The Role and Challenges of Pinoy SMEs

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Category: Entrepreneurship

"It is widely accepted that small and medium enterprises play a very important and significant role in the economic and social development of a country". This is an acknowledgment by the Philippine government itself, through the Department of Trade and Industry (DTI) in its 2004-2010 SME Development Plan.

Indeed, SMEs (small and medium enterprises, which also encompasses micro enterprises) have an overwhelming presence in the Philippine economy. Medium enterprises, as defined by the SMED Council, are those with total assets (excluding land) of P15M to P100M, or not less than 200 employees. Small enterprises are those with total assets (excluding land) of P3M to P15M, with 10 to 99 employees. Micro enterprises are those with total assets (excluding land) of P3M or less, with 1 to 9 employees.

The report indicates that in 2001, over 99.7% of all firms are SMEs, which also accounts for 69.1% of employment. Micro enterprises comprise 91.7% of all firms and has an employment share 35%. In terms of enterprises share, small enterprises come second (7.6%), followed by medium enterprises (0.4%) and large enterprises (0.3%). In terms of employment, large enterprises come second (31%), followed by small enterprises (24%) and medium enterprises (7%). These figures confirm, according to the report, the "increased importance" of micro and small enterprises.

Some of the identified "challenges," an entrepreneurial euphemism for "problems" or roadblocks, include:

1. Productivity limitations, including outmoded or less productive operational assets/methods, insufficient technology, limited room for efficient operational levels, insufficient management and professional know-how, insufficient incentives and inability to meet regulatory procedures, and insufficient access to information.

2. Limitations relating to funding sources. There is limited access to capital, with majority of SMEs relying mainly on owners' savings and personal loans from family and friends. This is particularly true during the initial stage of the business. The use of institutional debt financing is minimal due to the inability of SMEs to qualify for lack of collateral, as well as the lack of knowledge on credit sources and processes.

This is made worse, according to the report, by extended repayment terms (e.g., 90 to 120 days credit) exploited by supermarket, malls and marketing service networks. Entrepreneurs have a hard time sourcing capital and get paid, without interest, after 90 to 120 days.

The logical result of insufficient or inaccessible funding resources is the inability of entrepreneurs to acquire efficient production capacity level, which, in turn, results in low or marginal profitability. Lack of financing also results to the use of low-technology manufacturing which, again, restricts growth.

3. Inadequate knowledge about, and inaccessibility of, market opportunities. Most SMEs sell locally, to final consumers, usually individuals and households from the poor and middle classes. Only a few sell to main outlets such as supermarkets, department stores and market services because of, among other reasons, the inability to meet volume requirements and the unfavorable terms exacted by these volume buyers. Only a few SMEs can reach inter-regional, national and foreign markets.

During his second SONA, the President spoke of unemployment, the mismatch between workers' skills and industry needs, and of economic growth. The absence of SMEs in the speech is surprising given the huge employment contribution of SMEs and the "increased importance" they play in the Philippine economy. Of course, the President cannot accommodate everything in his speech. Just because there is no mention of SMEs in the speech doesn't mean that it will not be given sufficient attention. Hopefully this is the case.