Entrepreneurs should be the nation’s new heroes

M.A.P. Insights
Ronald U. Mendoza

Posted on October 06, 2015

Overseas Filipino Workers (OFWs) are considered modern heroes in our remittance-driven economy. At $25 billion, annual remittances by our OFWs are roughly five times the net foreign direct investment the country received in recent years. Anyone who has known the challenge of working abroad or knows an OFW could tell that working and living abroad requires not just skill but a good deal of courage in the face of considerable risk -- working in a foreign land often with very little protection, armed only with a strong belief in one’s capacity to compete and eke out a living away from home.

Without belittling their contributions, we should by now realize that after almost three decades of remittance-fed development, the country has failed to industrialize nor make a dent on the poverty rate. There is now a growing consensus that boosting manufacturing and revitalizing the agricultural sector are necessary, in order to create the much needed additional engines of inclusive growth that the country has sorely missed. To do this, we need to encourage entrepreneurship and innovation, in ways that will reveal our distinct comparative advantages in both domestic and international markets.

Entrepreneurs could play a key role here. And while some of them will probably come from the ranks of the OFWs returning home with the capital and experience to engage in business, many more are likely to emerge from our youth sector. After all, the youth will begin to comprise a growing share of our workforce and voting population for the two or so decades to come, ushering the country’s “youth bulge”.

Based on research by De La Salle University and the Global Entrepreneurship Monitor there is evidence that the entrepreneurial attitudes and aspirations in the Philippines are a model for Asia and the rest of the world. Most Filipinos consider entrepreneurship a good career choice and highly regard those who succeed in it. In Association of Southeast Asian Nations (ASEAN), Filipino entrepreneurs stand out for seeing good business opportunities in their environment and for being confident in their capability to start a business.

Filipino entrepreneurs are also less afraid of failure compared to their regional peers. In fact, almost half (42.8%) of Filipinos who are not yet involved in any stage of entrepreneurship intend to start a business within three years, and new entrepreneurs with businesses less than 3.5 years old already account for roughly a fifth (18.5%) of the adult population.

On average, the country’s new entrepreneurs are young (18 to 34 years old), married, and educated at least up to high school.

Nevertheless, while they demonstrate success in navigating the domestic market, very few are able to penetrate much larger export markets which offer true scale opportunities for expansion and job creation. Only a quarter of Filipinos entrepreneurs surveyed by the La Salle study demonstrated any export activity -- and fewer still, around 7% of entrepreneurs surveyed, have more than 75% of their customers outside the Philippines.

The entrepreneurship rate in the country is also artificially bloated by an army of unemployed and underemployed citizens who turn to entrepreneurship as a means to generate and augment their household income. Roughly half (43.6%) of new entrepreneurs get into business out of necessity.

These “forced” entrepreneurs have few standard job opportunities and no other viable sources of income, which is not surprising, considering that 4 in 5 unemployed persons in the Philippines are in the 15-to-34 age bracket. Many entrepreneurship ventures in the country could still dramatically improve their job-producing capacities -- notably by expanding the scale of their operations and penetrating into foreign markets.

This is not an easy task, and it requires much more than individual risk-taking and business acumen -- often government intervention is necessary in order to set up a conducive business environment, or help mitigate risks that are just too large for any one entrepreneur to shoulder alone.

In addition, many new entrepreneurs shut down their businesses relatively early in the venture. Several enterprises have shuttered operations before reaching 3.5 years, which takes place around 12% of the time -- about thrice the ASEAN average. This churning is not necessarily bad if there are many entrepreneurs who are trying to “discover” new products and services -- a process of innovation and experimentation that only generates success after repeated efforts (including many failures).

Furthermore, failed business owners, especially among the youth, commonly stumble on barriers like low profitability, limited access to capital, and inadequate entrepreneurial or management skills. Very few (3%) know of government programs that support young entrepreneurs and most (65%) rely on family and friends for funding. This type of resource backing definitely biases entrepreneurship in favor of relatively wealthier segments of the population. Since the vast majority of the Philippine population belongs to the “base of the economic pyramid” with lower incomes, this robs the country of many more potentially talented entrepreneurs and innovators.

All these barriers constrain entrepreneurship in general, but they particularly inhibit industrial development, which requires large and sustained investments and innovation, generated in turn by many established businesses and entrepreneurial startups.

This is where the State is called to intervene. And among the responses to boost and support entrepreneurship, the approval of the Youth Entrepreneurship Act could be critical.

Signed into law last month, the Youth Entrepreneurship Act (Republic Act No. 10679) promotes financial literacy and entrepreneurial interest and capacity among the youth, regardless of whether they are rich or poor. It gives young Filipinos access to training, funding, and other forms of support that will help them start and grow their own businesses.

An Entrepreneurship Education Committee will coordinate the national plan of action regarding entrepreneurial activity. It will be chaired by the Department of Education Secretary, with members from the Commission on Higher Education, the Technical Education and Skills Development Authority, the Department of Trade and Industry and the National Youth Commission. These agencies will implement the new programs in their respective areas.

Following key economic reforms like the Philippine Competition Act that will promote a level playing field in the economy, the Go Negosyo Law that will put up entrepreneurship centers in every municipality, city and province, improvements in Philippine cities’ ease of doing business led by the National Competitiveness Council, and the New Industrial Policy developed by the Department of Trade and Industry to coordinate country’s industrial road maps, the Youth Entrepreneurship Act is part of a basket of policies that seeks to capacitate the country’s entrepreneurs, notably among the youth.

A renewed form of risk taking now needs to take place -- from taking risks to work abroad and create one more remittance source, to taking risks to invest at home and create jobs for more Filipinos who want to live and work in their own country.

(The article reflects the personal opinion of the authors and does not reflect the official stand of the Management Association of the Philippines or the M.A.P.)

Ronald U. Mendoza is Executive Director of the AIM Rizalino S. Navarro Policy Center for Competitiveness (AIM-RSN-PCC). His co-author is Lance Garcia, an Economist at the AIM-RSN-PCC.