M. A. P. Insights
By Jamil Paolo S. Francisco
Is Competition Policy Relevant to Small Business?
The lack of market competition hurts most businesses and all consumers. It limits access to goods and services, keeps prices up and quality low, discourages innovation, and stifles business opportunities.
Two years ago, the Philippines passed its first comprehensive competition law, promoting and ensuring a level playing field for business through the creation of the Philippine Competition Commission (PCC).
Since then, the PCC has reviewed more than a hundred mergers and acquisitions, and undertaken several high-profile investigative inquiries. Very appropriately, the latest Philippine Development Plan (2017-2022) now contains a full chapter on national competition policy, which lays out the rationale, objectives, and approach the government is taking regarding competition advocacy and enforcement.
But while much attention has been drawn to the implications of competition policy on big business — the P69-billion buyout of San Miguel Corporation’s telco business by Globe and PLDT being “too big” to miss — the implications on smaller businesses may not yet be fully appreciated by the general public or by small business owners/managers themselves.
Earlier this year, the AIM Rizalino S. Navarro Policy Center for Competitiveness surveyed 530 small and medium enterprises (SMEs) in Metro Manila (MM) to learn more about their perceptions of competition and their responses to it. One of the first questions we asked was whether they knew about the new competition law and the PCC. Only 11% said yes.
Interestingly, attitudes towards competition were generally positive, with about 57% saying that competition was good for their business. What was surprising was that there was almost no difference in the attitudes of respondents towards competition from fellow SMEs versus competition from large firms. Off the bat, one would expect individual business owners/managers to perceive competition negatively, and especially when competitors were large. A similar percentage (57%) of SMEs in Metro Manila did not feel threatened by competition at all even if most of them (72%) reported having new competitors enter their markets in the past two years.
There are three possible explanations for this: (1) these SMEs perceive themselves to be “competitive” enough to hold their ground through innovation and/or differentiation, (2) the markets they operate in are big enough to accommodate more players leaving their sales unaffected, or (3) there are substantial barriers to trade that make their markets less contestable. If (1) is correct, then there is little to be worried about as we can expect the most efficient and innovative businesses to thrive. If (2) is correct, then (3) is more likely the reason for (2). And if (3) is correct, then we should be worried about lack of competition among SMEs in these markets.
Large corporations that serve very large markets are usually the target of competition authorities, but in an economy where spatial/geographical characteristics can effectively divide markets into territories, smaller business can easily dominate and become anti-competitive. For example, poor transportation networks (heavy traffic) and spotty communication infrastructure (expensive and unreliable Internet service) can substantially increase search and switching costs for consumers, substantially limiting their options.
Our findings on how SMEs respond to competition also have interesting implications.
Microeconomics textbooks would say that greater competition should lead to lower prices. We asked our respondents what strategies they were likely to employ when competition in their markets intensified. The most common response was to increase marketing activity and promotions (91%), followed by increasing product quality and differentiation (82%) and reducing costs (80%). Less than half of SMEs considered reducing prices (45%).
Although economists often interpret an increase in product quality as effectively a fall in “price per unit-of-quality,” the relatively lower percentage of firms that directly reduce prices in response to competition is a notable deviation from the textbook case. This can either be (1) because firms and their products are differentiated enough to be what the textbook calls “monopolistically competitive,” or (2) because prices are simply sticky downwards. Our findings suggest that the immediate impact of greater competition in terms of prices may not be as straightforward as initially expected. Only time and further empirical investigation can tell for sure.
But what our findings clearly do point out is that when we talk about competition policy, we have to talk about SMEs. Just the same, when we talk about SME development, we have to talk about competition policy.
We asked our respondents to identify barriers to entry into their markets. Large start-up costs (71%) topped the list, followed by economies of scale (68%) and — most notably — aggressive or predatory behavior by a major player (67%).
Regulating anti-competitive behavior by major market players is a key aspect of Philippine competition law. Large start-up costs and economies of scale may be structurally built into some sectors, but competition policy can bring down the cost of inputs and expand access to markets to ensure that firms with technical capacity and fairly sufficient capital can compete. Thus, SMEs can directly benefit from enhanced competition in markets for inputs and support services.
Finally, we asked our SME respondents if a single or very few firms dominated the markets across their value chains. Thirty-five percent said a single or very few firms dominated the markets for their inputs (upstream), while 34% said so about the markets for their output (downstream). This suggests that many SMEs may be squeezed in between, paying high input prices and enduring less favorable terms from business customers with high bargaining power, stifling their development and discouraging growth.
The fate of our SMEs is the fate of the Philippine economy. Ninety-nine percent of firms in the country are micro (89%) or small/medium (10%), accounting for about a third of gross value added, a fourth of the country’s exports, and half of the country’s jobs.
Competition policy can make markets more efficient, more productive, and more innovative. Its impact should be on all firms, big and small.
The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines and the Asian Institute of Management.
Jamil Paolo Francisco is Associate Professor of Economics and Head of Research & Publications at the Asian Institute of Management. He is the Executive Director of the AIM RSN Policy Center for Competitiveness (AIM-RSN PCC). The author would like to thank Mr. Emmanuel Garcia, an economist at AIM-RSN PCC for his technical assistance and research support.
