Economic Impact of SMEs

The government recognizes that small and medium scale enterprise has the potential for more employment generation and economic growth, and therefore, can help provide a sufficient industrial foundation for the country.  Thus, the declaration of the policy expresses the undertaking of the government to promote, support, strengthen, and encourage the growth and development of small and medium enterprises in all productive sectors of the economy particularly rural/agri-based enterprises.

Economic Importance of SMEs

Stakeholders of SMEs are called Entrepreneurs who are engaged in an economic activity called entrepreneurship that identifies an economic need, considers offering business solutions, proceeds to assemble the resources required, and assumes the risk of either succeeding or failing to satisfy the need.  Through the involved processes of engagement, the business henceforth play important roles in the development of the economy (Medina, 2003):

1. Providers of economic opportunities for those people who are no longer comfortable to live as employees for the rest of their lives, seek other option by engaging in small business operations to improve their economic lives and contribute to society;
2. Providers of products and services to consumers, which are oftentimes no longer feasible for big business operations to produce and are naturally passed on to small businesses, which could be in a form of subcontracting or outsourcing agreement;
3. Suppliers of products and services to other businesses that require raw materials, semi-finished parts, finished components, or even business processes like credit collection, accounting, human resource, etc. that are not considered core-competence yet an added value to the goods and services of certain enterprises, which again could be in a form of subcontracting or outsourcing contracts;
4. Distributors of products and services of some manufacturers that opt to concentrate full time in production and employ enterprises that are focused on quick distribution and even hub operation for just-in-time inventory;
5. Supporters of government by way of paying business permits, taxes, and remittances, out of its economic activities; and
6. Providers of employment.

Government Support to SMEs

Recognizing the importance of SMEs in the economy, the government in turn had created the Small and Medium Enterprise Development Council (SMED) to spur the growth and development of small and medium enterprises throughout the country in order to attain countryside industrialization (R.A. 8289):

1. By assuring, through the establishment of adequate support structure, and the creation and promotion of an environment conducive to the viability of these enterprises, establishment of mechanisms, the access and transfer of appropriate technology needed by small and medium enterprises;
2. By intensifying and expanding programs for training in entrepreneurship and for skills development for labor;
3. By facilitating their access to sources of funds;
4. By assuring their access to a fair share of government contracts and related incentives and preferences;
5. By complementing and supplementing the financing programs for small and medium enterprises and do away with stringent and burdensome collateral requirements that small entrepreneurs invariably find extreme difficulty complying with;
6. By instituting safeguards for the protection and stability of the credit delivery system;
7. By raising government efficiency and effectiveness in providing assistance to small and medium enterprises throughout the country, at the least cost;
8. By promoting linkages between large and small enterprises, and by encouraging the establishment of common service facilities;
9. By making the private sector a partner in the task of building up small and medium enterprises through the promotion and participation of private voluntary organizations, viable industry associations, and cooperatives;
10. And by assuring a balanced and sustainable development through the establishment of a feedback and evaluation mechanism that will monitor the economic contributions as well as bottlenecks and environmental effects to the development of small and medium scale enterprises.

Economic Impact of SMEs

Over the years, SMEs have showed notable effect to the Philippine economy.  According to the Department of Trade and Industry (DTI, 2004), the SMEs comprise 99.6% of all the registered business enterprises all over the country, they have contributed 32% to the total Gross Domestic Product; and generated 70% of the total employment in the country (Figure 2. DTI (2004): Size of SMEs).

 Though SMEs’ value added is 32% to the overall production of the country, it is still 47% lower compared to the value added of the registered large enterprises that only comprise .04% of the total registered businesses in the entire country, the weightier side of the economic scale however, favors employment (Figure 3. DTI (2004): Employment and Value Added of SMEs).

 

In comparison with the other Asian countries, except for value added production, the Philippines ranks third in terms of SME establishments and ranks fourth in terms of employment (Figure 4: (DTI 2004): Philippine SME Ranking With Other Countries).  

Drivers for SMEs

Economic System

Following the line of thinking of Gall (1977), “systems attract systems-people”, which would mean that a smaller system will have the opportunity to survive and grow within a bigger system that is friendly or akin to it.  Example, a school that promotes quality education would attract quality teachers and students; an enterprise that calls for zero-defect production would attract precision officials and workers.  This is also true with an economic system that supports entrepreneurship.  It would attract entrepreneurs to put up businesses.  Overtime the relationship becomes symbiotic for existence and growth.

Among the existing economic systems in the world today, it is capitalism that is perceived to be conducive to entrepreneurial activities for its certain characteristics.  Capitalism promotes the free market of enterprise, where businesses have the freedom to compete, which in return provides the society to exercise their freedom of choice, and with the limited role of the government to interfere with business decisions, the capitalist economic system is assured to remain as long as business enterprises tends to flourish.

Socio-Cultural Core Values

Naisbitt (1996) has described the Asian countries divided by culture, language, political ideology, religious philosophies, and geography as an Old Asia that is now transforming into New Asia that is forged by economic integration, technology, especially telecommunications, and travel and mobility of people into one coherent region, just as many young people today throughout Asia, are beginning to call themselves Asians.

In his logically connected study on the growing economy of New Asia, including the Philippines of course, Naisbitt stated that it is the increase of small and medium enterprises in every country which has catapulted the economic growth of the entire region, and he mentioned some proven drivers beyond purely economics:

1. From nation-States to Networks.  With the intensifying network of businesses in the entire region fuels the small and medium enterprises to widen its trade relationship within the region, Chinese network of entrepreneurs is taking the lead;
2. From Traditions to Options.  While it is widely believed that the West is losing moral standing internationally, the new Asian assertiveness in doing business that strongly involves Asian common values: strong family ties, hard work, respect for learning, honesty, self-discipline, and self reliance have defined a new way with which a common Asian country could adopt towards development, which is “Asianization” and not “westernization”;
3. From Government controlled to Market-Driven.  Central government control and direction of economies of the region have shifted to market economies, fuelling an explosion of economic growth and opportunities (economic cooperation and coordination) among the small and business enterprises across the region;
4. From Labor-Intensive to High Technology.  Where a dramatic shift from labor-intensive technology-enabled agricultural production and manufacturing has been observed as a strong factor for mass production;
5. From Export-led to Consumer-Driven.  As exports build up, consumer spending increases, middle class emerges where small and medium enterprises arise;
6. From Male Dominance to the Emergence of Women.  Looking at Chinese-network as an entrepreneurial model in Asia, apparently in China, women make up 25% of the entrepreneur.  

Financial Literacy

Kiyosaki (2001) explained in his book, Rich Dad Poor Dad, that an educated Dad stresses the importance of reading books, but end up as employee for the rest of his life and never had financial investment to meet both ends after retirement, while a rich dad stresses the need to master financial literacy if there is the desire to do business and build up an Empire State Building, and eventually retires with a financial investment that could be handed over to a financial-apprentice-successor.  Kiyosaki further stressed that without financial literacy, people end up buying liabilities that serves as financial leaks rather than assets that generate gains to add up on what has been invested (Figures 5-9, Cash Flow Formats).

 

Indeed there are financial lending institutions on every country ready to help start up and existing small and medium enterprises.  Here in the Philippines, there is the Planters Bank that has been outstandingly recognized for its focus in lending to start up and existing small and medium enterprises.  Its personnel even extend services as business development advisers in assisting customers, which are not widely practiced by other banks.  Entrepreneur’s lack of financial literacy however, would have the strong tendency to become excessive and imprudent and would lost sight in its investment.

Summary and Conclusion

Small and Medium Enterprises (SMEs) could start up like any other businesses and could end up like any other businesses.  To easily distinguish them however, is to merely look at their total asset, inclusive of those arising from loans but exclusive of the land on which their office, land, and equipment are situated, ranging from PhP3,000,000.00 to PhP100,000,000.00.  

SMEs are recognized by the government as a positive solution to increase the number of employment in the country as well as add up to the country’s gross domestic production.  For this reason, a development council has been created to assure the undertakings of the government will truly and beneficially cascade to all of them.  This initiative is a good start yet it requires stronger effort to develop the scorecards and cascade down the initiatives into measures and concrete program of actions to the various agencies being tapped to perform.

According to DTI (2004), SMEs comprise 99.6% of all the registered businesses in the country, have contributed 32% to the country’s total Gross Domestic Product, and have generated 70% employment for the country.  In comparison with the other Asian countries, the Philippines ranks third in terms of SME establishments and ranks fourth in terms of employment.  The aggregate of these small and medium enterprises however, is like figure of a huge fish composed of tiny fishes.  They are big in number but small value added.  Strong research and development and intensified entrepreneurial administrative capability is seriously needed to harness the technical component and commercial component of an industry to produce high valued goods and services like Singapore has: semi-conductor, electronic chips, mobile chips, efficient port operation services, back office operations, and business process outsourcing.  What differs Philippine SMEs to the other SMEs in U.S., Europe, and the rest of Asia, is their concentration on light and medium consumable goods more than services and high valued commodities and services.

The entrepreneurs are the stakeholders of SMEs that could thrive particularly in a capitalist economic system, driven with socio-cultural values, and pragmatic financial literacy.  As clearly observed, the stiff economic competition of U.S. and Europe is putting the Asian countries in a very disadvantage position.  The socio-cultural values displayed by Asian countries are something that should continue to intensify.  Hoecklin (1995) has vividly defined the road of globalization:  the entire region has to develop global economies of scale but at the same time be responsive to local environment; has to continuously nurture culture bound diversity, yet at the same time keep integration; and has to maintain flexibility and at the same time be focused.  Cultivating Asian core values would lead to a greater chance of success to build up milestones on the road of globalization.

Why China has become the entrepreneurial model in Asia?  Sanchez (2007) in his book entitled: 8 Secrets of the Truly Rich, Chinese parents inculcate into the minds of their children that they have to study well in order for them to build up their business empire, while Filipino parents inculcate to the minds of their children to study well in order to find a high paying job.  The rest is history. Chinese network is now dominating small and medium enterprises in the entire Asia, while Filipinos are dominating employment all over Asia.

Medina (2003) has shared an article attributed to the University of the Philippines Institute for Small Scale Industries.  It says that there are certain cultural values of the Filipinos favourable to entrepreneurship.  These are as follows:

1. pakikikapwa (human relation)
2. hiya (loss of face)
3. pakikisama (togetherness)
4. pakikibagay (adjusting or adapting to other people)
5. malasakit (concern)
6. utang ng loob (gratitude)
7. amor proprio (self-esteem)
8. bayanihan (cooperative spirit)
9. kasipagan (industriousness)
10. pagkamatipid (frugality)
11. mapagtimpi (has slef-control)
12. matapat (honest)

Strongly blend these Filipino cultural values with sound and pragmatic financial literacy as shared in this paper by Kiyosaki, would provide better chance for Filipinos to engage in building up their own business empire and help the country on its perennial problem of unemployment.  

With the number of students now enrolled in business schools like the Ateneo de Manila University, example, just in a class of twelve students taking Economics Management.  Should every student is able to put up a business and employ ten workers, then at the end of the day there are one hundred and twenty persons had a job.  Of course, there are other serious problems to consider like birth control and rapid population growth, but at least these students are doing something rather than nothing.  Wise men say: “if you are not part of the solution, then you are probably part of the problem”.

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Figures

Figure 1.  Categories of SMEs

Figure 2. DTI (2004): Size of SMEs

Figure 3. DTI (2004): Employment and Value Added of SMEs

Figures

Figure 4: (DTI 2004): Philippine SME Ranking With Other Countries

Figure 5: Cash Flow Pattern of an Asset

Figure 6: Cash Flow Pattern of Liabilities

Figures

Figure 7:  Cash Flow Pattern of a Person Still at Home

Figure 8:  Cash Flow Pattern of a Person in the Middle Class

 

Figures

Figure 9: Cash Flow Pattern of a Wealthy Person

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Reference Section

Printed Sources

Hoecklin, L. (1995). Managing Cultural Differences: Strategies for Competitive Advantage. E.I.U. Addison-Wesley Publishing Company.

Kiyosaki, T. R. & Lecher L. S. (2001). Rich Dad Poor Dad. New York, NY 10020.  Time Warner Company.

Medina, R. G. (2003). Entrepreneurship and Small Business Management. Quezon City.  Philippines.  Rex Printing Company, Inc.

Naisbitt, J. (1996).  Megatrends 2000.  New York, NY 10020. Simon and Schuster Inc.

Sanchez, B. (2007). 8 Secrets of the Truly Rich. Quezon City. Philippines.  Shepherd’s Voice Publication, Inc.

Online Sources

Department of Trade and Industry (2004).  SME Agenda. From the Internet:  http://www.business.gov.ph/SME_Agenda_SMEPlan.php

Gall, J. (1977), Some Laws of Systemantics.  From the Internet: http://en.wikipedia.org/wiki/Systemantics

Magna Carta For Small Enterprises. Published by the: Small Business Guarantee And Finance Corporation. From the internet:

http://www.dticebu.net.ph/Library/Magna%20Carta%20for%20Small%20Enterprises%20-%20RA%206977.pdf