics, 2016
and PSA, 2017
20
Figure 9. Sectoral distribution of SMEs, 2016
Sources: DTI MSME Statistics, 2016 and PSA, 2017
(NEDA, 2017). The development plan also
notes that the government needs to “assess
the implementation of, and compliance with,
MSME laws (i.e., Go Negosyo Act, Magna
Carta for MSMEs, and the Barangay Micro
Business Enterprises Act) and determine if
and where remedial legislation is needed”.
2. Issues and Challenges of SMEs in the
Philippines. MSMEs face multitude of
challenges hindering its development and
competitiveness. The MSME Development
Plan 2017-2022 identifies the following
as major challenges to MSMEs growth
and development: 1) access to finance;
2) business environment and the cost of
doing business; 3) access to market; 4)
productivity and efficiency; and 5) impacts
of climate change and ease of undertaking
disaster recovery.
In terms of enterprise-level challenges,
access to finance, access to markets, and
issues in productivity and efficiency are
21
major concerns for Philippine MSMEs. With
regard to access to finance, although the
law mandates 10 percent lending allocation
to the sector, in general, banks tend to
prioritize larger businesses due to perceived
high risk of lending to MSMEs. Information
problem on the side of the government
limits their capacity to assess the creditworthiness of SMEs that can be rooted to
SMEs’ lack of capability to maintain financial
records. For MSME borrowers, lack of
information on the benefits of credit limits
their access to financing from traditional
financial institutions. This is also true for
MSMEs’ challenge in accessing markets
due to lack of technical knowledge from
participating in global value chains and as
such, MSMEs only contribute 25 percent to
country’s total export. MSMEs’ productivity
also suffers from low skill levels of workers
and challenge in accessing inputs and
supplies which is aggravated by inadequate
infrastructure. In addition, access to
technology is one of the challenges faced
by Philippine MSMEs (MSME Development
Plan 2011-2016) where it was noted that
despite availability, technologies are not
widely used by MSMEs to increase their
productivity and competitive advantage.
Thus, the current MSME Development Plan
2017-2022 includes in its strategic goals
the improved access to technology and
innovation of MSMEs.
In terms of environment-level challenges,
the business environment and cost of
doing business still poses obstacles
for Philippine SMEs. Although there is
recognition of substantial improvements in
streamlining business processes, several
government procedures still tend to be
repetitive, time-consuming and costly for
SMEs (MSMEDP, 2017-2022). The 2018
World Bank Doing Business Report results
show that although the Philippines have
above-average distance to frontier (DTF)
scores on getting electricity, registering
properties, and resolving insolvencies, the
overall Philippine ease of doing business
DTF score is still below the regional
average. Ease of getting credit, protecting
minority investors, and enforcing contracts
garnered the lowest distance to frontier
(DTF) scores for the Philippines, which is
30.00, 40.00, and 45.96, respectively. These
three aspects of ease of doing business in
the country scored lower DTF compared
to the regional average in East Asia and
the Pacific, which is at 57.00, 52.33, and
53.09. Moreover, World Bank Enterprise
Survey shows that top three business
obstacles for firms are the informal
sector, corruption, and access to finance.
Indeed, much is desired to be improved in
the regulatory business environment for
SMEs’ competitiveness. This is especially
important in the peculiar characteristic of
doing business in a natural disaster-prone
country like the Philippines which calls for
efficient and effective business programs.
3. SME Policy Environment in the
Philippines. Aligned with the ASEAN
Strategic Action Plan for SME Development,
the Philippine Development Plan states
that one of the ways to achieve the outcome
of improved access to production networks
is to develop “inclusive business models
and social enterprises”. With recognition
of MSMEs contribution to economic
development, one of the indicators in PDP
2017-2022 is “proportion of small-scale
industries (enterprises) in total industry
value added increased” and “number
of MSMEs participating in global value
chains increased”. At the regional level, the
Philippine Development Plan also notes the
“Small Enterprise Technology Upgrading
Program” which will be expanded to
enable more MSMEs to access government
assistance. These indicators are concretized
in the MSME Development Plan by MSMED
Council where a dedicated Bureau for SMEs
Development in DTI is part of the council. In
terms of competition, PDP 2017-2022 notes
of creating a “level playing field for MSMEs”
which will be done through (a) diminishing
anti-competitive practices; (b) reducing
barriers to entry; and (c) reducing limits to
entrepreneurship to allow micro, small and
medium enterprises to thrive. Along with
the activities and visioning exercises which
were aligned with AmBisyon Natin 2040,
other planning considerations on MSMEs
are accomplishment Report of the MSMED
Plan 2011-2016; Philippine Development
Plan 2017-2022; ASEAN Strategic Action
Plan for SME Development 2016-2025;
ASEAN 2017 MSME Development Summit:
Manila Call to Action; and APEC Strategy
for SME Development 2017-2020; and DTI’s
7 M’s of Uplifting SMEs.
22
Methodology
and analytical
framework
III. A. Survey methodology
1. Sampling technique. The AIM-RSN-PCC
SME Competitiveness Survey 2018 was
conducted to collect and analyze quantitative
and qualitative data on factors affecting
SME development and competitiveness
and other business information. Multistage
random sampling was implemented in
selecting the 480 respondents. The first
stage is selecting 12 cities in Metro Manila
and one city from each of the five provinces of
CALABARZON. In this stage, the probability
of a city being selected is proportional to the
number of SMEs in Metro Manila cities and
number of firms in CALABARZON cities.
The number of observations per region
(NCR and CALABARZON) and per sector
(Industry, Services, and Agriculture) is also
proportional to the actual number of SMEs
in these groups.
The second stage is sampling the
barangays from each of the 17 drawn
cities1. Pre-determined points in the drawn
barangays served as the starting points for
the systematic sampling of respondents. In
this systematic sampling, the enumerator
attempts to interview every third
establishment, and proceeds to the next if
the prospect firm refuses or is not qualified.
This is repeated until the target number
of respondents in the city was completed.
The proportion of Services, Industry, and
Agriculture respondents in each city follows
the actual sectoral distribution of SMEs in
the region where the city belongs.
The survey was administered in Metro
Manila and CALABARZON because these
two regions hold the lion share of SMEs
in the Philippines at 35 percent and 13
percent, respectively. Figure 10 shows the
final distribution of survey respondents.
1
For the CALABARZON cities, only población barangays were
included in the frame because there are few businesses
outside the city proper.
24
Figure 10. Respondent distribution, by location
2. Survey respondent and SME definition.
To determine if a business is qualified to be
a respondent, several qualifications were
required. Adopting the SME definition under
the Magna Carta for SMEs, 1) the asset
size should be between PHP3 million up to
PHP100 million and 2) the total number of
employees should be between 10-199. In
addition, the business should have been
operating for at least two years and should
be formally registered. Survey respondents
are owners or managers/supervisors of the
businesses handling day-to-day operations
who had been with the firm for at least two
years.
25
3. Survey questionnaire. To achieve the
primary objectives presented in the first
section, the survey questionnaire was
designed to capture information related
to the factors affecting SME development
and competitiveness and other relevant
business information. The sections on the
survey questionnaire were determined
based on earlier studies and literature.
In addition, the questionnaire was further
developed to reflect the Philippine setting
by incorporating the challenges faced by
Filipino SMEs in their daily operation which
were asked during key informant interviews
(KIIs) with four selected Filipino SMEs in
Metro Manila.
To answer the first objective, the section
on overall obstacles and enablers covers
questions at various levels whether
at the firm-level, immediate business
environment, and national government
including
government
policies
and
regulations (International Trade Centre,
2015). To address the second objective
of describing SME competitiveness, the
questionnaire covered questions related
to the SMEs’ capacity to access, link,
and upgrade as well as questions on
entrepreneurial
characteristics.
This
also includes questions asking the SME
respondents’ perception on competition
and performance, quantitative information
on the firm’s performance, and plans for
innovation and expansion. Lastly, to revisit
policy gaps and provide recommendations,
as indicated in the third objective, questions
on
government
support
programs,
regulations, as well as corruption were
included in the questionnaire. The final
survey questionnaire used in this report
has the following 16 sections categorized
according to how they address the primary
objectives of the report (Table 1).
III.B. Analytical Framework
The concept of firm competitiveness is
widely studied where both the internal and
external environment shape the capacity
of an enterprise to upgrade and be more
productive. Firm competitiveness is more
Table 1. Sections of the AIM-RSN-PCC SME Competitiveness 2018 Survey Questionnaire
Objectives addressed
Survey Question
1) Screener Questions
To describe SME competitiveness and
2) Business Information
entrepreneurial characteristics
3) Respondent Information
4) Access to Labor
5) Access to Inputs and Supplies
To describe SME competitiveness as
6) Access to Markets
driven by capacity to access
7) Access to Finance
8) Access to and Use of Technology
9) Connection to Global Value Chains and Linkages with
To describe SME competitiveness as
Large and Foreign Firms
driven by capacity to link
11) Business Networks and Organization
12) Growth and Expansion
To describe SME competitiveness as
driven by capacity to upgrade
14) Innovation
To describe SME competitiveness in
10) Competition
terms of perception, performance, and
potential;
15) Other information about the business and the owner
13) Overall Obstacles and Enablers
entrepreneurial characteristics
16) Government support, regulations, and corruption
To revisit policy gaps
To determine obstacles and enablers at
various
levels
of
the
business
environment;
Source: AIM RSN PCC SME Survey
26
Figure 11. Analytical Framework
Source: Modified framework from International Trade Centre’s SME Competitiveness Framework (2015)
complex than performance (Buckley et. al,
1988) and is a multidimensional concept
(Ambastha and Momaya, 2004; and Depperu
and Cerrato, 2005) which requires looking
at both the quantitative and qualitative
characteristics of firms.
The framework of analysis for this
report utilizes the SME Competitiveness
Framework developed by the International
Trade Centre (2015). In ITC’s annual flagship
report SME Competitiveness Outlook, SME
competitiveness is defined as driven by the
capacity of SMEs to compete, connect, and
change in various levels of the economy
– at the firm-level, immediate business
27
environment, and national government.
Although the definition is intended for
SMEs, it can also apply to the broader
umbrella of firms. The relevance of the
definition, it should be emphasized, is in its
attempt to come up with concrete indicators
on how to measure SME competitiveness. A
modified version of ITC’s Competitiveness
Framework is presented below which
frames the analysis of the survey data in
this report.
The survey analysis follows the analytical
framework (Figure 11) illustrated above
while incorporating the concepts presented
in the conceptual framework (see Figure
1). The competitiveness of the SMEs was
gauged based on factors driven by the
environment, enterprise, and entrepreneur
aspects. It should be noted that the
business environment and entrepreneurial
characteristic affect the internal enterprise
capacity. Together, these three drive
SME competitiveness in terms of their
perception on competitiveness and growth,
performance in terms of quantitative
indicators, and potential in terms of plans
to innovate, export, and form linkages.
Overall, the analytical framework takes into
consideration how the 3Es - environment,
the enterprise, and the entrepreneur drive
SME competitiveness in terms of 3Ps perception, performance, and potential.
Business environment captures the three
levels of the economy influencing the
competitiveness of SMEs at the firm-level,
immediate business environment, and
national environment. The questions on
overall obstacles and enablers as well as
on government regulations and support
were analyzed in this manner.
Entrepreneurial characteristics
also
play an important role in driving the
competitiveness of a firm. Apart from
profile of entrepreneur, the entrepreneurial
mindset and risk aversion as well as
plans for further growth, expansion, and
innovation were asked to the respondents.
Enterprise’ internal capacity as drivers
of SME competitiveness are grouped into
their internal capacity to access, link, and
upgrade. Capacity to access are further
operationalized in terms of their access
to labor, inputs and supplies, markets,
finance, and technology. Emphasizing the
importance of connectivity, the framework
identifies capacity to link with large
business, foreign firms, and global value
chains. Lastly, capacity to upgrade is
operationalized with growth and expansion
indicators as well as level of innovation.
28
Survey results
and analysis
IV.A. Profile of SME respondents
1. Respondent’s profile (firms). A total of
480 firms were surveyed. As elaborated
in the methodology section, the survey
employed multi-stage random sampling
in selecting the respondents. Thus, the
sectoral distribution (Figure 13) is not
far from the country-level data. That is,
majority of firms are from services (80.4%),
followed by industry (18.8%) and with only
four respondents under agriculture (0.8%).
Majority of those in the industry sector
are manufacturers while wholesale and
retail trade comprise most of those in the
services sector (Figure 13). Note that only
four respondents are from agriculture
sector and all are from CALABARZON.
Out of 480 respondents, 348 are from NCR
and 132 are from CALABARZON. Majority
of firms surveyed are small-sized firms
(Figure 12).
On average, respondents (Table 2) belong to
the small enterprise category with average
asset size of PHP9.0M and average total
Figure 12. Respondent firms, by firm size
Medium,
13.8%
Small,
86.3%
Source: 2018 AIM RSN PCC SME Survey
30
Figure 13. Respondent firms, by sector composition
Source: 2018 AIM RSN PCC SME Survey
employee size of 24. SMEs interviewed are
on average 13.7 years in operation; however,
age group distribution (Figure 14) shows
that more than half of the respondents are
less than 11 years in operation with 28.8
percent still in the startup stage while only
slightly more than a quarter have operated
from 11-20 years. Female-owned firms are
slightly younger in operation (11.7 years) on
average than male-owned (15.3 years). As
expected, small firms tend to be younger
(12.7 years) than medium enterprises (20
years). Majority of firms interviewed are
under sole proprietorship (64.6%) while the
rest are owned through partnership (16.7%)
and corporation (18.8%).
Figure 14. Firm age
Source: 2018 AIM RSN PCC SME Survey
31
Table 2. Profile of respondent firms
Size and other information
Average asset size
PHP 9.0 million
Average employment
24
Average age of firm
13.7
Type of ownership
Sole proprietorship
64.6%
Partnership
16.7%
Corporation
18.8%
Source: 2018 AIM RSN PCC SME Survey
company for only five years or less. Majority
are female (64.79%) and the average age of
the respondents is 39.6 years old.
On a scale of 1 to 4 where 4 is advanced
skill and 1 is no skill, the respondents
identified sales and service (3.5), operations
management (3.4), and marketing (3.4)
as the skill sets in which they are most
profficient (Figure 16). The highest shares
of respondents with advanced skills are
also in these areas (Figure 17).
2. Respondent’s profile (manager).
Majority of respondents are employed
managers (Figure 15) while the rest are
managers who are also owners or one of the
owners of the firms. Average years in their
role is more than 7 years but more than half
(54.5%) of the respondents have been in the
Figure 15. Respondent’s role in the company
Owner and Manager,
32.1%
28.5%
3.5%
Employed Manager,
67.9% 59.0%
Owner of the
business and
manages dayto-day
operations
Owner of the
business but
lets someone
else manage
daily activities
9.0%
My family owns
the business,
but I am incharge of daily
activities
I don’t own any
part of the
business, but I
am in charge of
daily activities
Source: 2018 AIM RSN PCC SME Survey
32
Figure 16. Respondents’ skills proficiency (scores)
Purchasing
3.3
Information technology
3.3
3.4
Operations management
Human resource management
3.2
Financial management and accounting
3.3
3.4
Marketing
Business planning
3.2
3.5
Sales and service
0.0
0.5
1.0
1.5
2.0
2.5
Source: 2018 AIM RSN PCC SME Survey
Figure 17. Respondents’ skills proficiency (percent)
Source: 2018 AIM RSN PCC SME Survey
33
3.0
3.5
4.0
Table 3. Entrepreneur profile
Entrepreneur information
Average age of owner or majority owner
Share of female-owned firms
Share of firms with owner or majority owner who finished at least college
How the owner/s acquired the business
Started it from scratch
Bought as a successful business
Bought as an unsuccessful business
Inherited from a family member
Spin-off from other businesses
Type of ownership
Sole proprietorship
Partnership
Corporation
51.6
44.4%
86.1%
53.3%
11.9%
4.2%
22.5%
7.9%
64.6%
16.7%
18.8%
Source: Computations using the 2018 AIM RSN PCC SME Survey data
IV. B. Entrepreneur
On average, owners or majority owners
of small and medium enterprises (SMEs)
in the survey (Table 3) are in their early
50s and educated or has a college degree
(86.1%) and less than half (44.4%) are
women. Majority are individual owners
(64.6%) while more than half started the
business from scratch.
minority (17.5%) indicated “to have more
time for family” as top motivation. The
top three reasons are answered by most
middle-aged entrepreneurs (ages 5165). This is expected since they comprise
majority of respondents. Comparison of
proportions shows that adult entrepreneurs
(36 to 50 years old) are less likely to start a
business to become rich.
Entrepreneurial motivation. The top three
motivations for owning an SME are the
following – “to be successful or rich”, “to
fulfill a dream”, and “to have more time
for family” (Figure 18). The scores where
based on a scale of 1 to 5 (1=not a reason
and 5=biggest reason),
Risk aversion. While
majority
of
entrepreneurs (61.25%) are perceived as
risk neutral (Figure 20), comparison of
proportion shows that this is more likely
for small firms than medium enterprises.
Entrepreneurs of medium enterprises are
more inclined to be risk takers.
In terms of number of respondents (Figure
19), more respondents answered the first
two as their biggest reason (37.9% and
30.2%, respectively) followed by “to be my
own boss” (28.5%) – all three related to
opportunity-seeking mindset. A sizeable
34
Figure 18. Entrepreneurs’ reason for starting a business (score)
family
To continue the family tradition
social employment
To have more time for my family
Lost a job
Not able to look for a good job
To help society
To have a good social status or prestige
ambition
To be successful or rich
To fulfill a dream
To be my own boss
Source: 2018 AIM RSN PCC SME Survey
ambition
social family employment
Figure 19. Entrepreneurs’ reason for starting a business (percent)
Lost a job
Not able to look for a good job
To continue the family tradition
To have more time for my family
To help society
To have a good social status or prestige
To be successful or rich
To fulfill a dream
To be my own boss
Source: 2018 AIM RSN PCC SME Survey
35
Figure 20. Entrepreneurs’ risk aversion
Source: 2018 AIM RSN PCC SME Survey
IV. C. Environment
The respondents were asked questions
pertaining to overall obstacles and enablers
to their daily operations and success of
the business. Questions on barriers and
enablers were related to enterprise-level,
immediate business environment, and
government-level factors. Questions on
government support, regulations, and
corruption were also asked.
1. Overall obstacles. The top three overall
obstacles (Figure 21) of SMEs in the survey
are “tight competition”, “low quality of
products”, and “corruption”. These are
obstacles at the immediate business
environment,
enterprise
level,
and
government level, respectively. Notably,
the scores for all obstacles are above 2.0
meaning that all obstacles are at least a
minor obstacle for the firms. This is based
on a scale of 1 to 4 where 1 is not an obstacle
and 4 is severe obstacle.
Highest proportion of the respondents
(Figure 22) indicated “tight competition”
(34.4%) as a severe obstacle, followed by
“low quality of products” (32.1%) and “low
quality of infrastructure such as roads,
telecommunication and internet” (30.4%).
Low quality of products as a severe obstacle
vary by firm size where it is a bigger
obstacle to medium enterprises than small
firms. Notably, more than a quarter of the
respondents indicated corruption as a
severe obstacle where medium firms are
more affected than small firms.
36
Figure 21. Overall obstacles (scores)
Source: 2018 AIM RSN PCC SME Survey
Figure 22. Overall obstacles (percent)
Source: 2018 AIM RSN PCC SME Survey
37
2. Overall enablers. The top three
overall enablers (Figure 23) are “good
management skills of the owners and
managers”, “good employee skills”, and
“good quality of product” – which are all
factors at the enterprise level. Similar to
obstacles, these enablers were scored
on a scale of 1 to 4 where 1 is not an
enabler and 4 is a very important enabler.
While majority of respondents (Figure 24)
indicate that “good management skills of
the owners and managers” (80.2%) as very
important enabler, small firms are more
inclined to report this than medium firms.
For medium firms, what matters most
is the good quality of product as a very
important enabler. An ample proportion
also indicated good employee skills (69%),
good government regulations and policies
(37.9%) and lower cost and easier business
registration and renewal (37.5%) as very
important enablers.
Figure 23. Overall enablers (scores)
Source: 2018 AIM RSN PCC SME Survey
38
Figure 24. Overall enablers (percent)
Source: 2018 AIM RSN PCC SME Survey
Figure 25. Share of SMEs with competitors, overall
Source: 2018 AIM RSN PCC SME Survey
39
3. Immediate Competition. On average,
SMEs reported that they have experienced
above medium intensity of competition
during the current year with a mean score
of 3.2 on a scale of 1 to 5; 1=very low and
5=very high. SMEs have, on average, around
five other competitors while majority
(68.5%) has five or less competitors (Figure
25).
Comparison with main competitors. SMEs
rated their competitiveness on a scale of
1 to 4 where 1 is at a disadvantage and 3
at an advantage while 4 is the answer of
those who cannot say or assess how they
compare with other main competitors. On
average, SME respondents are almost at
an advantage (Figure 26) compared to main
competitors when it comes to quality of
products and services, financial stability,
and delivery time – all three with mean
score of 2.8. SMEs are least competitive
when it comes to technology (2.6) and price
(2.4).
Majority of respondents (Figure 27)
indicated that they are at an advantage in
terms of quality of products and services
(71.3%), delivery time (67.3%), features of
products and services (67.3%), quality of
employees (67.1%), and financial stability
(59.6%).
Comparison of proportions show that small
firms are less likely to be at an advantage
with main competitors when it comes
to quality of products and services than
medium firms. Younger firms are less
competitive in technology, delivery time,
financial stability, and quality of employees
than older firms. Small firms are more
competitive in marketing and branding and
market share than medium firms.
Response to tight competition. When asked
how likely they will respond to competition
(Figure 28) on a scale of 1 to 3 (1=unlikely
and 3=very likely), the top three answers
point to improvement of product quality
Figure 26. Self-perception of SMEs versus main competitors (mean score), overall
Source: 2018 AIM RSN PCC SME Survey
40
Figure 27. Self-perception of SMEs versus main competitors (percent), overall
Source: 2018 AIM RSN PCC SME Survey
or making it more unique, increasing
marketing activity, and searching for new
markets in the Philippines – with scores
2.2, 2.2, and 2.1, respectively. These three
also have the highest share of respondents
indicating high likelihood. While all three
are positive responses, it is notable that
searching for new markets abroad scored
lower with only 1.4 or unlikely.
Reactions to tight competition vary by
firm age, size, and sector. Comparison of
proportions show that younger firms are
less inclined to improve products and more
likely to reduce prices than older firms.
To cope with competition, services sector
SMEs are more likely to reduce costs than
those in the industry sector. Small firms
are less likely to search for new markets
in the Philippines than medium firms. This
41
suggests that the younger and smaller
firms as well as those in the services sector
are more inclined to respond negatively to
competition.
4. Government support, regulations, and
corruption. Only 10 out of 480 firms (Figure
30) reported that they were able to access
one or several government programs for the
business. However, the answers were not
necessarily related to specific government
programs for SMEs (e.g. SSS, Pagibig,
PhilHealth). A roundtable discussion
(RTD) with policymakers and stakeholders
conducted by the AIM RSN PCC validated
the low participation rate of SMEs to
relevant government programs. The RTD
highlighted the need for awareness-raising
and needs assessment for SMEs.
Figure 28. If competition becomes tight such that profit and market share of
your company becomes lower, how likely will you do the following?
(On a scale of 1 to 3, 1=unlikely and 3=very likely) (mean score)
Source: 2018 AIM RSN PCC SME Survey
Figure 29. If competition becomes tight such that profit and market share of your company
becomes lower, how likely will you do the following? (percent)
Source: 2018 AIM RSN PCC SME Survey
42
Important government programs and
policies to SMEs. All respondents were
asked to rate the importance of several
government programs to SMEs, on a
scale of 1 to 4 with 4 indicating very
important and 1 indicating not important.
Top important government programs for
SMEs are competition policy, improvement
of infrastructure, intellectual property
protection, and education and training
programs to address worker skills needed
in the business (Figure 31). Mentoring
programs and tax incentives are also rated
important.
In terms of distribution, the highest
proportion of respondents (Figure 32)
indicate the following as top three
very important government programs:
education and training for workers
(41.9%), competition policy (41.5%), and
improvement of infrastructure (39.8%).
An ample proportion of the respondents
Figure 30. Share of SME respondents
that accessed government
programs (percent), overall
Source: 2018 AIM RSN PCC SME Survey
43
also indicate mentoring program and tax
incentives as very important.
Comparison of proportions show that this
vary by firm size. Tax incentives programs
are more important for small firms
than medium firms while infrastructure
programs are more important for medium
firms.
Government regulations as obstacles.
Business regulations can either restrict or
facilitate business operations, as studied
in the literature and reported in the World
Bank’s Ease of Doing Business report. In the
survey, the respondents were asked to what
degree are several government regulations
an obstacle to their business. Results
show (Figure 33) that the top government
regulation perceived as obstacle is tax
regulation. The other top perceived
obstacles are “steps or procedures in
applying for a business permit” and
“government regulations for exports and
imports”. There are differences, though,
on how small and medium firms perceive
the degree by which regulations obstruct
their business. Tax regulation is a bigger
obstacle for small than medium firms.
On the other hand, steps and procedures
in applying for a business permit is a
larger obstacle for medium enterprises.
In terms of distribution (Figure 34), the
highest proportion of respondents (24.8%)
indicate steps or procedure in applying
for a business permit as severe obstacle,
followed by tax regulations (22.9%) and
standards on product quality and features
(20.8%).
Corruption. In the overall obstacles to SME
daily operation and success, corruption
ranked third. Comparison of proportions
shows that medium enterprises tend to
view corruption more as a severe obstacle
than small firms.
Figure 31. Importance of government programs to SMEs (scores), overall
Source: 2018 AIM RSN PCC SME Survey
Figure 32. Importance of government programs to SMEs (percent), overall
Source: 2018 AIM RSN PCC SME Survey
44
Figure 33. To what degree are the following government regulations obstacles
in the success of your business? (scores)
Source: 2018 AIM RSN PCC SME Survey
Figure 34. To what degree are the following government regulations obstacles
in the success of your business? (percent)
Source: 2018 AIM RSN PCC SME Survey
45
Figure 35 and Figure 36 show the distribution
of responses when asked to rate how
much they agree or disagree with the two
statements on informal payments. The scale
is 1 to 5 with 5 indicating strong agreement
and 1 indicating strong disagreement.
The first statement (Figure 35) is about
their agreement that informal payments
to government are made by businesses in
general. The second statement (Figure 36)
is about their agreement that the amount
of informal payments are predictable.
The two statements have practically the
same distribution of answers with higher
proportion of respondents disagreeing
with both statements at 34.4 percent and
35.0 percent, respectively. Both has the
same mean score of 2.2. This suggests that
SMEs, on the average, have the same level
of agreement to the existence of corruption
and its predictability.
To reduce social desirability bias, or the
tendency to give a wrong or misleading
answer to sensitive questions, respondents
were also asked an indirect corruption
question, “On average, what percent of
total annual expenses do businesses like
this one pay in informal payments or gifts to
public officials or government agencies?”
While majority of respondents (67.3%)
did not make informal payments (Figure
37), it can be noted that 27.3 percent of
all respondents admitted that they spent
between .002 percent to 10 percent of
their total annual expenses (Figure 38)
for informal payments. This is higher than
those who agreed about the existence of
corruption and its predictability (less than
10% of respondents). Out of 131 SMEs
which spent on informal payments, 110 or
84% are small enterprises.
Figure 35. Sometimes businesses are
asked to give gifts, or tokens to government officials to process necessary requirements in customs, taxes, licenses,
regulations, services, etc. (overall)
Source: 2018 AIM RSN PCC SME Survey
Figure 36. Businesses like yours usually
have an idea how much this “informal
payment” is, (overall)
Source: 2018 AIM RSN PCC SME Survey
46
Figure 37. Share of SMEs which spent on
informal payments, overall
Source: 2018 AIM RSN PCC SME Survey
proportion of responses (Figure 40) as
either a major reason or biggest reason
(38.8%). Comparison of proportions show
that medium firms, as compared to small
enterprises, are more likely asked by the
government to pay or wanted to avoid
delays in government transactions hence
they made informal payments.
A small proportion of respondent firms
(12.5% or 60 out of 480) currently set aside
an amount for future informal payments
to government (Figure 42). On average,
this amount is 8 percent of total annual
expenses, but majority of SMEs (61.7% or
37 out of 60) set aside 7 percent or less
(Figure 41).
When probed on their reasons for making
informal payments (Figure 39), the highest
weighted score (2.9), on a scale of 1 to
5 with 5 being the biggest reason and 1
indicating not a reason, points to delays
in business transactions in government.
This reason also garnered the highest
Figure 38. Amount spent on informal payments
as percentage of total annual expenses, overall
Source: 2018 AIM RSN PCC SME Survey
47
Figure 39. Reasons for making informal payments (score), overall
Source: 2018 AIM RSN PCC SME Survey
Figure 40. Reasons for making informal payments (percent), overall
Biggest reason
Source: 2018 AIM RSN PCC SME Survey
48
Figure xx. Amount set aside for informal payments as percent of
annual expenses, overall
Figure 41. Amount set aside for future informal payments as
percentage of annual expenses, 60 respondents
100%
80%
61.7%
60%
40%
23.3%
20%
6.7%
3.3%
0%
.002-7 percent
8-15 percent
1.7%
0.03
16-23 percent 24-31 percent 32-39 percent did not indicate
Source: 2018 AIM RSN PCC SME Survey
Figure xx. Share of SMEs
which currently set aside
Figure
42. informal
Share of SMEs
which set
amount
for
payments
aside amount for future
informal payments, overall
Yes, 12.5%
IV.D. Enterprise: Capacity to access, link,
and upgrade
1. Capacity to Access
The respondents were asked questions
related to the enterprise-level capacity to
access since at the bare minimum, ability
to access resources and opportunities
influence SME competitiveness. Specifically,
questions were asked on access to labor,
inputs and supplies, markets, finance, and
technology.
1.a. Access to Labor. The average total
employee size is 24. On average, SME
respondents employ women comprising
36.7 percent of their total employees.
However, the highest proportion of SME
respondents reported that women comprise
only 25 percent or less of total employees.
(Figure 43).
No, 87.5%
Source: 2018 AIM RSN PCC SME Survey
49
On average, respondent firms’ total
employees comprise of 41.2 percent semiskilled and unskilled workers, 43.7 percent
professionals and other skilled workers,
Table 4. Average share of employees, by
skill, formal education, and training
and 15.2 percent managerial staff (Table
4). SMEs reported that less than half of
their total employees, on the average,
have finished college (40.4%) and obtained
technical-vocational education (41.1%). On
average, 40.4 percent of SME respondentts
finished college while 41.1 percent has
technical vocation education.
Employees, by skill, formal education,
and training
Mean
Semi-skilled and unskilled workers
Professionals and other skilled workers
Managerial
41.2
43.7
15.2
Source: Computation using the
2018 AIM RSN PCC SME Survey
Employed managers or managing owners
rate their perception of their employees
based on a scale of 1 to 5 (5=strongly agree;
1=strongly disagree). Figure 44 shows
that managers have a positive perception
of their employees, with all scores at
least 4.0 indicating agreement to positive
statements. Top three highest scores point
to managers agreeing that their employees
are hardworking (4.3), loyal and trustworthy
(4.2), and qualified for their jobs (4.2).
These three also received the highest share
of responses (Figure 45) from managers
strongly agreeing with these statements.
The respondents were asked on a scale of 1
to 5 (5=very easy and 1=very difficult) to rate
the level of difficulty in hiring employees.
Mean scores show (Figure 46) that it is
somewhat difficult to find employees for
the management-level (2.2) as well as
professional and skilled staff (2.6). Higher
proportion of respondents (Figure 47)
indicate management staff as the most
difficult to find compared to skilled and
unskilled workers. Results do not vary by
firm size and industry. The results suggest
Percentage of women employees
Figure 43. Share of SMEs with women employees, overall
10.9%
76-100 percent
17.9%
51-75 percent
27.3%
26-50 percent
44.0%
0-25 percent
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Source: 2018 AIM RSN PCC SME Survey
50
Figure 44. Manager’s perception of employees (score), overall
The employees stay long in the company
4.1
The employees are loyal and trustworthy
4.2
The employees are hardworking
4.3
The employees have good communication and
social skills
4.0
The employees are qualified for their jobs
4.2
0.0
1.0
2.0
3.0
4.0
5.0
Source: 2018 AIM RSN PCC SME Survey
that on the average, although majority of
SMEs hired additional workers in the last
two years, respondent firms have difficulty
with access to labor when it comes to
hiring managers, professionals, and skilled
labors but not so much with semi-skilled
and unskilled workers. It is notable that on
average, SMEs spent 10.4 percent of their
total cost to training.
Figure 45. Manager’s perception of employees (percent), overall
The employees stay long in the company
31.88
The employees are loyal and trustworthy
33.96
The employees are hardworking
40.21
The employees have good communication and
social skills
31.67
The employees are qualified for their jobs
34.79
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Strongly disagree
Disagree
Neutral
Agree
Source: 2018 AIM RSN PCC SME Survey
51
Strongly agree
Figure xx. Difficulty in finding an
employee, by skill level
Figure 46. Difficulty in finding an employee, by skill level (score), overall
5
4
3.3
3
2.6
2.2
2
1
0
Management
staff
Professional and Semi skilled and
other skilled
unskilled
workers
workers
Source: 2018 AIM RSN PCC SME Survey
Figure 47. Difficulty in finding an employee, by skill level (percent), overall
100.0
90.0
80.0
70.0
60.0
50.0
40.0
36.0
30.0
20.0
10.0
27.9
26.5
15.2
0.0
Management staff
Professional and
other skilled
workers
Very difficult
Somewhat difficult
Somewhat easy
Very easy
8.3
2.5
Semi skilled and
unskilled workers
Neutral
Source: 2018 AIM RSN PCC SME Survey
52
1.b. Access to Inputs and Supplies. As
expected, majority of respondents (Figure
48) source their inputs and supplies locally
either from within the city of business
location (96.3%) or outside the city but within
their province or Metro Manila (87.1%). Only
19 out of 480 respondents reported that
they import some of their supplies either
from ASEAN countries (1.7%) or countries
outside ASEAN (3.3%).
Table 5 and Table 6 show the countries
from which respondent firms source their
imported inputs. Out of 19 SMEs which
import supplies from outside ASEAN, nine
buy from China while the rest source from
various countries.
Reasons for importing. The 19 respondent
firms which imported raw materials and
supplies from outside the Philippines were
asked about their reason for importing
on a scale of 1 to 5 (5=biggest reason and
1=not a reason). Quality of raw materials or
inputs has the highest mean score (Figure
49) followed by on time delivery and lower
price – all with a mean score of 3.1 or higher
indicating that all three are either moderate
or almost major reasons for importing. Two
respondents specified their own answers
(both biggest reasons) that their business
imported for advance technology feature
and for availability of stocks.
Results show that only few respondents
opt to import but for the few that chose to
import, they did due to barriers such as
low quality of raw materials. This suggests
that majority of the SMEs surveyed did
not import either because they do not
face barriers with their access to inputs
and supplies in the domestic market, the
entrepreneur does not want to import, or
the business environment does not enable
Figure 48. Access to inputs and supplies local and abroad (percent), overall
100.0
96.3
87.1
80.0
60.0
40.0
17.9
20.0
0.0
In this city
In Metro
In the
Manila or Philippines
province but but outside
outside this
of Metro
city
Manila or
province
In other
In other
ASEAN countries but
countries not ASEAN
Local
Source: 2018 AIM RSN PCC SME Survey
53
3.3
1.7
Abroad
Table 5. ASEAN countries source
of inputs and supplies, 19 SME respondents
ASEAN countries
Frequency
Percent
Indonesia
Malaysia
Singapore
Thailand
Total
1
3
3
1
8
12.5%
37.5%
37.5%
12.5%
100.0%
Figure 49. Reasons for importing
raw materials and inputs,
19 SME respondents
On time delivery
3.5
Quality of raw materials
or inputs
3.8
Source: Computation using the
2018 AIM RSN PCC SME Survey
Lower price
Table 6. Non-ASEAN countries source
of inputs and supplies, 19 SME respondents
Selected
non-ASEAN countries
Canada
China
Europe
Hong Kong
Japan
Korea
USA
Australia
Taiwan
UK
Spain
Canada
Total
Frequency
Percent
1
9
1
1
2
1
4
2
1
1
1
1
25
4.0%
36.0%
4.0%
4.0%
8.0%
4.0%
16.0%
8.0%
4.0%
4.0%
4.0%
4.0%
100.0%
3.1
0.0
1.0
2.0
3.0
4.0
Source: 2018 AIM RSN PCC SME Survey
Source: Computation using the
2018 AIM RSN PCC SME Survey
them to do so. It should be noted, however,
that access to inputs and supplies as an
obstacle to business success and daily
operations has a mean score of 2.6 – rated
as the fourth largest obstacle. Moreover,
government regulations for export and
import (see Figure 32 on government
regulations as obstacles) is perceived as
the third largest obstacle among restrictive
government regulations.
54
5.0
Figure 50. Access to markets, local and abroad, overall
99.6
100.0
86.0
80.0
60.0
40.0
21.0
20.0
0.0
In this city
In Metro
In the
Manila or
Philippines
province but but outside of
outside this Metro Manila
or province
city
0.6
0.8
In other
ASEAN
countries
In other
countries but
not ASEAN
Local
Abroad
Source: 2018 AIM RSN PCC SME Survey
1.c. Access to Markets. Only 21 out of
480 respondent SMEs export to other
countries. Majority sell their products
and services locally either in the same city
(99.6%), within the same province or in
Metro Manila for firms in NCR (86%) and
within the Philippines (21%). Table 7 shows
Table 7. Access to markets
outside the Philippines
Markets outside PH
Singapore
European countries
Hong Kong
Japan
London, United Kingdom
Australia
Europe
USA
Total
the countries reached by the products and
services of the exporting SMEs that chose
to disclose their market abroad.
More than half of respondents (59.6%) are
not actively searching for new markets
(Figure 51). The top three barriers on
Figure 51. Actively searching
for new markets?
Frequency Percent
3
25.0%
2
16.7%
1
8.3%
1
8.3%
1
8.3%
1
8.3%
1
8.3%
2
16.7%
12
100.0%
Yes, 40.4%
Source: 2018 AIM RSN PCC SME Survey
No, 59.6%
Source: 2018 AIM RSN PCC SME Survey
55
Figure 52. Barriers in terms of access to markets (score)
Quality of products and services
2.5
Lack of information on potential customer or
client
2.5
Weak internet and communication facilities
2.4
Poor quality of infrastructure connecting the
market and the production site or office
2.5
Distance of market from production site or
office
2.3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Source: 2018 AIM RSN PCC SME Survey
(Figure 53), either major barrier or severe
barrier, also point to the top three barriers.
access to markets (Figure 52) are quality of
products and services, lack of information
on potential customer or client, and poor
quality of infrastructure connecting the
market and the production site or office –
all three with mean score of 2.5 based on a
scale of 1-4 (1=not a barrier and 4=severe
barrier). Higher proportion of answers
Figure 53. Barriers in terms of access to markets (percent)
Quality of products and services
25.83
27.29
Lack of information on potential customer
or client
32.71
17.71
Weak internet and communication facilities
25.42
20.63
Poor quality of infrastructure connecting
the market and the production site or office
35
Distance of market from production site or
office
28.13
0
Not a barrier
Minor barrier
17.5
15.21
10 20 30 40 50 60 70 80 90 100
Major barrier
Biggest barrier
Source: 2018 AIM RSN PCC SME Survey
56
Figure 54. Share of SMEs that
applied for a loan, overall
Yes, 24%
No, 76%
Source: 2018 AIM RSN PCC SME Survey
Figure 55. Share of SMEs that applied for a
loan (percent), by size and sector
60.0%
48.5%
50.0%
40.0%
30.0%
20.0%
19.8%
23.3%
24.1%
Industry
Services
10.0%
0.0%
Small
Medium
Asset size
Sector
Source: 2018 AIM RSN PCC SME Survey
1.d. Access to Finance. The survey contains
questions on whether the respondent
applied for a loan or not, the success of
the loan application, the source of credit,
purpose of the loan, and sufficiency of the
loan amount. Respondents who did not
apply for a loan were also asked the reason
they did not do so. Several interesting
results came out of the survey dataset.
First, only 24 percent or 114 respondents
applied for a loan in the past two years, but
this figure varies across firm size (Figure
55). The share of respondents that applied
for a loan is practically the same between
the Industry and Services sectors, but
medium firms are more than twice more
likely to apply for a loan than small firms do
(Figure 56).
The purpose of the loan is also a significant
finding. While expansion and equipment
purchase are primary reasons for taking
out a loan, 83 percent of 114 respondents
applied for a loan to be used as working
capital (Figure 57). This suggests that the
biggest reason SMEs apply for a loan is to
fund day-to-day operations rather than to
grow and expand. A larger share of small
compared to medium firms also borrow for
emergency and disaster recovery purposes
(Figure 58), suggesting that loans serve
varying purposes for SMEs of different
sizes. Particularly for small businesses,
these purposes may have nothing to do
with growth but with survival. Out of 114
respondents which applied or attempted to
apply for a loan, 103 respondent SMEs were
able to acquire a loan. And while majority of
those borrowers took out loans from banks
(Figure 59), small firms are more likely to
borrow from other sources that usually
charge higher interest rates (Figure 60).
The reason for not borrowing (among the
366 respondents that did not borrow) also
offer insights into the behavior of SMEs
57
Figure 56. Purpose of loan (percent), 114 respondents
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
74.6%
83.3%
79.8%
41.2%
30.7%
25.4%
18.4%
9.6%
To fund
As working
For R&D,
To acquire
expansion of capital (i.e. availing of
buildings
the business payment for
new
and/or land
supplies and technology,
wages)
developing
products,
and other
innovations
19.3%
To fund for Payment for
HR
import and other loans development
export
or debt
activities
12.3%
Disaster
recovery
To purchase Emergency
or upgrade
equipment
Source: 2018 AIM RSN PCC SME Survey
Figure 57. Purpose of loan, 114 respondents, by size (percent)
100.0%
90.0%
80.0%
70.0%
81.3% 81.7%
87.5%
87.5%
76.8%
72.0%
60.0%
43.9%
50.0%
40.0%
29.3%
30.0%
34.4%
34.4%
25.6% 25.0%
20.0%
8.5%
10.0%
12.5%
19.5%
15.6%
24.4%
6.3%
14.6%
6.3%
0.0%
S
M
S
M
S
M
S
M
S
M
S
M
S
M
To fund
As working For R&D,
To acquire To fund for Payment for
HR
expansion of capital (i.e. availing of
buildings import and other loans development
the business payment for
new
and/or land
export
or debt
supplies and technology,
activities
developing
wages)
products,
and other
innovations
S
M
Disaster
recovery
S
M
S
M
To purchase Emergency
or upgrade
equipment
Source: 2018 AIM RSN PCC SME Survey
58
Figure 58. Sources of loan acquired (percent), 103 respondents
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
69.9%
19.4%
Banks
22.3%
13.6%
4.9%
Other financial The business owner Family or relative of "Five-six" or loan
institutions such as
or one of the
the business owner
sharks
cooperative,
owners
or one of the
savings and loan
owners
associations, and
lending companies
Formal sources
Informal sources
Source: 2018 AIM RSN PCC SME Survey
Figure 59. Sources of loan acquired (percent), 103 respondents, by size
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
87.1
62.5
25.0
Small
Medium
Banks
Small
22.6
6.5
9.7
Medium
Small
Medium
25.0
Small
Medium
Other financial
The business owner Family or relative of
institutions such as or one of the owners the business owner or
one of the owners
cooperative, savings
and loan associations,
and lending
companies
Formal sources
Informal sources
Source: 2018 AIM RSN PCC SME Survey
59
16.1
6.9
Small
0.0
Medium
"Five-six" or loan
sharks
Figure 60. Reasons for not Borrowing, 366 respondents,
Scale of 1 (weakest reason) to 5 (strongest reason)
3.78
The owner/s do not want to have debt
3.37
Did not need to borrow
3.25
Too risky
The interest was too high
3.00
Negative perception of loan or debt
2.88
The owner fears that the business won’t be able to pay the loan
2.61
Complicated loan application process
2.53
Slow processing of loan
2.22
Lack of acceptable collateral
2.07
Did not think loan application would be approved
2.00
Applied for a loan but it was not approved
1.85
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Source: 2018 AIM RSN PCC SME Survey
toward credit (Figure 61). Two of the primary
reasons for not borrowing – ‘the owner/s
do not want to have debt’ and ‘too risky’ –
suggest risk and debt aversion. Another
primary reason – they ‘did not need to
borrow’ – could suggest lack of information
on the benefits of credit.
Figure 61. Share of SMEs
that use technology, overall
Not at all, 5.2%
Uses technology,
94.8%
Source: 2018 AIM RSN PCC SME Survey
1.e. Access to and Use of Technology.
Majority of respondent SMEs use technology
(Figure 62) either in a limited, moderate,
or extensive manner while 5.2 percent or
25 SMEs do not use any technology listed
at all. The top three uses of technology
(Figure 63) are functions related to
finance and accounting, operations, and
customer relationship and management,
with an average rating of 3.0, 3.0, and
2.8, respectively (1=not at all used and
4=extensively used). Closely following is
inventory management, which is rated 2.7.
Higher proportion of SMEs also extensively
used the top three rated technologies
(Figure 64). However, this vary when it comes
to firm size and industry sector. Compared
to medium firms, small firms are less likely
to extensively use financial and accounting
technology and in fact are more likely to not
use it at all. SMEs in the industry sector are
more likely to extensively use technologies
related to operations than those in the
services sector.
60
Figure
xx.Level
Level
Usage
of Technology
(score)
Figure 62.
of of
usage
of technology
(score), overall
Cloud-based services
Social Media Use
Company Website
Selling and Marketing using Internet
Credit/Debit Card Transactions
Digital Payment
Finance at Accounting
Operations
Customer Relationship Management
Inventory management
1.7
2.2
2.2
2.3
2.1
2.1
3.0
3.0
2.8
2.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Source: 2018 AIM RSN PCC SME Survey
Importance of technology in business
operation. On a scale of 1 to 4 (1=not
important and 4=very important), the
respondents were asked to gauge the level
of importance of technologies listed in
the survey to their company. Four out of
5 technologies garnered mean scores of
2.4-2.6 (Figure 65) suggesting that these
technologies, on average, are more than
slightly important to the business.
Use of digital process in operations, finance
and accounting is the important or very
important technology for majority of SMEs
(Figure 63) while cloud-based technology is
importannt and very important to a minority
Figure63.
xx.Level
Level
Usage
of Technology
(%), overall
Figure
of of
usage
of technology
(percent),
overall
Cloud-based services
Social Media Use
Company Website
Selling and Marketing using Internet
Credit/Debit Card Transactions
Digital Payment
Finance at Accounting
Operations
Customer Relationship Management
Inventory management
4.4
12.1
15.2
15.6
9.0
12.3
39.0
31.7
29.4
23.5
0
Not at all
10
Limited
20
30
40
Moderate
50
Extensive
Source: 2018 AIM RSN PCC SME Survey
61
60
70
80
90
100
Figure
64.xx.Importance
in business
businessoperations
operations
(score),
overall
Figure
Importanceof
oftechnology
technology in
(score),
overall
Cloud-based services (e.g. cloud computing, storage)
1.9
Social media use
2.4
Company website
2.4
Selling and marketing using the internet
2.5
Use of digital process in operations, finance and …
2.6
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Source: 2018 AIM RSN PCC SME Survey
of SMEs. These results mirror the SMEs’
level of technology use, where cloud-based
technologies are also not extensively used,
while finance, accounting, and operations
use is highest (previous Figure 61). It should
be noted that the use of digital process in
operations, finance, and accounting are
less important to small firms than medium
firms.
can’t recall the technology they use in the
business. For those who answered what
kind or brand of technology is currently
used by the business, majority (64.1%)
currently use point of sale hardware or
software while less than 30 percent use
Microsoft software. Notably, 14 SMEs use
Systems Applications in Products (SAP),
which is a more sophisticated technology,
in their business; and is more likely used
by older SMEs operating for more than 20
years.
Brand of software used by SMEs are listed
in the table below (Table 8). It should be
noted that 136 of all respondents (28.3%)
refused to answer while three respondents
Figure xx. Importance of technology in business operations
Figure 65. Importance of technology
in business operations (percent), overall
(percent)
Cloud-based services (e.g. cloud computing,
storage)
24.0
Social media use
27.3
Company website
28.5
Selling and marketing using the internet
41.3
Use of digital process in operations, finance and
accounting
42.3
5.4
15.4
19.0
15.6
21.0
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
Not Important
Slightly Important
Important
Very Important
Source: 2018 AIM RSN PCC SME Survey
62
Table 8. Kind or brand of software currently used in the business
Category
Computer or
laptop
Microsoft software
Point of sale (POS)
hardware and
software
Systems
Applications in
Products (SAP)
Others
Specific brand or type
ASUS
Computer only
MS Excel
MS Office
MS Word
POS
Jimac
Electronic Cash Register
Count
1
1
4
97
1
221
1
1
Percent
SAP
14
4.0%
Calculator/Bundy Clock
Oracle
Quickbooks
Auto Cad
Payroll System
Sketch App
Cord Draw
Total
1
1
1
1
1
1
1
348
0.6%
29.3%
64.1%
2.0%
100.0%
Source: Computations using the 2018 AIM RSN PCC SME Survey
2. Capacity to Link
The relatively smaller size of small
and medium enterprises (SMEs) poses
disadvantages to their productivity and
growth. A recent strand of literature points
to linkages of SMEs as one path towards
competitiveness. There are several types of
linkages identified in the literature and three
of them are forward linkages, backward
linkages, and formal partnerships such
as outsourcing, sub-contracting, being
licensed to manufacture or distribute a
product, joint venture, strategic alliance,
and consortium. Some of the benefits
of these linkages is the opportunity for
SMEs to expand their market, directly
and/or indirectly participate in the global
value chains, and information/technology
transfer.
To gauge the respondents’ capacity to
63
link, questions were asked on SMEs’
relationships and engagements with large
and foreign firms as well as with fellow
SMEs. In addition, their connection to
global value chains and membership in
business networks and organizations were
also probed.
2.a. Connection to Global Value Chains
and Linkages with Large and Foreign
Firms. SMEs were asked to identify what
percentage of their total sales and revenues
come from various sources. On average,
retail sales or sales from the general
public (62%) is the top source of sales and
revenues for SMEs surveyed (Figure 67).
This is expected since more than 80 percent
of SMEs surveyed are from the services
sector. Other sources of sale and revenues
are sales to other Philippine SMEs (16.5%)
and to large firms (14.7%); while the rest
are from sales to government (4.6%), export
(1.7%), and others (0.5%).
As presented in Figure 68, all SME
respondents sell to domestic large firms
while majority sell to the general public
(95.6%) and to other Philippine SMEs
(68.3%)) and less than half (40%) are
suppliers to government agencies. This
suggests that although all SMEs sell to
domestic large firms, this only contributes
14.7 percent of sales or revenues and
thus can still be increased. Moreover,
domestics SMEs tend to buy more from
SME respondents compared to large firms.
Although only 21 SME respondents are
current exporters, 26 SMEs reported to have
portion of their sales and revenues coming
from exports the previous year. This means
that five SMEs were former exporters and
are currently not exporting.
Comparison of proportions show that small
firms and those in the Industry sector are
more likely to be suppliers to domestic
large firms than medium firms and those
in the Services sector.
SME respondents were also asked to
indicate how many percent of their total
supplies and materials come from various
sources. On average, a large portion of
SMEs’ supplies and materials (Figure 66)
Figure 66. Sources of sales or revenues in the previous year (percent), overall
Others (Enrollment
fees; Individual;
Occasional events),
0.5 %
Sales to government
agencies, 4.6 %
Export, 1.7%
Sales to SMEs (PH),
16.5%
Sales to large firms
(PH), 14.7%
Retail sales or sales
(general public),
62.0%
Source: 2018 AIM RSN PCC SME Survey
64
Figure 67. Share of SMEs that sell to various revenue sources
in the previous year (percent), overall
95.6%
100%
100.0%
80%
68.3%
60%
40.0%
40%
20%
5.4%
0.6%
0%
Export
Retail sales
Sales to
or sales
large firms
(general
(PH)
public)
Sales to
Sales to
Others
SMEs (PH) government (Enrollment
agencies
fees;
Inidvidual;
Occasional
events)
Source: 2018 AIM RSN PCC SME Survey
Figure 68. Sources of supplies and materials in the previous year (percent), overall
Others, 1.4%
Imports, 9.7%
Domestic large
firms, 42.0 %
Domestic SMEs,
46.9%
Source: 2018 AIM RSN PCC SME Survey
65
come from domestic SMEs (46.9%) and
domestic large firms (42%) followed by
imports (9.7%) while others (1.4%) are
sourced from specified sources such as
private individuals, condo rental, and
existing materials.
In terms of shares of SMEs, majority of
SME respondents source their supplies
and materials (Figure 70) from domestic
SMEs (90.2%). Also, 73.3 percent of all
SME respondents get their supplies and
materials from domestic large firms while
more than a quarter (27.9%) import some
of their supplies and materials from other
countries. Comparison by firm size shows
that small firms are less likely to import
than medium firms.
SME respondents were also asked to
identify one or several types of linkages
with domestic large firms and foreign firms.
Overall, higher proportion of SMEs (Figure
71)are sub-contracted or outsourced by
large businesses in the Philippines (42.9%)
while almost 30 percent of all respondents
are licensed by domestic large firms to
manufacture or distribute products. Out of
all respondents, 15.8 percent of SMEs are
subcontracted or outsourced by foreign
firms.
Overall, 53.8 percent of SMEs (Figure 72)
have one or several types of partnerships
and/or linkages with domestic large firms
while only 22.5 percent (108 out of 480)
have linkages with foreign firms. A sizeable
minority (102 out of 480) has linkages with
both domestic large firms and foreign
firms.
Share of
SMEs that
Figure xx.
identified supplies and materials in
Figure 69. Share of SMEs that buy supplies and materials
the previous year (% of total
from various sources (percent), overall
expenses), overall
100%
90.2%
80%
73.3%
60%
40%
27.9%
20%
2.5%
0%
Imports
Domestic Domestic
large firms SMEs
Others
Source: 2018 AIM RSN PCC SME Survey
66
with domestic
large firms
with foreign firms
Figure 70. Partnerships with large and foreign firms (percent), overall
Figure xx. Partnerships with large and foreign firms (%), overall
Part of a joint venture, strategic alliance, or
consortium with a multinational or foreign company
6.5%
Licensed by foreign businesses as manufacturer or
distributor of products
7.7%
Sub-contracted or outsourced by foreign companies
15.8%
Part of a joint venture, strategic alliance, or
consortium with a large business here in the …
16.7%
Licensed by large businesses here in the
Philippines to manufacture or distribute products
29.8%
Sub-contracted or outsourced by large businesses
here in the Philippines
42.9%
0.0%
20.0%
40.0%
60.0%
Source: 2018 AIM RSN PCC SME Survey
Figure
xx. of
Types
of by
linkages
by firms
Figure
71. Types
linkages
firms (percent),
overall
(%), overall
100%
80%
60%
40%
20%
53.8%
22.5%
21.3%
0%
with one or
with one or
several
several
linkages with linkages with
domestic large foreign firms
firms
both with
linkages with
large and
foreign firms
Source: 2018 AIM RSN PCC SME Survey
67
80.0%
100.0%
Comparison of proportions show that
SMEs with linkages with either large firms,
foreign firms, or both are more likely to
export than SMEs with no linkages. Firms
ten years or younger are less inclined to
export than older firms. Comparison of
firm size shows that small firms are less
likely to have linkages with foreign firms
compared to medium firms.
SMEs currently exporting. Only 21 out
of 480 respondents (4.4%) are currently
exporting (Figure 73) while only 6.3 percent
(30 out of 480 respondents) plan to export
in the next two years (Figure 74). It should
be noted that out of the 459 SMEs who are
not current exporters, only eight SMEs are
planning to export in the future.
Motivation of those who export or planning
to export. The 30 firms, which are either
currently exporting or are planning to export
in the next two years, were asked about
their motivation. All motivations listed in the
questionnaire were rated important. The
top motivations (Figure 75) are response
to growing global demand for their product
or service and to have new markets, which
both garnered the same score of 3.4 (on a
scale of 1 to 4; 1=not important and 4=very
important). The former is related to a
reaction to a positive development in the
market while the latter is a more proactive
motivation behind exporting. The other two
motivations, “to search for new markets
because the domestic market is small”
and “higher revenues” were also rated
important (3.2).
Figure 72. Share of SME respondents
currently exporting (percent), overall
Yes, 4.4%
No, 95.6%
Source: 2018 AIM RSN PCC SME Survey
Figure 73. Share of SME respondents
planning to export (percent), overall
Yes, 6.3%
No, 93.8%
Source: 2018 AIM RSN PCC SME Survey
In terms of distribution (Figure 76), 15 out
of 30 firms (either exporting or planning
to export) are highly motivated to export
“to have new markets” (50%) and as a
68
Figure xx. Motivations for exporting, current exporters and
planning
to export
(score)
Figure 74. Motivation for exporting
(score),
current
exporters and planning to export
To search for new markets because the
domestic market is small
3.2
To have new markets
3.4
Response to growing global demand for my
product or service
3.4
Higher revenues
3.2
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Source: 2018 AIM RSN PCC SME Survey
response to growing global demand from
their product or service (50%).Notably,
an ample proportion of the respondents
(43.3%) are exporting or planning to export
to search for new markets because the
domestic market is small. This suggests
that a sizeable proportion of the SME
respondents are exporting out of necessity
than opportunity. Moreover, only more
than a quarter of the respondents (26.7%)
engaged or plans to engage in exporting
to have higher revenues, which is a more
assertive motivation behind exporting.
Figure xx. Motivations for exporting, current exporters
Figure 75. Motivation for exporting
(percent),tocurrent
exporters and planning to export
and planning
export (%)
To search for new markets because the
domestic market is small
43.3
To have new markets
50.0
Response to growing global demand for
my product or service
50.0
Higher revenues
26.7
0
Not Important
Slightly important
20
40
Important
Source: 2018 AIM RSN PCC SME Survey
69
60
80
Very Important
100
Reasons why SMEs do not export (or plan
to export). All the respondents were asked
about their opinion on the reason why
some SMEs do not export or plan to export
(Figure 77). Based on a scale of 1 to 5
(1=not a reason; 5=biggest reason), the top
reasons for not exporting or even planning
to export are related to the entrepreneur
and the business environment, specifically
the government. The owner or manager
being content at the current state of the
business (3.6) is the top ranked reason
for not exporting followed by risk aversion
(3.4). This is closely followed by high tariff
rates for the export market, also rated with
a score of 3.4. The next two reasons, also
related to the environment, with a score
of 3.2 point to government regulations
on complicated process for exporting
and corruption and bureaucracy. At the
enterprise level, the top reason is related
to insufficient or difficult access to finance.
Highest number of SME respondents
(Figure 78) also identified the same top three
reasons for not exporting – high tariff rates
for the export market (28.3%), the owner or
manager is already content with how the
business is doing (27.3%) and perception
that exporting is “too risky” (25.8%). Other
biggest reasons identified by higher number
of respondents are at the enterprise level
related to access to market, product quality,
and access to finance. Comparison of
proportions show that entrepreneurs who
started their business to seek opportunity
Figure 76. Reasons for not exporting or lack of plans to export (score), overall
Figure xx. Reasons for not exporting or lack of plans to export (score), overall
Entrepre
neur
Environment
Lack of competitiveness in sector or industry where …
Low quality of infrastructure (e.g. roads, …
2.70
Foreign currency fluctuations
3.00
3.16
Corruption and too much bureaucracy in government …
3.25
Complicated process for exporting
High tariff rates for the export market
3.42
Too risky
3.45
3.57
The owner or manager is content at the current state of …
Unsuccessful experiences or attempts in exporting
Enterprise
2.63
2.26
Lack of information about customers abroad, such as …
2.86
The business does not have internationally recognized …
2.88
Unable to meet high quality standards for export products
2.98
Access to raw materials and input
2.84
Lack of or difficult access to neeeded technology
2.93
3.04
Insufficient or difficult access to financial resources
No market for products or services abroad
2.91
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
Source: 2018 AIM RSN PCC SME Survey
70
Figure xx. Reasons for not exporting or lack of plans to
export (%), overall
Figure 77. Reasons for not exporting or lack of plans to export (percent), overall
Entrepre
neur
Environment
Lack of competitiveness in sector or …
3.1
Low quality of infrastructure (e.g. roads, …
6.9
Foreign currency fluctuations
9.6
Corruption and too much bureaucracy in…
14.8
Complicated process for exporting
12.5
High tariff rates for the export market
28.3
Too risky
25.8
27.3
The owner or manager is content at the …
Unsuccessful experiences or attempts in…
3.8
Enterprise
Lack of information about customers …
7.9
The business does not have …
15.0
Unable to meet high quality standards for …
17.7
Access to raw materials and input
7.1
Lack of or difficult access to neeeded …
9.2
Insufficient or difficult access to financial …
17.5
21.3
No market for products or services abroad
0 10 20 30 40 50 60 70 80 90 100
Not a reason
Minor reason
Moderate reason
Major reason
Bigest reason
Source: 2018 AIM RSN PCC SME Survey
are more inclined to expand their business
than those who began their businesses
because of other reasons.
71
2.b. Business Networks and Organizations.
Another aspect of SMEs’ capacity to link
is their membership or participation in
business networks and organizations. In
the survey, only 27 out of 480 respondents
are members of business organizations
(Figure 79). Table 9 shows the business
organizations where eight out of 27 SME
respondents are a member of industry
sector-related organizations. However,
only 12 out of 27 SMEs (44.4%) are active
while the other 12 are neutral and the rest
are not active (Figure 80).
The 27 respondents who are members of
business organizations were asked about
the benefits of their membership to the
organizations on a scale of 1 to 5 where 1
is not beneficial and 5 is very beneficial.
The top three benefits in terms of mean
score (Figure 81) are getting “good advice
from other organization members”
(3.8), “increased access to supplies and
inputs”, and “better access to pricing and
market information” (3.5). Higher share
of respondents (Figure 82) also indicated
the same top benefits as very beneficial
where 10 out of 27 respondents indicated
getting good advice from other business
organizations as very beneficial.
Figure 78. Share of SMEs that are members of
business organizations (percent), overall
Yes, 5.6%
No, 94.4%
Source: 2018 AIM RSN PCC SME Survey
Figure 79. Share of SMEs in terms of level
of activity in organizations (percent), overall
Not active,
11.1%
Active,
44.4%
Neutral,
44.4%
Source: 2018 AIM RSN PCC SME Survey
Table 9. Membership in business organizations
Category
Education
Industry sector
Professional organizations
Youth entrepreneurs
Others
No response/can't remember
Total
Frequency
4
8
3
6
2
4
27
Percent
14.8%
29.6%
11.1%
22.2%
7.4%
14.8%
100.0%
Source: 2018 AIM RSN PCC SME Survey
72
Figure xx. Benefits of membership in business orgs (score), 27 respondents
Figure 80. Benefits of membership in business organizations (score), 27 respondents
Better access to pricing and market information
3.5
Good advice from other organization members
3.8
Increased access to supplies and inputs
3.6
Increased access to markets
3.4
Increased bargaining power over suppliers
2.9
Increased bargaining power over buyers
3.0
0.0
1.0
2.0
3.0
4.0
5.0
Source: 2018 AIM RSN PCC SME Survey
Figure xx. Benefits of membership in business orgs (%),
Figure 81. Benefits of membership in
organizations (percent), 27 respondents
27business
respondents
Better access to pricing and market
information
25.9
Good advice from other organization members
37.0
Increased access to supplies and inputs
25.9
Increased access to markets
18.5
Increased bargaining power over suppliers
14.8
Increased bargaining power over buyers
11.1
0.0
Not beneficial
Slightly beneficial
20.0
Moderately
40.0
Beneficial
60.0
80.0
100.0
Very beneficial
Source: 2018 AIM RSN PCC SME Survey
3. Capacity to Upgrade
Another aspect of enterprise capacity
relevant for SME competitiveness is the
capacity to upgrade. In literatures which
studied small and medium enterprises
development (Mead and Liedholm, 1998;
and Hampel-Milagrosa, Loewe, and Reeg,
2014), upgrading is not confined to growth
and expansion but as well as innovation.
Firm upgrading can be an increase in
productivity, income or number of paid
73
workers, change from informal to formal,
or implementation of firm-level innovations
(Hampel-Milagrosa et. al, 2014).
Figure xx. Share of SMEs in terms of
ofinmarket
share
(%),share
overall
Figure 82. growth
Share of SMEs
terms of growth
of market
(percent), overall
Decreased, 7.3%
Remained the same,
51.9%
Increased, 40.8%
Source: 2018 AIM RSN PCC SME Survey
3.a. Growth and Expansion. To gauge
the SME respondent’s capacity to grow
and expand, questions were asked on
growth in terms of market share, number
of additional employees, reasons for
expansion, and sources for financing
expansion. The respondents’ perceptions
were also inquired in terms of their level of
growth as well as quantitative indicators of
growth.
Figure xx. Shares of SMEs that added
Figure 83. Share of SMEs that added fixed assets
fixed
assets or
employees
(%),
of employees
(percent),
overall
overall
100.0
80.0
60.0
64.2
69.6
40.0
20.0
0.0
Acquired new
equipment or fixed
assets
Hired additional
employees
Source: 2018 AIM RSN PCC SME Survey
Overall, slightly more than half (51.9%) of
SMEs indicated that their market share
(Figure 83) remained the same in the past
two years while an ample proportion (40.8%)
said that their market share increased. It
should be noted, however, that 38.8 percent
of all respondents indicated “somewhat
increased” market share while only 2.1
percent indicated “largely increased”.
However, this varies by firm size where
small firms are less likely to have increased
their market share in the past two years
than medium enterprises. In terms of firm
age, SMEs in operation for six to 10 years
are more likely to have increased in market
share for the past two years as compared
to others.
Majority of SMEs acquired new equipment
or fixed assets (64.2%) and hired additional
employees (69.6%) in the last two years
(Figure 84). Comparison of proportions
show that medium firms have been more
inclined to acquire new assets in the last
two years than small enterprises.
74
Expansion activities. Out
of
480
respondents, 398 SMEs (82.2%) engaged
in expansion in one or several ways for
the last two years (Figure 85). Majority of
respondents engaged in expansion (Figure
86) by increasing their volume of production
while more than half sold additional
products (58.75%) and sold to additional
markets (51.04%). Less than a quarter of
the SME respondents opened additional
office or production site.
For the 82 SMEs that did not expand in one
or several ways, the reason (Figure 87) was
probed on a scale of 1 to 5; 1=not a reason
and 5=biggest reason. The three biggest
reasons for not expanding are all related to
the entrepreneur where the owner does not
want to lose full control over the quality of
the products and services (3.4), the owner
does not want to lose direct control over all
aspects of the business (3.1), and the owner is
content with the current state of operations
of the business (3.1). This suggests that
entrepreneurial characteristic is one of
the biggest determinants of expansion.
However, also notable is the next reason
that market for products and services are
not growing (2.8) which is related to the
immediate environment.
Figure
xx. Share
SMEs
that
Figure
84. Share
of SMEsof
that
expanded
expand
did(percent),
not expand
(%),
and
did notand
expand
overall
overall
Did not expand,
17.1%
Expand, 82.9%
Source: 2018 AIM RSN PCC SME Survey
75
Figure 85. Share of SMEs that engaged
Figure xx. Expansion activities (%),
in expansion (percent), overall
overall
100
80
60
73.96
58.75
40
51.04
23.33
20
0
Increased
Sold
the volume additional
of
products
production
Sold to
Opened
additional additional
local
office or
markets production
sites
Source: 2018 AIM RSN PCC SME Survey
Figure 88 shows the distribution of the
answer of the 82 respondents about their
reasons for not expanding. The highest
proportion of answers on the biggest reason
point to the perception that expansion
is “too risky” (23 out of 82 or 28.1%). The
other two reasons which garnered around
a quarter of responses are related to the
owner not wanting to lose full control
over quality of products and services (22
out of 82 or 26.8%) and being content with
how the business is doing (20 out of 82 or
24.4%). Comparison of proportions show
that entrepreneurs who are risk takers are
more likely to engage in expansion.
Financing for expansion. For the 398 SMEs
that engaged in expansion for the last two
years, Figure 86 shows how the business
financed its expansion. Majority of the
SME respondents financed their expansion
from business savings (75%) or savings
of the owner (68.2%). In terms of formal
financing, only 19.6 percent (78 out of 398
SMEs) financed their expansion through
bank loans. This varies with firm size where
small firms are less likely than medium
firms to loan from the banks to finance
their expansion.
Figure
86.xx.
Reasons
for not
(score),
82 respondents
Figure
Reasons
for expanding
not expanding
(score),
overall
Lack of reliable new manager
1.8
The owner is content with the current state of
operations of the business
3.1
Too risky
2.8
Lack of access to credit
1.7
Lack of capital funding
2.0
The owner does not want to lose full control over
the quality of the products and services
The owner does not want to lose direct control
over all aspect of the business
The market for your products and services are
not growing
3.4
3.1
2.8
0.0
2.5
5.0
Source: 2018 AIM RSN PCC SME Survey
Figure 87. Reasons for not expanding (percent), 82 respondents
Figure xx. Reasons for not expanding (%), 82 respondents
Lack of reliable new manager
2.4
24.4
The owner is content with the current state of operations …
28.1
Too risky
Lack of access to credit
3.7
Lack of capital funding
3.7
26.8
The owner does not want to lose full control over the …
The owner does not want to lose direct control over all …
18.3
The market for your products and services are not growing
8.5
0.0
Not a reason
Minor reason
10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
Moderate reason
Major reason
Biggest reason
Source: 2018 AIM RSN PCC SME Survey
76
Figure
Sources for
of financing
for theexpansion
business expansion
Figure 88. Sources
ofxx.
financing
the business
(percent),(%),
398 respondents
398 respondents
100.0%
74.9%
80.0%
68.2%
60.0%
40.0%
20.0%
19.6%
5.8%
5.8%
Loan from
other financial
institutions
such as
pawnshops,
cooperatives,
and other
lenders
External
investor
17.3%
2.0%
0.0%
Bank loans
Used some of Savings of the Borrowed from Five six o loan
owner
sharks
the business
relatives or
savings
friends of the
owner
Formal financing
Informal financing
Source: 2018 AIM RSN PCC SME Survey
Figure xx. How much has the
business grown in the past
two years (%), overall
Figure 89. How much has the business grown in the past two years (percent), overall
100.0%
80.0%
72.3%
60.0%
40.0%
20.0%
0.0%
0.4%
6.7%
13.5%
The
The
No
The
The
business business signif icant business business
declined moderately change
grew
grew
signif icantly declined
moderately signif icantly
Source: 2018 AIM RSN PCC SME Survey
77
7.1%
Growth of business in the last two years.
All respondents were also asked to assess
how much the business grew in the last
two years. Overall, majority of the SMEs
(Figure 90) indicated that the business grew
moderately while 34 SME respondents
(7.1%) replied that they grew significantly.
Figures 91 and 92 show the percent increase
(or decrease) of revenue and profit in the
past two years. Majority of SMEs reported an
increase in their sales or revenues (79.4%)
while 7.1 percent indicated a decrease. A
sizeable proportion of respondents (36.5%)
reported an increase in their sales by 2 to
25 percent while almost a quarter (24.8%)
have indicated an increase by 50 percent or
more.
All respondents expect an increase in sales
and profit in the next two years. On average,
SMEs expect sales to grow by 37.4 percent
while profit to increase by 34.2 percent.
However, as shown in Figures 90 and 91
the highest number of SME respondents
(41.3% and 46.5%, respectively) expect
sales or profit growth by 25 percent or less.
In terms of profit, similar proportion of SME
respondents have indicated an increase
(79.4%), decrease (7.1%) and no changes
(13.5%). Notably, 42.7 percent of all
Figure
xx. Share
of SMEs that
respondents have indicated
an increase
of
up to 25 percent in their
profit whileaalmost
reported
decline or increase in
a quarter of all SMEs indicated an increase
sales
or revenues (%), overall
of 26 percent to less than
50 percent.
100%
Figure 90. Share of SMEs that reported a decline or increase
in sales or revenue (percent), overall
80%
60%
36.5%
40%
20%
13.5%
3.8%
0%
18.1%
by 5 to
25%
1.7%
24.8%
1.7%
by 26 to by 50% or remained
less than
more
the same
50%
decreased (7.1%)
remained
(13.5%)
by 2 to
25%
by 26 to by 50% or
less than
more
50%
increased (79.4%)
Source: 2018 AIM RSN PCC SME Survey
78
in profit (%), overall
100%
80%
Figure 91. Share of SMEs that reported a decline or increase
in profit (percent), overall
60%
42.7%
40%
24.4%
20%
13.5%
4.0%
0%
12.3%
3.1%
by 26 to remained by 0.05 to by 26 to by 50% or
Figure
of than more
50%
thexx.
same Share
25%
less
50%
SMEs that expect an
decreased (7.1%)
remained
increased (79.4%)
increase
in
sales
or
(13.5%)
revenues
inPCCthe
next
Source: 2018 AIM RSN
SME Survey
two years (%), overall
by 5 to
25%
100%
Figure 92. Share of SMEs that expect an increase in sales or
revenues in the next two years (percent), overall
80%
60%
40%
41.3%
30.8%
27.9%
20%
0%
increase by 2 increase by 26
to 25%
to less than
50%
increase by
50% or more
Source: 2018 AIM RSN PCC SME Survey
79
that expect an increase in
profit in the next two years
(%), overall
100%
80%
60%
Figure 93. Share of SMEs that expect an increase
in profit in the next two years (percent), overall
46.5%
40%
29.4%
24.2%
20%
0%
increase by 1 to
25%
increase by 26 to
less than 50%
increase by 50%
or more
Source: 2018 AIM RSN PCC SME Survey
3.b. Innovation
The respondents were asked a set
of questions tackling various types
of innovation - product, process, and
marketing innovations. The survey contains
questions on whether they entered one or
several types of innovation, percentage of
business expenditure spent on innovation,
reasons for not innovating, and plans to
innovate.
While majority of SMEs (425 out of 480)
engaged in one or more types of innovation
Figure
94. Engaged
in innovation, overall
Engaged
in innovation
in the last two years (see Figures 95 and
96), the answers were self-reported claims
of the survey respondents and were not
objectively validated.
Nevertheless, it should be noted that for
those which engaged in innovation, only a
relatively smaller proportion (see Figure
97) introduced a new product or service
to the company or market for the past two
years.
Types of innovation
Figure 95. Types of innovation, overall
97.2%
No, 11.5%
79.3%
Yes, 88.5%
Product Innovation
Source: 2018 AIM RSN PCC SME Survey
72.0%
Process Innovation Marketing Innovation
Source: 2018 AIM RSN PCC SME Survey
80
Figure 96. Innovation
activities,
425 SME respondents
Innovation
Activities
Improved marketing
71.8%
Improved process of production or service delivery
79.3%
Improved current products and services
92.7%
Introduced new products / services new to market
47.5%
Introduced new products / services new to the company
57.9%
Source: 2018 AIM RSN PCC SME Survey
Notably, more medium enterprises are
product/service innovators (Figure 98) while
more small firms engaged in process and
marketing innovation. When disaggregated
by region (Figure 99), more SMEs in NCR
introduced new products or services while
more SMEs in CALABARZON improved their
current product or process. Comparing
between sectors (Figure 100), more
services firms introduced new products or
services, but the Industry sector is slightly
more likely to improve its current products
and services. Comparison of proportion
shows that SMEs that applied for a loan
or attempted to borrow are more likely to
innovate than those that did not apply or
even attempt to apply for a loan.
Figure 97. Innovation activity by firm size, 425 respondents
Innovation activities by firm size
100.0%
90.0%
81.9%83.3%
80.0%
71.3%
70.0%
60.0%
50.0%
62.1%
63.6%
59.1%
64.5%
57.6%
49.5%
39.4%
40.0%
30.0%
20.0%
10.0%
0.0%
Introduced new
products / services
new to the company
Introduced new
products / services
new to market
Improved current
products and
services
Small
Improved process of Improved marketing
production or service
delivery
Medium
Source: 2018 AIM RSN PCC SME Survey
81
Innovation activity by region
60.0%
Figure 98. Innovation activity by region, 425 respondents
50.0%
40.0%
31.7%
30.0%
20.0%
25.0%
17.5%
13.5%
14.2%
22.3%
24.2%
21.1%
18.7%
11.8%
10.0%
0.0%
Introduced new
products / services
new to the company
Introduced new
products / services
new to market
Improved current
Improved process of
products and services production or service
delivery
NCR
Improved marketing
CALABARZON
Source: 2018 AIM RSN PCC SME Survey
On average, SMEs surveyed spent 27
percent of their total expenditure for
innovation-related activities. However,
more than half of those which innovated
spent only 20 percent or less. This is true
for firm disaggregation (Figure 101) noting
that medium enterprises are more inclined
to spend 21%-40% for innovation.
Innovation activities by industry
Figure 99. Innovation activity by industry, 425 respondents
100.0%
90.0%
84.4%
80.0%
81.3%
70.0% 70.2%
70.0%
61.1%
60.0%
50.0%
40.0%
64.5%
53.9%
40.0%
44.0%
33.3%
30.0%
20.0%
10.0%
0.0%
Introduced new
Introduced new
Improved current
Improved process of
products/services new products/services new products and services production or service
to the company
to the market
delivery
Industry
Improved marketing
Services
Source: 2018 AIM RSN PCC SME Survey
82
Percentage
of expenditure
forsize,
innovation
by firm
Figure 100. Innovation
spendingused
by firm
425 respondents
size
56.4%
46.4%
42.9%
26.8%
5.7%
0-20%
21-40%
5.4%
41-60%
Small
8.4%
1.8%
61-80%
Medium
Source: 2018 AIM RSN PCC SME Survey
For those who did not innovate (55 out of
480), majority do not have plans (Figure 99)
to innovate in the future. While the top three
reasons for not innovating (Figure 103) are
“the owners are content with the current
state of business operation”, “market is not
growing”, and “too risky”.
Figure 101. Plans to innovate, overall
Plans to innovate
No, 60%
Yes, 40%
Source: 2018 AIM RSN PCC SME Survey
83
2.7%
3.6%
81-100%
Figure 102. Reasons for not innovating, overall
Reasons for not innovating
5
4
3
3.5
3.0
2.9
2.1
2
1.9
1.9
1
0
Owner is
Market is not
content with the
growing
current state of
business
operations
Too risky
Lack of capital Lack of reliable Lack of access
or f unds
new manager
to credit
Source: 2018 AIM RSN PCC SME Survey
84
Summary, Concluding
Remarks, and
Policy Implications
C
onsidered as the backbone of the
economy, Philippine SMEs contribute
a third of the country’s Gross
Value Added (GVA), provide two-thirds
of employment, and promote regional
economic activity. But their productivity
remains much lower than that of large
businesses. Thus, increasing productivity
and competitiveness of SMEs has become
an important policy focus.
Survey results show that skills and
product quality are the top enablers of
SME success, alongside opportunityseeking entrepreneurial mindset. On the
other hand, hostile business environment
(i.e. tight competition, corruption, poor
infrastructure) and low product quality are
the top obstacles to SME competitiveness.
This suggests that although firm and
entrepreneur characteristics affect firm
productivity, the business environment at
various levels of the economy can provide
barriers for SMEs to grow and develop.
At the enterprise level, findings show
that barriers to SMEs’ access to labor,
technology, markets, and finance can
impede SME growth and productivity.
It is also notable that although SME
respondents grew moderately in the last
two years, their market share remained
the same. Most SMEs find it difficult to
hire skilled workers, have lower usage
of more sophisticated technology, do not
search for new markets, do not export,
and do not apply for a loan. While reasons
are attributed to entrepreneurial mindset,
enterprise capacity, and barriers in the
business environment, the results highlight
the relevance of access to finance or credit.
Credit access can influence SMEs to fund
product quality improvement, which can
attract local and international markets.
It can also increase SME productivity,
86
thereby providing higher productivity work
to workers. However, majority of SMEs do
not borrow due to debt and risk aversion as
well as perception of not needing it; while
most who applied for a loan used portion of
the funds as working capital for day to day
operations.
Another finding at the enterprise level
shows that capacity to link with value chain
partners is not maximized by majority
of SMEs. While more than half of SME
respondents have large firm linkages,
only a sizeable minority has foreign firm
linkages. Only 4.4 percent of SMEs currently
export and only 5.6 percent of SMEs are
members of business organizations.
This finding emphasizes the missed
opportunities in terms of linkages with
value chain partners. As linkage with large
and foreign firms as well as membership in
business organizations are associated with
inclination to export, pursuing this path can
impact SME competitiveness.
Lastly, findings highlight that, in response
to tight competition, younger and small
SME respondents are more likely to
respond in ways that are not conducive to
growth compared to older and mediumsized firms. Results show that smaller,
younger, and Services firms are more likely
to respond to tight competition by reducing
prices or reducing costs and are less likely
to improve their products or to look for new
markets.
Concluding Remarks
SME development and competitiveness are
driven by factors related to entrepreneurial
mindset, enterprise capacity, and business
environment. Overall, the entrepreneur
ultimately decides on how to begin and carry
on with the business during its lifetime.
Therefore, addressing the motivational
87
factors of entrepreneurs and providing
them with a solid knowledge and skills base
are crucial for SME Competitiveness. After
all, a self-aware entrepreneur who has a
vision and clear direction for the company
is more successful. But then again, the
potential of what a business can do can only
be based on how it has performed in the
past. Carefully looking at the enterprise’
performance as well as its capacity to
access, link, and upgrade are critical for SME
competitiveness. Lastly, the environment
can restrict or facilitate business activities
as well as entrepreneurial behavior. Thus, it
is incumbent upon the government to strive
for a competitive business environment
and alleviate obstacles such as corruption
and poor infrastructure to provide a levelplaying field for SMEs to compete.
Policy Implications
The report highlights the importance of
increasing awareness on the benefits of
access to resources and opportunities
for linkages and upgrading. Intensifying
capacitation to promote growth mindset is
another policy direction emphasized in the
report. Lastly, policies on strengthening
government institutions are crucial to create
a level-playing business environment for
SMEs to compete.
1. Strengthening institutions is crucial to
curb inefficiency caused by corruption,
poor infrastructure, and complicated
exporting process - which hamper
capacity of SMEs to compete. The business
environment can restrict or facilitate firm
competitiveness. Results show that hostile
business environment and low product
quality are the top obstacles to SME
competitiveness. “Tight competition”, “low
quality of products” and “corruption” are the
top three overall obstacles to SME success.
Moreover, poor infrastructure impedes
access to markets and inefficient exporting
procedures prevent SMEs from exporting.
While product quality can be improved
through firm capacitation, addressing
inefficiency in the business environment
calls for a more holistic approach from the
government. Corruption and government
inefficiencies flourish because of weak
checks and balances. Therefore, corruption
as well as poor infrastructure and
complicated exporting procedures can be
addressed by strengthening government
institutions, especially in areas with
low business activity or poor business
growth. Strong institutions influence
behaviors of firms and entrepreneurs to
spend more productively on SME growth
and development instead of spending
on informal payments and market
inefficiencies. Overall, it is incumbent
upon the government to provide the levelplaying field for SMEs to compete.
2. Promotion of growth mindset in
capacitation programs for owners,
managers, and workers as well as
training for improving product quality
can enable SME success. A business is
only as competitive as the people and the
quality of product or service it has. Skilled
owners, managers, and workers as well
as good product quality are top enablers
of SME success. On the other hand, illequipped managers and workers and
complacent entrepreneurial mindset can
hurt potential for expansion, increase
in productivity, and access to finance.
As opportunity-seeking entrepreneurial
mindset is linked to expansion, training
for potential entrepreneurs can include
visioning exercises to promote more
opportunity-seeking motivations behind
entrepreneurship. To increase productivity
in daily operations, education and training
programs based on skills assessment of
SME workers can be conducted; as well as
training for product quality improvement
with the goal of reaching new markets.
Another aspect is the low access to credit
and inclination of SMEs to borrow to survive
day-to-day operations rather than to thrive
and expand. To address this, managers and
owners can be capacitated in preparing
expansion plans and business plans
– influencing them to have a forwardlooking mindset about business growth to be submitted to banks as a supporting
document for loan applications.
3. Increasing awareness of SMEs on the
benefits of access to technology, finance,
government programs, and linkages with
large and foreign firms can allow them to
take advantage of available opportunities.
Firms can only take advantage of resources
and opportunities they are aware of.
Lack of information on the availability of
resources and benefits of opportunities
impact SMEs potential to grow and develop.
Survey results highlight SME respondents
low credit access, low usage of more
sophisticated technology, low awareness on
SME programs, and less linkages with large
and foreign firms. To address low credit
access, the government in partnership
with financial institutions can increase its
information dissemination on the benefits
of loans to SME owners. To promote SMEs
usage of more sophisticated technology
for their productivity, SME programs can
increase awareness on the benefits of
these technologies, even the use of social
media for business. Information drive on
relevant SME programs can be heightened
to allow higher participation of SMEs.
Lastly, to promote linkages with large and
foreign firms as well as membership in
business organizations, the government
can conduct awareness-raising campaign
on the benefits of such linkages.
88
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