Session 6.1: Entry, Survival and Exit of Firms in Global Value Chains The Case of Small and Medium-Sized Manufacturers From The Philippines by Adrian R. Mendoza

The views expressed in this presentation are the views of the author and do not necessarily reflect
the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development
Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee
the accuracy of the data included in this paper and accepts no responsibility for any consequences
of their use. Terminology used may not necessarily be consistent with ADB official terms.
What Matters for the GVC Entry and Exit

of Manufacturing SMEs in the Philippines?
Adrian R. Mendoza
February 7, 2020
ADB Institute, Tokyo, Japan
ARMendoza What Matters for the GVC Entry and Exit of Mfg. SMEs in the Philippines?
Outline
I. SMEs in the Philippines

II. Philippine Manufacturing SMEs in GVCs
a. Stylized Facts
b. Entry and Exit
III. Conclusion
SMEs in the Philippines
Two definitions
• Skewed distribution of firms based on size

• SMEs account for 99.52 percent of the 1,003,111 businesses in the 2018
List of Establishments (LE)
• micro and small firms: 99.04 percent
• medium-sized firms: 0.49 percent
• Same pattern in most industries
• Large employers represent less than 1 percent of the three most
populous sectors (in terms of number of establishments): wholesale &
retail trade and repair of motor vehicles & motorcycles;
accommodation and food service activities; manufacturing
• Little dynamism in terms of size distribution

• SMEs accounted for around 99.5 percent of the annual total
establishments from 1995 to 2018.
• Large enterprises typically account for less than 0.50 percent of all
businesses.
• SMEs link the production sector to the consumers:

• Many SMEs are in wholesale and retail trade
• Examples of wholesale trade activities: wholesaling of agricultural raw
materials & live animals, food, beverages & tobacco, household goods,
and machinery & equipment.
• Examples of retail trade activities: retail sellers in non-specialized stores
(e.g., “sari-sari” (or variety/sundry), groceries, and convenience stores)
and retail selling of manufactured goods (e.g., textile and wearing apparel,
household equipment, computer and telecommunication devices,
automotive fuel) in specialized stores.
A typical sari-sari store in the

Philippines
Source: Wikimedia Commons
• SMEs host 63.19 percent of the total 9

million employees documented in the 2018 Distribution of Employees by Firm Size, 2018
LE.
• medium-sized firms: 7.29 percent Micro
• More balanced in manufacturing Small
• SMEs accounted for 47.70 of total Medium
Large
employment
• Nine is the average employment of all
establishments in 2018 LE
• Typical establishment in the Source: Author’s calculation based on PSA data
Philippines is small!
Uneven distribution of SMEs across

regions:
Central Luzon • Around 53 percent of SMEs are
NCR found in most industrialized regions:
Calabarzon Central • National Capital Region (NCR),
Visayas
Central Luzon, Calabarzon, and
Central Visayas.
• These regions account for 69.19
percent of the total SME
employment in the country.
Source: Author’s calculation based on PSA data
• The largest SMEs are concentrated in

NCR, Calabarzon, Central Visayas, and
Northern Mindanao. Ilocos Cagayan
Valley
• Relatively “smaller” SMEs are the common
employers in poorer regions Bicol
Mimaropa
• The regions of Ilocos, Cagayan Valley, Eastern
MIMAROPA, Bicol, Eastern Visayas, Visayas
and Autonomous Region in Muslim
Mindanao (ARMM) have the largest
ratio of SMEs to large establishments.
• SMEs in these areas are relatively ARMM
smaller compared to those in industrial
hubs. Source: Author’s calculation based on PSA data
• In 2016, 35.7 percent of the Philippines’ gross domestic product (GDP)

originated from SME activities (OECD and ERIA, 2018).
• medium-sized firms: 10.3 percent
• SMEs in manufacturing, wholesale and retail trade and repair, and
financial intermediation have respective shares of 6.87 percent, 6.58
percent, 6.0 percent.
• Two major trends:

• Contribution of SMEs in GDP hasn’t changed from a decade ago
(Aldaba, 2014).
• Official target: increase contribution to GDP to 50-55 percent by 2022
• Low SME productivity: 99.5 percent of establishments in the Philippines
only contributed a third of the country’s gross output.
• Policy strategies to improve SME productivity: improving business
climate, increasing access to finance, enhancing management and labor
capacities, improving access to technology and innovation, and
expanding access to markets.
Philippine SMEs in GVCs GVC Typology
Type 1: purely domestic operations (i.e., no exports and no imports)

Type 2: firm imports but not exports
Type 3: firm exports but not imports
Type 4: firm simultaneous exports and imports but outside SEZ+
Type 5: firm simultaneous exports and imports inside SEZ+
Assertion in Mendoza (2019): “true” participants in globally-fragmented

production are most likely involved in Types 4 and 5 transactions
ARMendoza Philippine Firms in GVCs: Innovation, Governance, and Upgrading

Philippine SMEs in GVCs Data
• Transaction-level information on firm’s exports and imports compiled

by the Philippine Statistics Authority (PSA) from 1991 to 2012.
• Merged annual enterprise surveys and censuses conducted by the PSA
between 1996 to 2012.
• Focus on the years after the global recession (i.e., 2008, 2009, 2010, and
2012).
• 2011 trade data excluded because there was no matching enterprise
survey for that year.
ARMendoza Philippine Firms in GVCs: Innovation, Governance, and Upgrading

Philippine SMEs in GVCs Stylized Facts
• Combined shares of
Types 2 to 5 firms in all
of manufacturing
generally increased after
the mid-90s
• Two-way trade became
more prevalent than both
pure exporting or pure
importing
• Still large share of Type 1
producers.
• Less skewed distribution

compared to LE
• SMEs still account for
majority of the sampled
manufacturers
• SMEs are prevalent in Type 1 while large

manufacturers are more common in Types
4 and 5
• Declining trend in the risk ratios as we
move away from Type 1
• SMEs are not as active in GVCs as large
manufacturers
• Same pattern across major manufacturing
sectors.
• Bernard et al. (2007), Kasahara and Source: Author’s calculation based on PSA data
Lapham (2013): firms that export and/or
import are bigger
• New “new trade theory” (NNTT)

• Sunk costs prevent the foreign market entry of producers with inferior
characteristics
• Association between size and trading is partly explained by the self-
selection of larger firms into exporting and/or importing
• Bigger firms have more resources and extensive network that enable them
to overcome the large financial and transactional costs associated with
international operations.
• Major traded items of SMEs are traditional and relatively low-tech products
• Major exports: tin, animal and vegetable fats and oils, alcohols, soap,
metals, fruit and nuts, yarns and textile fabrics, and furniture
• Major imports: food and agro-based products (e.g., meat of bovine
animals, wheat, feeding stuff for animals, animal and vegetable fats and
oils, and maize), paper and cardboard, metals, and chemical products (e.g.,
polymers of ethylene, inorganic chemicals, insecticides)
• Compared to large
manufacturers:
• SMEs* exported
fewer products to a
smaller number of
destinations.
• SMEs import a less
diverse basket of
products from fewer
sources compared to
large establishments.
*SMEs in the surveys with matched trade data
• SMEs with exports and

imports (Types 4-5) have
better attributes than purely
domestic SMEs (Type 1).
• Differentials generally
increase as we move closer to
Type 5.
• Two-way traders near or
inside ecozones are the most
dissimilar producers from
the typical Type 1 SMEs.
• SMEs with exports and

imports (Types 4-5) have
better attributes than purely
domestic (Type 1) and
partially internationalized
(Types 2-3) SMEs.
• The results are mixed for
large manufacturers
• The earlier evidence for
heterogeneity of Philippine
manufacturers may be driven
by SMEs.
• ECDs of SMEs with foreign

transactions (Types 2-5) always lie
to the right of Type 1 SMEs.
• Type 5 SMEs stochastically
dominate all other firm categories
• No observed stochastic
dominance of a particular firm
type among large manufacturers.
• Large firms appear to be less
differentiated even if they have
varying degrees of GVC
participation
• Máñez-Castillejo et al. (2010):

productivity threshold proposed by
Melitz (2003) is only binding for
smaller firms.
• Figure 3: TFP distribution of the
most productive SMEs (i.e., Type
5), is comparable to Type 1 large
establishments and strictly
dominated by large Type 5 traders.
Summary
• SMEs are less prevalent than large manufacturers in all types of international transactions.
• GVC-oriented SMEs (i.e., Types 4 and 5) typically outperform both domestic-oriented
(i.e., Type 1) and partially-internationalized (i.e., Types 2 and 3) SMEs along many
important attributes.
• Compared to large manufacturers:
• SMEs export fewer products to a smaller number of destinations.
• SMEs import a less diverse basket of products from fewer sources.
• SMEs’ exports and imports are relatively less sophisticated.
• The heterogeneity of Philippine manufacturers is mainly driven by wide disparities in the
characteristics of SMEs.
• The productivity of Type 1 large firms is comparable or even better than the most
productive category of SMEs (i.e., Type 5).
Philippine SMEs in GVCs GVC Entry and Exit
Some definitions:
• Entrant: firm present in 𝑡𝑡 but not in 𝑡𝑡 − 1
• Dropout at time 𝑡𝑡: firm is present in 𝑡𝑡 − 1 but not in the current period.
• Net entry at time 𝑡𝑡: the difference between the number of entrants and the
number of dropouts
• Survival rate: percentages of firms that survived in year 𝑡𝑡 after entering
foreign markets in 𝑡𝑡 − 1
Deteriorating export base:

• Net entry is generally negative
since 2006 due to the continuous
decline of export entrants and the
above average number of
dropouts.
• Broadly similar trend for imports.
• Balaoing (2017): New export
entrants are one-time exporters or
those firms that already exit a year
after entry.
• SME entrants to
exporting/importing declining
since 2006.
• SME dropouts has outnumbered
the entrants starting 2008.
• Balaoing (2017): average
permanent exit of SMEs from
exporting is relatively higher
compared to large manufacturers.
Figure 5. Entrants’ Second Year Survival Rate

• Second year survival rate is
generally higher for entrants in
importing than in exporting
• Second-year survival rates have
been declining after 2000
• mild reversal in 2010
• Survival rate in two-way trading
has fallen below the survival rates
for all export and import entrants
• Similar pattern for manufacturing Figure 5. Entrants’ Second Year Survival Rate
SMEs:
• Higher survival rate in importing
• Declining trend through 2008, but
increasing after 2009
• SMEs that entered two-way trading
during the global financial crisis
seemed more badly hit than other
types of traders
• Survivors stochastically dominate

dropouts in terms of employment
• True for survivors in importing,
exporting and two-way trading
• No similar evidence for other firm
attributes (e.g., capital intensity and
productivity)
• Logistic model for GVC entry:

exp 𝒗𝒗′𝒋𝒋𝒋𝒋−𝟏𝟏 𝜷𝜷
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑗𝑗𝑗𝑗 𝒗𝒗𝒋𝒋𝒋𝒋−𝟏𝟏 =
1 + exp 𝒗𝒗′𝒋𝒋𝒋𝒋−𝟏𝟏 𝜷𝜷
• Logistic model for GVC exit:

exp 𝒗𝒗′𝒋𝒋𝒋𝒋−𝟏𝟏 𝜸𝜸
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑗𝑗𝑗𝑗 𝒗𝒗𝒋𝒋𝒋𝒋−𝟏𝟏 =
1 + exp 𝒗𝒗′𝒋𝒋𝒋𝒋−𝟏𝟏 𝜸𝜸
• Younger SMEs are more likely than

older ones to engage in two-way
trading.
• Highly productive SMEs are more likely
to enter foreign markets.
• Past importing experience increases the
likelihood of GVC entry (possibly
through productivity enhancing effect)
• SMEs in SEZ+ are more likely to join
production network
• Foreign-owned manufacturing SMEs
are more likely to participate in GVCs
Asymmetry in the factors that affect

the GVC entry and exit of SMEs
• Age, TFP, and nearness to SEZs
are not significant deterrents of
GVC exit
• Size and foreign ownership
significantly reduce the likelihood
of an SME’s GVC exit.
Table 14. Determinants of Leapfrogging of Manufacturing

SMEs from Type 1 to Types 4 or 5 • “Leapfrogging” from purely
domestic operations to two-way
trading requires the full fixed costs
of importing, exporting, and
adjusting to GVC operations.
• Traditional route: gradually
develop internal capabilities
• Alternative route: establish
stable linkages with foreign
multinationals
• Empirical evidence support the
latter.
Policy Implications
• SMEs are not simply smaller versions of large establishments

• Evidence for SME-driven heterogeneity calls for a more nuanced approach to
industrial and export policy.
• Make a distinction between SMEs and large firms when formulating export
promotion and competitiveness strategies
• Targeted programs to help weaker SMEs acquire the capabilities needed to
overcome the barriers to GVC participation
• Mayer and Ottaviano (2007): do not waste time helping the incumbent
superstars “but instead nurture the superstars of the future”.
Policy Implications
• Promote wider access to indirect channels of exporting and importing where

entry costs are lower
• Strengthen domestic value chains:
• Efficient networking of producers in a multi-level set-up where bigger GVC
firms collect, consolidate, and process the inputs from lower-tier small
suppliers.
Policy Implications
• Despite the “fast route” provided by multinational linkages, government

must still pursue strategic trade and investment policy that will support
long-run upgrading to sophisticated and higher-value adding GVC activities.
• Increase value creation through a stronger culture of R&D and innovation
• Manufacturers, small and large, should strive for long-run upgrading
rather than mere survival inside GVCs
• Firms must exert effort to build stronger technological capabilities,
nurture innovative tendencies, and increase absorptive capacity
What Matters for the GVC Entry and Exit
of Manufacturing SMEs in the Philippines?
Adrian R. Mendoza
February 7, 2020
ADB Institute, Tokyo, Japan

Session 6.1: Entry, Survival and Exit of Firms in Global Value Chains The Case of Small and Medium-Sized Manufacturers From The Philippines by Adrian R. Mendoza

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Session 6.1: Entry, Survival and Exit of Firms in Global Value Chains The Case of Small and Medium-Sized Manufacturers From The Philippines by Adrian R. Mendoza

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The views expressed in this presentation are the views of the author and do not necessarily reflect

What Matters for the GVC Entry and Exit

I. SMEs in the Philippines

• Skewed distribution of firms based on size

• Little dynamism in terms of size distribution

• SMEs link the production sector to the consumers:

A typical sari-sari store in the

Source: Wikimedia Commons

• SMEs host 63.19 percent of the total 9

Uneven distribution of SMEs across

• The largest SMEs are concentrated in

• In 2016, 35.7 percent of the Philippines’ gross domestic product (GDP)

• Two major trends:

Type 1: purely domestic operations (i.e., no exports and no imports)

Assertion in Mendoza (2019): “true” participants in globally-fragmented

ARMendoza Philippine Firms in GVCs: Innovation, Governance, and Upgrading

• Transaction-level information on firm’s exports and imports compiled

ARMendoza Philippine Firms in GVCs: Innovation, Governance, and Upgrading

• Less skewed distribution

• SMEs are prevalent in Type 1 while large

• New “new trade theory” (NNTT)

• SMEs with exports and

• SMEs with exports and

• ECDs of SMEs with foreign

• Máñez-Castillejo et al. (2010):

Deteriorating export base:

Figure 5. Entrants’ Second Year Survival Rate

• Survivors stochastically dominate

• Logistic model for GVC entry:

• Logistic model for GVC exit:

• Younger SMEs are more likely than

Asymmetry in the factors that affect

Table 14. Determinants of Leapfrogging of Manufacturing

• SMEs are not simply smaller versions of large establishments

• Promote wider access to indirect channels of exporting and importing where

• Despite the “fast route” provided by multinational linkages, government

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