Why industrial revival fails without SMEs

Industrial revival breaks down when small and medium enterprises are treated as secondary players. Governments announce industrial parks, court investors, and count large factories—but without SMEs embedded from the start, manufacturing does not compound. It stalls. This is the failure behind repeated industrial disappointments, and it will recur unless SMEs are treated as indispensable rather than auxiliary.

SMEs account for more than 99 percent of Philippine enterprises, generate 62 percent of employment, and contribute about 36 percent of gross value added. Yet in manufacturing, their role remains limited. Studies have shown that SMEs contribute only about 20 percent of manufacturing value added, with large firms capturing nearly 80 percent. That imbalance has persisted across decades.

Other Asian economies are markedly different. Across Southeast Asia, SMEs account for 40 to 57 percent of gross domestic product. In Singapore, SMEs generate 44 percent of value added. In Indonesia, they make up more than half of GDP. The difference is not enterprise density—the Philippines has that—but whether SMEs are systematically connected to industrial production.

Large firms dominate policy considerations, but SMEs determine whether industrialization actually works. They supply components, fabricate tooling, maintain equipment, and solve production problems that don’t appear in feasibility studies. When SMEs are peripheral, manufacturing becomes import-dependent, slow to adapt, and highly vulnerable to shocks. Taiwan’s success rested on thousands of SMEs absorbing technology and responding quickly to demand from lead firms. Philippine strategies, by contrast, often assumed that once large plants were established, suppliers would emerge on their own. They rarely did.

Appliance manufacturing exposes this weakness with particular clarity. No appliance sector survives on assembly alone. Tool-and-die shops, metal stampers, plastics molders, component suppliers, maintenance services, and testing facilities are essential—and most of them are SMEs. However, Philippine companies continue to import even basic stamped parts and plastic components that could be produced locally. When ancillary firms are absent or underdeveloped, costs rise, lead times stretch, and design adaptation becomes difficult. Factories may operate, but they never mature.

To be fair, government has continually tried. The Department of Trade and Industry has expanded Negosyo Centers, MSME financing, and export training. The Department of Science and Technology’s Small Enterprise Technology Upgrading Program has helped firms acquire equipment and improve quality. Department of Energy programs have supported energy efficiency and technology adoption. Nongovernment organizations and foundations have also provided mentoring and management support to thousands of entrepreneurs. But these initiatives remain fragmented. Training without contracts, supplier fairs without sourcing commitments, and financing without long-term demand do not change industrial structure. SMEs cannot develop on goodwill alone.

Industrial revival requires rules-based inclusion, not discretionary assistance. SMEs invest when demand is predictable. Anchor firms—especially those receiving public incentives—must be required to source locally where capability exists, and to support supplier upgrading where it does not. Protection without performance bred complacency; exposure without support bred collapse.

Shared industrial infrastructure is equally critical. Advanced tooling, testing, and certification are beyond the reach of most SMEs. These are public goods and must be run professionally, tied to real production needs. Financing must also match production reality. Short-term loans do not build capability. Financing linked to equipment upgrades, supplier relationships, and export participation does. SMEs must be exposed to export-linked discipline. Supplying exporters forces compliance with global standards, documentation, reliability, and cost control. Domestic markets rarely impose these pressures.

Countries that succeeded did not pit large firms against SMEs; they compelled them to grow together. South Korea embedded SMEs into supply chains and enforced performance, rather than treating them as protected dependents. If SMEs remain peripheral, appliance —and any future anchor industry—will remain fragile. If SMEs are deliberately integrated, industrial revival gains depth, resilience, and staying power.

Industrialization could not be sustained by a few flagship plants. It is sustained by thousands of smaller firms climbing the value chain—one contract, one capability, one export link at a time.

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Pete Maniego is an engineer, lawyer, economist, and past chair of the National Renewable Energy Board, Institute of Corporate Directors, University of the Philippines Engineering Research & Development Foundation, and Energy Lawyers Association of the Philippines.