若非座上賓，則成俎上肉：論菲律賓中小企業在政商關係中的地位 - 政大學術集成

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(1)International Master’s Program in Asia-Pacific Studies College of Social Sciences National Chengchi University. Master’s Thesis. 立. 政治大. ‧. ‧ 國. 學. n. al. er. io. sit. y. Nat. If You are not at the Table, You are on the Menu: An Examination of Small and Medium-sized Enterprises’ Place in the Philippine State-Business Relations. Ch. engchi. i Un. v. Student: Lianne Angelico C. Depante Advisor: Prof. Alexander C. Tan, Ph.D.. 110 2 February 2021. I DOI:10.6814/NCCU202100402.

(2) If You are not at the Table, You are on the Menu: An Examination of Small and Medium-sized Enterprises’ Place in the Philippine State-Business Relations : Lianne Angelico C. Depante : Prof. Alexander C. Tan, Ph.D.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. C hA Thesis U n i engchi. v. Submitted to International Master’s Program in Asia-Pacific Studies, National Chengchi University in Partial Fulfillment of the Requirement for the Degree of Master in Asia-Pacific Studies. 110 2 February 2021 II DOI:10.6814/NCCU202100402.

(3) Abstract Small and Medium-sized Enterprises (SMEs) are the backbone of many economies. This is especially true in the Philippines’ case, where 99.52% of businesses fall under the category. Yet despite accounting for nearly all firms and employing the majority of the labor force, Philippine SMEs contribute a mere 35.7% to the GDP, performing among the worst in the region. As such, scholars have tried to illuminate this conundrum, with much of the studies underscoring economic and firm-based explanations. Such approaches, however, are limited as they overlook the broader political context in which SMEs operate in. To fill this lacuna, this work has combined interest-based and institutional approaches by using a modified theory of state-business relations as a framework in analyzing the Philippine SME sector. With literature review and key informant interviews as its data-gathering instruments, this thesis. 政治大 the relationship between the two. The findings of this study’s contemporary analysis of state立 qualitatively examined the organization of the Philippine state and the SMEs and the nature of. SMEs relations indicate that, on the government side, the state’s neoliberal orientation has. ‧ 國. 學. hindered the agencies tasked to develop the SMEs from becoming effective development partners, whereas on the SMEs’ side, the sector is largely unorganized, limiting its potential to. ‧. serve as a check-and-balance on the government’s ineffective policy implementation. Under. y. Nat. these circumstances, the nature of interaction between the two has been beset by issues. sit. regarding credibility and transparency, perversely impacting the way SME policies are. er. io. formulated and implemented. To understand the situation that led to this point, a historical. al. n. iv n C U h e n lopsided contributed to the formation of the country’s structure, the unorganized g c h i industrial. analysis was conducted, particularly by investigating the critical junctures and events that nature of SMEs, and the state’s neoliberal orientation. By and large, this work has demonstrated. that, contrary to market fundamentalism, politics matters in development and the economy. It is in this light that the agenda of political empowerment of SMEs is recommended to be taken by scholars, policy-makers, and the SMEs themselves if we are to flip the table that hinders the tiny firms from becoming potent, productive forces in the economy. Keywords: SMEs, Philippines, state-business relations, collective action, political economy, institutionalism. III DOI:10.6814/NCCU202100402.

(4) 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. IV DOI:10.6814/NCCU202100402.

(5) Acknowledgments In Philippine society, to forget utang na loob (roughly translated as debt of gratitude) is tantamount to violating the most important socio-cultural rule. Lest I make this offense, I would like to express my ‘indebtedness’ to the following organizations and people who helped me in the course of my two-and-a-half-year graduate school journey: One person that definitely stood out is my adviser, Dr. Alexander C. Tan. With his immense knowledge and relentless passion in teaching, Prof. Alex has sparked my interest in political economy of development, motivating me to write about a polity that is both close to our hearts—the Philippines. As an adviser, he never lost his belief in my work and abilities. For that, I am immensely grateful for all the encouragement and guidance I have received from. 政治大 Profound gratitude to the立 members of my committee as well, whom all have contributed. him. Toh sia di, Tan sien si!. ‧ 國. 學. significantly to my research. Dr. Tsai Chung-min, who is also among my favorite professors at the National Chengchi University, helped me in sharpening my arguments and framework, while Dr. Kar Yen Leong, a great Southeast Asianist at Tamkang University, gave me some. ‧. advice on how to incorporate historical variables into my analysis. While I greatly benefitted. sit. y. Nat. from their inputs, I bear the sole responsibility for all the mistakes made in this thesis.. er. io. I am also thankful to my informants, whose participation and assistance were crucial in. al. iv n C Dr. Tristan Canare, Prof. Jalton Taguibao, Mae Salonga, Usec. Merly Cruz, Dir. h eDir. n gSusan chi U n. my analysis. Special thanks to Prof. Marivic Raquiza, Prof. Tonet Raquiza, Dean Rene Ofreneo, Bien Ganapin, Prof. Lynn White III, Prof. Shingo Mikamo, Atty. Rufino Margate, Atty Jovy. Anne Querubin, Sir PA de Guzman, Ma’am Agnes V. Ravelas, Dir. Gloria Recio, and Ma’am Mylene Abiva for cooperating and obliging to my request for documents and interview. Without their inputs, I wouldn’t have been able to turn this work into reality. Salamat po! My journey would likewise not have been possible without the assistance of the Taiwanese government, particularly the Ministry of Education (MOE). I was among the lucky few to have received financial support from the MOE in light of the New Southbound Policy, and with that, I am eternally thankful for a once-in-a-lifetime opportunity. May my home for the past two-and-a-half years, Taiwan, and my motherland, the Philippines, further their ties for years to come! 謝謝台灣！我心中永遠有你。. V DOI:10.6814/NCCU202100402.

(6) I also wish to thank my colleagues at Zhengda’s Science and Technology Innovation Center for Taiwan-Philippines Indigenous Knowledge, Local Knowledge, and Sustainable Studies (CTPILS), especially Dr. Tang Ching-Ping; Dr. Kuan Da-wei; and its staff members, Kagi, Scud, Channy, Jia Lin, and Tin. Beyond the additional wherewithal, I am grateful to CTPILS for giving me an opportunity to grow as a scholar and deepen my understanding of development—one that stresses political and social, in addition to economic, empowerment. I am likewise indebted to my professors at the University of the Philippines National College of Public Administration and Governance (UP NCPAG), especially Dr. Ma. Victoria R. Raquiza and Dr. Kristoffer B. Berse. Ma’am Marivic has been one of the most instrumental in my intellectual journey, as she was the one who introduced me to the theory of developmental state. While I am a less of a classical developmentalist now, I would not have. 政治大 wish to thank Sir Kris for the trust, 立guidance, and the “sidelines.”. developed an interest in the political economy of development without her guidance.* I also **. ‧ 國. 學. have them both as my mentors and friends.. Certainly, I am fortunate to. Also, many thanks to all the friends and acquaintances I’ve made along the way. Special. ‧. mention, however, must be given to Bonggyu Lee, Irsyad Martias, Manoj Panigrahi, Matthana Rodyim, Chao Teng-yun, Tang Shi-ke, Huang Zhu-xue, Wang Jia-lin, Liu I-cheng, and my. y. Nat. sit. Filipino circle in Taiwan (Michelle, Virge, Jalenico, Patrick, Pau, Dana, Teri, Ryan, and Elmaz). n. al. er. io. for they have become my second family in a faraway—1,161 kilometers, to be exact—land.. i Un. v. Last but certainly not the least, no words are enough to express my gratitude to my. Ch. engchi. mom, grandma, and shobe, who, despite being far away from them, have supported and rooted for me all the way; and, of course, the love of my life, Michelle, who has been my go-to confidant through struggles, successes, and anything-in-between. I hope that I could repay their unending kindness someday. Again, to all of my pinagkakautangan ng loob (those I have ‘debt’ with), my heartfelt gratitude. Ang aking tagumpay ay inyo rin. 我的成功也是你們的。. *. My appreciation of developmentalism now lean towards Peter Evans’s (1995) idea of ‘embedded autonomy,’ where the state has to be insulated from rent-seeking interests but at the same time open to inputs from different societal actors like the academe, civil society, business associations, and individual enterprises.. **. Sideline, in Philippine English, means part-time opportunities. It is approximate to the concept of ‘side hustle.’. VI DOI:10.6814/NCCU202100402.

(7) 政治大. 立 Overlooking the sea. ‧ 國. 學. from a land afar, She endures bereavement and despair.. ‧. Dedicated to Maria. y. sit. io. n. al. er. Nat. Just to give light, not just to her Own, but also Our Mother.. Ch. engchi. i Un. v. VII DOI:10.6814/NCCU202100402.

(8) Table of Contents List of Figures ................................................................................................................... X List of Tables ..................................................................................................................... X List of Abbreviations ........................................................................................................ XI Chapter 1: The Problem and its Background .................................................................. 1 Introduction .........................................................................................................................................1 SMEs: The ‘Crippled’ Backbone of the Philippine Economy ............................................................2 Statement of the Research Problem and Questions .............................................................................3 Significance of the Study ....................................................................................................................5 Scope and Limitations of the Study ....................................................................................................5 Thesis Organization.............................................................................................................................5. 治政 Definition of SMEs in the Philippines ................................................................................................ 7 大立 Profile of the Sector.............................................................................................................................8. Chapter 2: Overview of the Philippine SME Sector ........................................................ 7. ‧ 國. 學. Policies and Programs on SME Sector Development in the Philippines ..........................................10 Agencies Supporting SMEs in the Philippines .................................................................................13 Performance of the Philippine SME Sector ......................................................................................15. ‧. y. Nat. Chapter 3: Various Explanations to the Philippine SME Sector’s Weak Performance: A Review of Literature................................................................................................... 18. sit. The Dominant Perspective: The Technical-Economic School in Small Enterprise Sector Development .....................................................................................................................................19. er. io. Access to Finance ........................................................................................................................................ 19 Access to Expanded Markets and Value Chains ......................................................................................... 21 Business Environment Reform .................................................................................................................... 22. al. n. iv n C U ...................................................23 h eofnPhilippines Firm-based Explanation to the Performance SMEs i h c g Orientation and Characteristic of the Owners ............................................................................................. 23 Financial Decision-making Style and Literacy of Owners .......................................................................... 24 Firm-specific Traits and Characteristics ...................................................................................................... 24. The Political Economy Perspective to SME Sector Development ...................................................25 Idea-based Explanations .............................................................................................................................. 27 Institutional Explanations ............................................................................................................................ 27 Interest-focused Explanations...................................................................................................................... 28. Theory of State-Business Relations (SBRs)......................................................................................29 Collective Action and Organization of the SME Sector.............................................................................. 30. Gaps in the Literature ........................................................................................................................32. Chapter 4: The Theory of State-Business Relations ...................................................... 33 Rationale for the Selection of the Theory .........................................................................................34 Components of State-Business Relations..........................................................................................34 Private Sector’s Organization ...................................................................................................................... 34 Nature and Capacity of the State (Public Sector’s Organization) ............................................................... 35 Nature of the Interaction between the State and the Businesses ................................................................. 36. VIII DOI:10.6814/NCCU202100402.

(9) Impact of Historical and Political Developments to SBRs ...............................................................37 Taiwan: A Case of a Successful State-SMEs Relations ....................................................................37 Summary of the Chapter ...................................................................................................................40. Chapter 5: Research Design ........................................................................................... 41 Ontological and Epistemological Underpinnings of the Study .........................................................41 Methodology .....................................................................................................................................41 Data Collection Methods...................................................................................................................42 Methods of Data Analysis .................................................................................................................45 Summary of the Current Study’s Research Design...........................................................................45. Chapter 6: Historical Roots of Philippine SBR and the LE-dominated Industrial Structure ........................................................................................................................ 46 The Philippines: An Overview ..........................................................................................................46 Land, Entrepreneurship, and the State: A Brief of History of the Philippines..................................48. 政治大. Pre-colonial Philippines ............................................................................................................................... 49 Spanish Colonial Period: The Roots of the Oligarchy and Captured State ................................................. 50 American Colonial Period: Buttressing the Foundation of Elite Capture of the State ................................ 52 Post-independence Period: A Continuation of the Past ............................................................................... 54 Marcos’ Martial Law: A Regime of Overt Crony Capitalism and Missed Opportunities........................... 57 Contemporary Period: The Return of the Oligarchy and the Continuing Neoliberalization of the Political Economy .................................................................................................................................. 60. 立. ‧ 國. 學. Discussion and Synthesis ..................................................................................................................65. ‧. Summary of the Chapter ...................................................................................................................73. y. Nat. Chapter 7: State-SMEs Relations in the Philippines...................................................... 74. sit. The Organization of the Philippine State and DTI: Nature, Capacity, and Ideology .......................74. er. io. The Nature of the Philippine State: Weak and Oligarchic .......................................................................... 75 The Department of Trade and Industry: An Island of State Strength .......................................................... 76 The Other Side of the Island: DTI as a ‘Crippled’ Agency ......................................................................... 77. al. n. iv n C Overview of the Philippine Business Sector 80 h ............................................................................................... i U e n Country g c h....................................................................... The Absence of an SME-wide Organization in the 83. The (Dis)organization of Philippine SMEs .......................................................................................79. Probing the Absence of SME-wide Business Organization in the Philippines ........................................... 85 PCCI and PCE as Shackled Advocates for SMEs ....................................................................................... 87. The Nature of Interaction between the SMEs and the State in the Philippines ................................91 The Nature of Contemporary SBR in the Philippines ................................................................................. 91 The MSMED Council .................................................................................................................................. 93 Issues and Challenges: Lack of Credibility and Transparency in State-SMEs’ Interactions ...................... 93. Summary of the Chapter ...................................................................................................................96. Chapter 8: Conclusion ................................................................................................... 98 Recommendations ...........................................................................................................................100 Theoretical Implications ............................................................................................................................ 100 Limitations of the Current Study and Areas for Further Research ............................................................ 101. Addendum: The COVID-19 Pandemic as a Crucial Turning Point for SME Collective Action? ..103. References ..................................................................................................................... 104 Appendices .................................................................................................................... 125 IX DOI:10.6814/NCCU202100402.

(10) List of Figures Figure 1. Share of number establishments by sector, value added by sector, and contribution of establishments to total employment in the Philippines (latest available data) ...................... 2 Figure 2. Significance of SMEs in ASEAN Member States (latest figures) ............................. 3 Figure 3. Share of SMEs and LEs to total number of firms in the Philippines ......................... 8 Figure 4. Employment share of SMEs and LEs in the Philippines ........................................... 8 Figure 5. Distribution of SMEs by Industry Sector (2018) ....................................................... 9 Figure 6. ASEAN SME sectors’ contribution to their respective national economies............ 15 Figure 7. Firm-size distribution in 2001, 2008, 2015, and 2018 ............................................. 16 Figure 8. Literature Map.......................................................................................................... 26. 政治大. Figure 9. Theoretical Framework of the Current Study .......................................................... 33 Figure 10. McNabb’s Six-Step Procedure in Qualitative Data Analysis ................................ 45. 立. Figure 11. The Philippines and Adjacent Countries ................................................................ 46. ‧ 國. 學. Figure 12. Product Export Treemap of the Philippines (2018) ............................................... 47 Figure 13. Comparison of Malaysia and the Philippines’ Progress in Inequality Reduction.. 63. ‧. Figure 14. Comparison of Malaysia and the Philippines’ Progress in Poverty Reduction ..... 63 Figure 15. Share of Agriculture, Industry, and Services to the GDP in the Philippines (1970-. Nat. sit. y. 2019) ........................................................................................................................................ 64. al. er. io. Figure 16. Budgets (in billions of Philippine Pesos) of DTI, DA, DOH, DSWD, DPWH,. n. DepEd (2014-2020) ................................................................................................................. 77. Ch. i Un. v. Figure 17. Percentage of Manufacturing SMEs in the Philippines (Base: Total Number of. engchi. SMEs) (2006-2018) ................................................................................................................. 86. List of Tables Table 1. Classification of Philippine Businesses ....................................................................... 7 Table 2. Distribution of SME Establishments Per Region (2018) .......................................... 10 Table 3. Tally of Legislations and their Policy Scope/Areas Relevant to SMEs .................... 12 Table 4. List of Interviewees of the Study .............................................................................. 43 Table 5. List of Informants (Questionnaire Option) ................................................................ 44 Table 6. Richest Families and Individuals in the Philippines and their Banks (2020) ............ 68 Table 7. Ownership of Largest Publicly Traded Companies in East and Southeast Asia ....... 81. X DOI:10.6814/NCCU202100402.

(11) List of Abbreviations ASEAN BMSMED BSP CARP CGS DCI DTI EOI FFCCCII. 立. 政治大. er. sit. y. ‧. ‧ 國. 學. al. n. NEDA NGO NMA OFW PCE PCCI PNB PCCI PSE RA SAP SBR SMEs US. io. KMME LEs MSMED Council. Nat. FPI FTA GDP GFI GOCC GVA GVC HI IMF ISI IT-BPO. Association of Southeast Asian Nations Bureau of MSME Development (under DTI) Bangko Sentral ng Pilipinas (Central Bank of the Philippines) Comprehensive Agrarian Reform Program Credit Guarantee Schemes Department of Commerce and Industry (pre-cursor to DTI) Department of Trade and Industry (Philippines) Export Oriented Industrialization Federation of Filipino-Chinese Chambers of Commerce and Industry, Inc. Federation of Philippine Industries Free Trade Agreement Gross Domestic Product Government Financial Institution Government-owned and Controlled Corporation Gross Value Added Global Value Chains Historical Institutional Approach International Monetary Fund Import Substitution Industrialization Information Technology-Business Process Outsourcing Industry Kapatid Mentor ME program (PCE’s initiative) Large Enterprises Micro, Small, and Medium-sized Enterprises Development Council (Philippines) National Economic and Development Authority Non-governmental Organization New Minimalist Approach Overseas Filipino Workers Philippine Center for Entrepreneurship Philippine Chamber of Commerce and Industry Philippine National Bank Philippine Chamber of Commerce and Industry Philippine Stock Exchange Republic Act (Philippines) Structural Adjustment Program (IMF) State-Business Relations Small and Medium-sized Enterprises United States of America. Ch. engchi. i Un. v. XI DOI:10.6814/NCCU202100402.

(12) Chapter 1 The Problem and its Background Small-and medium-sized enterprises represent over 90 per cent of the business population, 60-70% of employment and 55% of GDP [in a myriad of economies]. [They] therefore do not just significantly contribute to the economy – they ARE the economy. Christopher Arnold (2019). Introduction In many countries, especially those emerging ones such as the Philippines, Small and Medium-sized Enterprises (SMEs) play a predominant role in achieving socio-economic. 政治大. development. 1 Regarded in both the academic and policy-making circles as the ‘engine,’. 立. ‘backbone,’ and ‘driving force’ of economic growth, SMEs comprise the largest sector in most. ‧ 國. 學. economies, employ a significant portion of the labor force, and contribute to a great extent to the gross domestic product (GDP) (Hall, 2002; International Labour Organization, 2019;. ‧. Kumar, 2017). As a matter of fact, in developing countries in general, the sector constitutes almost all the private enterprises, 45% of employment, and 33% of GDP (Stein et al., 2010);. sit. y. Nat. whereas their counterparts in the developed world represent over 90% of the businesses, 60 to. io. er. 70% of employment, and 55% of GDP (World Trade Organization, 2016).2 In addition to the sector’s contribution to employment and GDP, SMEs also serve as an indispensable catalyst in. n. al. i Un. v. the promotion of investments, competition, entrepreneurship, innovation, and backward and. Ch. engchi. forward linkages (de Kok, Deijl, & Veldhuis-Van Essen, 2013; International Labour Organization, 2019), making them a crucial component of any nation’s industrialization drive (M. V. R. Raquiza, 2016).3 1. In this thesis, the terms small-scale enterprises and businesses are, from time to time, used in SMEs’ stead. Also, it is worth noting that while there have been attempts made to specifically define the SMEs (see Gibson & van der Vaart, 2008), there is no universal consensus on its definition due to the variation of economic conditions between countries (Berisha & Pula, 2015; Burgess, 2003; Harvie & Lee, 2002; Hobbs, 2017). In the literature, the sector is defined in terms of number of employees (most common), asset size, capital, sales, production capability, or industry (e.g., IT, agriculture) (Hall, 2002; Harvie & Lee, 2002; Miranda & Miranda, 2018; Raquiza, 2016).. 2. The same is true in the context of Asia. In developing Asian countries such as Cambodia, Laos, and Nepal, SMEs represent the vast bulk of the corporate sector; whereas in developed economies like Japan, which is known for their large conglomerates, SMEs account for about 99% of firms, 70% employment, and 50% of GDP (Abe, 2009).. 3. In addition to economic benefits, the sector also serves as a vehicle for social inclusion. SMEs are instrumental in poverty and income inequality reduction, as small enterprise development usually results in employment generation through expansion of existing and/or the creation of new firms (International Trade Centre, 2017;. 1 DOI:10.6814/NCCU202100402.

(13) Given the importance of SMEs in many economies, authorities have devoted substantial resources and attention in the sector’s development. Yet, all over the world, these kinds of businesses still face considerable constraints that prevent them from reaching their potential to contribute more to the economy. This is clearly evident in the performance of SMEs in a myriad of developing countries such as the Philippines, an emerging Southeast Asian economy numerically dominated by tiny, albeit relatively unproductive, enterprises.. SMEs: The ‘Crippled’ Backbone of the Philippine Economy Philippine SMEs, which are legally defined in the country as firms that have less than 200 employees or less than PHP 100 million (or roughly USD 5.3 million in current terms) in asset size, dominate the national economy.4 In 2018, they accounted for 99.52% of the total number of formal private businesses and employed 63.19% or 5,714,262 of the workforce. 政治大. (Department of Trade and Industry, 2018), making the sector “the backbone, the heart, and. 立. [even] the lungs,” to use Fruman’s (2016: para. 8) description, of the Philippine economy.5. ‧ 國. 學. Figure 1. Share of number establishments by sector (top), value added by sector (middle), and contribution of establishments to total employment (bottom) in the Philippines (latest available data) Small. Medium. Large. NUMBER OF ESTABLISHMENTS. 88.45%. Ch. 28.66%. CONTRIBUTION TO TOTAL EMPLOYMENT. 0.49% 10.58% 0.48%. y 21%. 10%. n. al. 5%. engchi. sit. io. VALUE ADDED BY SECTOR. er. Nat. Total: 1,003,111. ‧. Micro. i Un. 64%. v. 27.04%. 7.29%. 36.81%. Note: Data for Number of Establishments and Contribution to Employment are from the Philippine Statistics Authority (2018), while data from Value Added by Sector are sourced from the Philippine Statistics Authority (2012) (latest). However, despite accounting for nearly all the registered firms and employing the majority of the labor force, the SME sector merely contributes 35.7% to the Philippine GDP Vandenberg, 2006). Meanwhile, in some contexts such that of the developmental states of Japan, Taiwan, and to a certain extent, Korea, SMEs have played a social safety net role, as subsidies and regulations favorable to the sector usually have indirect and hidden effects on the overall ‘welfare mix’ (Kim, 2010). 4. In the Philippines, small businesses are further divided to include a ‘micro’ category. For the detailed classification of Philippine SMEs, kindly refer to the succeeding chapter. The term SME is used in this thesis to refer to the entire sector, including those classified as micro.. 5. While important especially in the context of developing world, the informal sector is not within the scope of this research paper. Further studies may investigate the informal sector in order to have a better prognosis of the issue.. 2 DOI:10.6814/NCCU202100402.

(14) (Department of Trade and Industry, 2018), indicating its underproductive nature vis-à-vis the large enterprises (LEs). In light of this immense disparity between the productivities of SMEs and LEs relative to their shares to the total number of businesses in the country, economists such as Aldaba (2011) characterize the nature of the Philippine industrial structure as “hollow.” Furthermore, looking from a comparative perspective, the Philippine SME sector’s contribution to the economy is, at best, lamentable considering that its counterparts in Southeast Asia, with the only exception of oil-rich Brunei, contribute around 36.6% to 61% to the GDPs of their respective economies (see Figure 2 below), prompting the erstwhile National Economic and Development Authority (NEDA) Secretary Cielito Habito (2014) to conclude that the country's SME sector as the “smallest among its neighbors” (i.e., ASEAN-6) and its poor performance as the reason behind the country’s “lack of inclusive growth” (para. 5).6. 政治大. Figure 2. Significance of SMEs in ASEAN Member States (latest figures). 立. 100%. ‧ 國. 70% 60% 50%. Total Firms GDP. al. v C hSGP THA VIEU n iBRN e n 99.70% 99.90% 99% g c h i98% 96.50%. KHM. LAO. MMR. 99.80%. 99.80%. 99.40%. 36.60%. 49%. 42.20%. 45%. 34.80%. 65.30%. 65%. 78.50%. 64%. 54.50%. 71.70%. 82.20%. 80%. n. 10%. sit. io. 20%. er. 30%. y. Nat. 40%. ‧. SMEs' % Share. 80%. 0%. 學. 90%. PHL. IND. 99.60%. 99%. 36%. 61%. Employment 63.30%. 87.80%. MYS. Source: OECD/ERIA (2018). Notes: Firm size classifications vary by member-states. Data (i.e., nominal value added) for Singapore (SGP) from 2017. Data for Indonesia (IND), Malaysia (MYS), the Philippines (PHL) and Thailand (THA) from 2016. Data (i.e., gross business revenue instead contribution to GDP) for Brunei Darussalam (BRN) from 2015. Data for Cambodia (KHM) from 2014, and data for Lao PDR (LAO) from 2014. Data for Myanmar (MMR), however, is only an estimate, while there is no data available on GDP or equivalent for KHM, LAO, and MMR.. Statement of the Research Problem and Questions What, thus, accounts for the ‘crippled' nature of the country’s economic backbone? Phrased more specifically, why does the Philippine SME sector contribute a comparatively low 6. Latest comparative data (2018, pre-COVID-19 pandemic) shows that the Philippine poverty rate stood at 21.9 percent, making it the among the worst in the entire ASEAN region (World Bank, 2020c).. 3 DOI:10.6814/NCCU202100402.

(15) percentage to the GDP despite comprising nearly all the registered firms and employing the majority of the workforce in the country? Given this seeming contradiction, as well as the significance of SMEs to the economy, the foregoing conundrum has become a subject of intense intellectualization, with much of the analyses underscoring the explanations offered by economics (e.g., Aldaba, 2008, 2011, 2017; Canare, Francisco, & Price, 2017; Pernia & Salas, 2005; Tambunan & Chandra, 2014) and management science (e.g., Daño-Luna, Canare, & Francisco, 2018; Hampel-Milagrosa, Loewe, & Reeg, 2014; Mendoza, 2015; Roxas, 2009).7 While these works are oftentimes correct and helpful in determining market failures and firmspecific limitations, they fail to take into consideration the broader perspectives, such as politics and governance. Viewed against this backdrop, this thesis attempts to fill this lacuna by drawing from. 政治大 SME sector. By making structures, institutions, and actors the focal points of analysis, the 立 the political economy perspective to explain the developmental conundrum of the Philippine. political economy approach allows us to better understand the prevailing political conditions. ‧ 國. 學. that impede (or facilitate) the adoption and/or proper implementation of policies. This approach appears to be revealing in the context of Philippine SMEs, as the sector suffers from a poor. ‧. performance notwithstanding the wide range of policies ‘passed’ for SME sector development.. Nat. sit. y. More particularly, this work employed a modified version of Kondoh (2005) and te. al. er. io. Velde’s (2006) state-business relations framework (see Chapter 4). Essentially, this approach,. n. which is mainly inspired by the literature on institutionalism and interest groups, ascribes the. Ch. i Un. v. sector’s poor performance to the problematic ties between relevant political economic actors.. engchi. The success or failure of state-SMEs relations, as advanced in the framework, is largely determined by the level of organization of the SMEs, the capacity and willingness of the state to undertake policies, and the nature of interaction mechanisms between the two sectors, all of which are influenced, to a certain degree, by the ‘structure’ of the polity (i.e., prevailing institutional configuration shaped by critical junctures in history).8. 7. Generally, not much attention has been paid to SMEs due in part to the difficulty in finding data (Ameda & Baysic-Pobre, 2013) and the common tendency of scholars to prioritize LEs because of the longstanding belief that big businesses are the engines of the economy. The view that LEs must be prioritized because larger firms drive the overall competitiveness of the economy—and in turn, the focus of much academic and policy analyses— is known in the literature as the Market Systems approach (Donor Committee for Enterprise Development, 2018).. 8. Kondoh and te Velde’s frameworks was modified by factoring in the influence of “structure” (or history) to state-business relations into the analysis. This idea was inspired by Heo and Tan’s (2003) framework in examining the divergent impact of the 1997 Asian Financial Crisis on Korea and Taiwan (see Chapter 4 and Appendix A).. 4 DOI:10.6814/NCCU202100402.

(16) In light of the discussed problématique and analytical framework, the sub questions of this paper were constructed as follows: Sub Question 1: How has the country’s political economic history shaped the industrial structure and the organization of the state and the SME sector? Sub Question 2: How do the organization of and interaction between the state and the smallscale enterprises, in contemporary times, influence the way SME-oriented policies are formulated and implemented?. Significance of the Study Considering the sector’s potential, as well as its vital role to play in promoting broadbased development—a goal that has long eluded many developing countries’ governments—. 政治大 policymakers, but also the millions 立of people stricken in poverty at large.. shedding light on this conundrum is of paramount importance to, not just the academics and. ‧ 國. 學. Particularly, on a theoretical level, one expected outcome of this study, as mentioned earlier, is to identify a political economy explanation as to why SMEs, in some developing. ‧. economies such as the Philippines, are underproductive—an inquiry that suffers from a lack of scholarly attention. In doing so, this thesis hopes to contribute to the fields of political economy. y. Nat. sit. of development, area studies, and, perhaps, public governance by furthering the understanding. al. er. io. of how states and SMEs interact, as well as how the latter operate as political—in addition to. v. n. economic—agents in the context of a historically unequal society like that of the Philippines.. Ch. engchi Scope and Limitations of the Study. i Un. Like in many developing economies, the Philippines has a sizable informal sector. The Department of Labor and Employment estimates that 56% of the country’s total working population are in the informal economy (Gonzales, 2018). Typically, firms and their workers have limited access to public services and operate without regulation and protection from the state. While studying this sector is crucial to have a comprehensive understanding of SMEs, this important subset is regrettably not within the scope of this thesis given resource limitations.. Thesis Organization The remainder of this work is organized as follows. In the next chapter, an overview of the country’s SME sector will be presented. In particular, Chapter 2 discusses the definition. 5 DOI:10.6814/NCCU202100402.

(17) and classification of SMEs in the Philippines, the important policies in relation to SME development, the government agencies concerned with the implementation of these programs, and the current state of the SME sector. The is then followed by a review of literature on SME sector development in the Philippines. Particularly, Chapter 3 commences with an introduction of three major theoretical explanations on the conundrum and concludes with a discussion of the research gap (i.e., the lack of institutional and interest-based perspectives in the political economy of Philippine SMEs) and the concepts that served as foundations of this work’s theoretical framework. Chapter 4 then draws attention to the paper’s theoretical framework and argument. More specifically, the chapter expounds the three components of the theory of state-business. 政治大. relations (SBR) used in this paper and the impact of historical and political developments in the SBR. The chapter ends with a discussion of the experience of a polity that is regarded in. 立. development circles as a model for SME development to demonstrate how the framework was. ‧ 國. 學. applied in the context of Philippine state-SMEs relations.. Chapter 5 details the research design of the present investigation. In particular, the. ‧. sit. Nat. ontological and epistemological underpinnings of the study.. y. chapter elaborates on the methodology, data collection and analysis methods, and the. er. io. Chapters 6 and 7 zero in on the findings of this research. Whereas the former focuses. al. iv n C SMEs, the latter discusses the contemporary ties, focusing on the organization of h e nstate-SMEs hi U c g the state and the SMEs and the nature of the relationship between the two sectors. n. on the historical analysis of the country’s SBR, including relations between the state and the. Finally, Chapter 8 concludes the current investigation, providing a summary of the findings, theoretical implications and areas for further research. The concluding chapter ends with a discussion of prospects of a responsive state and organized SME sector amidst the COVID-19 pandemic.. 6 DOI:10.6814/NCCU202100402.

(18) Chapter 2 Overview of the Philippine SME Sector: Definition, Policies, Institutions, and Current Performance Before turning to the research proper, it is necessary, early on, to detail the Philippine SMEs, the main subject of the current investigation. In this chapter, an overview of the SME sector in the country is provided, opening with a discussion of the definition and classification of SMEs. This is then followed by a presentation of the sector’s profile, as well as the various policies related to SME development and the agencies concerned with program and policy implementation. Chapter 2 concludes with an elaboration of the discussion made in the previous chapter about the performance of the Philippine SME sector.. 政治大 In the Philippines, SMEs have two operational definitions: by asset size and by number 立 of employees. In connection with the former, the sector is defined in the Republic Act (RA) Definition of SMEs in the Philippines. ‧ 國. 學. No. 9501 or the Magna Carta for Micro, Small and Medium Enterprises (Magna Carta for Micro, Small and Medium Enterprises (MSMEs), 2008) as:. ‧. any business activity or enterprise engaged in industry, agribusiness, and/or services,. sit. y. Nat. whether single proprietorship, cooperative, partnership, or corporation whose total assets, inclusive of those arising from loans but exclusive of the land on which the. io. n. al. er. particular business entity’s office, plant, and equipment are situated, must have value. i Un. v. falling under the categories: micro (less than 3 million pesos), small (3-15 million. Ch. engchi. pesos), and medium (15-100 million pesos) (emphasis provided). Apart from asset size, SMEs are more commonly classified in terms of number of employees: micro (1-9 employees), 10-99 (10-99), and medium (100-199). Below is a table summarizing the categories of Philippine SMEs vis-à-vis the LEs: Table 1. Classification of Philippine Businesses. Category Microenterprise Small enterprise Medium enterprise Large enterprise. No. of Employees 1-9 employees 10-99 employees 100-199 employees 200 or more employees. Assets Less than 3 million pesos 3 million to 15 million pesos 15 million to 100 million pesos More than 100 million pesos. Source: Republic Act No. 9501 – Magna Carta for Micro, Small and Medium Enterprises (2008). For brevity and comparability’s sake, however, the term ‘SMEs’ is used in this thesis to refer to the entire sector including those categorized as ‘micro’ in the Philippine legal system. 7 DOI:10.6814/NCCU202100402.

(19) Profile of the Sector In 2018 (latest available data), there were 998,342 SMEs in the Philippines, accounting for 99.52% of the total number of firms registered with either the Department of Trade and Industry (DTI) or the Securities and Exchange Commission (SEC). Of this figure, the majority (88.45%) were classified as microenterprises (887,272), followed by small and medium-sized businesses at 106,175 (10.58%) and 4,895 (0.47%), respectively. The minuscule share of medium vis-à-vis the micro- and small-sized enterprises, as highlighted earlier, underlines the ‘missing middle’ phenomenon and the ‘hollow’ nature of the country’s industrial structure. Figure 3. Share of SMEs and LEs to total number of firms in the Philippines SMEs LEs. 0.49%. 0.48%. Medium. 政治大. Small. 10.58%. 立. ‧ 國. 學. 88.45%. 99.52%. Micro. ‧. Source: Department of Trade and Industry (2018). y. Nat. sit. Similarly, this pattern mirrors the sector’s contribution to employment. In the same year,. er. io. SMEs created a total of 5,714,262 jobs, comprising 63.19% of the country’s workforce. To be. al. n. iv n C 2,610,221 or 28.86% of the entire labor h force i U Closely following this figure, e n gin cthehcountry. more precise, microenterprises generated the highest number of jobs, with the sector employing. small firms hired 2,445,111 workers (27.04% of the total employment); whereas medium enterprises produced lesser jobs, with 658,930 (7.29%) employed in the sector. Figure 4. Employment share of SMEs and LEs in the Philippines MSMEs LEs. 7.29%. Medium. 27.04%. Small. 38.61%. 63.19% 28.86%. Micro. Source: Department of Trade and Industry (2018). 8 DOI:10.6814/NCCU202100402.

(20) In terms of sectoral distribution,46.25% SMEs were mostly concentrated in the8.77% ‘wholesale6.63% and 14.48% retail trade’ and ‘repair of motor vehicle and motorcycle’ sectors, constituting almost half (46.25% or 461,765) of the total number of SMEs in the country.9 This is followed by the ‘accommodation and food service activities’ and ‘manufacturing’ sectors, which accounted for 144,535 (14.48%) and 116,535 (11.65%) SME establishments, respectively. The breakdown for other sectors, including the previously discussed, is shown in the figure below: Figure 5. Distribution of SMEs by Industry Sector (2018) 46.25%. 立. 14.48%. 8.77%. 政治大. Accommodation and Food Service Activities. Other Industries. 11.65%. 4.61%. 6.63%. Other Service Activities 2.96%. 2.87%. ‧. ‧ 國. 學. Wholesale and Retail Trade; Repair of Motor Vehicles and Motorcycles. Financial and Insurance Activities. Manufacturing. ICT. Human Health and Social Work Activities. Education. 1.78%. Nat. y. sit. n. al. er. io. Source: Department of Trade and Industry (2018). Notes: Other Industries include Administrative and Support Service Activities (1.76%); Professional, Scientific, and Technical Activities (1.59%); Arts, Entertainment, and Recreation (1.54%); Real Estate Activities (1.16%); Transport and Storage (1.10%); Agriculture, Forestry, and Fishing (0.85%); Construction (0.43%); Water Supply, Sewerage, Waste Management, and Remediation Activities (0.14%); Electricity, Gas. Steam, and Air Conditioning Supply (0.12%); and Mining and Quarrying (0.08%). Ch. engchi. i Un. v. Geographically, the majority of SMEs can be found in the following regions: National Capital Region (20.36%), CALABARZON (14.84%), Central Luzon (11.63%), Central Visayas (7.05%), and Western Visayas (6.17%). The combined number of SME establishments in these five regions comprised 60.05% of the country’s total in 2018 (Department of Trade and Industry, 2018), indicating a highly dense geographic distribution of SMEs in the country.10 This concentration, according to the Department of Trade and Industry (2018), has a strong correlation with the population size and the degree of economic activity within the region. Table 2 hereunder shows the other regions’ total number of SME establishments.. 9. The categories are based on the Philippine Statistics Authority’s yearly List of Establishments.. 10. This is in stark contrast to some countries such as Taiwan, where SMEs, particularly the manufacturing-oriented ones, are dispersed geographically, leading to a more equitable income distribution (Clark & Clark, 2016).. 9 DOI:10.6814/NCCU202100402.

(21) Table 2. Distribution of SME Establishments Per Region (2018). Region. Total No. of Firms. % of Total. Micro. Philippines National Capital Region CALABARZON Central Luzon Central Visayas Western Visayas Davao Region Ilocos Region SOCCSKSARGEN Bicol Region Northern Mindanao Zamboanga Peninsula Eastern Visayas Cagayan Valley MIMAROPA Cordillera Administrative Region Caraga ARMM. 1,003,111. 100%. 205,250. Small. Medium. Large. 887,272. 106,175. 4,895. 4,769. 20.46%. 166,921. 34,523. 1,868. 1,938. 149,007 116,458 70,932 61,783 58,685 50,877 44,940 40,514 37,412. 14.85% 11.61% 7.07% 6.16% 5.85% 5.07% 4.48% 4.04% 3.73%. 133,640 104,875 61,176 55,482 52,449 46,708 41,581 37,111 33,040. 13,778 10,754 8,775 5,894 5,758 3,977 3,121 3,215 4,079. 778 444 444 214 252 122 120 118 155. 811 385 537 193 226 70 118 70 138. 33,244. 3.31%. 30,888. 2,216. 73. 67. 30,789 30,753 23,952. 3.07% 3.07% 2.39%. 21,948. 1,914. 70 52 57. 40 35 33. 20,466. 2.04%. 18,783. 1,587. 47. 49. 19,873 8,176. 1.98% 0.82%. 18,069 7,730. 1,687 423. 67 14. 50 9. 學 ‧. ‧ 國. 立. 治 2,355 政 28,324 28,547 大 2,119. sit. y. Nat. Source: Department of Trade and Industry (2018). Note: Ranked in order of total number of firms from highest to lowest. er. io. Policies and Programs on SME Sector Development in the Philippines. al. n. iv n C U itself—at least, nominally— engine of socio-economic development.h Asesuch, the state n g c h i pledges Philippine laws and agencies recognize the substantial role of entrepreneurship as an. to develop private enterprises in the country and protect the sector against unfair competition. and practices. This is chiefly manifested in the highest law of the land, particularly Article XII, Section 1 (para. 3) of the 1987 Constitution, to wit: In the pursuit of [industrialization and full employment], all sectors of the economy and all regions of the country shall be given optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and similar collective organizations, shall be encouraged to broaden the base of their ownership. In order to achieve this goal, a plethora of laws have been enacted by the government since the early 1990s to promote entrepreneurship in the country. The foremost of which is RA 6977, otherwise known as the Magna Carta for Small Enterprises. Passed in 1991 to 10 DOI:10.6814/NCCU202100402.

(22) consolidate then existing SME programs into a single framework (Aldaba, 2008), this landmark piece of legislation, which was amended in 1997 (RA 8289) and 2007 (RA 9501) in light of changes in the business and market environment, aims to “promote, support, strengthen, and encourage the growth and development of [SMEs] in all productive sectors of the economy” (RA 6977, 1991, sec. 3). The most salient provisions of the legislation and its amendments are the following: (1) the establishment of the Micro, Small and Medium Enterprise Development (MSMED) Council; (2) the creation of the Small Business Guarantee and Finance Corporation, which later merged with Guarantee Fund for Small and Medium Enterprises to form the Small Business Corporation; (3) the enactment of a mandatory credit program, ordering all lending institutions in the country to allocate at least 8% of their total loan portfolio to micro and small enterprises and 2% to medium-sized firms; and (4) the streamlining of requirements in an effort to improve ease of doing business in the country (Khor et al., 2015).. 政治大 Another law that is considered to be crucial in small enterprise sector development is 立. the Barangay Micro Enterprise Act (RA 9178). Enacted in 2002 to promote the integration. ‧ 國. 學. of microenterprises into the mainstream economy, the law provides various incentives to informal businesses, such as income tax exemption; exemption from minimum wage regulation;. ‧. priority to special financing window; and technology transfer, production and management,. y. sit. Nat. training, and marketing assistance programs (BMSMED, 2010).. al. er. io. Twelve years later, the government implemented yet another legislation popularly. n. known as the Go Negosyo Act (RA 10644).11 This landmark legislation mandates the creation. Ch. i Un. v. of Negosyo Centers in all provinces, cities, and municipalities that function as one-stop hubs. engchi. for business registration assistance and business advisory and information services. In addition, the Act reconstituted the membership of the MSMED Council and expanded the functions of the body to include coordination, supervision, and evaluation of Negosyo Centers. The law likewise established the Philippine Business Registry Databank, a database of all commercial enterprises in the country, and the Startup Fund for MSMEs. Similar to RA 9178, the Go Negosyo Act strengthens government’s existing SME programs on technology transfer, production and management training, and marketing assistance. Recently, two laws were passed in view of small business sector development: the Philippine Innovation Act (RA 11293) and the Innovative Startup Act (RA 11337). The. 11. Negosyo, in Filipino (or Tagalog), means business or commercial enterprise.. 11 DOI:10.6814/NCCU202100402.

(23) country’s Innovation Act, which has been implemented since July 2019, created the National Innovation Council and the Innovation Fund. Through strengthening SMEs’ position in the national innovation system, these two provisions help small entrepreneurs increase their capacity and enable their businesses to join the domestic and global supply chains. On the other hand, the Innovative Startup Act, which was also introduced in the same year, established the Philippine Startup Development Program, which is aimed at incentivizing the proliferation and growth of startups and startup enablers in the country. Furthermore, RA 11337 mandates the creation of startup ecozones and other related initiatives, such as the introduction of venture capital funds and startup visas to prospective investors and business people. What has been discussed thus far are the major laws concerning SMEs. However, it should be borne in mind that, in addition to the abovementioned policies, the Philippine. 政治大 sector, as enumerated in Appendix B. These legislations, including the ones highlighted in the 立 government has been implementing other laws that have a direct and/or indirect impact to the earlier part of this section, are tallied in the following table for the purpose of brevity:. ‧ 國. 學. Table 3. Tally of Legislations and their Policy Scope/Areas Relevant to SMEs. n. Ch. engchi. y. sit er. io. al. Number of Laws 6 12 14 8 6 10 9 3 2 17. ‧. Nat. Policy Arena Ease of Doing Business Governance Access to Finance Market Expansion or Trade Access to Technology Access to Training Tax Incentives Advocacy or Representation Entrepreneurial Education Operations-related Policies (Fiscal, Labor, etc.). i Un. v. Source: Makati Business Club (2016), Table 3. Note: Some laws tally in two or more policy arenas.. Aside from laws, the government also implements programs and projects in relation to SME sector development. Among the most notable SME-oriented programs is the SME Unified Lending Opportunities for National Growth (SULONG), which provides credit at a concessional interest rate for export promotion and capital outlay needs of the SMEs. In 2016, the government has upgraded this financing program with the 3P or the Pondo sa Pagbabago at Pag-Asenso (translated in English as Fund for Change and Development), earmarking at least PHP 2 billion (approximately USD 40 million) annually to end loan sharks, who usually provide above-the-market credit rates to small entrepreneurs. The SB Corporation, as tasked by the Magna Carta for SMEs, is responsible for implementing the 3P program. 12 DOI:10.6814/NCCU202100402.

(24) More than financing initiatives, the Department of Trade and Industry has also come up with a product development and marketing assistance program called the One Town, One Product (OTOP) Philippines. Patterned after Japan’s successful One Village, One Product, OTOP Philippines enables SMEs to develop products and services that are rooted in the culture, resources, and comparative advantage of the local community. The program likewise provides retail spaces for SMEs to market their products to domestic consumers and tourists. Regarding technology upgrading, the government, through the Department of Science and Technology, implements the Small Enterprise Technology Upgrading Program (SETUP), which is aimed at “encouraging and assisting SMEs to adopt [technological] innovations to improve their operations” (Department of Science and Technology, n.d., para. 1), primarily through tech transfer and support. Meanwhile, for entrepreneurial education, the. 政治大 Roving Academy, Project KAPATID, and Mentor ME (Micro Entrepreneur) Program. 立. Trade and Industry department provides mentorship programs to SMEs such as the SME. ‧ 國. 學. Other projects and programs of the government include the Strengthening the Disaster Resilience of Small and Medium Enterprises project, Shared Service Facilities Program,. ‧. Export Competitiveness Program, and the Youth Entrepreneurship Program (YEP).. sit. y. Nat. Clearly, it can be inferred from the discussion above that the Philippines does not lack programs and laws catering towards SMEs. To be able to grasp the issue more comprehensively,. io. er. it is now time to turn to the agencies concerned with the implementation of these policies.. n. al. i n Agencies Supporting SMEs inCthe Philippines U hengchi. v. The most important government body responsible for the regulation of businesses (including LEs) and implementation of private sector development policies in the country is the Department of Trade and Industry (DTI). Mandated to help the country realize its “goal of globally competitive and innovative industry and services sector that contribute to inclusive growth and employment generation” (Department of Trade and Industry, n.d.-a, para. 2), DTI is comprised of six functional groups (i.e., Management Services, Consumer Protection, Industry Promotion, Regional Operations, and Industry Development) and is attached to 11 agencies for policy and program coordination purposes (See Appendix C). Under DTI’s Regional Operations functional group, the agency that is specifically tasked to implement SME policies and programs is the Bureau of Micro, Small and Medium. 13 DOI:10.6814/NCCU202100402.

(25) Enterprise Development (BSMED). In addition to its primary role of implementing SME policies and programs, the Bureau also acts as the secretariat of the Micro, Small and Medium Enterprises Development (MSMED) Council. As the secretariat, the BSMED assists the Council by preparing position and background papers and annual reports on the status of Philippine SMEs, as well as monitoring and coordinating the SME development programs and policies in the country. Moreover, every five years, the agency coordinates the writing of the medium-term MSME development plan and recommends this to the Council for approval. The MSMED Council, which was established in 1991 pursuant to the Magna Carta for MSMEs, serves as the country’s highest policy-making body for SMEs. Chaired by the secretary of Trade and Industry, this inter-agency council that is mandated to meet quarterly is composed of the following members: secretaries of Agriculture, Interior and Local. 政治大 representatives from the SME sector to represent the country’s major island groups, with at 立 Government, Science and Technology, Tourism; chairman of the Small Business Corporation; least one of them coming from the microenterprise sector; a representative from the women. ‧ 國. 學. sector designated by the Philippine Commission on Women; and a youth representative assigned by the National Youth Commission.12 Its primary responsibilities are to recommend. ‧. policies to the President and the Congress, review extant policies on regulation and financing. sit. y. Nat. of SMEs, and provide the framework in tapping local and foreign funds for SME development.. al. er. io. Under the Go Negosyo Act, the Council’s role has been expanded to include the. n. coordination, supervision, and evaluation of Negosyo Centers. The aforementioned law also. Ch. i Un. v. created an advisory unit to the Council, comprising the secretaries of Science and Technology. engchi. and Socio-economic Planning departments, governor of the Central Bank, presidents of Land Bank of the Philippines and Development Bank of the Philippines, president of the Credit Information Corporation, and representatives from the labor sector, private banking sector, microfinance NGOs, and the academe (i.e., University of the Philippines Institute for Small Scale Industries). While the MSMED Council may consult the advisory unit in its meetings and activities, it has the prerogative not to take the heed of the unit’s advice. Another government agency responsible in SME development is the Small Business Corporation (SB Corporation). A government-owned and controlled corporation (GOCC) 12. Raquiza (2016) describes the MSMED Council as an institution that is “crippled at birth” because of the lackluster budgetary support it has received from the national government since its inception. She discovered that the lack of support had constrained the Council from fulfilling its mandate (e.g., meeting on a quarterly basis), thereby affecting its constituents, i.e., the SMEs, negatively.. 14 DOI:10.6814/NCCU202100402.

(26) formed through the merger of Small Business Guarantee and Finance Corporation and Guarantee Fund for Small and Medium Enterprises in 2001, the SB Corporation is responsible for building capacity and financing alternatives to the SME segments traditionally regarded as unfinanceable (e.g., micro and small agri- and aqua-enterprises, firms in small island economies, micro retailers, first-time small businesses, Islamic SMEs, indigenous peopleowned enterprises, and calamity-stricken SMEs) (SB Corporation, 2019). In line with the Magna Carta for MSMEs, the Corporation’s programs include wholesale lending, direct and retail lending, credit guarantees, equity financing, and entrepreneurial education and training. It must also be noted that, along with the government, business associations, cooperatives, and non-government organizations, such as the Philippine Chamber of Commerce and Industry and the Philippine Center for Entrepreneurship, take part in SME. 政治大. development by providing extension and financial services to small firms (Evangelista, 2014).. 立. Performance of the Philippine SME Sector. ‧ 國. 學. Notwithstanding the wide-range of policies, programs, and institutions related to smallscale enterprise development, Philippine SMEs still remain to be unproductive. This is clearly. ‧. manifested in the sector’s limited share to the country’s macroeconomic output. While the. y. Nat. sector accounts for 99.52% of the total number of firms and 63.19% of the jobs in the country,. sit. SMEs’ contribution to the GDP only stands at 35.7%—a figure that places the Philippines. n. al. er. io. amongst the worst in the entire ASEAN region.. Ch. i Un. v. Figure 6. ASEAN SME sectors’ contribution to their respective national economies Brunei. engchi. 34.80%. Philippines. 35.70%. Malaysia. 36.60%. Thailand. 42.20%. Vietnam. 45%. Singapore. 49%. Indonesia. 61% 0%. 10%. 20%. 30%. 40%. 50%. 60%. 70%. Source: OECD (2018). Notes: Firm size classifications vary by member-states. Data (i.e., nominal value added) for Singapore from 2017. Data for Indonesia, Malaysia, the Philippines and Thailand from 2016. Data (i.e., gross business revenue instead contribution to GDP) for Brunei Darussalam from 2015. There is no data available on contribution to GDP or equivalent for Cambodia, Laos, and Myanmar.. Dissecting this figure, workers in the microenterprise category predictably fared the lowest in terms of value added per worker (or labor productivity), obtaining a score of 10% 15 DOI:10.6814/NCCU202100402.

(27) relative to the LEs. On the other hand, small businesses registered 52% vis-à-vis large-sized businesses, whereas medium-scale enterprises’ labor productivity posted a relatively high contribution at 82% (Makati Business Club, 2016). This trend is consistent with the microeconomics’ concept of scale economies, where LEs are generally more productive. The sector’s poor performance is also evident in the historical distribution of firm sizes in the country. For the past two decades, firm-size distribution has virtually remained unchanged, as evidenced by the figure below. In 2001, the proportion of medium-sized enterprises relative to the total number of firms in the country—a metric used by economists to determine the vibrancy of the SME sector—stood at 0.40%. Figure 7. Firm-size distribution in 2001, 2008, 2015, and 2018 100% 95%. 立. 90% 85%. 2001. 0.30%. Medium. 0.40%. Small. 7.60%. Micro. 91.70%. y. al. n. Large. io. 50%. 2008. 2015. 0.39%. 0.43%. sit. 55%. Nat. 60%. er. 65%. ‧. 70%. ‧ 國. 75%. 學. 80%. 政治大. iv 0.43% n C h0.40% 7.66% U9.59% i e h n c g 91.55% 89.53%. 2018 0.48% 0.47% 10.58% 88.45%. Source: MSMED Council (2004, 2010, 2016, 2018). Seven years later, the share stayed at 0.40%. It took the same duration for the share to grow by 0.03% and another three years to achieve 0.47%, the highest in recent memory. Based on one forecast of this pattern, it will take another two decades for the share to increase by 0.08%, ceteris paribus.13 This snail’s pace trend hints at the considerable challenges that small-sized firms face in order to graduate to the medium category. As indicated earlier, the general inability of tiny firms to develop into medium-sized ones, as well as the low number of small enterprises (compared to those in the micro category), highlights the missing middle 13. The figure was derived by the author from a simple linear regression of the time series data of the share of medium-sized enterprises in the past twenty years.. 16 DOI:10.6814/NCCU202100402.

(28) phenomenon in the Philippine industrial structure—a problem that has perhaps contributed to the non-inclusive character of the country’s recent strides in economic growth. In summary, the SME sector’s relatively small contribution to GDP, its low labor productivity compared to that of LEs’, and the modest growth of the share of medium-sized enterprises in the past two decades are all indicative of Philippine SMEs’ weak performance. This, however, comes despite the sector’s dominance in terms of share of employment, as well as the wide “presence” of programs, policies, and agencies concerning SME development in the country. Why is this the case? In the following chapter, a review of literature on the explanations for the sector’s poor performance is undertaken, which will be followed by a discussion of the theory of state-business relations, an important paradigm that served as the foundation of this work’s theoretical framework.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. 17 DOI:10.6814/NCCU202100402.

(29) Chapter 3 Various Explanations to the Philippine SME Sector’s Weak Performance: A Review of Literature Private sector, particularly SMEs, development has been a longstanding preoccupation of those in the academic and policy-making circles. This attention largely stems from the belief that SME sector development, as discussed in the initial chapter, is a way for countries to achieve development, given the sector’s enormous potential in stimulating employment, investment, and innovation. However, like in any other disciplines, scholars and pundits alike vary in their analysis and perception of the problem, offering different theories (and variables) to explain the variation in the performance of the SME sector.. 政治大. In the international development community, the dominant school of thought zeroes in on the technical and economic components of the conundrum. Espoused by various multilateral. 立. agencies such as the World Bank, Asian Development Bank, and USAID, this approach, to put. ‧ 國. 學. it succinctly, attributes the weak performance of the SME sector to the constraints (or market failures) that impede the proper functioning or—in the words of neoclassical economists—the. ‧. Pareto efficiency of the market. Not surprisingly, most of the scholarly works on small-scale enterprise sector development in the Philippines echo this perspective.. y. Nat. io. sit. In addition to the technical-economic school, some studies regarding the Philippine. n. al. er. SME sector have concentrated on the internal capacity of firms. While the previous perspective. i Un. v. underscores market variables in analyzing the sector’s performance, the firm-oriented approach. Ch. engchi. focuses on the orientation, skills, practices, and networks of the businesses and their owners. Whereas the two previously mentioned theories are often helpful in finding out market failures and entrepreneur-specific limitations, limiting one’s analysis to the technical-economic and firm-centered schools would result in overlooking important factors that affect the economy in general and the economic behavior of its actors (including the state) in particular, such as ideas, interests, and institutions. In an attempt to overcome this limitation, a handful of scholars have attempted to go beyond these perspectives and analyze the performance of the Philippine SME sector in light of the political economy approach. In this chapter, these different theories to SME sector development in the Philippines are discussed. This section commences with a review of the relevant extant literature on the dominant narrative, the technical-economic school, in explaining the poor performance of the 18 DOI:10.6814/NCCU202100402.

(30) Philippine SME sector. This is then followed by a discussion of works in another perspective, namely, the firm-oriented view. The final section of this chapter introduces a minority perspective, one which suffers from a lack of scholarly attention in the country and which this thesis’s theoretical framework and analysis build upon. Before proceeding, however, it is worth mentioning that given the sheer volume of studies previously conducted on the topic internationally, the discussion will underline the works done in relation to the Philippine SME sector, with non-Philippine related literature only serving as a backdrop for each subsection.. The Dominant Perspective: The Technical-Economic School in Small Enterprise Sector Development Bringing the dominant approach to the fore is crucial as it helps us understand the policies that have served as the strategy of the Philippine government vis-à-vis SME sector. 政治大 and aid-granting institutions, underscores 立 the technical and economic facets of the problem. development (see Chapter 2). This approach, which is widely used by those in the development. ‧ 國. 學. Phrased succinctly, the technical-economic school in SME sector development attributes the. poor performance of SMEs to the constraints that impede the proper functioning of the market.. ‧. As the mainstream approach, there is an extensive body of work done exploring the issue of SME sector’s poor performance vis-à-vis various technical and economic constraints:. y. Nat. sit. access to finance (Beck & Demirguc-Kunt, 2006; Berger & Udell, 1998; Chittithaworn et al.,. er. io. 2011; Harvie et al., 2013), market access (Rogerson, 2013), and regulations (Klapper et al.,. al. iv n C thematic manner in light of the literaturehon the PhilippineU e n g c h i SME sector. n. 2006; World Bank, 2020a).14 For reasons of economy, these components are elaborated in a. Access to Finance Finance is regarded as the lifeline of any business, whether LEs or SMEs. As such, most of the analyses in the private sector development have delved into the domain of determining the constraints related to SMEs’ access to finance. In the Philippines, the majority of the ‘access to finance’ literature are in accord that SMEs, in general, lack formal means to credit, thereby resulting in lower profitability, productivity, and innovation (Harvie et al., 2013; Khor et al., 2013). Many SMEs in the country tend to rely on internal sources for financing, with 53% to 73% of SMEs sourcing their initial capital internally and 52% to 78% relying from the same for operation and expansion (Nangia & Vaillancourt, 2007). 14. The cited works are based on Canare, Francisco, and Price’s (2017) review of non-Philippine-context literature.. 19 DOI:10.6814/NCCU202100402.

(31) The Magna Carta for MSMEs (see preceding chapter), a landmark legislation requiring financial institutions to allocate at least 10% of their loan portfolios to the sector, was not able to significantly stimulate bank lending to the small businesses. In fact, the ratio of SME lending vis-à-vis the banks’ total bank portfolio has declined for the past several years (Khor et al., 2015) and is expected to decline even more pursuant to the implementation of Basel III (Casaclang, 2018). Theoretically, the reason for the banks’ aversion to lending to SMEs, according to Harvie, Narjoko, and Oum (2013) and Yoshino and Taghizadeh-Hesary (2018), is the notion that SME lending entails more risks on the part of financial institutions, given that small-scale enterprises have higher default rates in light of their weaker financial, managerial, and business positions. Furthermore, Saito and Villanueva (1981) estimated that the transaction costs for extending credit to Philippine SMEs are at least twice that of providing loans to big businesses, suggesting the unprofitable nature of the SME lending industry in the country.15. 政治大 Aldaba’s (2011) survey of Philippine SMEs confirms these assertions, finding that poor 立. credit history, inadequate income flow, and unstable operations as reasons for the banks’. ‧ 國. 學. reluctance to lend to SMEs. To overcome default risks, banks have “continued to impose [high] collateral… and other stringent conditions such as minimum loan requirements” (p. 344).16. ‧. Although there is generally a consensus that an accessible and inclusive financial. Nat. sit. y. system is a sine qua non for the development of the SME sector, analysts tend to differ on the. al. er. io. approaches to solve the problem. Aldaba (2011), for instance, recommends the. n. institutionalization of a credit information facility to facilitate more lending from financial. Ch. i Un. v. institutions. What her proposal tells us is the widespread anti-SME bias in the financial sector,. engchi. which is perhaps rooted in the “information asymmetries” brought by limited commercial, operational, and financial capacities of small-scale businesses (Mahari, 2017, p. 141). Khor, Jacildo, and Tacneng (2015), on the other hand, argue for the expansion of alternative means of credit access, particularly equities markets. They found that there is a vast untapped opportunity for the sector to venture into equity financing, considering that SMEs only accounted for 0.005% of the Philippine Stock Exchange’s (PSE) total capitalization by. 15. Contrary to conventional wisdom, Jagtap (2019) finds that SME lending can be profitable for some Asian financial institutions, provided that interventions, such as the application of technology in operations, are applied.. 16. Other factors that discourage banks from expanding financial services to SMEs include macroeconomic instability, inadequate regulation on deposits, capital shortage, competition with government banks, and weak supervision from the Central Bank (Lamberte, 2001).. 20 DOI:10.6814/NCCU202100402.