Similar to other developing countries, small and medium enterprises, or SMEs, are crucial components of the Philippine economy. SMEs encompass a wide range of businesses, including small establishments, medium-sized enterprises, micro business ventures, and even informal enterprises.
Though categorized as small, these enterprises comprise most of the businesses in the Philippines and play an important role in the economy — enough for them to be considered the backbone of the country’s economy. Owing to their sheer number, SMEs contribute to many aspects of the Philippine economy, like job creation. Often, SMEs create jobs in localities large businesses and corporations cannot reach.
That said, SMEs have the potential to play an even bigger part in the economy. And with the proper support, they could drive the Philippines into the center world stage of progress.
How do SMEs help the Philippine economy?
Small businesses and medium sized enterprises, alongside the business process outsourcing (BPO) industry, have kept the economy buoyant through the pandemic. In addition, SMEs are vital in helping the Philippines in its goal of becoming an upper middle-income country in the near future. Below are the ways SMEs can accomplish this:
Providing opportunities
SMEs help address the issue of unemployment by creating jobs, especially in remote and rural areas where formal employment opportunities are limited. As these businesses expand their operations and scale their businesses, they will also need a larger workforce.
In addition, to direct hiring employees, SMEs also help in job creation through their supply chains. SMEs rely on suppliers, partners, contractors, and distributors to support their operations.
Since SMEs often operate within local communities, they help generate dependable livelihood opportunities for the population. As a result, this leads to increased economic activities and improved lifestyle quality that minimizes the need for the locals to move to bigger cities.
Create more products and services
Aside from employment, SMEs are also vital to the expansion of the services sector and food security.
First, SMEs are more agile and flexible compared to large enterprises and corporations. This characteristic allows them to identify emerging trends and quickly respond to changing consumer needs. The result is the introduction of new and innovative products and services. Such experimentation in offerings makes SMEs creative and diverse drivers.
Because there are a multitude of SMEs, they can cater to very niche markets and address other specialized customer needs. Additionally, their proximity to local communities gives them a deeper understanding of their target market and customer preferences. This localized knowledge helps SMEs create products and services that resonate with specific markets. Essentially, SMEs fill the gaps that larger firms overlook, which makes a great value proposition.
Overall, small businesses and medium sized enterprises create a more vibrant and competitive market landscape, providing consumers with a broader range of choices and driving economic growth. By fostering a supportive ecosystem for SMEs, governments, the private sector, and stakeholders can expand and provide better access to products and services.
Boost economic growth
Micro, small, and medium sized enterprises (MSMEs) make up around 99.6% of Philippine businesses. Over the years leading up to the pandemic, an average of 40% of the country’s gross domestic product (GDP) has been from MSMEs.
As an emerging economy that strives to achieve an upper middle-income country status, the Philippines has a lot to benefit from SMEs. Aside from creating more employment opportunities, SMEs drive growth and development by stimulating local markets and increasing rural incomes.
SMEs have a better pulse on local markets, and they can also quickly adapt to the community’s changing needs. In addition, they are important agents in addressing economic challenges and championing more inclusive growth, thereby allowing an enabling environment.
As a result of their diversification and innovation, SMEs drive up our country’s overall productivity and competitiveness. With more support, small businesses have the potential to strengthen the local economy and also elevate the country’s global position worldwide.
Generate tax revenue
SMEs in the Philippines contribute to tax revenue generation in various ways. Here are some key ways in which SMEs increase tax revenues.
Income Tax
SMEs pay income tax based on their annual profits. As SMEs generate revenue and earn profits, they also report their income and pay income tax based on the applicable tax rates. The income tax paid by SMEs contributes to the overall tax revenue collected by the government.
Value Added Tax (VAT)
SMEs that meet certain thresholds must register for and collect Value Added Tax (VAT) on their sales of goods and services. The businesses then forward the collected VAT to the government, thereby contributing to tax revenue. SMEs play a significant role in VAT collection, especially in sectors such as retail, services, and manufacturing.
Employee Withholding Taxes
SMEs that employ workers are responsible for withholding and remitting taxes from employee salaries. By deducting and remitting these taxes on behalf of their employees, SMEs ensure compliance with tax obligations and contribute to tax revenue collection.
Excise Taxes
SMEs in specific industries, such as manufacturing or importation of certain products like alcohol, tobacco, and petroleum products, may be subject to excise taxes. The excise taxes on these products are a significant source of tax revenue for the government, and SMEs operating in these sectors contribute to the collection of such taxes.
Business Registration and Licensing Fees
SMEs need to register their businesses and obtain relevant licenses and permits. The fees associated with business registration and licensing contribute to tax revenue. These payments vary based on the type and size of the SME’s business activities.
Overall, SMEs in the Philippines generate tax revenue through income tax payments, VAT collection, withholding taxes, excise taxes, and business registration fees. Their contributions to tax revenue play a vital role in funding government programs, public services, and infrastructure development that benefit the nation as a whole.
Supporting SMEs
With support and given their number, SMEs have the full potential to influence the national economy through different programs. Some of these are as follows:
Access to financing
Improved access to financing is important for SMEs. As such, the government and its agencies can establish a dedicated funding program, venture capital initiatives, and other financial incentives to extend capital to SMEs. One form of this is loans from the Department of Trade and Industry (DTI), which provides as much as Php 10 million for qualified applicants.
To add to this, collaborating with financial institutions and creating specialized loan programs with favorable terms can help address the challenges of unmet financing. In addition, it also ensures that SMEs have the necessary funds to start and expand their businesses.
Business development services
Aside from providing financing assistance, SMEs can also benefit from the streamlining of bureaucratic processes. This includes regulatory burdens that often weigh down SMEs. The government can further simplify its processes from business registration to licensing and compliance. With this, everybody can save time and reduce costs. Plus, it encourages more entrepreneurs to register and enter the formal sector.
Training and development
Extending comprehensive business development services such as training, mentoring, and advisory support to SMEs is crucial. Often, these businesses lack the necessary skills and knowledge to navigate challenges and seize growth opportunities, especially in emerging markets.
Offering tailored training programs, mentorship initiatives, and access to business networks can equip SMEs with the tools and expertise needed to enhance their competitiveness and sustainability. Furthermore, training is important for SMEs so they can initiate programs to adapt to problems such as climate change while remaining committed to sustainable development.
Access to markets and technology
Facilitating market access for SMEs is essential for their growth. The government can support SMEs in expanding their reach by promoting domestic and international trade opportunities, participating in trade fairs and exhibitions, and facilitating connections with potential customers and suppliers. Additionally, technological adoption and digitalization among SMEs can help enhance their efficiency, productivity, and market competitiveness.
Policy support and coordination
Developing a comprehensive SME policy framework and ensuring effective coordination among relevant government agencies is crucial. The government should prioritize SME development in its economic agenda, ensuring that policies and programs are aligned and effectively implemented. Regular engagement and dialogue with SME stakeholders can help identify challenges, gather feedback, and design targeted interventions that address their specific needs.
As one of the developing countries and emerging economies in Asia, the Philippines could benefit from supporting its local SMEs. By empowering SMEs through supportive policies and initiatives, the Philippine government can harness their potential to drive sustainable economic growth, reduce poverty, and improve the overall well-being of the population.
Empowering local communities
SMEs are one of the most effective agents in ensuring economic growth reaches even the most remote of Philippine economies. By revitalizing local economies, they empower communities and raise the standards of living in many localities outside the bug cities.
This is the same mission that drives Camella as it expands to more cities and provinces in the Philippines. With every new community, the house and lot developer opens up new opportunities and brings about an elevated lifestyle that all Filipino families deserve.
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