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Jane Lynn D. Capacio, Tara Alessandra Abrina, and JC Punongbayan

What are the implications of a pandemic on micro-, small-, and medium-sized enterprises (MSMEs)? Value chains and lead firms, in cooperation with government, could hold the answer to economic recovery amid crisis.

(The authors are grateful to Adrian Mendoza for his comments and for pointing out key materials that were used in this policy blog. Acknowledgements are also due the following entrepreneurs for their insights: Tal de Guzman of Risque Shoes and Stride Collective, Kaye Elefan-Relucio of Radiant Collective, and Anthony John Rodriguez of Sari.)

In an interview with the Grameen Foundation, Jenny Gromo talked about how her sari-sari (variety) store is barely keeping afloat during the lockdown.

She and her husband noticed it was getting increasingly difficult to buy supplies due to quarantine restrictions. Aside from the lack of public transportation, people in their barangay were only allowed to run errands on Wednesdays and Fridays.

In each grocery trip, Jenny and the other store owners could only buy a maximum of five cans of sardines, and back at the store the five cans were sold out before five o’clock. Some store owners opted to keep the sardines for their families.

When the COVID-19 lockdowns hit, micro-, small-, and medium-sized enterprises (MSMEs) in the Philippines cried for help, describing their situation as a “ticking time bomb.” Those that participate in global value chains (as exporters, importers, or both) were pounded by sluggish market demand, costlier raw materials and intermediate goods, higher logistics costs, late shipments, and cancelled export and import orders.4

The situation in other parts of the world mirrors our own. As of April 26, 2020, some 1,149 companies belonging to the Bangladesh Garment Manufacturers Exporters Association reported suspended or cancelled export orders consisting of 981 million pieces of garments and amounting to approximately $3.17 billion. This affected over 2 million workers, mostly women. In India, economic losses were pegged at $3 billion.

A menu of solutions

The problems in supply chains and distribution channels are only expected to worsen the longer the pandemic persists. Unfortunately, many of the purported “solutions” to MSME’s woes—coming from the government, private sector, international organizations, and even MSMEs themselves—have not been very systematic. Many are piecemeal or one-size-fits-all.5
These proposals include:

loans and other forms of financial assistance, such as deferred payments and lower interest rates;
wage or hazard pay subsidies of around Php 5,000 to Php 8,000 for employees;
deferred payment of taxes, fees, and rents;
support for innovations in MSME business models, including those that maximize the potential for e-commerce and pivot towards creating PPEs and other essential items;6
assistance so work spaces can comply with COVID-19 safety standards, such as the use of UV lamps, disinfectant mats, and thermoguns;7
freeing up local and global supply chains for essential products and services; and
other proposals like a separate stimulus package and staggered business hours.8
To help Jenny and her fellow entrepreneurs, we recommend a value chain framework that could better identify gaps and opportunities for MSMEs.

MSMEs in the Philippines and their value chains

In the Philippines, MSMEs like Jenny’s store comprise 99.5% of business establishments and account for 5.7 million jobs or 63.2% of total employment.

Sari-sari stores and other businesses under the “wholesale and retail trade, repair of motor vehicles and motorcycles” sector in the Philippine Statistics Authority’s list of establishments make up for almost half of MSMEs.

Table 1 shows that MSMEs in the Philippines are highly diverse.9 Even among the smaller set of manufacturing MSMEs, there are also several types of firms.10

Unfortunately, despite government policies and programs set up to support these establishments, their productivity has generally remained low.11

Every one of these enterprises belongs to a “value chain”—the interdependent production processes geared to create value for end consumers.12 The lengths and complexities of different value chains are as diverse as the enterprises they support.

For instance, a sari-sari store owner could be in an extremely short value chain along with the makers of canned goods and other products, wholesalers, retailers, and consumers. The value chain of a shoe store in Marikina, meanwhile, includes the makers of raw materials (foreign and local), shoemakers, designers, “shoepreneurs,” and commercial and retail buyers. On the other hand, an electronics company located in a processing zone might be involved in a long value chain that imports raw materials and export products to be used in the next stage of manufacturing.

Role of lead firms and the path to recovery

In every value chain, there is often a “lead firm” that determines “what is to be produced, how, and by whom.”13 In a global set up, the lead firm often decides whether to outsource, make components in-house, or something in between. It also specifies the price, volume, production, quality, and distribution.14
For Jenny’s sari-sari store, the lead firm is most likely a wholesaler or supermarket with access to the volume and variety of goods that Jenny and her customers need to keep in stock. In global value chains, a large company may act as the lead firm and anchor. In other value chains, this role is filled by a social enterprise, an MSME, a financial institution, a local government unit, or any organization that steers the value chain.

If they wanted to, lead firms can foster not just efficiency but also inclusion in the value chains they are involved in. Their motivation could be intrinsic (like the need to have steady supply of goods) or extrinsic (like a policy that requires them to be sustainable, transparent, and accountable).15
In our action research on Jollibee Group Foundation’s Farmer Entrepreneurship Program for example, we found out that a lead firm like Jollibee Foods Corporation (JFC) has the power to influence the efficiency and inclusiveness of the entire value chain. Their use of this power enabled farmers to sell products to JFC, resulting in higher incomes and improved human capital investments for all participants, especially for its weakest players, the smallholder farmers.16During a crisis, lead firms can also uphold standing purchase orders and payments and advise cancellations in advance.

The lead firm’s power becomes especially crucial in crises, such as a pandemic, which spare no enterprise.

In a study of Dutch companies, Van Tulder et al. noted that Phillips, an anchor firm enmeshed in various chains, created an auditing program in the 1990s for its suppliers.17Because the company was able to oversee its entire supply chain, for decades it was able to coordinate inclusive resiliency measures among its small-medium enterprise (SME) partners.

This illustrates that lead firms can trigger the recovery of value chain participants amid a crisis. At the very least, the lead firm can use its position to open conversations among co-players in the value chain and share issues, tradeoffs, and risks.

In Jenny’s case, a grocery store could coordinate with manufacturers and dealers to help her sari-sari store with logistics while public transportation is widely unavailable. Opening dialogue ensures that most of the gaps can be seen and considered.

Transitioning MSMEs to e-commerce and cashless transactions

To cope with the pandemic, MSMEs are also transitioning to e-commerce and cashless transactions. Lead firms in value chains—such as supermarkets, microfinance institutions, telecommunications companies—will be instrumental in helping MSMEs make this transition.

For example, with the help of the Grameen Foundation, Jenny’s sari-sari store was able to provide her community with financial services through pre-paid mobile load, bills payment, and money remittance services during the pandemic. This illustrates that telecommunications companies can help build the capacity of MSMEs to engage in digital platforms and serve as lead firms (or partner with lead firms) in spurring recovery.

Intermediaries, such as social entrepreneurs, are also crucial allies. While they ramp up their e-commerce platforms and engage in cashless payments and home deliveries, many of them also partner with smallholders. In this way, social entrepreneurs play the role of lead firms that shoulder the initial costs of digitization and enable others’ business survival. By partnering with specific farmers’ groups, social entrepreneurs18 are in a better position to sustain their business while ensuring the survival of smallholders and downstream value chain players (e.g., restaurants, logistics providers).

Role of government

Finally, government is key in helping value chains cope with crisis.

Richard Baldwin, an international economics professor at the Graduate Institute in Geneva, says, “In normal times, governments can leave production to the private sector. Governments don’t have to know anything about logistics, supply chains, or production schedules since an army of entrepreneurs and firms are looking after those things in exchange for a profit.”

While government is usually a silent observer of value chains—and occasionally a mediator—it must stand ready to intervene in times of crisis.

The COVID-19 pandemic is like a perfect storm that has cast many a value chain unmoored, many an MSME stranded in the middle of the sea. Lead firms and governments, working together, could serve as a buoy that anchors these value chains and preserves the life of these MSMEs.