Transnational Corporations (TNCs) have played a vital role in fostering rapid industrialisation in many developing countries. The Philippines is among the countries which have typically followed a TNC-dependent development strategy. However, the country has been far lagging behind other ASEAN members in economic performance. The present study examines this issue, mainly focusing on the linkage formation between TNCs affiliates and Philippine local suppliers. The creation of linkage is important because most of spillovers are transmitted through the industrial linkages with TNCs. This constitutes a prerequisite for access to international markets through global value chain. Three factors are proposed to determine the overall performance of linkage formation; i.e., outsourcing strategies of TNCs’ local affiliates, local entrepreneurial response, and host government policies. A case study method is employed from author’s fieldwork at Cavite Export Processing Zone, the Philippines. The cases of Penang, Malaysia, are referred just for a comparison. An economic enclave structure is clearly identified in the Philippines, in which only a few locally-owned suppliers have emerged. Extremely weak local entrepreneurship in the Philippines is identified to explain the poor performance of linkage formation.