Small and medium enterprises (SME) owners and managers need to find new profitable market niches where competition is still low, or consider indirect exporting to penetrate more overseas markets.
A research paper series titled “Obstacles of Philippine SMEs’ Participation in Global Value Chains” published by the Philippine Institute for Development Studies (PIDS) cited data from a survey and related literature indicating that Philippine SMEs are not well connected to GVCs.
In terms of GVC connectivity per sector, most indicators suggest that industry SMEs are more linked to GVCs than services SMEs.
The paper said Philippine SMEs are having difficulty competing with companies from other ASEAN and East Asian countries.
“The lower cost of labor and the bigger government support that SMEs enjoy in competitor countries compared to the Philippines are making it harder for Philippine SMEs to compete in international markets. Given that these circumstances are beyond Philippine SMEs’ control, what they can do is to target the right market where they can
establish early mover advantages,” it said.
The paper also underscored the difficulties of many SMEs in reaching international markets due to their lack of access to information about foreign markets, coupled with their inability to mass-produce that would make exporting profitable.
“One way to address these obstacles in connecting to GVCs is through indirect exporting. This may be done through consolidatorsa third party that buys export quality products from local producers that they could sell in countries where demand for these products exists,” it said.
The paper further said indirect exporting may also be done by providing inputs to firms that export, such as foreign companies or large businesses. These inputs may be in the form of supplies or services through outsourcing or subcontracting arrangements.
To help SMEs overcome the challenges in connecting to GVCs, it said it is imperative for policymakers to provide more incentives to exporters of higher-value products, implement programs that promote linkages between SMEs and foreign or large firms, improve credit terms of SME loans, and enhance the efficiency of port and customs operations.
The paper said most Philippine SME exporters operate at the low end of the value chain, such that they export raw materials rather than processed, and high-value products.
It thus underscored the importance of providing incentives on the purchase of equipment that processes raw materials into higher-value products.
“This could be in the form of tax breaks for the purchase of equipment or equipment financing. In addition, for big industries consisting of multiple SME exporters, organizing consortiums may be facilitated. Through these consortiums, members may pool funds to purchase machines they can use jointly,” the paper added.
It further cited an earlier Asian Development Bank (ADB) paper noting that SMEs can connect to GVCs not only through exporting but also through the provision of supplies or services to firms that are already connected to the value chain.
“Given that only a small share of SMEs are connected to large or foreign firms through this kind of arrangement, policymakers may explore the establishment of an information exchange platform, where large and foreign firms can post their outsourcing and subcontracting requirements, while SMEs can post their qualifications, capabilities,
and services offered,” it said.
Moreover, simplifying processes and reducing the incentives for corruption through automation would help ease exporting and importing, it added.