The MSME in the

Philippines

LEARNING OUTCOMES:
At the end of this lesson, the students will be able to do
the following:

Define and understand the meaning of MSME;

Identify the legal basis of MSME in the Philippine as well as its role and
importance, ;
Recognize the contribution of MSME to the Philippine Economy; and
Determine the major challenges confronting the Philippine MSMEs.

INTRODUCTION:

You are now learning halfway of this course pack. Welcome to module 3 - lesson 1. In this lesson, you
will be acquainted with the terms relevant to MSMEs and its involvement in the economic landscape of the
Philippines. As future entrepreneur, you need to know the stakeholders of a specific industry that you wanted to
engage and the kind of environment you will interplay. This will all the more open your mind in the world of
entrepreneurship and appreciate existing enterprises. At the end of the day, you will realize that entrepreneurs
are indeed important in an economy. This will also let you discover some issues and challenges of the Philippine
MSMEs. So, keep reading and enjoy learning this lesson!

ACTIVITY: Brainwriting.

In this activity you will write down a word or words that will come up in your mind when you
hear MSME. Please write your answers on the speech bubble icons below.
 ANALYSIS:Let’s evaluate!

Please answer the questions stated below:

1. What do you think are the

ABSTRACTION:

Understanding MSMEs

Among the developing countries in Southeast Asia, Philippines has been one of those nations developed
quite rapidly in terms of its economy. It was also predicted by the World Bank that the Philippines’ economic
growth will increase to reach more than 6% until 2019 onwards.

In order to sustain this peat, the industrial and service sectors has been geared towards becoming
globally competitive that by 2022. This direction was reflected in the 2017-2022 Philippine Development Plan
regarding expanding economic opportunities in industry and services as outlined in the 2017-2022 Philippine
Development Plan. Moreover, it was also hoped that the economic relations with other countries will be
strengthened and may probably lead to free trade agreements and other cooperation agreements to benefit the
local stakeholders. This will enable the Filipino citizens to access with various economic opportunities through
job creation and encouraging entrepreneurship in the country.

With this direction, entrepreneurship in the Philippines has been given attention as they significantly
influence the economy. One of the primary government agencies responsible in its development and promotion
is the Bureau of Small and Medium Business Development (MSMED) under the Department of Trade and
Industry.

What is MSME?

MSME, which stands for Micro, Micro, Small and Medium Enterprises, has been considered as the
backbone of any society for job creation and economic contribution. MSMEs have been defined in many ways.
United States for instance, use employment size of less than 500 to describe small enterprises. On the other
hand, in developing countries where market size and firm size are much smaller, employment size of less than
100 or 250 are usually used.

The Philippines employs two criteria in operationally defining MSMEs, namely employment and asset
size. The Republic Act No. 9501 or the Magna Carta for Micro, Small and Medium Enterprises delineates
MSME as “any business activity or enterprise engaged in industry, agribusiness and/or services, whether single
proprietorship, cooperative, partnership or corporation whose total assets, inclusive of those arising
From loans but exclusive of the land on which the particular business entity’s office, plant and equipment are
situated, must have value falling under the categories on Table 7.0.

Table 7.0 Categories of MSMEs based on asset and number of employees.

Category Total Asset Total Number of Employees

Micro not more than PhP 3,000,000 1 – 9 Employees
Small PhP 3,000,001 – PhP 15,000,000 10 – 99 Employees
Medium PhP 15,000,001 – PhP 100,000,000 100 – 199 Employees
Large Above PhP 100,000,000 More than 200 Employees

The above definitions shall be subject to review and adjustment by the Micro, Small and Medium
Enterprises Development (MSMED) Council taking into account inflation and other economic indicators. The
Council may use other variables such as number of employees, equity capital and assets size. The Council
shall ensure that notwithstanding the plans and programs set for MSMEs as a whole, there shall be set and
implemented other plans and programs varied and distinct from each other, according to the specific needs of
each sector, encouraging MSMEs to graduate from one category to the next or even higher category.

The Philippines Statistics Authority classifies an enterprise as a micro enterprise if it has less than 10
employees, small if it has 10-99 employees, medium with 100-199 employees, and large if it has 200 or more
employees as shown below. On the other hand, the Small and Medium Enterprise Development Council
(SMEDC) uses asset size as its basis for classification.

Legal basis of MSME in the Philippines

The MSMEs exist with the legislation of the Republic Act 9501 in 2008. This law provides reference
on the “Magna Carta for Micro, Small and Medium Enterprises (MSMEs)”, a landmark legislation that defines
the current national policy to promote, support, strengthen and encourage the growth and development of
MSMEs. Enacted by the Philippine Congress in 1991 as Republic Act 6977, and amended by Republic Act
8289 in 1997, and further amended by Republic Act 9501 in 2008, the law is geared towards the development
of the Filipino entrepreneurial spirit by providing a business environment conducive for MSMEs.

Recognizing that MSMEs have the potential for more employment generation and economic growth
and therefore can help provide a self-sufficient industrial foundation for the country, it is hereby declared the
policy of the State to promote, support, strengthen and encourage the growth and development of MSMEs in
all productive sectors of the economy particularly rural/agri-based enterprises.

It was emphasized in the Section 2 of this law that the government shall provide essential and
appropriate services to MSMEs in all productive sectors of the economy particularly those belong to the rural or
agri- based enterprises. This direction was geared towards generation of more employment and stimulates
economic growth in order to help provide a self-sufficient industrial foundation for the country.

It was also reflected in the law that the government shall recognize the specific needs of the MSMEs and
\shall undertake to promote entrepreneurship, support entrepreneurs, encourage the establishment of MSMEs
and ensure their continuing viability and growth and thereby attain countryside industrialization by:

a. Intensifying and expanding programs for training in entrepreneurship and for skills development
for labor;
 b. Facilitating their access to sources of funds;
c. assuring to them access to a fair share of government contracts and related incentives and
preferences;
d. Complementing and supplementing financing programs for MSMEs and doing away with stringent
and burdensome collateral requirements that small entrepreneurs invariably find extreme difficulty
complying with;
e. Instituting safeguards for the protection and stability of the credit delivery system;
f. Raising government efficiency and effectiveness in providing assistance to MSMEs throughout the
country, at the least cost;
g. Promoting linkages between large and small enterprises, and by encouraging the establishment of
common service facilities;
h. Making the private sector a partner in the task of building up MSMEs through the promotion and
participation of private voluntary organizations, viable industry associations, and cooperatives; and
i. Assuring a balanced and sustainable development through the establishment of a feedback and
evaluation mechanism that will monitor the economic contributions as well as bottlenecks and
environmental effects of the development of MSMEs.”

MSME Statistics in the Philippines

MSMEs by Number of Establishments. The 2018 List of Establishments of the Philippine Statistics
Authority (PSA) recorded a total of 1,003,111 business enterprises operating in the country. Of these, 998,342
(99.52%) are MSMEs and 4,769 (0.48%) are large enterprises. Micro enterprises constitute 88.45% (887,272)
of total MSME establishments, followed by small enterprises at 10.58% (106,175) and medium enterprises at
0.49% (4,895).

Figure 4.0 Percentage Share of the Number of Enterprises in the Philippines (Source: PSA, 2018)
 MSMEs by Industry Sector. In terms of sectoral contribution, the top five (5) industry sectors
according to the number of MSMEs in 2018 were: (1) Wholesale and Retail Trade; Repair of Motor
Vehicles and Motorcycles (461,765); (2) Accommodation and Food Service Activities (144,535); (3)
Manufacturing (116,335); (4) Other Service Activities (66,162); and (5) Financial and Insurance Activities
(46,033). These industries accounted for about 83.62% of the total number of MSME establishments.

Figure 5.0 Percentage Share of MSMEs per sector in the Philippines (Source: PSA, 2018)

* Other Service Activities include personal services for wellness, except spas, repair for personal
and household goods, funeral and related activities, repair of computer and communications
equipment, laundry activities, and other personal service activities.
** Other Industries (16.4% ) include Information and Communication (2.96%), Human Health and
Social Work Activities (2.87%), Education (1.78%), 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%).

MSMEs by Geographical Spread. Majority of the MSMEs can be found in the National Capital
Region (NCR) with 203,312 (20.36%) business establishments, Region 4-A (CALABARZON) with
148,196 (14.84%), Region 3 (Central Luzon) with 116,073 (11.63%), Region 7 (Central Visayas) with
70,395 (7.05%), and Region 6 (Western Visayas) with 61,590 (6.17%). These top five (5) locations
accounted for about 60.05% of the total number of MSME establishments in the country. Regional
concentration of MSMEs is largely associated with economic activity and population size.
Figure 6.0 Distribution of Establishments per Region (Source: 2018 List of Establishments, PSA as cited
by DTI)

MSMEs by Employment. Together, these MSMEs generated a total of 5,714,262 jobs or 63.19%
of the country’s total employment. The micro enterprises produced the biggest share (28.86%) closely
followed by small enterprises (27.04%) while medium enterprises were far behind at 7.29%. Meanwhile,
large enterprises generated a total of 3,328,801 jobs or 36.81% of the country’s overall employment.
Figure 7.0 Percentage Share of MSMEs in the Philippines based on employment generated (Source: PSA,
2018)

In terms of regional distribution, majority of the jobs are generated by MSMEs in the National
Capital Region (NCR) with 1,621,685 jobs; followed by MSMEs in Region 4-A (CALABARZON) with
824,283; Region 3 (Central Luzon) with 605,056; Region 7 (Central Visayas), 449,775; and Region 6
(Western
Visayas), 318,467.

By industry sector, MSMEs in the Wholesale and Retail Trade; Repair of Motor Vehicles and
Motorcycles sector generated the most number of jobs with 2,040,774 followed by Accommodation and Food
Service Activities (882,455), Manufacturing (767,831), Financial and Insurance Activities (316,226), and
Education (301,970).

MSMEs by Sales and Census Value-Added. In terms of value added, the MSME sector
contributed 35.7% of the total with manufacturing contributing the largest share of 6.87%.
Wholesale and retail trade and repair contributed 6.58% followed by financial intermediation with
a share of 6%.

Within the sector, small enterprises accounted for the largest share of 20.5%. Medium enterprises
followed with a share of 10.3% while micro enterprises registered a share of 4.9%. Among small enterprises,
wholesale and retail trade and repair contributed the most with a share of 4.07% followed by manufacturing
with a share of 3.82% while financial intermediation was next with a share of 3.35%.

For medium enterprises, manufacturing accounted for the biggest share of 2.77% followed by
electricity, gas and water with a share of 1.92% and financial intermediation with 1.87%. For micro
enterprises, wholesale and retail trade and repair represented the largest contribution of 1.73%.
Figure 8.0 Percentage Share of MSMEs in the Philippines based on sales of Value Added (in million pesos),
(2006 PSA Report- Latest)

Exports Contribution of MSMEs . MSMEs account for 25% of the country’s total exports
revenue. It is also estimated that 60% of all exporters in the country belong to the MSME category. MSMEs
are able to contribute in exports through subcontracting arrangement with large firms, or as suppliers to
exporting companies.

Major Challenges and Issues of MSMEs in the Philippines

SMEs face challenges from increased competition, the ability to adapt to rapidly changing market demand,
technological change, and capacity constraints relating to knowledge, innovation, and creativity. For many SMEs,
however, their potential is often not fully realized due to factors related to their small scale:

 lack of resources (finance, technology, skilled labor, market access, and market
information)
 lack of economies of scale and scope;
 higher transaction costs relative to large enterprises;
 lack of networks that can contribute to a lack of information, know-how, and experience of
domestic and international markets;
 increased market competition and concentration from large multinational enterprises caused by
globalization and economic integration;
 inability to compete against larger firms in terms of R&D expenditure and innovation (product,
process, and organization);
 subject to “churning” and instability; and
 lack of entrepreneurial zeal, capacity, and know-how. In addition, many small businesses find that
their geographical isolation puts them at a competitive disadvantage.
 a. Despite these substantial obstacles many economies remain heavily dependent on SMEs, particularly for
employment generation. Despite their perceived weaknesses SMEs have not been swept away with the
process of globalization and regional integration, but, rather, their role and contribution have changed and
evolved which have enabled many to remain internationally competitive and collectively be an important
source of employment generation (Harvie and Charoenrat 2015).

APPLICATION: Let’s connect the dots!

Activity 1. Shared Reading

You have to read the full text of the Republic Act 9501. Then, consider the questions that follow:

1. What implementations of this law have you experienced or observed? If none, research about the
implementation and discuss the reasons why the initiatives did not reach and impact you.

Activity 2. Metaphor of Learning

You are tasked to:

a. Discuss major highlights and understanding you have gained from this lesson about
MSME.
b. Make a reflection as to how MSME greatly helped the country.
c. Decide what appropriate drawing or graphic that will best illustrate your understanding about
the economic contribution of MSMEs.

Excellent! Hoping that you learned something about

MSMEs. The knowledge that you acquired in this
lesson is expected to guide in your future
entrepreneurial engagement. Now onward to the next
lesson!