Philippine small and medium enterprises (SMEs), especially those engaged in services, are not well-connected to global value chains (GVCs) because of a host of internal and external factors, according to a new study by the Philippine Institute for Development Studies (PIDS).
In a new discussion paper titled Obstacles and Enablers of Internationalization of Philippine SMEs Through Participation in Gobal Value Chains, the state-run policy research body said most indicators of interconnectivity showed industry SMEs are more linked to GVCs than services SMEs.
For the study, PIDS conducted a survey based on indicators of interconnectivity on SMEs in Metro Manila and several government offices.
The weak participation of Philippine SMEs in GVCs were found to be influenced by stiff competition within the ASEAN and east Asia region; inability to conform to international standards, regulatory requirements, and local institutions; lack of adequate support from government; international market demand and inputs supply; and lack of entrepreneurial mindset and skills on the part of business owners.
PIDS said Philippine SMEs find it difficult to compete with other players from ASEAN and East Asia because they lack the ability to scale up production, thus missing out on economies of scale and having a greater need to raise the per unit cost of products.
Most Philippine SME exporters are also on the low part of the value chain, exporting mainly raw materials rather than processed and high value products.
Such businesses also cannot meet international standards and regulatory requirements because of lack of access to additional finance, skilled labor, and proper entrepreneural mindset.
Inefficiencies in ports and customs also increases the cost of exporting and importing.
Philippine SMEs were also found to have difficulty penetrating international markets because of lack of information and inability to mass produce. Because of this, they resort to indirect exporting through commodity consolidators. Another way is by providing supplies or services to foreign or large firms that are already connected to GVCs.
“Many SME owners also lack the entrepreneurial mindset or skills to effectively navigate the international market. This includes not only management skills, but the mindset to pursue new markets despite the challenges, including the willingness to take some risks,” according to the study.
