The effects of COVID-19 on Micro, Small and Medium Enterprises (MSMEs) in

the City of San Fernando and the Effects of Digitalization on their Economic
Growth.

Local Economic Development

Gamboa, Philip
Culata, Rica
Jiao, Jaemee
Navarro, Miles
I. BACKGROUND OF THE STUDY

The onset of this pandemic has contributed to various inimical changes, that
extends to different sectors of our country. Many firms and companies, large and
small, have downsized or discontinued their operations, causing unemployment to
surge. As lockdowns were in place, the country's economic growth slowed. The City
of San Fernando Pampanga was not exempted from the impact of COVID-19. The
City's operations were hampered when quarantine measures were implemented.
According to the financial reports of the Commission on Audit (COA), the City's
revenue decreased from Php2,024,797.00 in 2019 (pre-pandemic) to Php922,180.00
in 2020 (pandemic). As a result, economic activity in San Fernando City has greatly
decreased. One of the sectors that were greatly affected was the micro-, small,
medium enterprises (MSMEs) in the San Fernando. The total number of registered
businesses decreased from 2,050 MSMEs in 2019 to 1,488 MSMEs in 2020.

MSMEs play an important role in the economic growth of a local government in

terms of sustainable development, job creation, the provision of products and services,
poverty reduction, and reduced inequality (Kamal-Chaoui, 2017). It is vital for MSMEs,
both pre-pandemic and established during the pandemic, to recover and remain
profitable to aid the San Fernando Local Government in its recovery today. One of the
most effective ways to do so is to assist MSMEs to digitalize their operations to reach
more consumers and broaden their target market. People prefer to shop online rather
than at physical stores because the COVID-19 pandemic prevents them from going
out and becoming infected. Online shopping is also popular due to its convenience,
as consumers do not have to travel and wait in a lengthy queue to buy what they want.
It is now as simple as a swipe and a click on their phones. Having said that, during the
pandemic, more small businesses used social media platforms such as Facebook and
Instagram to reach out to more customers and sell their products or services.
However, for a range of factors, most MSMEs in San Fernando, Pampanga, have not
shifted to using an online platform for their business operations. One reason is that
the owners are unfamiliar with the operations of social media, e-commerce, and
internet enterprises.
 Prior to the pandemic, the San Fernando Local Government in Pampanga held
Livelihood Trainings in the month of March. They also held trade fairs and diskwento
caravans such as 'Trabaho, Negosyo, at Kabuhayan para sa mga Fernandino' to help
MSMEs promote their products in their community. They also collaborated with the
Department of Trade and Industry (DTI), through the Negosyo Center in the City of
San Fernando, to hold business ethics seminars and skills training. During the
pandemic, the San Fernando LGU implemented economic recovery programs. The
City Investment and Promotion Office (CIPO), in collaboration with the DTI Pampanga,
implemented the "Livelihood Seeding program - Nesosyo Serbisyo sa Barangay,"
which enables for a larger reach of business development assistance by bringing
government services closer to people. San Fernando – Business Licenses and
Permits Division (BLPD) also made business registration and license renewal easier
by digitizing the process and cooperating with 2Go Express Inc. for efficient delivery.
These training and projects aided San Fernando's MSMEs in slowly recovering from
the pandemic. However, will this suffice?

There are various benefits for MSMEs to use digital solutions, including higher
productivity, cost savings, and profit margin expansion (Hew, 2021). Because the City
of San Fernando depends on MSMEs for economic recovery, it would be better to
empower MSMEs to digitalize by offering a free online marketplace for them to do so,
conducting e-commerce trainings and seminars, and enacting regulations that support
this cause.

II. OBJECTIVES

The study aims to achieve the following research objectives:

1. To determine the effects of the COVID19 pandemic and assess the economic
impact on the micro, small and medium- enterprises (MSMEs) in San Fernando
City;
2. To assess digitalization of operations of the micro, small and medium-
enterprises' (MSME) help gain customers and sell goods/services;
3. To determine how the government of San Fernando City assists owners of
MSMEs in CSFP to digitize their operations; and
 4. To differentiate the different barriers and understand the relevance of the
digitalization of MSMEs in CSFP.

III. SIGNIFICANCE OF THE STUDY

This study will be undertaken to find out the effects of digitizing the micro, small
and medium-enterprises (MSMEs) in San Fernando, Pampanga and its economic
impact to the city’s local government.

Furthermore, this study intends to give importance to the following:

Students

This comparative study will supply information regarding the direct effects of digitizing
business transactions specifically in this digital era and in the middle of a global
pandemic.

Micro, Small and Medium Enterprises

The results of this study will provide an insight into the impact of the digital platforms
to the customer engagement, prices, and income of affected businesses from various
industries in the city.

Local Governments

This study will add to the existing knowledge on the impact of online platforms to the
capacity of business owners to fulfill their tax duties and to the improvement of tax
collections in local government units.

Future Researchers

This study will provide data on the current status of small businesses in the target
population and its possibilities for expansion through maximization of the digital
advancements to extend their product or service reach.

IV. SCOPE AND LIMITATIONS OF THE STUDY

Local Government Unit
The group focused on the province of Pampanga, particularly in the City

of San Fernando, to assess the impacts of the COVID-19 lockdown on the

 economic stability of local government units through the contributions of

MSMEs.

Micro, small and medium enterprises

The group only looked into the businesses that are independently

owned, not franchised, and are registered with DTI. Furthermore, the group

only considered those businesses that already existed and started their

operations prior to the declaration of the enhanced community quarantine

(ECQ) by the incumbent President Rodrigo Duterte in the entire Luzon on

March 17, 2020.

Survey Respondents

The group only administered the survey to 50 respondents due to the

limited movement allowed by the local government of San Fernando,

Pampanga.

V. CONCEPTUAL FRAMEWORK
 The study focused on the micro, small and medium enterprises that existed in
the city of San Fernando even before the COVID19 lockdown was implemented in
2020. The researchers looked into the ordinances and projects that the local
government provided to assist the businesses which have been affected by the
stringent quarantine protocols. Through a comparative study, the researchers intend
to find the significance of providing a digital platform where the businesses and
consumers can transact despite the limitations set by the lockdown to assess whether
it will have an effect on the economic growth of the local government as it is expected
to cause a change on customer engagements, profit, supply management,
competitors, and tax compliance.

VI. DEFINIATION OF TERMS & ACRONYMS

The Business Permit and Licensing Office (BPLO) - the local arm or office
responsible in processing of business applications both new and renewal.

City Investment and Promotion Office (CIPO) - serve as the local arm that will guide
the CSF policies and programs for investment promotion which identifies key
opportunities and issues facing local business and to advocate and promote policies
and practices that promote investments and create employment; and provides advice
and guide in appropriate strategies, programs and projects to develop the local
economy of CSF

COVID-19 (Coronavirus disease 2019) - is an ongoing global pandemic of

coronavirus disease 2019 caused by severe acute respiratory syndrome coronavirus
2 (SARS-CoV-2).

CSF (City of San Fernando) - is a 1st class component city located in the province
of Pampanga. According to the recent population census, it has a population of
354,666 people.
Digitization - is the use of digital technologies to change a business model and
provide new revenue and value-producing opportunities; it is the process of moving to
a digital business.

DILG (Department of Interior and Local Government) - is the executive department

of the country responsible for promoting peace and order, ensuring public safety and
strengthening local government capability aimed towards the effective delivery of
basic services to the citizenry.

DTI (Department of Trade and Industry) - is the department tasked as the main
economic catalyst that enables innovative, competitive, job generating, inclusive
business, and empowers consumers.

E-commerce - refers to a business model that allows companies and individuals to

buy and sell goods and services over the Internet. Ecommerce operates in four major
market segments and can be conducted over computers, tablets, smartphones, and
other smart devices.

ECQ - s a series of stay-at-home orders and cordon measures implemented by the

Inter-Agency Task Force for the Management of Emerging Infectious Diseases (IATF-
EID) wherein there is a restriction of movement of people unless it is out of necessity
such as buying food and other essentials.

GDP (Gross Domestic Product) - Gross domestic product (GDP) is the standard
measure of the value added created through the production of goods and services in
a country during a certain period.

Local Economic Development (LED) - is a central part of developmental local

government. It is a process which brings together different partners in the local area
to work together to harness resources for sustainable economic growth. Local
economic development is increasingly being seen as a key function of local
government and a means of ensuring that local and regional authorities can address
the priority needs of local citizens in a sustainable way.
Market Development and Administration Department (MDAD) - the local office of
the Quezon City LGU that is tasked on the administration of city-owned markets and
regulation of the establishment and operation of privately owned and/ or operated
markets and all other market related activities including tiangges and street vending

MSME (Micro, small and medium enterprises) - according to the Magna Carta for
MSMEs or RA 6977, Enterprises which have Php 3 million and has 9 employees or
less are classified as micro enterprises, whereas enterprises which have assets that
are between Php 3 million and Php15 million and employes between 10 to 99
employees are considered small enterprises and enterprises which have assets
between Php 15 million to Php 100 million with 100-199 employees are classified as
medium enterprises.

San Fernando On the Go - a Digital marketplace solution developed by the LGU of

City of San Fernando, La Union which served as one of the best practices employed
by LGUs being studied for CSF.

LGU (Local Government Unit) - a local government unit which is a political

subdivision of the Republic of the Philippines at the provincial, city, municipal, or
Barangay level.

Social media - a computer-based technology that facilitates the sharing of ideas,

thoughts, and information through virtual networks and communities. It is internet-
based and gives users quick electronic communication of content, such as personal
information, documents, videos, and photos.

Social media platform - A system for disseminating information over the Internet to
a selected group of followers. Social media platforms are used by people to publish
their daily activities, comments and photos as well as re-publish information posted by
others. The two major social media platforms are Facebook and Twitter.
VII. REVIEW RELATED LITERATURE

Micro-, Small-, and Medium-Sized Enterprises (MSMEs) are particularly

vulnerable to the economic implications of the COVID-19 pandemic. In contrast to
large corporations, they have few assets and low cash reserves. Some MSMEs have
been forced to close their operations and lay off workers, while many others are
struggling to maintain a positive cash flow. In 2020, during the start of the pandemic,
the Philippines comprised 99.5% of MSMEs. This employed 63% of the country’s total
workforce. MSMEs accounted for $40% of the Philippines GDP prior to the start of the
pandemic. During the first four months of lockdowns, the country’s GDP fell to 16.5%
in the second quarter of 2020 (“MSME Sector is key to COVID-19 inclusive recovery
for PH”, 2020). It is necessary for MSMEs to recover from the pandemic's impact since
doing so will enable the Philippine economy to recover as well. With the pandemic
being prolonged and the road to recovery slow, MSMEs need support from the public
sector. Having stated that, the government intends to assist MSMEs through
initiatives, projects, and relief operations.

Digitization of MSMEs

One of the solutions that were found to help the MSMEs in recovery is
digitalizing them. The Asia-Pacific Cooperation acknowledges that digitalizing MSMEs
is relevant especially since the COVID-19 crisis accelerated trends towards e-
commerce. Since quarantine protocols limit individuals from going out and purchasing
their necessities in physical stores, online spending has surged by 30% in March 2020.

Making the business operations of MSMEs online would be beneficial not just
to the enterprise owner but to the economy as well. In an article entitled “Digital
transformation for PH SMEs urged”, Dr. Alfredo Pascual, president of the Institute of
Corporate Directors, stated that digital transformation is key to be able to gain
business opportunities in this economy. He also encouraged tech-savvy
entrepreneurs to use available digital platforms to connect with not just the local
market but globally as well.
 LGU digitization projects

However, simply urging MSME owners to digitize their operations will not be
enough to mitigate the impact of the COVID-19 pandemic on our economy. Various
Local Government Units in the Philippines set up projects towards the digitalization of
the MSMEs in their community. In 2020, the Quezon City Local Government Unit
(QCLGU) partnered with Shopee Philippines to offer free training to entrepreneurs
who wish to enter the online market. Not only that, but the QCLGU, through the Market
Development and Administration Department (MDAD), also launched a free online
marketplace in partnership with Palengkonek Incorporated, for small vendors to have
a platform where they can meet customers and sell their goods. The City Government
of San Fernando, La Union, launched ‘San Fernando On the Go’ in 2020. It functions
as an online delivery application to help residents from chosen barangays in the city
obtain the essential products or necessities they require. It is the response of the LGU
to the encouragement of the Department of Internal Local Government (DILG) to use
online platforms for marketing and delivery of goods. It also gave idle tricycle drivers
more income while public transportation was suspended because of the quarantine.
Online applications and platforms provided by the LGU enabled MSMEs to increase
their revenue and maximize their sales during the pandemic by allowing them to reach
more customers, market their product, and reduce operational and logistic costs.

VIII. METHODS AND PROCEDURES

A. RESEARCH DESIGN

When the pandemic hit the country, the MSMEs were severely affected; they had
a problem sustaining their businesses and holding their employees since there was
low consumer demand. Businesses are also having issues with their cash flow. This
study adopts a comparative case study approach. The survey was designed to
compare and analyze the business conditions on their profit, consumers, supplies,
competitors, and ease of paying taxes before , during (May 17, 2020 – June 15, 2020)
, and after the lockdown (June 16, 2020 – up to present).
 The researchers would gain a better knowledge of how the pandemic affected
MSMEs in San Fernando, Pampanga, and whether or not digitalizing their operations
helped cope with the pandemic's repercussions and impact on the LGU's economic
growth by collecting data through the survey approach.

B. DATA GATHERING PROCEDURE

This study made use of survey data collection, which is the data gathering
procedure. The method applied was a quantitative survey method. The survey was
administered to the respondents through a pen-and-paper survey method. The pen-
and-paper surveys were disseminated by handing the questionnaires to the MSMEs
owners in San Fernando, Pampanga.

This study investigated the impact of the Covid-19 pandemic on MSMEs in the City
of San Fernando, Pampanga. Each of the 50 respondents was given a questionnaire
consisting of 9 questions. The survey has consisted of two components, business
conditions and transition to online business.

IX. RESULTS AND DISCUSSIONS

The table shown below represents the level of agreement of the survey
respondents on their status during pre-pandemic, lockdown, and post-lockdown based
on their customers.

How is your business during the pre-pandemic, lockdown, and post-lockdown based
on your customers, profit, supply, competitors, and payment of tax?

Table 1: Survey Results - Comparison of the status of MSMEs in CSFP during the COVID-19
pandemic
FREQUENCY

HS S N D HD
MEAN VERBAL INTERPRETATION
PRE – PANDEMIC
 16 26 8 0 0
CUSTOMER 4.16 Satisfied
16 25 9 0 0
PROFIT 4.14 Satisfied
38 11 1 0 0
SUPPLY 4.74 Satisfied
5 16 24 5 0
COMPETITORS 3.42 Neither Satisfied nor Dissatisfied
37 9 4 0 0
TAX 4.66 Satisfied

4.22
LOCKDOWN

9 12 11 9 9
CUSTOMER 3.06 Neither Satisfied nor Dissatisfied
6 14 12 9 9
PROFIT 2.98 Dissatisfied
11 21 12 0 6
SUPPLY 3.62 Neither Satisfied nor Dissatisfied
8 12 19 5 6
COMPETITORS 3.22 Neither Satisfied nor Dissatisfied
8 11 11 6 15
TAX 3.22 Neither Satisfied nor Dissatisfied

3.22

POST -
LOCKDOWN
9 29 12 0 0
CUSTOMER 3.94 Neither Satisfied nor Dissatisfied
11 28 11 0 0
PROFIT 4.00 Satisfied
28 22 0 0 0
SUPPLY 4.56 Satisfied
10 27 10 3 0
COMPETITORS 3.88 Neither Satisfied nor Dissatisfied
15 14 19 2 0
TAX 4.10 Satisfied

4.10

Table 2: Benchmark and Interpretation of Mean range

Scale Range Verbal Interpretation

5 5.00 Highly Satisfied

 4 4.00 - 4.99 Satisfied

3 3.00 - 3.99 Neither Satisfied nor Dissatisfied

2 2.00 - 2.99 Dissatisfied

1 1.00 - 1.99 Highly Dissatisfied

Based on the results, the pre-pandemic period demonstrated that businesses

are satisfied with customer, profit, supply, and taxes, falling in the range of 4.14-4.74,
while competitors showed that businesses were already neither satisfied nor
dissatisfied even prior to the lockdown. With the parameters given, the overall
weighted mean before the pandemic is 4.22, which still falls on the businesses being
satisfied.

During the lockdown period, there has been a decline with how businesses
handle the customer, supply, competitors, and taxes as these four resulted in the
respondents being neither satisfied nor dissatisfied, which fall in the range of 3.06-
3.62, while the profit significantly dropped to a mean of 2.98 remarked as dissatisfied.
With the parameters given, the overall weighted mean is 3.22 which is neither satisfied
nor dissatisfied.

For the post-lockdown period, three components were seen to rise namely
profit, supply, and taxes as the respondents claimed that they were satisfied, with the
mean falling in the range of 4.00-4.56, while customer and competitors remained being
neither satisfied nor dissatisfied, falling in the range of 3.88-3.94. With the parameters
given, the overall weighted mean is 4.10, which is satisfied.

The survey results present that due to lockdown, the MSMEs in the San
Fernando, Pampanga had been evidently affected particularly on profit, customer, and
competitors. These three components showed a significant decline primarily due to
the limitation of the customers from physically transacting with the businesses given
the risk that social interaction may cause during the height of the lockdown. This
explains the dissatisfaction remarked by the businesses on how customers responded
during the lockdown thereby causing profits to decline as well. On the other hand, the
lockdown also provided an opportunity for other businesses to begin causing more
competitors to the existing businesses already therefore challenging the respondents
as they attempt to return to their businesses-as-usual hence, the competitor
component during the post-lockdown still weighed low with a mean of 3.88.

The following results show how the businesses directly responded and adapted
to the effects of the lockdown, specifically in transitioning their advertisements and
transactions to a digital medium, in order to mitigate the economic risks and impact
associated with the pandemic.

Table 3: Survey Results - Analysis of the MSMEs’ responses to the COVID-19 restrictions

1. Did you lay off employees?

The results show that 60% of the respondents had to lay off their employees
due to the decline in income during the lockdown. This was necessary in order for the
businesses to allocate more funds for the continuity of their operations. On the other
hand, 40% retained its employees but constructed a different work set-up to minimize
the cost of manpower still.

2. Did you change your product and service prices?

 The results show that the majority of businesses were forced to raise the prices
of their goods or services, with 68% of the respondents answering yes, primarily for
the rapid recovery of their revenues. On the other hand, the other 32% were able to
maintain their price levels while keeping the operations from running.

3. Did you transition your business to an online platform such as Facebook and
Instagram or other online platforms?

The pandemic forced business owners to go digital because of the restrictions

and guidelines established for retail stores, beauty salons, restaurants, and other
businesses. Transitioning to online selling provided a way for these businesses to
cope with the lost profit as 68% of the respondents answered yes to digital transitions
mainly through Facebook marketplace, Foodpanda, and Grabfood while 32% stuck
with traditional selling.

4. Is social media helpful to you to advertise your product or service?

This question was addressed to businesses who only prefer to market their
services and products, especially the personal service sectors such as hairdressing
or beauty salons. 84% of the respondents used social media, such as Facebook, to
advertise their products and services, and 16% didn't use social media.

5. Did you receive help from the local government during the pandemic?

The local government supported households who were badly affected in the
CSFP by distributing cash assistance. The group would like to know if the LGU helped
the MSMEs by giving financial aid to sustain the operation of their business. Based on
the survey results, 4% responded that they received assistance from the LGU during
the lockdown, and 96% said they did not.

6. If the local government offers a free online market, are you willing to join?

According to the respondents, many businesses expand their market by shifting to

online selling. The group would like to know if they are willing to join, especially if it's
 a free registration. 78% of the respondents are willing to join if the LGU offers a free
online market, while 22% are unwilling to join.

X. CONCLUSION

This study investigated the effects of the COVID-19 Pandemic to the MSMEs
that form the majority of the Local Economic Development (LED) of the City of San
Fernando and the effects of Digitalization to their economic growth. The results show
that the COVID-19 Pandemic has a significant impact on the MSMEs and they are
inclined to utilize e-commerce platforms as a support for their transactions for their
respective businesses. Furthermore, the study provided valuable information for the
local government on the implementation of an e-commerce platform which is expected
to have a significant effect on the business and its operations which will help the local
government on determining the necessary interventions and assistance that can be
provided to MSMEs in order to mitigate the effects of the COVID-19 and in effect
stimulate the local economy.

The effects of COVID-19 to the local economy of the City of San Fernando,
more particularly in relation to the city’s MSMEs, were proven to be significant as it
affected the customers' interaction with the business owners, reduced their revenues,
disrupted the supply chain, and eventually affected the business registration and
renewal processes. These effects put a huge burden on the MSMEs which all the while
affect the sustainability of their business operations. These effects caused the
businesses to be challenged in paying for taxes which the local government used to
fund its public expenditures and services. Furthermore, the impediments brought by
the lockdown limited the capacity of the local government to produce products and
services as the responses showed significant decrease in customer demand and
commodity supply. Due to limited physical movements, businesses who are used to
the traditional method of doing business significantly declined therefore limiting the
production, output, and exchange of goods and services in the city.

Another effect concluded by the study is the impact of the lockdown to the
employment rate of San Fernando, Pampanga. Out of all the respondents, 40%
 claimed that they were forced to lay-off employees as a result of the decline in the
overall profit of the MSMEs affected the labor force of the city as majority of the
businesses resorted to down-sizing the number of employees to recover from the
losses caused by the restrictions of the lockdown.

The use of an e-commerce platform presents a more effective way of engaging

to clients and customers with the use of social media. Since e-commerce is already
popular and widely used by the majority of people nowadays, the customer reach of
the MSMEs will likely increase without exhausting significant resources, and all the
while boosting their sales and revenues. The use of e-commerce benefits not only the
MSMEs, but also the consumer as it provides convenience, and at the same time,
practicality.

XI. RECOMMENDATIONS

There are numerous advantages for MSMEs to implement digital solutions,

including increased productivity, cost reduction, and profit margin improvement (Hew,
2021). Because the City of San Fernando relies on MSMEs for economic recovery, it
would be preferable to enable MSMEs to digitize its business transactions by providing
a free online marketplace for them, conduct training and seminars about e-commerce,
and provide ordinances that support this cause. Furthermore, the local government
has to build a stronger infrastructure for connectivity to ensure smooth implementation
of the said recommendation. The Internet Transaction Act should also prioritize
establishing the E-Commerce Bureau that will protect the consumers and businesses
that deal with online transactions.

There is a high demand for money transfers or e-commerce transactions, but

some users lack confidence in using it because of fraud. The local government should
have an adequate legal infrastructure or regulatory framework in e-payments.

Another recommendation would be implementation of public policies in line with

the monetary policies implemented by the central bank. During the lockdown, the
Bangko Sentral ng Pilipinas lowered the interest rates in an attempt to increase the
 money supply in circulation given that the aggregate consumption declined during the
height of the lockdown. With this, the local government could provide programs that
would encourage businesses to maximize commercial banks loans in order to support
the continuity of their business operations. Moreover, the local government could also
assist the MSMEs with loan applications by ensuring prompt processing and approval
of business permits renewal for them to easily obtain loan grants by the banks with
ease due to completeness of the documents required.

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Supporting msmes’ digitalization - apec.org. (n.d.). Retrieved April 4, 2022, from

https://www.apec.org/docs/default-source/Publications/2020/7/Supporting-MSMEs-
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