Filipinos and entrepreneurship: What’s the real score?

Written on Friday, July 18th, 2008 at 5:33 pm | by Jon Limjap

The result of the GEM Philippines 2006-2007 National Report, as cited by CVJ, is baffling, to say the least. In the study, GEM Philippines states that the distribution of entrepreneurs by socio-economic status is as follows: Class ABC+ 7%, Class C- 19%, Class D 54%, Class E 20%.

Results show that four out of 10 Filipinos (39.2%) aged 18 to 64 have businesses (see Figure 3) and the Philippines ranks second among the 42 countries surveyed by GEMfor 2006. The country is only second to Peru among middleand low income countries and ranks first among benchmarked countries in Asia.

This appears to state that Filipinos are, in fact, business-oriented. This is in stark-contrast to the often maligned notion of the Filipino as culturally biased against entrepreneurship, and having a seek-employment mentality as opposed to a business-oriented culture.

An important side-note, of course, is that the study most likely includes the Filipino Chinese in its demographic, although the large representation of the D & E classes (as opposed to the local Filipino Chinese community that mostly belongs to the ABC classes) may indicate that there is a majority “native” Filipino sample there.

Composition

One important aspect of the study is the composition of these enterprises:

Five percent (5%) of Filipinos own nascent (start-up) businesses, while 16% are managing new businesses and 20% are established business owners. More than half (57%) of these businesses are within one to 10 years of age. However, most of these businesses are small in scale and scope, being micro enterprises generally venturing in the consumer services sector.

Emphasis mine.

Aside from the fact that a big chunk of these businesses are young (at 1 to 10 years), they are also mainly micro enterprises — businesses at their infancy and whose sustainability is yet to be proven.

The study also implies that part of its sample are members of the underground economy, ergo, businesses that are not registered with the Department of Trade and Industry nor their respective city governments — thus indicating small scale/one-to-three man operation businesses which include sari-sari stores, ambulant vending, cellfone repair, etc.

Taking these factors into account, the demographic exhibits an ambiguity if taken in the context of how effective entrepreneurship is in curbing poverty. The question becomes: are Filipinos starting small but will move towards more established businesses, or are they staying at the single-person operation level that is, essentially, unsustainable?

I don’t see any clear answer to this question based on the study.

The difference between a Business Owner and the Self Employed and its impact on sustainability

One other factor of sustainability is pinned on the difference between a business owner and a self-employed person. Robert Kiyosaki* explains this in his book Rich Dad Poor Dad. This is concisely explained in the anecdote in his article Building a Pipeline to Wealth.

Essentially, Kiyosaki differentiates income earners into four types:

  • Employee - a person who works for someone else
  • Self-Employed or Small Business Owner - a person owns his job and is his own boss
  • Business owner - a person owns a system of making money, rather than a job to make money
  • Investor - a person who spends money on businesses or other financial instruments to earn even more money

I do not have the precise statistics to prove it, but my general impression is that the fact that the majority of Filipino businesses being micro enterprises mean that they’re one-man operations. This fact has major reprecussions to the sustainability of a business — if the self-employed person gets sick, or is faced with an emergency, the business grinds to a halt.

This is as opposed to a business where an established system sustains the operations despite the fact of the absence of the business owner. It also allows the business owner to focus on issues like expansion, operational efficiency, improving profitability, etcetra — the necessary ingredients into creating a major enterprise.

Turning small-time to big-time

Many of the taipans as we know them today started off as self-employed but were able to successfully move to the business owner stage, and eventually to investor. Not everyone can make this jump however — there is a large gap between the self-employed and business owner stages in that while everyone can put up a business, not everyone can establish a system.

The latter is the reason why franchising is becoming such a hot item in the market — franchises are essentially systems for sale, and gives a budding entrepreneur the opportunity to bypass the self-employed stage totally. However, this is mostly only available to the middle and upper classes, as initial investments required for franchises are prohibitive (some might say impossible) for the lower classes to bear.

There are private efforts to be able to help turn small-time operations from the C, D and E classes into more profitable, systemic operations. One example is Hapinoy, an effort to create a unified chain of sari-sari stores with a standardized system which also provides microfinancing to small business owners. With the effort at its infancy, it remains to be seen if these efforts will become successful.

Another area that can be improved to help improve businesses is technology. Personal computers have become both cheap and ubiquitous enough that many small business owners can utilize such systems to automate tasks that would be otherwise burdensome to entrepreneurs who cannot yet hire employees or external services for various tasks.

Conclusions

While the GEM Philippines National Report proves as a helpful set of indicators vis-a-vis the state of entrepreneurship in the Philippines, it still doesn’t answer the question as to how successful Filipinos are in their business forays. What it does tell us is that there are more Filipinos willing to try entrepreneurship out, as evidenced by the large chunk of 1 to 10 year old businesses in the general demographic.

I believe it’s unfair to dismiss entrepreneurship by virtue of the distribution of businesses by socio-economic status: this demograph clearly shows where the business owners mostly are, not where they are eventually headed. In this respect, more efforts have to be taken to be able to make sure that the majority business owners — those who are from Class D and E, are helped out in heading towards the correct direction in their quest to improve their income and eventually join the ABC classes.

The question now becomes, how do we educate and enable the D and E entrepreneurs considering that creating systems (and essentially, jumping from self-employed to business owner) might be prohibitive to them in terms of income? How do we even raise awareness to those oblivious to the fact that there is a need to move into more systemic operations so as to become bigger operations?

Suggestions are welcome. :)

* NOTE: There are many people who are skeptical of Robert Kiyosaki (me included — primarily because of his involvement in MLM) but the principles he described above are fundamental enough to stand on their own despite questions on the author’s credibility.

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About The Author: Jon Limjap is a software developer and co-owns a travel agency business. He started writing about political issues in the Filipino-language Ang Pahayagang Plaridel of DLSU-Manila, and has been blogging on and off at http://blog.kapenilattex.com since 2005

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Comments

13 Responses to “Filipinos and entrepreneurship: What’s the real score?”

  1. cvj on July 18th, 2008 7:15 pm

    Very well said. Anything that would help to get our entrepreneurs to succeed with their respective businesses is most welcome.

  2. benign0 on July 18th, 2008 7:30 pm

    Ben Kritz wrote in his article that a big hurdle to jump from being a small business or self-employed into becoming a true “system for making money”, lies in formalisation. He cites the high cost and red tape of formalising businesses in the Philippines as a major issue in getting Pinoys to transition into the sort of business enterprise that builds capital or equity.

  3. Jon Limjap on July 18th, 2008 8:33 pm

    benign0,

    I am aware of that fact, given the hassles we (or more accurately, my wife) has to go through for her travel agency requirements.

    Fortunately the accountancy firm we outsource our accounting work does this for us, e.g., business permit renewal, filing tax returns, etc. Unfortunately there’s that overhead cost that smaller, “underground” businesses cannot afford.

    A perk we do enjoy from the government is the Barangay Micro Business Enterprise law, which, among other benefits, exempts the a micro enterprise business owner from income tax (taxes are still collected, however, in the form of sales taxes — we’re non-VAT).

    However I would understand if people would object to the BMBE as it, among other things, exempts the business from minimum wage laws.

    A copy of the BMBE law can be seen here:
    http://www.lawphil.net/statutes/repacts/ra2002/ra_9178_2002.html

    As what I had mentioned, Hapinoy is one example of an effort to integrate small, informal businesses into a larger formal one. I am curious if such an approach would actually work — I guess only time will tell if it will.

  4. cocoy on July 19th, 2008 7:26 am

    Good one jon. most interesting.

    In my experience small businesses fail because of mismanaged funds— an undisciplined owner and of course getting sidetracked/thrown out of focus.

    Spread the word i suppose is the best answer to lack of information. it means, sharing the experiences of what made others successful and what didn’t.

    I too am much interested in Hapinoy’s efforts and how it’ll turn out.

  5. cvj on July 20th, 2008 1:14 pm

    Jon, you might be interested in going through one of the earlier reports of GEM, this one from 2003 in particular.

    In that report (the Philippines was not yet included), there was a distinction made between ‘entrepreneurial’ firms, ’startups’ and ‘existing’ businesses and a ratio called ‘FEA’. However, in the 2006 edition which Habito participated in by preparing the Philippine report, those distinctions (and the FEA metric) was no longer there. It might resolve some of the aspects of the report which you find baffling.

  6. Maybe, it is all about how one phrases it | Filipino Voices on July 21st, 2008 8:18 am

    […] when it isn’t, see Jon’s recent and must read post on The Real Score on Filipinos and Entrepreneurship on why it […]

  7. Been writing elsewhere… on July 22nd, 2008 12:50 pm

    […] Filipinos and Entrepreneurship: What’s the real score? The result of the GEM Philippines 2006-2007 National Report, as cited by CVJ, is baffling, to say the least. In the study, GEM Philippines states that the distribution of entrepreneurs by socio-economic status is as follows: Class ABC+ 7%, Class C- 19%, Class D 54%, Class E 20%. […]

  8. Driving down an unentrepreneurial road | Filipino Voices on October 31st, 2008 11:24 pm

    […] GEM Philippines 2006-2007 Report reveals that four out of ten Filipinos are entrepreneurs, and of those, 19% belong to the Class C […]

  9. Driving down an unentrepreneurial road on November 9th, 2008 11:46 pm

    […] GEM Philippines 2006-2007 Report reveals that four out of ten Filipinos are entrepreneurs, and of those, 19% belong to the Class C […]

  10. leytenian on November 10th, 2008 12:43 am

    Jon,

    The answer to your question is economics. The wealth of the people is directly dependent to the growth of his/her own environment- our country. One can only grow when resources are available. Investing relies on basic knowledge of financing, interest rates and population. Pinoy don’t need to go to school for that to be self employed or a small business owner. To move thru the ladder of income earners, a pinoy requires a higher level of education and there is where our government can supplement, by providing on going seminars or provide an attractive educational system for those who are willing to get their formal education.

    Robert Kiyosaki “Rich Dad, Poor Dad” on his accomplishments, appear to be an exaggerations, fabrications or misdirection. It focuses only on 4 income types but he barely mentioned that he has to get out of Hawaii and invest somewhere else, where growth is consistent. Hawaii is a tourism industry. Real estate is too risky there. Rooms for growth is limited.

    I have no doubt that many pinoys have the ability to become independent only when our Executives will open our door to the global clients.

    If I have to look on the map and where Philippines is strategically located, I would say, we can be the capital tourism of Asia. Many rich businessmen in Asia will flock and relax in our country. I don’t understand why Phuket Thailand, Bali Indonesia, China are marketing and advertising on CNN, Fox News, and all the magazines of any airlines.

    Why is our Tourism Department cannot move our ladder to be world class in tourism. ( Capital diving of Asia, Surfing Capital of Asia- but not advertise globally)
    Only then, when people in the Philippines experience high employment that the lower income types can move up the ladder.

    Location, Location, Location. The rest will follow.

  11. leytenian on November 10th, 2008 12:58 am

    The real score: It’s them that’s running our country. They drag us to their own mentality. I’m telling you, these people do not fit the job descriptions. I’m not blaming but they are paid to do the job. They are expected to perform at PAR. The result of those performances are a burden to our independence.

  12. leytenian on November 10th, 2008 1:43 am

    The Philippine Tourism Industry is only an example. The executors and implementators of our country ( executive Departments) should get things done before we can even discuss the REAL Score for our people.

    Executive Departments implementing multiple failures.
    1. Road Kills

    2. Department of Agrarian Reform

    3. The Blame Game-An Irresponsible Executor

    All of our failures are manageable. It is the skills of our President together with Congress to work in tandem with a clear set of Goals. Follow ups are lacking. They are good in making laws but poor in “check and balance”. Why is that?

  13. Jon Limjap on November 10th, 2008 8:14 am

    leytenian,

    While I have reservations regarding some of your comments, I do acknowledge that they have a great grain of truth in them nonetheless. I also agree about tourism — and that is why my wife and I are in the travel business. I believe in its great potential, and its very, very direct effect on the economies of rural areas… perhaps I can expound more in a later article.

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