A comprehensive government strategy is crucial to support the entry of more SMEs in the export market and global value chains, two key areas where fewer Filipino SMEs participate compared to their peers, causing domestic firms to miss out on the many benefits of being part of export supply chains, a new World Bank (WB) study shows.
“Too few Philippine small and medium-sized enterprises (SMEs) export and participate in global value chains, undermining their growth and productivity,” says the World Bank’s latest edition of its “Philippines Economic Update,” released this month.
“Philippines SMEs export less than their counterparts in peer economies. That matters as exporting is more than a channel for sales; it is a platform for productivity growth and quality job creation,” the WB update, which dedicates a special chapter to call for aid to Filipino SMEs, added.
“Equally, too few Philippine SMEs participate in global value chains. That is costly, because those that do gain productivity through tougher competitive pressure and the diffusion of know-how.”
The report observed that SMEs generate 63% of the country’s total employment and contribute 36% percent of gross value-added, but that they contribute less in manufacturing and exports.
Moreover, they are less likely to export than their peers in other economies. The document mentioned 12 economies directly exporting at least 10% of sales in 2023, and the Philippines was the fourth lowest, with 1.3% SMEs as direct exporters, just above Cambodia, Bangladesh, and Myanmar. Among the ASEAN country exporters mentioned, the Philippines trailed Thailand, Indonesia, Malaysia, and Singapore.
Three key constraints in developing SME exports and global supply chain linkages were identified in the study:
• Restricted access to testing facilities and certification services that leads to higher costs or rejection rates from export destination markets
• Limited access to finance for equipment and quality upgrades due to inadequate credit information and collateral
• Limited market information to match buyers and sellers
To improve access to testing and certification services, the paper urged the government to make these services more affordable and reliable, enhance quality testing by simplifying regulations for laboratories and import testing equipment, and lower testing costs through reputable third-party certifiers.
The state should also secure international recognition and compatibility of certification and standards as well as strengthen systems to prevent and control disease outbreaks.
Additionally, the World Bank recommended expanding access to investment finance for firm equipment and quality upgrades through mechanisms that will reduce credit risks. For instance, state-owned PhilGuarantee can tailor specific loan guarantees for equipment, certifications, and consulting to stimulate SME investment.
Furthermore, the Small Business Corporation under the trade department “can customize SME-focused on-lending schemes through private financial intermediaries where the risk-return incentives require it.”
Targeted technical assistance can also be given to help SMEs design investment proposals that reduce risks for financiers and lower underwriting costs.
Finally, to address the problem of market information gaps, the paper suggests that the government support SME supplier-buyer collaboration by creating a marketplace that connects exporters and SME suppliers and incentivizing partnerships through trade fairs, networking activities, and project design funding. The administration can likewise create a digital marketplace linking firms with pre-qualified vendors and consultants.
