Internationalizing small firms

May 25, 2015 at 15:57

12:51 AM | Tuesday, May 19th, 2015

SINCE LAST week, Boracay has been abuzz with delegates from across the Asia-Pacific region converging on the resort island for various meetings under the Asia Pacific Economic Cooperation (Apec). As host and chair of this year’s Apec meetings, the Philippines is highlighting small firms—micro, small and medium enterprises (MSMEs)—in the agenda for cooperation across the region that spans both sides of the Pacific. Last time we hosted Apec in 1996, we did the same—and for good reason.

It is often said that small firms are the backbone of any economy. If they are, then we don’t seem to be taking care of our backbone too well, and unless things change, our economy may find itself stooped and bent some time in the future. If it’s any comfort, we are not necessarily alone in this situation. Across the Apec region, small firms consistently account for more than 97 percent of all enterprises; for the bulk of the region, including the Philippines, the share is in fact 99 percent or more. But there is a wide divergence of their contribution to the economy. Contribution to gross domestic product varies from a low of 21 percent in Russia to a high of 59 percent in China and Indonesia; the Philippines is lower than average, at 36 percent. Contribution to total employment ranges from a low of 25 percent in Russia to a high of 92 percent in Indonesia (with Canada a close second at 90 percent); we are again below the average (67 percent) at 61 percent.

As for exports, the small firms’ contribution ranges from below 15 percent (Australia, Chile and Peru) to nearly 70 percent (China). Unfortunately, we lack reliable data to be able to determine exactly where the Philippines lies in this range, but indications point to our MSMEs’ export contribution being near the bottom end. What we know from sample survey data is that the bulk of Filipino enterprises do not export at all. The 2006 Global Entrepreneurship Monitor survey in the Philippines revealed that 77 percent of Filipino firms sell exclusively to the domestic market, while some 15 percent export 25 percent or less of their output. Only 2 percent of firms are export-oriented, that is, they export more than half of their output.

SMEs in our comparable Asean neighbors Thailand, Indonesia and Vietnam appear to have greater export involvement (between 16 and 35 percent of total exports, based on data compiled by the Apec Secretariat). While researching on the SME indicators of these countries, I found that they had begun undertaking measures to “internationalize” their SMEs years ago. It’s about time we came up with a similar strategy to expand the export role of small Filipino firms.

There are at least three reasons why it’s important that we internationalize our SMEs, meaning, link our small firms to foreign markets. First, information technology has made foreign markets as easily accessible to a single entrepreneur doing business from her bedroom with her computer, as they are to a transnational company with an elaborate marketing network. Second, it is through international exposure that a firm achieves greater resilience in its own domestic market, especially in the context of a market opened by closer regional integration. Third, it is through extending their market reach that micro enterprises can “graduate” into small enterprises, and that small can expand into medium, and medium can transform into large enterprises. Thus, internationalization fosters greater dynamism, resilience and stability in small firms, thereby making them solid foundations for broad-based (aka inclusive) economic growth.

What would it take to internationalize MSMEs? There are essentially three modes by which a small firm can connect to overseas markets: (1) individually sell its products directly to (similarly small) buyers abroad; (2) be part of a cluster of otherwise competitor firms pooled together to service volume orders (usually from distributors or institutional buyers) coming from overseas; or (3) sell its products to a value-adding firm linked to a regional or global value chain.

The first mode is most easily undertaken through the use of e-commerce platforms and social media. A prior need, then, is wide accessibility of reliable, low-cost and high-speed Internet, and of inexpensive logistics services for delivering the product.

The second mode would be done through deliberate efforts to foster clustering of similar producers (small farmers or manufacturers), usually facilitated by government provision of shared service facilities such as drying or processing equipment. There have already been a number of such clustering initiatives, such as Normin Veggies (that banded together Northern Mindanao vegetable producers) and the Sultan Kudarat Muscovado Farmers and Millers Corp.

The third mode takes a deliberate decision by a large internationally connected firm to make its value chain inclusive, by sourcing raw materials or intermediate products from small producers. Jollibee and Nestlé, for example, have been sourcing onions and coffee, respectively, from small farmers around the country, rather than take control of their entire value chain through vertical integration into large-scale farming.

Whichever mode is employed, small firms need cumbersome government procedures eased to remove unnecessary impediments to doing business across borders. This week, the Philippine government is spearheading in Boracay what is hoped to be an Apec-wide agenda to provide the necessary enabling environment for internationalizing small firms across the Asia-Pacific region.