OTOP Philippines 2011 survey report

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Micro, small and medium enterprises (MSMEs) dominate the Philippine business sector particularly in the rural areas. The Philippine government adapted the One Town, One Product (OTOP) program as a …

Micro, small and medium enterprises (MSMEs) dominate the Philippine business sector particularly in the rural areas. The Philippine government adapted the One Town, One Product (OTOP) program as a job generation and poverty reduction strategy by promoting the creation and growth MSMEs. The study reveals that after six years of implementing the program, it has generated positive results in terms of investments, sales, enterprises assisted and jobs generated. Despite certain limitations and misgivings in its implementation, the study concludes that the program was successful in upgrading rural enterprises and linking them with the mainstream market. Conversely, the entrepreneurs deem the OTOP-Philippines very useful and they are satisfied with the kind of support that their businesses are receiving through the program. Some observations and recommendations for reforms were put forward to make the program more relevant and effective.

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  • 1. OTOP-Philippines: Enhancing the competitiveness of rural enterprises Felix A. Tonog Philippine Business for Social Progress Manila, Philippines Email: fatonog@pbsp.org.ph Revised December 2011 Abstract Micro, small and medium enterprises (MSMEs) dominate the Philippine business sector particularly in the rural areas. The Philippine government adapted the One Town, One Product (OTOP) program as a job generation and poverty reduction strategy by promoting the creation and growth MSMEs. The study reveals that after six years of implementing the program, it has generated positive results in terms of investments, sales, enterprises assisted and jobs generated. Despite certain limitations and misgivings in its implementation, the study concludes that the program was successful in upgrading rural enterprises and linking them with the mainstream market. Conversely, the entrepreneurs deem the OTOPPhilippines very useful and they are satisfied with the kind of support that their businesses are receiving through the program. Some observations and recommendations for reforms were put forward to make the program more relevant and effective. Keywords OTOP; OVOP; micro, small and medium enterprise development; rural enterprise Acknowledgement This study was undertaken through collaboration between the Ritsumeikan Asia Pacific University, Japan and Philippine Business for Social Progress, Philippines. We are grateful to Prof. Kunio Igusa and Prof. Takeshi Fujimoto for their support and guidance throughout this study. This study would not have been possible if not for the dedication and hard work of the research team composed of Katrina dela Rosa, Lizlei Puno-Manabat, Arianne Jane Sulla and Rowena Rivera. The views expressed herein are those of the author and not necessarily of APU nor of PBSP.
  • 2. OTOP-Philippines: Enhancing the competitiveness of rural enterprises 1 Introduction The One Town-One Product (OTOP) program was adopted in the Philippines in 2004 as a flagship program of the government to promote the creation and growth of micro, small and medium enterprises (MSMEs), especially in the rural areas. MSMEs dominated the business sector in terms of numbers, and were seen as a potent force to generate jobs, propel local economy, and combat poverty. Patterned after the One Village, One Product (OVOP) movement at Oita Prefecture in Japan, OTOP-Philippines aims to generate jobs by improving the competitiveness of local industries by focusing on the product or service in which the particular town or municipality has the resources, capability and the skills needed to produce the product or deliver the service efficiently. The program ―is meant to catalyze development in the regional and rural areas. It has effectively enhanced the entrepreneurial consciousness of the people in the countryside and has paved the way towards the more productive utilization of the indigenous resources as raw materials‖ (Cruz 2010). Many countries, particularly in Asia, have already adopted OTOP as a SME promotion strategy. The OVOP movement, as popularized by former Oita Governor Morihiko Hiramatsu, Ph.D., is founded on three principles: ―Think globally, Act locally‖; ―Self-reliance and Creativity‖; and ―Human Resource Development‖. Applying these principles in promoting the growth of Oita’s local economy, Dr. Hiramatsu devised ―a regional development strategy preferentially driven by economic interest, and decided to adopt a policy to realize a society where the citizens’ lives and the community’s benefits come first‖. Such strategy is based on endogenous development theory where ―people can develop their areas by promoting the semi-secondary industries (or agro-processing), while making full use of their potential resources and capital and also preserving the environment‖ (Oita OVOP International Exchange Promotion Committee 2006). Beyond the increase in the per capita income of people, Dr. Hiramatsu envisions, through the OVOP movement, ―a society where all citizens can be proud and feel satisfied with their lifestyles in each of their respective communities; where the elderly live with peace 2
  • 3. of mind, the young can fully express their vitality, and people can produce their own specialties including culture and tourism even in rural places‖. This study was undertaken to assess the effectiveness of OTOP-Philippines as a program and its relevance to MSME promotion and development initiatives as perceived by the entrepreneurs participating in the program. Specifically, the study aims to: a) review the OTOP-Philippines policy and its relevance to MSME needs and development priorities; b) identify the elements of the program and determine their effectiveness; c) understand the profile of OTOP-participating enterprises and entrepreneurs; d) assess the scale of OTOP-business operations; and e) assess the entrepreneurs’ perception of the program. A survey questionnaire was used to gather data from the respondents. A total of 31 OTOP-enterprises from the three major regional groupings in the Philippines (11 from Luzon, 10 each from Visayas and Mindanao) participated. The questionnaire was divided into five parts. Part I gathered data on the profile of the enterprises and Part II asked information about the profile of the entrepreneurs and their motivations or reasons for engaging in their respective businesses. Part III inquired on the entrepreneurs’ business prospects as well as business-related problems they encountered, while Part IV looked into their marketing strategies. Part V sought to gather information on the perception of the entrepreneurs about the OTOP program. The questionnaire also allowed the respondents to express their feelings and insights for each of the component being measured. The data gathered was then analyzed using descriptive statistics. In addition, three case studies were developed to highlight the experiences of enterprises participating in the program and to validate the survey data. OTOP-related documents and government reports were reviewed to assess the performance of the program. 1.1 Policy Framework The OTOP-Philippines program must be viewed within the broader context of micro, small and medium enterprises (MSME) development policy in the country. While there has been a number of legislations and government initiatives in the past that promotes the creation of rural cooperatives and enterprises, it was Executive Order (EO) No. 176 issued in 2003 that paved the way for the development of a comprehensive program to promote “Isang 3
  • 4. Bayan, Isang Produkto” (One Town, One Product). The said EO stipulates the objectives of the Program: […]Stimulating local economic activity and small and medium enterprise (SME) growth, generating jobs, developing the countryside, and sustaining the anti-poverty thrust of government through countrywide lending to SMEs. […] For every city or municipality in the country, a product or service cluster will be identified for funding support, such that an SME offering such product or service in the said city or municipality shall be eligible to apply for a loan with a Funding Source. The Magna Carta for Micro, Small and Medium Enterprises (or Republic Act 6977 as amended by R.A. 8289, and amended further by R.A. 9501 on May 23, 2008) provides the comprehensive legal framework to promote, develop and assist MSMEs in the Philippines. It stipulates the fundamental policy of the government for MSME development: 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. To this end, the State 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 […] (Sec. 2, R.A. 9501). The notion of MSMEs varies widely from country to country, and there is no single definition by which MSMEs can be understood. In the Philippines, MSMEs, as defined in R.A. 9501, refer to ―any business activity or enterprise engaged in industry, agribusiness and/or service, 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 under the following categories: Table 1: Categorization of Enterprises by Asset Size Category Micro Small Medium Asset Size Not more than PhP 3,000,000 PhP 3,000,001 – PhP 15,000,000 PhP 15,000,001 – PhP 100,000,000 4
  • 5. Moreover, R.A. 9501 features the following important amended provisions (MSMED Council 2009):  Mandatory allocation of credit resources of all lending institutions for MSMEs for 10 years, increasing banks’ allocation of their loan portfolio to MSMEs of at least 10%, and providing for administrative sanctions and other penalties to be imposed on lending institutions for non-compliance with the mandatory credit allocation provision;  Revision of MSME definition, raising the ceiling to qualify as a micro-enterprise to assets of not more than PhP 3 million from the previous threshold of PhP 1.5 million; small enterprises, with total assets of PhP 3 million to not more than PhP 15 million; and medium enterprises, from PhP 15 million to not more than Php100 million, from the previous threshold of PhP 60 million;  Increase in the capital stock of the Small Business Corporation, the government’s financial institution focused on assisting MSMEs, from PhP 5 billion to PhP 10 billion, and the creation of a Venture Capital Microfinance Trust Fund under the Corporation to promote business opportunities as available to MSMEs; and  Strengthening of the MSME Development (MSMED) Council, which is assigned to formulate an MSMED Plan and integrate various government and private sector initiatives. Seeing the huge potential of micro-enterprises to foster economic activities and employment generation, R.A. 9501 specifically articulates the needs of micro-enterprises as distinct from small enterprises, and calls for interventions and programs to address those needs and support the mainstreaming of micro-enterprises. As of the 2009 data of the DTI, there are 780,437 registered business establishments in the country. Of this number, 99.6% are MSMEs: 91.1% or 710,822 are micro-enterprises; 8.1% of 63,529 are ―small‖; and 0.4% or 3,006 are ―medium‖. Large enterprises account for only about 3,080 (or 0.4%). Collectively, MSMEs employ about 63.7% or 3,595,641 of total jobs: 30.7% by micro-enterprises; 25.7% by small enterprise; and 7.4% by medium enterprises. It is also estimated (NSO 1994) that MSMEs contribute about 30% to total sales in the manufacturing industry, and around 60% of exporters belong to MSME category, contributing about 25% to total export revenues (SERDEF/UP-ISSI 2001). As such, MSMEs play an important role in the country’s economic development through their contribution to rural development and decentralization of industries, creation of employment opportunities and more equitable 5
  • 6. income distribution, use of indigenous resources, creation of backward and forward linkages with existing industries, and entrepreneurial development. Table 2: Distribution of Enterprises, by Category and Share in Employment Category No. of Establishments Percentage Employment Percentage Micro Small Medium MSMEs Large 710,822 63,529 3,006 777,357 3,080 91.1% 8.1% 0.4% 99.6% 0.4% 1,731,082 1,449,033 415,526 3,595,641 2,049,298 30.7% 25.7% 7.4% 63.7% 36.3% TOTAL 780,437 100.0% 5,644,939 100.0% Source: DTI; NSO The national export development strategy likewise stipulates the promotion of SMEs as an important component of stimulating economic growth and rural development. Within the framework, ―the formation and creation of industrial zones is also a mechanism to disperse industrialization to other parts of the country to stimulate economic growth, while clustering is hoped to spur the growth of small and medium enterprises across the country in partnership with other government agencies, the private sector and local governments‖ (Reyes-Macasaquit 2008). Furthermore, ―the 2005-2007 Philippine Export Development Plan (PEDP) called for sustaining the clustering approach to industry development with special emphasis on regions and provinces with export-oriented cities/municipalities covered by the One-Town, One-Product (OTOP) initiative‖ (ibid.). ―Industry clustering is now the [Philippines’] key strategy towards an inclusive economic growth that is both efficient and sustainable‖ (Cruz 2011). The Medium-Term Philippine Development Plan, 2004-2010, outlined the dual strategies of product development through OTOP and credit provision through SULONG (SME Unified Lending Opportunities for National Growth) to support three million entrepreneurs and generate six to 10 million jobs: The One Town-One Product (OTOP) Program shall be implemented. This involves the development and promotion of a product or service where a town has competitive advantage. The OTOP interventions include: provision of a comprehensive package of assistance to MSMEs and OFWs through a convergence of services by local government units, national government agencies and private sector in product/design development, skills and entrepreneurship training, marketing assistance and introduction of appropriate technologies. OTOP also promotes the Big Enterprise-Small Enterprise Program as a source of technology 6
  • 7. and market, ensures sustainability of the MSMEs through the industry clustering approach by capitalizing on complementation among towns within a province or region. Technology based entrepreneurship shall be encouraged and supported (MTPDP 2004-2010, p. 14). In 2010, the Philippine gross domestic product (GDP) grew by 10.9% to PhP 8.513 trillion. The highest growth was posted by the industry sector at 14.9%, followed by the service sector at 10.6%. The primary sector of agriculture, fishery and forestry grew only by 0.6 percentage points to 3.9%. More than half (54.8%) of the GDP is accounted for by the service sector, while agriculture is lagging behind contributing only about 14% of GDP. Clearly, there is a need to boost the growth of agriculture and agro-processing business activities in order to disperse economic development in the countryside and reduce poverty in rural areas. In a country like the Philippines where urban-rural divide is very evident, rural areas are sharply lagging behind their urban neighbors. Unlike in Japan, industries co-exist in harmony with farms in rural areas and blend with the rural culture. Through the OTOP program, rural economies are envisioned to be revitalized by promoting agriculture and agroprocessing enterprises. Table 3: GDP by Industrial Origin (At current prices; In Million Pesos) Value 2010 Growth GDP 8,513,034 10.9% Agriculture, Fishery and Forestry Industry sector Service sector 1,182,371 2,663,497 4,667,166 3.9% 14.9% 10.6% % Share Value 100.0% 7,678,918 13.9% 31.3% 54.8% 1,138,334 2,318,882 4,221,702 2009 Growth 3.6% 3.3% -1.2% 6.6% % Share Value 100.0% 7,409,369 14.8% 30.2% 55.0% 1,102,465 2,347,802 3,959,102 2008 Growth % Share 11.5% 100.0% - 14.9% 31.7% 53.4% Source: National Statistical and Coordination Board (NSCB) Seeing the benefits that the OTOP program has generated in the past six years, the present Aquino government decided to pursue it. According to DTI Secretary Gregory Domingo, ―the implementation of OTOP has been extended by the present administration, since the said programs proves to be an effective strategy in stimulating economic development in the countryside‖ (De Leon 2011). The program will be pursued and scaledup as an integral component of the regional clustering program and will be imbedded in the tourism promotion program (Ho 2011). Clearly, the success of the OTOP program, or any local economic development initiative, would not have been realized if not for the cooperation and support of the local government units (LGUs). Reyes-Macasaquit (2008) contends that ―the local governments 7
  • 8. have an increasing role to play in the country’s industrial development, particularly since they have been granted increased autonomy to manage the economic and social affairs of their areas of jurisdiction. Some LGUs have enacted their own investment codes in an effort to develop indigenous industries. The OTOP program and industry clustering initiatives are promising developments in the area of local economic development that should be aggressively pursued‖. 1.2 Program Design and Implementing Structure OTOP-Philippines was conceptualized to achieve the twin purpose of supporting the creation and growth of MSMEs and rural enterprises, and generating jobs as a means of reducing poverty. The program supports micro, small and medium enterprises to manufacture, offer and market distinctive products or services through the use of indigenous raw materials and local skills and talents. It offers a comprehensive assistance package through a convergence of services from local government units, national government agencies, and the private sector. This includes: (a) business counseling, (b) skills and entrepreneurial training, (c) product design and development, (d) appropriate technologies, and (e) marketing (see http://otopphilippines.org/aboutus.html). Business Enabling Environment Access to Finance Develop the Countryside Through Establishment of SMEs Capacity Building Market System Development Technical Intervention Source: Cruz 2010. Fig. 1: Framework of the OTOP-Philippines Program To achieve its goals, according to the OTOP accomplishment report (Cruz 2010) refinements in the implementation of the OTOP program have led to the development of the five outcome portfolios: (1) Business enabling environment to include policy support; (2) Access to finance to include both public and private funds; (3) Market system development to 8
  • 9. provide marketing models; (4) Learning and innovation for systematic program enhancements; and (5) Sector competitiveness using the value chain approach to facilitate convergence of stakeholders and business development service providers. Corresponding to these desired outcomes are the following strategies that guided the activities and initiatives undertaken:  Provide access to comprehensive and focused support programs to enhance managerial and technical capabilities of implementers. This includes the conduct of training, seminars and other assemblies and online mentoring.  Provide support for the improvement of processes in the delivery of services, ranging from reducing the cost of doing business, advocacy and promotion, recognition of best practitioner;  Provide opportunities for expanding of existing businesses. Activities falling under this strategy consist of granting incentives based on product quality and adherence to standards;  Promote comprehensive support to enhance market access. This includes establishing market database, trade fair and mission participation, market matching, market consolidation, pasalubong (gifts and souvenirs) centers, domestic consumption campaigns, product development and promotions;  identify and implement programs to bridge financing needs, to involve access to financing, financial brokering, financing forum and donor forum/consultancy; and  Develop and implement advocacy program to improve the levels of awareness and support to the OTOP Program through the enhancement of the website, promo collaterals, audio-visual presentations and through the adaptation of the OTOP program to global concerns and trends (such as climate change, corporate social responsibility, and monitoring and evaluation systems). The Department of Trade and Industry (DTI) takes the lead in program planning and implementation at the national and sub-national levels, primarily acting as the coordinating body of all OTOP-related initiatives. Other national government agencies such as the Department of Science and Technology (DOST), Department of Tourism (DOT), Department of Agriculture (DA), Department of the Interior and Local Government (DILG), Department of Labor and Employment (DOLE), as well as government financing institutions like Small Business Corporation, Land Bank of the Philippines (LBP), and the Development Bank of the Philippines (DBP) also take part in the program by providing business support services and access to financing. At the local level, the mayor of each city or municipality has the 9
  • 10. responsibility of leading in identifying, developing and promoting a specific product or service which the locale has the competitive advantage. National Level Government Agencies MSME Development Council Department of Trade & Industry – RODG DOT DA DILG DOST DOLE GFIs MSME Development Plan Regional Level Government Agencies OTOP-Philippines Provincial and Municipal Level Government Agencies MSME MSME National and Local Sub-sector Associations MSME MSME Source: Author Fig. 2: OTOP-Philippines Implementing Structure Through a long process of consultations with national government agencies, local government units and the private sector, regional flagship OTOP were identified in which the city/municipal OTOP were to be aligned. Table 3 shows the OTOP products for the 16 regions of the country. Table 4: Regional Flagship OTOP Name of Region CAR Ilocos Region Cagayan Valley Central Luzon CALABARZON MIMAROPA NCR Bicol Region Western Visayas Central Visayas Eastern Visayas Samboanga Peninsula Northern Mindanao Southern Mindanao SOCSARGEN CARAGA Source: Cruz 2010. OTOP Product Roasted Coffee Bangus Home furnishings Lanterns Paper Mache Woven Buntal Healthcare and Wellness Services Ceramics Loom Woven Products Woven Rafia Mussels Seaweeds High-value Vegetables Banana Chips Fresh Banana Palm Oil The OTOP-Philippines identified five performance indicators against which the program was measured: (i) employment generated; (ii) investments; (iii) domestic sales of 10
  • 11. OTOP products; (iv) export sales of OTOP products; and (v) number of enterprises assisted or developed. The accomplishment report (Cruz 2010) reveals that the program exceeded its performance targets, but employment. From 2005 up to the third quarter of 2010, the program implemented various activities and interventions that generated positive results. Export sales achieved USD 650.65 million, and domestic sales of PhP 15.6 billion. The number of enterprises assisted reached 55,512 or 163% of target, which in turn created 417,489 jobs. Furthermore, the program attracted total investments of PhP 10.28 billion or 138% of target. Table 5: OTOP-Philippines Performance (2005 – 2010Q3) Performance Indicators Targets Accomplishments Total % Accomp. 2005 2006 2007 2008 2009 2010Q3 668,000 Employment 417,489 62% 70,439 70,609 70,733 85,419 84,268 36,021 7.43 10.28 138% 0.814 1.891 2.331 2.618 1.663 0.960 12.38 15.60 126% 1.302 1.808 2.774 3.565 3.614 2.532 Exports (USD M) 522.00 650.65 125% 85.19 92.23 105.40 106.92 173.91 87.00 MSMEs Assisted/Dev'd. 33,964 55,512 163% 6,599 7,928 9,291 13,044 11,741 6,909 Investments (PhP B) Domestic Sales (PhP B) Source: DTI 2010. In addition, the same report mentioned other important accomplishments of the program: increased Pasalubong Centers (1,050) that carry OTOP products; OTOP market outlets (5,121); product prototypes produced (6,783); new product designs launched (7,781); conducted two National OTOP Summits; and facilitated international trade missions. More importantly, ―of the 1,518 cities and municipalities of the Philippines, 1,497 of them or 99% are now homes to active OTOP enterprises that have benefited from all forms of support from both their respective local governments and the national government.‖ 2 Presentation and Analysis of Survey Results 2.1 Background of enterprises The survey data reveals that the majority, 71% (22), of enterprises participating in the OTOP program are self-owned, i.e., sole-proprietorship. This is understandably so because most family-owned micro or small enterprises prefer this form of business organization due to its relative ease of formation which only requires business name registration with the 11
  • 12. provincial DTI office and the business permit from the municipal office. The ―others‖, 29% (9), are organized either as cooperatives, corporations, or business units of not-for-profit organizations. In terms of type of business activity, 39% are engaged in handcraft production, while 26% are into food processing. Small manufacturing accounts for 16%, while agribusiness and agri-based products are 13% and 6%, respectively. Type of Company Agri-based products, 6% Agribusine ss, 13% Others, 29% Selfowned, 71% Type of Business Food processing, 26% Handcraft, 39% Small manufacturi ng, 16% Fig. 3: Distribution of respondent-enterprises by type of ownership and business activity As can be gleaned from Table 5, 51.6% of the enterprises employ 10 workers or less, while 32.3% employ 11 to 20 workers. Only a few companies have more than 30 employees. Likewise, seven out of 10 companies have capitalization of PhP 500,000 or less, while about 16% have capitalization of more than PhP 1 million. About 64% of the firms have annual sales turnover of PhP 1 to PhP 3 million. These figures suggest that the large majority of the enterprises surveyed participating in the OTOP program are ―small‖ in terms of the scale of their operations. Table 6: Scale of OTOP Firms Employment No. of Workers Freq. Capital Percentage <10 11-20 21-30 31-40 41-50 51-60 61-70 16 10 0 2 1 0 2 51.6% 32.3% 0.0% 6.5% 3.2% 0.0% 6.5% No answer 0 31 0.0% 100.0% Capital (Php '000) <100 100-500 501-1000 1001-3000 3001-5000 5001-10000 >10001 No answer Annual Sales Freq. Percentage 12 10 4 2 1 1 1 38.7% 32.3% 12.9% 6.5% 3.2% 3.2% 3.2% 0 31 0.0% 100.0% Sales (Php '000) <1000 1001-3000 3001-5000 6001-9000 9001-12000 12001-15000 15001-20000 >20000 No answer Freq. Percentage 0 20 2 4 0 1 0 2 0.0% 64.5% 6.5% 12.9% 0.0% 3.2% 0.0% 6.5% 2 31 6.5% 100.0% 12
  • 13. 2.2 Profile of entrepreneurs Table 6 shows the profile of the respondent-entrepreneurs as to gender, age, level of educational attainment and commitment to the business. Table 7: Profile of Respondent Entrepreneurs Category Gender Male Female No answer Freq. Age Range < 30 31-40 41-50 51-60 > 61 No answer Percentage 8 20 3 31 1 3 11 10 3 3 31 25.8% 64.5% 9.7% 100.0% Category Level of Education Primary School Secondary School Diploma University Degree No answer Freq. 3% 10% Commitment to Business 35% Full-time 32% Part-time 10% 10% 100% Percentage 1 5 4 20 1 31 3.2% 16.1% 12.9% 64.5% 3.2% 100.0% 30 1 31 96.8% 3.2% 100.0% The enterprises surveyed are predominantly owned or managed by women with more than 64% of the respondents. This somehow validates the popular observation of the growing participation and increasing role of women in setting-up and managing rural enterprises. In addition, these micro-enterprises are predominantly in the handcraft and food processing sectors. These types of business activities are relatively convenient for women to put up due to ease of entry and do not require big capital. Women are also naturally inclined to engage in food processing and handcraft business because these can be done at home while performing their household roles. Another view in the predominance of ―women-owned‖ micro and small enterprises is that wives are actually the ones doing the paper work of registering the business while the husbands are either employed or busy supervising the business. Registering a business may take long hours of waiting and going back and forth, to which men mostly do not have the patience. To avoid complications and to fast-track processing, the business is registered in the name of the wife instead. However, in most cases, business decision-making is a shared responsibility of the couple. 13
  • 14. As to age, the large majority of entrepreneurs surveyed are within the age ranges of 41-50 years old (35%) and 51-60 years old (32%). There are not so many younger entrepreneurs below 40 years old. The survey further reveals that the entrepreneurs are well-educated—64% of them have college or university degree, and 16% completed secondary education. Almost 13% have undergone some formal skills or vocational training. Moreover, almost all (97%) reported that they work full time in the business making it the family’s major source of income. In starting up the business, the respondents used their own money as capital or borrowed from relatives and friends, or obtained loans from financing institutions. Some received grant from government agencies. The entrepreneurs were highly motivated by their sense of self-fulfillment in owning and running their businesses. This gives them the freedom to employ their skills and knowledge in doing their work without having someone telling them what to do. Others ventured into business to augment household income while allowing them to spend more time with the family. Contributing to society by providing employment opportunities and sense of self-worth to workers, particularly to women, were noble reasons behind why many entrepreneurs started the business. To gain social recognition as an ―entrepreneur‖ also figured as one of the motivating factors. 2.3 Business prospects Three out of four enterprises surveyed have positive outlook on their business. More than half (52%) said that their current businesses are doing well, while 23% said that their businesses are performing very well. On the other hand, 23% mentioned that their businesses are pretty normal and only 3% said that their current business performance is bad. The findings suggest that the market acceptance of the OTOP products is growing with increasing demand both from local and export markets. Based on the OTOP-Philippines accomplishment report mentioned earlier, the OTOP enterprises have demonstrated very positive business potential. The growth in both domestic and exports sales indicates the increasing market acceptance of the OTOP products. Given the right combination of business development services and access to financing, those OTOPparticipating enterprises can be competitive. In addition, that 99% of city and municipal governments have adopted the program is a manifestation that OTOP-Philippines have become the primary strategy for local economic development. 14
  • 15. Table 8: Evaluation of Current Business Evaluation of Current Business Frequency Percentage Rank 7 16 7 1 0 31 23% 52% 23% 3% 0% 100% 2 1 2 4 5 Very Good Good Normal Bad Very Bad Total Access to financing tops the list of the problems that the enterprises are experiencing as mentioned by almost all (97%) of the respondents. This validates the findings of the ―Doing Business 2012‖. Overall on the ―ease of doing business‖, the Philippines is ranked 136th out of 183 economies indicating the need to institute more reforms to make the business enabling environment more conducive to the creation and growth of enterprises. On the ―ease of getting credit‖, the Philippines is ranked 126th out of 183 economies showing the relative difficulty of getting credit particularly by small business establishments. Firms consistently rate access to credit as among the greatest barrier to their operation and growth. This reveals that despite the provision of R.A. 9501 for mandatory credit allocation for MSMEs, the availability of funds from government financing institutions, and the liquidity of the banking sector, the MSMEs’ are still having difficulty accessing credit; the primary reason being is the lack of hard collateral. Business problems encountered Others Transportation Employment Technical 13% 74% 77% 81% Raw Materials Availability 84% Marketing 84% Financial 97% Fig. 4: Business Problems Encountered Problems related to marketing and availability of raw materials ranks second with 84% of the respondents having problems along this area. Moreover, technical problems (production, product development, packaging, etc.), employment related problems, and 15
  • 16. transportation and logistics were encountered by 81%, 77%, and 74% of the respondents, respectively. Table 9: The Philippines compared to global good practice and select Asian economies on the ease of doing business Ease of Doing Business 2012 - Global Rank Economies Singapore Hong Kong SAR, China Thailand Malaysia Japan Vietnam Bangladesh Indonesia Philippines Cambodia Lao PDR Timor Leste Rank DB2012 Rank DB2011 1 2 17 18 20 98 122 129 136 138 165 168 1 2 16 23 20 90 118 126 134 138 163 169 Source: Doing Business 2012, WB/IFC That the Philippine MSME sector is still largely uncompetitive can be partly explained by the compounding of financial, business development, and structural problems that the entrepreneurs are experiencing as shown above. In the 2010-2011 Global Competitiveness Index, the Philippines is ranked 85th out of 132 countries/economies surveyed. Such ranking of the Philippines lags behind those of its Asian neighbors such as Singapore (3rd), Malaysia (26th), Thailand (38th), Indonesia (44th), and Vietnam (59th). 2.4 Marketing More than half (58%) of the entrepreneurs surveyed are exporting their products, while the rest cater to the domestic market. This validates the earlier estimate that 60% of exporters are MSMEs. Further, that the majority of the OTOP enterprises are export-oriented somehow corroborates the increasing export sales record of OTOP in Table 4 above. These enterprises are able to tap the export market by either directly selling to companies abroad, selling to local company that consolidates and exports products, or subcontracting from an exporting company. 16
  • 17. Distribution Channels Public market Cooperative Street stall or booth Others* Own shop Wholesale Export Products? 0% 10% No Pricing of Products Others 42% 3% 29% 48% 52% Yes Decide own* 58% 68% 0% 20% 40% 60% 80% 0% 50% 97% 0% 100% 100% 200% Fig. 5: Distribution of Enterprises as to Channels of Distribution and Pricing Strategies Seven out of ten (68%) of surveyed enterprises are distributing their products through wholesale arrangement either to local retailers or exporters. More than half (52%) are also engaged in retailing in their own shops, while 48% sell their products through bazaars, trade fairs, in malls, and in showroom of government agencies. Almost all (97%) of the respondents said that they decide their own pricing scheme using the basic cost-plus formula [selling price = total cost (raw materials + labor + overhead) + margin]. Overall, Philippine export sales grew by 33.71% in 2010 to USD 51.392 billion from USD 38.435 billion in 2009 (see Table 8 below). Traditional exports grew by 47.27% to USD 28.274 billion, relying heavily on electronic products. But it should also be noted that almost all product categories where OTOP contributes posted increase in sales: garments and textiles, 11.93%; wearable, 0.89%; food, 1.78%; home furnishing, 23.18%; marine products and carrageenan, 12.62%; giftware and holiday decors, 11.44%. Coconut products recorded the highest growth at 88.25% to USD 1.508.47 billion. This is a good indication that the OTOP-supported products are gaining wider export market acceptance. Promoting these products also reduces the country’s reliance on electronic products that are more vulnerable to adverse export market developments. In 2010, according to the National Statistics Office, the top nine destination countries for Philippine exports are China (19.52%), Japan (15.17%), USA (14.70%), Singapore (14.27%), Germany (5.17%), Netherlands (4.73%), Republic of Korea (4.34%), Thailand (3.48%), and Taiwan (3.41%). 17
  • 18. Table 10: Philippine Export Sales Report (F.O.B Value in Million USD) COMMODITIES 2010 I II III IV. 2007 2006 38,435.81 49,023.17 50,465.72 47,027.88 23,831.50 1,870.89 2,571.92 28,274.31 15,582.31 1,671.55 1,944.92 19,198.78 21,046.84 2,142.90 2,099.94 25,289.68 23,624.39 2,503.85 1,853.79 27,982.03 22,250.79 2,843.33 1,718.12 26,812.24 118.66 1,577.87 1,107.21 1,181.02 537.84 74.84 67.32 7,247.97 1,869.85 13,782.58 117.61 1,550.32 752.05 958.77 477.58 67.16 67.32 6,600.18 1,470.49 12,061.48 153.98 1,681.27 901.88 1,139.62 808.03 182.92 67.32 7,454.06 2,481.65 14,870.73 160.66 1,486.23 891.58 1,011.71 584.84 202.99 61.68 7,460.89 2,604.56 14,465.14 76.51 1,303.07 784.21 825.72 465.45 206.91 66.83 7,338.98 2,058.32 13,126.00 371.16 775.31 1,508.47 45.51 2,700.45 6,635.20 TRADITIONAL EXPORTS 1 Semiconductors 2 Garments & Textiles* 3 Machinery & Transport Sub-total PRODUCT MGT. CATEGORY - REVENUE STREAMS 1 Wearables (excl. garments)* 2 Food* 3 Motor Vehicle Parts/Components 4 Home Furnishing* 5 Marine Products & Carageenan* 6 Giftwares/Holiday Decors* 7 Organic Products* 8 Electronic Products 9 Mineral Products Sub-total OTHER PRODUCTS 1 Petroleum Products 2 Metal Components 3 Coconut Products* 4 Construction Materials Sub-total OTHERS 2008 51,392.54 TOTAL 2009 292.95 481.43 801.31 46.32 1,622.01 5,553.54 1,240.16 577.56 1,348.25 182.87 3,348.84 5,513.92 1,108.68 485.32 946.23 167.57 2,707.80 5,310.75 846.36 389.36 756.15 181.49 2,173.36 4,916.28 Source: National Statistical and Coordination Council * Commodities where OTOP contributes The following table summarizes the respondent-enterprises’ views and practices on the mix of marketing strategies that they employ. Capitalizing on the unique features of the products (such as distinct taste, craftsmanship and design, and quality certification) is the primary product differentiation strategy. Others have invested in good packaging to establish their brands in the domestic market. To achieve higher market share, the enterprises sees that participating in trade fairs and mission is an effective strategy. In addition, by continuously offering new and better products, maintaining high product quality, and securing product standards certifications, the enterprises would be able to increase their market acceptability. Table 11: Summary of Marketing Strategies (a) How to differentiate the products?  distinct taste and unique flavors  consistent good product quality  distinct style, unique designs, and exquisite craftsmanship  use export quality materials  capitalizing on How to achieve higher market share?  penetrating the mainstream market by participating in local and international trade fairs  aggressive marketing  continuously offering new and improved products  maintaining high Main promotion method       trade fairs and bazaars word-of-mouth, referrals from clients and friends kiosk inclusion in the OTOP catalogue website, online marketing LGU endorsements;     Other promotion methods free taste, promo at restaurants endorsements from local government and DTI word-of-mouth, referrals from customers through volunteers and friends 18
  • 19.       product standard certifications (GMP/HACCP, OCCP) premium quality and uses 100% organic ingredients, chemical free, organically-grown use recycled materials local branding improved packaging mixed local and imported raw materials     product quality advocating on organic rice farming collaborating with local and national government bodies securing product standards certifications (GMP/HACCP, OCCP) passing export requirements and standards  use of traditional promotional materials (brochures, leaflets, flyers) By focusing on the demand of the market, soliciting feedback from buyers and customers, observing market trends and outlook, and complying with international standards on product quality and safety, the entrepreneurs surveyed are able to develop new products that have strong market potential. Creating new and innovative designs for handcraft products requires a lot of imagination and experimentation particularly in the use of different raw materials. Table 12: Summary of Marketing Strategies (b)        How to develop new products? paying attention to market demand soliciting feedback from customers satisfying buyers’ requests observing market trend and outlook complying with internationallyaccepted manufacturing standards product research using imagination in experimenting with materials used by competitors How to improve product and quality?  learn new technology to continuously improve products  continuous skills training  upgrade designs  strict compliance with standards  undertaking research and development (R&D)  market testing and product evaluation  monitoring buyers’ preference  soliciting customers’ feedback  using better raw and finishing materials  regular monitoring  intensive quality control    How to improve services? put value in dealing with customers evaluation and feedback ensure availability How to gain consumer’s reputation  maintain quality  consistently deliver commitments to clients on time  reasonably-priced products  unique design of products  maintain professional relationship with buyers and partners  availability of products  open to customers’ feedback The great majority (84%) of the respondents agree that it is necessary to create regional brand for the OTOP products to strengthen their market positioning. About a quarter 19
  • 20. (74%) are optimistic that it is quite possible to create regional brand while 13% thinks that it is difficult to do so in view of the growing and stiffer competition from other countries. Necessity to create regional brand No answer Possibilities to create regional brand No answer 3% 6% Difficult No 13% 13% Not so much Yes 84% 0% 20% 40% 60% 80% 100% 6% Quite Possible 74% 0% 20% 40% 60% 80% Fig. 6: Perception of the Respondents on the Necessity and Possibility of Creating Regional (OTOP) Brand 2.5 General image of OTOP This section shows the respondent-entrepreneurs’ extent of knowledge of, perception on the usefulness of, and level of satisfaction with the OTOP program. More than 60% of the respondents said that they know about OTOP rather well and 32% claimed that they have very well knowledge of the program. Only 6% said that they don’t have so much knowledge about OTOP. This high degree of awareness of the OTOP by the entrepreneurs is indicative of the effectiveness of the program’s information campaign and the extent of reach. Everybody agreed that the OTOP program serves its intended purpose with 68% saying that it is very useful and 32% saying useful. Knowledge on OTOP Never Heard 0.0% Little Knowledge Usefulness of OTOP 0.0% Not so much Not useful at all Not very useful 0.0% 6.5% Know rather well Know very well 0.0% 61.3% 32.3% Useful Very useful 32.3% 67.7% Fig. 7: Respondents’ Knowledge and Perceived Usefulness of OTOP 20
  • 21. This positive perception by the entrepreneurs is further validated by their level of satisfaction with the support they are receiving through the program. More than half (52%) are very satisfied and 35% are satisfied with the performance of the program as well as with the support their respective businesses are receiving in the areas of marketing (trade fairs, market matching), training, product development and design, access to financing (loan, grants and subsidies), business process and management support. Type of support from OTOP program Others Management Evaluation of OTOP Support 1 Unsatisfied Business Process 10 Financial 0.0% Not Satisfied 8 0.0% 10 Design Training Marketing Average 15 12.9% Satisfied 24 35.5% Very satisfied 30 51.6% Fig. 8: Respondents’ Assessment of OTOP Program Support to MSMEs According to the OTOP Program assessment study (Cruz 2010), there are five types of interventions that are considered crucial by respondent-OTOP MSMEs to the growth of their business. These are: product design and development (36%); marketing (31%); skills, entrepreneurial and business training (19%); business counseling (7%); and loan facilitation (7%). These findings somehow correspond to the findings of this study given in Fig. 8. Evaluation of OTOP Exhibition Others 2 Knowledge on the competitor's… 10 Price setting 11 Quality improvement 17 Understanding consumers' needs 18 Sales promotion 26 0 5 10 15 20 25 30 Fig. 9: Evaluation of OTOP Exhibitions The OTOP exhibitions and trade fairs have likewise benefited the participating enterprises through (1) sales promotion, (2) understanding consumers’ needs, (3) improving 21
  • 22. the quality of the products, (4) appropriate pricing, and (5) having knowledge about the competitors’ products. Those trade fairs were organized by the government in collaboration with the sector associations at the provincial, regional and national levels primarily to provide venue where OTOP enterprises can showcase their products. Those events also provided the entrepreneurs to meet buyers and talk to consumers about their perceptions of the products, their preferences and consuming habits. Finally, the respondents articulated their insights on how the OTOP program and policies can be further enhanced. The majority of the enterprises suggested that financing should be made more accessible to MSMEs to allow them better opportunities to improve their products, upgrade their plant, machineries and equipment, and to augment their working capital. They also suggested that a more permanent place in Metro Manila could be provided for OTOP products to be sold throughout the year and not only during trade fairs or exhibits. An OTOP shop in central commercial areas in Metro Manila will give the products continued market presence and will be more accessible to the consumers. Other suggestions include:  Strengthen partnership with, and support from the local government units  Provide common service facilities for OTOP enterprises in the municipal level  Enhance assistance on product development, design, packaging, and promotional activities  Provide subsidies for participation in OTOP activities and trade exhibits  Fair treatment among OTOP beneficiaries However, some respondents believe that ―entrepreneurs should not be spoon-fed all the time so that they will learn how to survive and innovate‖. 3 Case Studies The case studies of three enterprises from Pampanga, Cavite and Davao City presented in this section highlight the experiences of enterprises participating in the OTOP program. They demonstrate the different forms of assistance that the program provides depending on the needs of a particular enterprise. 22
  • 23. 3.1 Case 1: Navarro Foods International, Pampanga Navarro Foods International is engaged in the food processing business that produces crab paste, fermented shrimp, and fermented mudfish. Gil Navarro, the business owner, had his humble beginning in the late 1970s when he decided to cook crab paste to augment his meager income as a tailor. Coming from the area of crab paste makers in Masantol, Pampanga, he experimented concocting his own recipe of crab paste. With an initial capital of PhP 400, he purchased a sack of crabs, and processed them into crab paste in his small kitchen. Surprisingly enough, Mr. Navarro’s recipe exceeded the taste and quality of other crab paste makers. From then on, he would sell his product to households and eateries in the neighboring province of Tarlac since Pampanga was already saturated with crab paste vendors. The venture turned out to be so profitable that he started selling his product to wet markets and small restaurants. Eventually, distributors became interested in his products and began carrying his brand. Navarro’s Taba ng Talangka had its break in 1980s when a distributor of food products based in Manila, started buying his product in large volume. Through the assistance of DTI, DOST and other government agencies, Mr. Navarro was able to improve the packaging of his products. He participated in trade fairs and exhibits sponsored by DTI and Philfoodex, where he became a member. To meet the growing demand for his product, he increased his daily production from 50 kilos to 1,000 kilos of crabs and hired additional workers. Mr. Navarro also ventured to other products such as balao-balao (fermented shrimp) and burong isda (fermented fish). Navarro Foods has a production area, office and retail outlet beside his house in Masantol, which he renovated through a loan of PhP 950, 000 from SB Corporation in 2003. He also received assistance from DOST on product packaging and in securing registration with the Food and Drugs Administration (FDA). His products are packed either in bottles or cans and properly labeled. When crab paste was identified as the OTOP of the municipality of Masantol, Pampanga, Navarro Foods was one of the first enterprises to join the program. Through the help of DTI, Navarro Foods underwent compliance and accreditation to Hazard 23
  • 24. Analysis and Critical Control Points (HACCP) to enable the product to enter the supermarkets. In early 2005, Navarro Foods opened an OTOP retail outlet in a mall in Manila. Aside from Taba ng Talangka, he also carries sweets and delicacies from other manufacturers in Pampanga, most of who are members of the Sweets and Delicacies Association. Eventually, he added another stall to carry non-food products also from Pampanga. This venture proved to be very profitable. Mr. Navarro relates that only about 40 percent of his sales are from crab paste. Undoubtedly, Navarro’s Taba ng Talangka has already established its niche in the market. The success of Mr. Navarro in the local market is overwhelming. His dream is to penetrate the export market for his product. Having this in mind, he changed his business name to Navarro Foods International, Inc. and incorporated with the Securities and Exchange Commission (SEC) on February 20, 2003. In September 2005, he joined a Trade Mission to the USA and Canada, organized DTI. Mr. Navarro is overwhelmed by the fast growth of his business with the support from government and other private business organizations. Mr. Navarro thinks that the business is doing pretty well. However, like most growing family enterprises, the company is having difficulty in dealing with employment issues since most of the workers are relatives who seem not to treat company policies seriously. The distance of the source of raw materials, which is a 12-hour land trip, causes high transportation costs. Added to this is the declining supply of crab meat. Mr. Navarro is well aware of the OTOP program and he thinks that it is very useful for enterprises like his to be part of the program. The OTOP fairs and exhibitions opened market opportunities for the company. Developing a strong brand is important in penetrating new markets and maintaining market position, says Mr. Navarro. Currently, the company is working on the fabrication and installation of retort and boiler machines through a loan from the Department of Science and Technology (DOST), which is part of the OTOP program. The project is to be completed in 2011. 3.2 Case 2: KATAKUS, Inc., Davao City KATAKUS or Kababayen-an alang sa Teknolohiya nga Haum sa Kinaiyahan ug Kauswagan, Inc. (Empowering Women through Appropriate Technology) was organized in May 1996 by the defunct Women in Development Technology Institute. As a nongovernmental organization, its main program is sustainable agriculture but it also serves 24
  • 25. as the marketing arm of agricultural products of its partner organizations. The Kababayen-an sa Katipunan Alang sa Kalambuan (KKK) or Katipunan Women for Development, on the other hand, is an organization of peasant women consisting of 45 members. KKK is the production arm of KATAKUS based in Panabo City in Mindanao. The handmade paper project aims to provide livelihood to women to augment their families’ income. After all, the area has abundant raw materials such as banana stalks, durian peel, rice straws, cogon grasses, coconut husks, ramie and other fibers that could be used as basic material for crafts, providing the women with alternative source of income. KATAKUS produces lampshades, photo frames, photo albums, scrap books, occasion cards, boxes, candle holders and other novelty items. As a social enterprise, KATAKUS is aware of its purpose of creating economic and social value by employing women in the community. Thus, marketing is extensively pursued in both domestic and foreign markets. There are around 20 distributors in Davao City and Manila, most of which are specialty stores and handicraft shops. Export destinations include The Netherlands, Japan, USA, Kuwait, United Kingdom, Hong Kong, Canada and Germany. KATAKUS started operation only in 2002. Sales slowly rose each year. From approximately USD 4,000 in 2003, sales doubled in 2004, and increased to USD 10,000 in 2005. In 2006, after the discovery of the durian paper, sales astonishingly increased by 160 percent to USD 28,000. However in 2007, KATAKUS lost some of its export buyers and sales relied mainly on the local market, although this too decreased by eight percent. At the height of its operation in 2007-2008, KATAKUS hired as many as 31 piece-rate women workers earning an average of PhP 200 per day. What distinguishes KATAKUS from other manufacturers of handmade paper products is that it uses the durian paper, which was an invention of Betty More, Executive 25
  • 26. Director of KATAKUS, in 2004. Davao City is the durian capital of the Philippines. Ms. More claimed that around ten tons of durian peels are generated every day, more during peak season from July to October. The durian paper was launched in August 2005 during the Davao City Kadayawan Festival. Similar to the experience of many export-oriented companies, KATAKUS was badly affected by the global economic slowdown as its export sales have been declining. Currently, the company is relying on its local market and in participating in local trade fairs and OTOP activities in which it is earning about PhP 100,000 a month. Ms. More is well knowledgeable about the OTOP program through which the company has received assistance in financing, marketing, and product development. She believes that while these support programs are very useful in improving the competitiveness of small businesses like KATAKUS, there is a need for more coordinated and comprehensive effort in addressing critical issues from production, to financing, to marketing. As it grows, KATAKUS needs additional tools and equipment to improve further its production. It needs to continually upgrade the skills of the workers on new techniques and in handling different materials. Limited capital prohibits the company from hiring enough personnel to focus on marketing and finance and from investing in machineries. Ms. More is confident that OTOP program will continue to help KATAKUS realize its potential as a profitable enterprise by and for women. 3.3 Case 3: Carmfood Enterprises, Cavite The fish trading and processing business was started by Carmelita’s grandparents in 1971. Fish processing is the common livelihood in their town of Rosario in Cavite. It was a simple family business set in a small portion of the land where its current plant is located. The business, which produces smoked and dried fish, was initially registered as Carmen’s Smoked and Dried Fish Factory. When Carmelita took over, she started expanding both her market and their product line. Marinated and cooked fish were added to the products. Nearby cities, supermarkets and Filipinos abroad were included in her target markets. In 1989, the name was changed to Carmfood Enterprises to reflect the transformation of a simple backyard business into a flourishing one. Carmelita ventured into this business mainly because of the influence by her parents and the need to earn higher income. However, she too is driven by her passion for hard-work and the sense of self-fulfillment. 26
  • 27. The plant operates in a 9,222 square meter lot with two one-story buildings: the main processing area and the old building for packaging and storage area. A portion of the lot is used for parking and the rest of the vast open lot is used for drying. In the main processing plant, the workers are clustered according to the work process—initial rinsing, evisceration, de-boning. All the processes are done manually using basic tools and equipment. Most use hairnets, aprons, masks and rubber boots. Only one worker wore gloves. Wooden tables are provided but some workers prefer to sit in low stools as they were used to this working style. These workers with their plastic basin, and wooden/plastic chairs positioned themselves based on the availability of space in their designated production area. There are assigned cooking vats for each product. The smokehouse is still part of the main processing area where smoking is still done the traditional way with wood shavings and saw dust. Wooden slates serve as fish trays for drying and smoking. Sun drying is done in the open lot. Most of the workers have been with the company for more than 10 years. Workers' average age is 35 with the oldest at 72. Carmelita herself still helps in the production. The major functions of the business are divided among her children with the eldest, Carol as the general manager. According to Carmelita, the business is doing very good despite the problems that they encounter in the normal course of operations. Limited capital results in cash flow problems since some clients pay in terms and cash is mostly tied with inventories while bills have to be paid on time. During fishing off-season, the company has to buy from other provinces, which entails additional transportation cost. 27
  • 28. Carmfoods has been participating in OTOP trade fairs, which according to Carmelita, is very helpful in promoting their products and in meeting new buyers. Carmfoods products are available in major supermarkets and groceries. The company is able to export its products through a local consolidator and exporter. Carmelita says that the OTOP program is very useful because of all the support that their company is able to get—from access to financing and business development services to the network that they were able to establish. Carmfoods is currently constructing its new four-storey plant. Local and national agencies assisted in the planning to ensure that the plant is compliant to HACCP standards. Part of the construction cost is covered by their PhP 18 million OTOP loan from the Development Bank of the Philippines in 2009. Additional equipments for the plant will be purchased through a loan from DOST. In preparation for their operation, the management team received trainings on GMP and HACCP 4 Conclusion The distribution of Philippine business establishments is largely skewed to rural micro and small enterprises. While these types of enterprises confront many difficulties from inefficiencies in production, limited capital and lack of access to financing, inferior products, and limited access to mainstream markets, we have seen from the foregoing discussions that OTOP-Philippines provides tremendous opportunity for these enterprises to become viable and competitive in the long run. Given the number of micro and small enterprises and the very important role that they play in making the local economy vibrant, we can say that the government’s policy to promote and support these enterprises is really necessary and crucial to the overall economic growth and development. The regulatory framework and structural mechanisms are rightly in place to make the OTOP-Philippines successful. Six years of implementing the program have generated positive results in terms of investments, sales, enterprises reached and jobs created. OTOP-Philippines has reached its intended primary beneficiaries—the rural micro, small and medium enterprises—that are in need of help and support to sustain their businesses. The localization of program implementation allowed the program to focus on sectors and types of business activities that are dominated by rural micro and small 28
  • 29. enterprises. In addition, the program has given women-entrepreneurs the opportunity to upgrade their business activity from mere home-based livelihoods into viable enterprises. Despite an array of business problems they are encountering, the rural entrepreneurs have very positive outlook for their business. The program has been quite successful in linking the rural enterprises with the market, both domestic and export. OTOP-Philippines has opened the doors of the export market to many rural enterprises that otherwise would not have had the chance to access these markets. That many are in agreement on the necessity and possibility of creating and promoting a regional OTOP brand for the Philippine products to strengthen their market presence is a positive indication that those rural enterprises have already realized the need to go out of their comfort zones and to embrace a bigger challenge for their businesses. Although many of those enterprises were affected by the global economic slowdown, they were resilient enough to keep their businesses up and running. Overall, the entrepreneurs have high praises for the program, which they deem very useful. They are happy with the kind of support that their businesses are receiving through the program. However, there are still areas where more attention should be drawn and where reforms are needed to make the program more relevant and effective. 1. While OTOP-Philippines is strongly marketing focused, equal attention must be given to improving the production efficiencies of rural enterprises to increase their competitiveness. In the handcraft business for instance where production is rarely mechanized, consistency in product quality is a big problem causing rework, rejects, wastage and high operating costs. 2. Investment in research and development must be intensified to develop new and better products that have high market potential. ―SMEs seldom have the means to follow a well-established, formal, and strategic procedure for commercializing new ideas‖ (Bolinao 2009). Given these circumstances, the need is great for increased ―collaboration in terms of financial support and actual R&D outputs‖ to improve productivity and increase capacity to innovate and upgrade (ReyesMacasaquit 2008). The study done by FINEX and ACERD (see Aldaba 2008) identified the following factors that prevent SMEs from acquiring the necessary technology or engage in their research and development: lack of funds; insufficient information; lack of skills in evaluating alternative technologies; difficulty in meeting government requirements for availing assistance. 29
  • 30. There is a lot of room for improvement in the processed food sector to produce foodstuff that will cater to the global market. The growing market consciousness for health and wellness offers huge potential for organic foods and this is an area where rural enterprises can definitely strongly participate. ―Ironically,‖ as Tonog (2010b) asserts, ―the growing demand of the market for environment-friendly and fair products puts a strong pressure on business, especially on MSMEs in developing countries like the Philippines, to comply with stringent regulatory standards—from product safety to fair labor practices.‖ 3. Financing should be made more accessible to rural micro and small enterprises for without it they would not be able to scale-up production, invest in modern technology, or undertake serious research and development activities. As many of those surveyed agreed, access to financing remains illusive for various reasons. One of such reasons is the lack of or insufficient collateral needed to borrow money form formal financing institutions. Another compelling reason is the entrepreneurs’ inability to comply with the documentary requirements of banks. Access to financing is crucial to growing MSMEs. Jenkins et al. (2007) argues that ―credit enables small and medium-sized enterprises to enter the marketplace, scale-up production, upgrade technology and change or improve their products and services‖. But access to credit is a major stumbling block to MSME growth in the Philippines. Despite the apparent availability of funds from government financing institutions (GFIs), and the liquidity of the banking sector, the majority of MSMEs’ still has difficulty accessing credit (see ADB 2007). Zavatta (2008) earlier observed that ―the information that SME can realistically provide to external financiers often lacks detail and rigor. The problem is often aggravated by the low level of education of small entrepreneurs, who may not be in the position to adequately articulate their case‖. Moreover, he opined that ―the information supplied to bankers and outside investors by familyowned SME is often not fully accurate and realistic, and opaque behavior may prevail. Under these conditions, outside financiers tend to adopt a very cautious attitude toward SME, and either reduce the amount of financing sought or refuse it altogether‖. As such, there is a strong case in helping rural entrepreneurs improve their financial management skills while encouraging financing institutions to develop and offer financing products that suit the conditions of rural MSMEs. 30
  • 31. 4. The noble intention of the OTOP program is sometimes diminished by too much politicking at the local level. It has been observed that some mayors choose the products or service to be promoted under OTOP on the basis of personal business interest, or as favor to select groups identified with him or her. While the DTI has clear guidelines in the selection of products or services primarily based on the locale’s indigenous resources and competitive advantage, these are sometimes easily set aside. In addition, since politics has been involved in the implementation of the program, its continuity suffers when there is a change in the local leadership. Because of this, private sector participation and leadership in the implementation of the OTOP program is very important in making sure that the program is sustained freed from politics and that it will continue regardless of who the mayor is. 5. To further strengthen the competitiveness of the OTOP industry, structural reforms are needed to make sure that the business enabling environment is conducive to the creation and growth of rural enterprises. This includes streamlining of the business registration process, reducing the barriers to entry and growth, and making the regulatory regime more predictable. For example, the high transportation and logistics costs makes it prohibitive to many rural enterprises to explore and enter new markets, whether domestic or export. According to the Doing Business 2009, ―the relatively higher cost of exporting from the Philippines (USD 816 per container) compared to Malaysia (USD 450), Thailand (US$625), and Indonesia (US$704) makes it disadvantageous to Philippine MSMEs.‖ Given the export orientation of the majority of OTOP enterprises, the high cost of exporting lessens the ability of Philippine exporters to compete regionally and globally. ―The Philippines,‖ Tonog (2010a) argued, ―has a long way to go in improving its competitiveness. Critical to this is the curbing of corruption at all levels and streamlining the bureaucracy to stimulate enterprise creation and harness economic activities.‖ Micro, small and medium enterprises are indeed the backbone of Philippine economy. They are the engines of economic activity and job creation especially in the countryside 31
  • 32. where large companies hardly exist. The fact that the Philippines is largely agricultural, supporting the development of rural agro-enterprises will ensure that the poor benefits from economic growth. The OTOP-Philippines program, in spite of its limitations, offers opportunities to thousands of rural enterprises to become viable and competitive. Therefore, it is imperative that reforms are instituted to make the program truly unleash and harness the entrepreneurship that is needed to move the Philippines forward. @ 32
  • 33. References: ADB (Asian Development Bank). 2007. Philippines: Critical Development Constraints. Country Diagnostics Studies. Manila: ADB – Economics and Research Department. Aldaba, Rafaelita M. 2008. SMEs in the Philippine Manufacturing Industry and Globalization: Meeting the Development Challenges. PIDS Discussion Paper Series No. 2008-15. Makati City: Philippine Institute for Development Studies. Berger, Allen N. and Gregory F. Udell. 2005. A More Complete Conceptual Framework for Financing of Small and Medium Enterprises. World Bank Policy Research Working Paper 3795, December 2005. Bolinao, Edgardo S. 2009. Innovation Process and Performance in Small- to Medium-Sized Firms: A Conceptual Framework. DLSU Business and Economics Review 19.1 (2009), pp. 71-80. Manila: De La Salle University. Caccam, Eugenio Jr. M. (ed.) 2009. Nurturing the Enterprising BoP: Cases from the PBSP Business Advisory Program. Manila: Philippine Business for Social Progress (PBSP). Cruz, Merly M. (2010). OTOP-Philippines: A Success Story. OTOPreneur, December 2010. Department of Trade and Industry – Regional Operations and Development Group. (http://otopphilippines.org) Cruz, Merly M. (2011). Industry Clustering: Building Capacities in the Regions – A sustainable development model. OTOPreneur Magazine 3, September 2011. Department of Trade and Industry – Regional Operations and Development Group. Dalglish, Carol L. and Rebecca L. Bradley. 2006. Micro-enterprises in developing economy – challenges and sustainability. In Proceedings ICSB, Melbourne. Accessed from http://eprints.qut.edu.au De Leon, Max V. (2011). Aquino adopts GMA’s Otop in bid to spur growth. ABS-CBN News, May 17, 2011. (http://www.abs-cbnnews.com/business/05/16/11/aquinoadopts-gma%E2%80%99s-otop-bid-spur-growth) DTI (Department of Trade and Industry). Annual Report 2008. Manila: Department of Trade and Industry. Ho, Abigail L. (2011). DTI seeking P100M funding for Otop program. Philippine Daily Inquirer, July 10, 2011. (http://business.inquirer.net/6547/dti-seeking-p100m-fundingfor-otop-program) IBRD (International Bank for Reconstruction and Development) and (WB) World Bank. 2010. World Development Indicators 2010. Washington, DC: IBRD and WB. IBRD (International Bank for Reconstruction) / The World Bank. 2008. Doing Business 2009. Washington, DC: The World Bank. www.doingbusiness.org Jenkins, Beth and Eriko Ishikawa. 2009. Business Linkages: Enabling Access to Markets at the Base of the Pyramid. Report of a Roundtable Dialogue March 3-5, 2009, Jaipur, India. Washington, DC: International Finance Corporation, International Business Leaders Forum, and the CSR Initiative at the Harvard Kennedy School. Jenkins, Beth, et al. 2007. Business Linkages: Lessons, Opportunities, and Challenges. IFC, International Business Leaders Forum, and the Kennedy School of Government, Harvard University. Karamchandi, Ashish, et al. 2009. Emerging Markets, Emerging Models: Market-based solutions to the challenges of global poverty. Monitor Group. Klein, Martin H. 2008. Poverty Alleviation through Sustainable Strategic Business Models: Essays on Poverty Alleviation as a Business Strategy. Erasmus Research Institute of Management, Erasmus University Rotterdam. 33
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