Joan Mae A.

Villegas
APPLIED ECONOMICS
CONTEMPORARY ECONOMIC ISSUES FACING THE FILIPINO
Chapter 5

Entrepreneurs in IT related industries are more commonly referred to as start-ups.

In contrast, an entrepreneur tries to come up with a new product or service. Entrepreneurs are considered visionaries.
Most of the social media innovations, for instance started as an idea that later on tremendously changed how people
interact and communicate.
Furthermore, having a new and untested idea as is often the case for entrepreneurs means a greater amount of risk.
The potential return is likewise high if the entrepreneur is able to make the idea into a tangible product (or a viable
service) and successfully market it to consumers. The uncertainty of the success of a new idea makes entrepreneurs more
significant risk takers compared to typical business owners.

Innovation Strategies of Entrepreneurs

What are the innovation strategies entrepreneurs normally use? One strategy is creation of a new product or
service in response to a consumer need. An example is the innovation of power banks in answer to consumers’ need to
stay connected and their heavy reliance on battery-operated gadgets while mobile.
Another strategy is improvement of an existing product to keep up with evolving consumer needs and
preferences while at the same time a new market is created. An example is the flat screen TV. It serves the same purposes
as its box like predecessors, but the new design opened up possibilities like the option to mount it on walls and save
counter space.
Finally, there is process improvement. Enterprising individuals can be entrepreneurs by coming up with an idea
or service that will make a process more efficient or will provide a more cost-effective alternative to how it is usually
done. Take for example the idea of setting up car wash services at mall car parks. It is out of the box and takes advantage
of the desire of customers for a one-stop shop. Now, they can have their can washed while running errands at the mall.
Whoever thought of the idea broke the conventional business model of a car wash shop.
Entrepreneurs do not only focus on end consumers. Innovations can also target businesses. An example is a
business that provides housekeeping services to companies. Another is a graphic design business that created logos for
companies or other businesses. These are examples of business-to-business (B2B) marketing as opposed to businee-to-
consumers (B2C) transactions.

Disruptive Innovation
In a nutshell, innovation is at the core of successful entrepreneurship. It is about finding a niche market and
creating a product or service that addresses a consumer need or problem. Innovations can further be classified based on
their impact. While some innovations are considered revolutionary like the invention of fire or wheel, there is also what is
called disruptive innovation, which includes products and ideas that totally break existing market structures.
Is also defined as a process that, as the name implies “disrupts” or changes the structure of an existing market. It
creates a new industry rather than just compete with an existing one. It challenges the status quo by gradually gaining a
substantial customer base. It is the brainchild of Clayton Christensen, a Harvard Business School professor and founder on
the Clayton Christensen Institute.
In saving your documents and media files, for example, CDs are “disrupted” by the innovation of cloud services.
CDs are slowly being phased out that even a CD drive is now an optional feature of newer versions of laptops and
personal computers. An increasing amount of consumers is moving into online storage because of affordability,
accessibility, and maintenance. Of course, there are downsides like possible loss of data but that is the same drawback as
with the old storage solutions. Overall, consumers appreciate the ability to conveniently access their files via their phones
or tablets without the need to physically carry storage hardware.
Keep in mind that an additional feature of an existing product is not considered a disruptive innovation. For
instance, the addition of a memory card slot to a mobile phone id not a disruptive innovation in the sense that it did not
displace any product. So is a feature that improves the battery life of your phone. What is considered as disruptive
innovation is the invention of smartphones. They integrated the Internet and effectively created a hybrid of a laptop and a
phone. Smartphones displaced what is now referred to as “dumb phones” and successfully formed a whole new industry
catering to on-the-go, tech-savvy consumers. Furthermore they opened a whole bunch of opportunities in the form of
application development (apps) and games markets.

The Filipino Entrepreneur

 Filipinos can be very enterprising. It is not a surprise that some of the most successful Filipinos today were once
struggling entrepreneurs who started with only an idea and an intense drive to succeed. They look huge risks and
persevered, and all their hard work eventually paid off.
You may have heard of the story of Henry Sy and how he started selling a few pairs of shoes and went on to
become the owner of the largest department store chain in the country and one of the richest men in Asia. His rags-to-
riches story is a source of inspiration to many. It demonstrates how family background is not a hindrance to success in the
world of business. Similarly, a degree is not a prerequisite to becoming an entrepreneur. This is exemplified by the brains
behind some of the most successful computer and social networking companies. While it helps to have knowledge of how
the different aspects of business work, having the right attitude holds as much importance in the success of a business
venture.

Governance and Support

The Department of Trade and Industry (DTI) governs entrepreneurs and businesses in the Philippines. The agency
is in charge of business registrations and trade policies. It regularly hosts programs on regional and national levels that
aim to educate and encourage Filipinos to put up a business.
Republic Act No. 10679, also known as the Youth Entrepreneurship Act, was passed in July 2015. The act aims to
support the development of young individuals (18 to 30 years old) in the fields of finance and entrepreneurship by
integrating financial literacy and entrepreneurship programs in education curriculums. The program will be implemented
by an Entrepreneurship Education Committee (EEC).
Similarly, Filipino entrepreneurs in some industries or sectors often form a small network and share best
practices. The Philippine Center for Entrepreneurship (PCE) is a nonprofit organization that advocates entrepreneurship in
the country. It is more commonly known for its program called “GoNegosyo”. Like the DTI, the PCE organizes events
and seminars that target current and potential entrepreneurs and provide support to business ventures with high potential.

Types of Business Structures

Before proceeding with the discussion in typical challenges facing entrepreneurs, it is worthwhile to learn the
three main types of business organizations: sole proprietorship, partnership, and corporation. The business type highly
influences the risks and magnitude of challenges faced by business owners and entrepreneurs alike.
• Sole Proprietorship
- Refers to a business having a single owner. The owner and the business are taken as the same entity,
which means the profit of the business is also the income of the owner.
• Partnership
- refers to a business having more than one owner. The owners and the business are also considered as
one entity, but the profit of the business is divided among the partners.
• Corporation
- refers to a business type where the owner and the business are considered as separate entities.
Because ownership varies, the profit of the business is not equivalent to the owner’s income. The
owners of a publicly traded corporation are its stockholders. Additionally, a conglomerate to two or
more corporations under the same ownership or parent company.

It is important to understand the distinction of the different business types because a sole proprietorship may
sometimes face different challenges from a corporation. For instance, regulatory and business registration requirements in
the Philippines are much more complex for a corporation than a partnership or a sole proprietorship.
Although entrepreneurial ventures often start as a sole proprietorship, they often evolve into corporations. Henry
Sy, for example, started as a sole proprietor with him personally selling hid merchandise. His venture eventually became a
conglomerate of business ventures from department stores to real estate.

New Business Registration

How easy is it to register a new business in the Philippines? The length of process largely depends on the type of
business structure. Registration of a sole proprietorship generally takes shorter than setting up a corporation because of
fewer requirements. A sole proprietorship business registration has eight steps based on the published procedure on the
national government’s Web site while a corporation on average takes 15 steps to register based on the Doing Business
2015 study of World Bank.
Figure 5.1 summarizes the major steps of a sole proprietorship business registration in the Philippines. The
process involves dealing with five government agencies. It starts with business name registration with the DTI, followed
by a trip to the barangay and city or municipality office where the business will be located to secure barangay clearance
and business permit, respectively. The business permit is also referred to as the mayor’s permit. After securing permits,
the owner must apply for a tax identification number (TIN) with the Bureau of Internal Revenue (BIR). The BIR will also
issue an authorization to print receipts and invoices. The bureau will also stamp the business’ accounting ledgers and
invoices afterward. Finally, the owner must register as self-employed with the Social Security System (SSS) to complete
the process.

1 DTI Register business name

2 BARANGAY Secure barangay clearance
3 MUNICIPALITY Get a business permit
4 BIR Apply for tax identification
number (TIN); secure
authority to print receipts; have
ledgers and invoices stamped
5 SSS Apply as self-employed owner
Fig. 5.1Steps in sole-proprietorship business registration in the Philippines

Issues and Challenges Facing the Filipino Entrepreneur

In this section, you will learn some common issues and challenges faced by Filipino entrepreneurs. Typical
capital and financing concerns of entrepreneurs are discussed in this section. You will also learn about operational
challenges such as wages and taxes.

Investments, Interest and Financing

Recall the discussion on interest rates in the previous module. Interest is the cost of borrowing. Consumers
typically borrow from banks to finance spending and investments such as real estate, cars, or other expensive purchases.
Businesses, on the other hand usually borrow money to finance business expansion or capital expenditures. An increase in
interest rates discourages borrowing. As a result, consumers tend to reduce their spending and business tend to postpone
expansion and capital expenditure investments. In both instances, a higher interest rate reduces spending and investments.
Conversely, a fall in interest rates tends to increase spending and investments.
Financing a business idea is a common issue that hinders individuals from taking the entrepreneurial route. Where
will they get the money to make a prototype and conduct research and experiments? Grants and loans may be awarded to
qualified individuals under the Youth Entrepreneurship Act. But for those who are ineligible, an entrepreneur has to
decide how to finance his or her idea.
An entrepreneur can choose from two sources of financing. The first options is to personally bankroll the idea or
use one’s own funds. The fund may come from the entrepreneur’s savings, loans from family members, or personal
securities investments. This also taking out personal loans from banks. Due to the uncertainty of success, people are
cautious of getting bank loans and putting all their money into an idea, especially at high interest rates.
The second option open to entrepreneurs is through external financing. External financing refers to sourcing
funds from third party investors who are willing to provide the required capital in exchange for a share in the ownership of
the idea. Ownership dissuades a lot of entrepreneurs who want to retain full equity and control on how the project should
proceed.
Crowdsourcing is a term that describes solicitation of funds and outsourcing services or ideas to people via the
Internet. Crowdsourcing is an innovation in itself and it has gained popularity in recent years mostly outside the country.
Typically, innovators post a video of their idea or prototype on a crowdsourcing site to gain attention and solicit funding.
Similarly, companies who want to cut back on costs may outsource a part of the work by posting their requirements online
and choosing the worker who can take on the job for the least cost. A mobile phone manufacturer that crowdsources the
creation of apps to freelance software programmers is an example.

Rent
For businesses that require a physical store, rent is one of the highest cost that drive down operating income.
Business rent is driven by several factors such as ever-increasing real estate prices, location, foot traffic, among others. An
entrepreneur must decide on the most strategic location to put up his or her business to maximize potential returns. For
example, real estate prices in the city are relatively steeper than those in the province. If one’s target market is city are
dwellers, then it makes more business sense to operate in the city rather than in the province.
Foot traffic refers to the number of people passing by the business. Heavier foot traffic means more people are
made aware of the business’s existence. Heavy traffic areas inside a mall understandably fetch higher rents than quie,.
lonely corners. Simply put, the more exposure, the better for one’s business.

Minimum Wage
Another factor that drives up a business’ operating expense is wages. Higher wage rates translate to lower profit
because the companies have to pay workers more. Conversely, lower wage rates potentially result in higher business
income. It is essential for a business owner to abide by the country’s minimum wage laws. A business owner would want
to avoid being involved in messy and expensive labor lawsuits. The National Wages and Productivity Commission
(NWPS) under DOLE regularly reviews minimum wage rates across sectors.
Moreover, as a business expands and hires more employees, the bigger is an entrepreneur’s financial and
administrative responsibility in terms of wage and employee benefits. A responsible entrepreneur takes care of his or her
workers by ensuring that employee benefits such as SSS contributions are properly set up and are paid on time.

Taxes
How does tax affect entrepreneurs? In the financing stage, a higher income tax means less disposable income
available for the business. Then once the business is in operation, there are local and national taxes to settle. Local taxes
are typically paid at the city or municipality of operation, while the capital gains tax is paid in the regional district office
of BIR. In terms of the payment process, the BIR has set up what the agency calls the RFP program, which stands for
“Register, File and Pay”. This is the simplified process for business owners where the first step is to register the business,
then file the applicable tax forms, before finally paying the calculated tax liability.
The most common business taxes paid entrepreneurs are percentage tax, value-added tax (VAT), capital gains tax,
and income tax.
•Percentage Tax
- is paid by entities that are exempt from VAT, with gross annual sales nit exceeding a limit prescribed
by the BIR, and subject to additional guidelines. Specific industries and businesses have varying
percentage tax rates that range from 3% to 15%
•VAT
- is a tax on sale, lease, and importation of goods and services and is subject and is subject to additional
guidelines. The VAT arte is currently at 12%. Businesses are required to disclose VAT breakdown of
purchases so you will see this on official receipts.
•Capital Gains Tax
- is imposed on the sale of capital assets such as real estate properties and stocks. Real estate is at 6%,
while tax on gains from the sale of stocks ranges from 5% to 10%.
•Income Tax
- is the most common tax filed by employed and self-employed individuals or those who derive their
income from business or professional practices. Income tax rates range for 5% to 10%.

ACTIVITY1
1. How do you feel about bout the tax system in the Philippines? What do you think could be improved on
the system? How do you propose to improve it?