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 (GVCs),” 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 SMEs are having difficulty competing with companies from Association of Southeast Asian Nations (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 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 consolidators, a 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 sub-contracting arrangements.
To help SMEs overcome the challenges in connecting to GVCs, it said it is imperative that policymakers must 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 SME exporters operate at the low end of the value chain, such that they export raw materials rather than processed and high-value products.
The study also underscored the importance of providing incentives on the purchase of equipment that processes raw materials into higher-value products. (Philexport News And Features )