**INDIAN SME’s – THE KEY COMPETETIVE FACTORS FOR
SUCCESS IN GROWING ECONOMY
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1, 2
Dr. K. Maran, 2 R. Suresh, 3 Pravat Kumar Sarangi
Management Studies, Sri Sairam Engg College, Chennai, India.
3
Management Studies MGR University, Chennai, India.
1
Email: [email protected]
Abstract
SME serves as a major source for employment opportunities and wealth creation in
developing countries. They contribute towards social stability and generate tax revenues.
According to the International Finance Corporation, “There is a positive relationship between
countries overall level of income and the number of SME’s per 1000 people”. SME’s have
been defined against various criteria such as the number of workers employed, volume of
output or sales, value of assets employed, and the use of energy. Organization for Economic
Cooperation and Development (OECD) defines establishments with up to 19 employees as
‘small’, between 100 to 499 employees as medium and over 500 employees as large
enterprises. However, many establishments in certain developing countries with 100 to 499
employees are regarded as relatively ‘large’ firms. The key factors to develop Indian
economy and for successful competition in emerging environment are technology, research
and development, sharing knowledge and information, financial resources etc.
Introduction:
SME serves as a major source for employment opportunities and wealth creation in
developing countries They contribute for more social stability and generate tax revenues.
According to the International Finance Corporation, “There is a positive relationship between
countries overall level of income and the number of SME’s per 1000 people”. The “World
Bank” report indicates that a healthy SME’s sector corresponds with a reduced level of
informal or black market activities. In developing countries, SME and micro enterprises
account over 95% of firms, 60%-70% of employment, 55% of G,D,P, and they generate the
lions share of new jobs. SME‘s are an important source of local supply and service to larger
corporations. They have extensive local knowledge of resources, supply patterns and
purchasing trends, it shows interest in community development and draws upon form the
community for their work force and rely on it to do business. It also contributes for the local
community by providing goods and services at affordable cost and by providing employment,
particularly for low skilled workers as well as women employees and young people, who
make up the greatest proportion of the unemployed in emerging economies.
Definition of SME’s in India:
In India the small and medium enterprises are not well defined. The internal group
set up by the Reserve Bank of India has recently recommended that the units with investment
in plant and machinery in excess of SSI limit and upto Rs.10 crores may be treated as
medium enterprises.
The definitions of ‘small’ and ‘medium’ sized enterprises differ from one country to
another. SME’s have been defined against various criteria such as the number of workers
employed, volume of output or sales, value of assets employed, and the use of energy.
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Organization for Economic Cooperation and Development (OECD) defines establishments
with upto 19 employees as ‘small’, between 100 to 499 employees as medium and over 500
employees as large enterprises. However, many establishments in certain developing
countries with100 to 499 employees are regarded as relatively ‘large’ firms.
SME’s Competitiveness
According to Michal E. Porter, entrepreneurs competitive strategy is mainly for a firm
is to produce exceptional quality of goods and services than its competitors with low price
and more differentiated product. In this context, low cost is mainly based on a firm to design,
produce and market a comparable product more efficiently than its competitors.
Differentiation is the competence of a firm to provide unique and superior value to the buyer
in terms of product, quality, special features or after sales services etc. For instance, Indian
premier automobile industries like Telco and Bajaj by adopting combination strategy of both
low cost and product differentiation made them increase their market share both in Indian
foreign auto market. Telco group is ready to sell at a price of $2000 in Indian market before
2008 and Bajai as many varieties in the two wheeler segment like Bajaj Pulsar, CT100,
Boxer, Discovery etc. The IT industry has shown an unprecedented growth since the early
nineties, with the overall consistent compounded annual growth rate (CAGR) in excess of
35%. IT sectors is one the largest export earners for India. The key for successful
competition in emerging environment is that Indian SME’s have to concentrate on the
following the key factors like technology, research and development, sharing knowledge and
information, financial sources etc.
Significance of SME’s in India:
Indian market is growing rapidly in manufacturing, service, retail, IT and food
processing sector. Foreign direct investment has increased during the last decade. This
growing trend creates excellent opportunities for the development of Indian SME’s which
plays an important role as the driving force for growth of national economy through
employment generation. SME’s sector in India employs around 26 million people and is
involved with production of over 8000 industrial items such as consumer items, capital and
intermediate goods. SME’s in India are backbone of Indian economy because, it constitutes
more than 90% of the total number of industrial enterprises. In India, 40% of value addition
in the manufacturing output and approximately 35% of India’s exports. Major sectors
contributing to SME’s exports include readymade garments (27%) Engineering goods
(14.5%), Electronics & Computers, and Processed foods (11% each). In terms of exports,
sports goods have 100% exports from SME’s sector, followed by Readymade Garments
(90%), Leather (70%), Marine Products (47%) and Chemicals & pharmaceuticals (44%). In
the last 10 years, the share of SME’s exports has increased in most of the sectors, at the same
time in some sectors, the share of SME’s in total exports has declined.
Objectives:
The main purpose of this study is to analyze, after globalization SME’s are suffering
due to lack of technology, R&D facility, material cost and lack of support from government.
In the global village, SMEs will have to act very speedily and face to challenge the
technological problem, upgrading R&D, minimizing material cost etc. This paper, discusses
important issues liked. What are the technological capacity utilized by the Indian SMEs in the
global environment? How to develop technology capacity? What is the role of government in
policy formulation? and How to formulate the policy to develop more SME’s in India? What
is the role of financial institution for technological venture capital? And to find out the
feasible solution to improve SME’s performance and growth of Indian economy. Hence the
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SME’s have to adopt the following factors like technological capacity, industrial cluster
system (sharing knowledge, minimizing material cost), government policy and regulation,
role of financial institutions, research and development, labour etc. There aforesaid factors
are more important to successfully run the business as well as to develop Indian economy in
global competitive field.
Competitiveness factors:
The following are more important competitiveness factors for the development of
SME’s in terms of both quantity and quality that contributes significantly the Indian
economic growth the emerging business scenario.
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Technology capacity:
Adopting new technology and assistance in its application level is crucial to build up
technological capacity. In the competitive field, knowledge management and technology are
most important factors to enter into the global market, hence technology up-gradation is
essentential to SMEs in developing country. In tea industry, IIT (Kharagpur) has successfully
introduced a new processing technology in plantation, Earlier it takes more than 20 to 22
hours for one batch of plucked leaf to be processed to block tea in the factories, the focus is
now being shifted to technology research with a view to develop new process of tea
manufacture using the latest techniques of enzyme activation. The other example which can
be quoted is ,the low cost remedies to remove arsenic, which was developed by Naval
Material Research Laborite (NMRL).They introduced a stainless steel filter device for
effective removal of arsenic from contaminated drinking water and making it safe for human
consumption. The main investment (one time) in the naval device is around Rs.500 which
costs for the stainless steel filter and Rs.150 for the plastic parts. To the great advantage, the
life of the filter is guaranteed for 5 years which requires little maintenance. NMRL has filed
for a national patent for the process and an international patent (US) for the product filter.
In India, one of the oldest traditional sector, which has shown this remarkable ability
for adaptation to technological changes is the leather industry. Central Leather Research
Industry (CLRI) Chennai has successfully introduced microprocessor control in tannery wet
operations at industrial level and it has promoted cleaner processing, quality, consistency, and
international market level equivalence. Anticipating the impact of computer aided techniques
in foot wear and garment design, CLRI has alerted and prepared the industry so well that
CAD is now widely employed by expert manufactures of foot wear and garments.
JT Chellam (2004) one of the leading manufacturers in south India have invented new
process to enhance the appearance of tea by adding sugar, to the green leaf before the cutting
begins. So the tea is found with better density and it is much sought by the exporters. In this
win-win situation both the manufactures and the producers gain because, the higher unit
realization is passed on to the producer. The existence of CSIR Lab has increased to multifold
in India, which are helpful to fulfill the technological needs of the SMEs .Mechanical
Engineering Resource and Development Organization (MERADO). Ludhiana, the main
purpose is to develop design, standardization of industrial machinery, Machine tools,
consumer durable, agriculture machine etc. Some of the notable invention made by this
organization design are development of sugarcane harvest machine, electrical cloth cutting
machine, high speed over lock machine, leather shaving machine, flat bed and post bed
leather sewing machine, wood knitting machine, friction welding machine etc. This
technology developed by (MERADO) has benefited not only the particular state SMEs but
also other states SMEs which has got more benefited from this technology, however in the
present scenario SMEs need more co-ordination and co-operation from technology
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supporting institution and R&D centers. SMEs carefully utilize the human resource skills, in
different dimensions for the up grade of technological origination.
o
Government Policy and Regulations:
In global scenario, policies play the role of the motivators. A well structured policy is
the only way for establishment and development of SMEs, for which it needs conducive
policy environment. After liberalization, SMEs are faced with more challenges and
opportunities. The ultimate aim of policy and regulation is to improve and develop more
SMEs and to face the challenges with little efforts through, structured policy and regulation.
Hence the following policies are more important to this sector.
Create more awareness about SMEs scope and opportunities to young engineers and
scientific mind and also by announcing more privilege to those who are to initiate SMEs like
seeds capital, export incentives, tax benefits.
•
Setting up more industrial R&D center’s and also motivate the private centers
to initiate more R&D centers in the changing competitive environment.
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By organizing more seminars, conferences, trade & technological related
national and international level.
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•
Promoting more training centre for human resource development for SMEs
Promoting more cluster centre for technology and transfer of the technology,
at all the levels of SMEs in India.
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•
Establishing more business centers.
Promoting technology with more private R&D institutions, university, and
other bodies at Regional, National and International levels
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Encouraging more venture capital financing in technology to improve the
SMEs sector in India.
The above policies may or may not be initiated by the Indian government. In the case, they
implement these polices, SMEs will be able to shine in the competitive environment and also
earn more economy.
o Industrial Cluster System
Sector Specification and clusters seem to be a common phenomenon for small scale
manufacturing in developing countries. Most of the business have been very successful
which are primarily based on fact and they have acquired accumulated knowledge through
learning by working experience and learning by interaction with business people for instance
in India Tirupur is more popular for knitting wear companies, diamond polishing at surat,
leather footwear in Agra, locks in Aligharh, bicycle and bicycle parts, sewing machine parts
and machine tools in Ludhiana, Crackers (Fire works) in sivakasi. Ludhiana based woollen
knitting wear companies are manufacturing to an account of 95%, sewing machines 85% and
60% bicycle and its parts in India. Tirupur based knitting wear companies contribute in
exports more than Rs.50, 000 million ($1100 million) and 56% of product exported by 20062007. The astonishing performance of Tirupur based Industries was analyzed by American
Texas University .In India, the largest fireworks (crackers) manufacturers is remarked by the
place sivakasi in Tamil nadu, who occupy a share of 3/4th of firework manufacturing.
Similarly many SME’s would shine in the Indian market, if they follow the industrial cluster
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strategy like technology and knowledge sharing .Which may contribute for the further growth
of SME’s in India and also provide a chance for the growth of Indian economy.
Research and Development
Today around 3000 R&D institutions are in India of which 1370 are in the private
sector. In these around 1250 are in house R&D and more than 45,000 employees are working
in technical and scientific jobs and they receive incoming expenditure of amount of rupees
7.3 billion every year. In the competitive environment SMEs are forced to encourage the
investment in their home country, most of the SMEs lack the financial resources. The best
resource to acquire more technology is through partnership alliance and linkage with other
organization and institutions like IIT, MIS &T and R&D centers.
India ranks quite high in possessing a large pool of organizations scientists and
engineers. There are 1500 technical institutions providing technical education to 0.40 million
students every year and a fully equipped infrastructure development. To overcome the lack of
technology development each institution has to initiate an innovative technological
development. Then the Indian SMEs will gain a very great position in global level. So the
government has to strongly instruct all the technical educational institutions to link with
SMEs and find a feasible technological development in growing economy.
As stated earlier, technological transfer needs to be increased and linkages
strengthened to technology development. The technology development indicates the countries
development so almost all developed countries have to help SMEs. Developed countries like
(Japan, USA) are adopting sophisticated technologies to build up more economy, likewise
India should also follow some technological strategic alliance, transfer and link with many
technical university, institute and R&D center. However, government should be supported
with more finance for SMEs technologies, through the mode of technology acquisition from
foreign country with low price, more incentives and more duty draw back scheme. Then the
SMEs will be able to compete in global level.
o
Role of financial institution
Financial resource is another one important factor for smooth running of SMEs the
recent survey conducted at Chennai, stated that around 25% to 35% of SMEs are not in a
position to run their business because they had problem in arranging working capital fund
and another one survey conducted at Chennai city says that majority of SSI are paying two
third of interest on its profit to money lenders. This is the major hurdle to all SMEs.So the
Government has to take serious decision on the role of financial institutions to develop SMEs
in India.
Government should formulate favorable policy to SMEs. The technology up gradation
is another one difficult task to Indian SMEs. The government should facilitate to acquire
more technology through venture capital financing only then all SMEs will get indigenous
technological development. However in India in 1987,Industrial development Bank of India
had become the first introducer of Venture capital scheme. (VCF) scheme for financing
ventures seeking development of indigenous technologies and adopting of foreign technology
to facilitate more innovative production in India. There after Industrial credit investment
corporation of India (ICICI) provided financing technology and oriented innovative company
then (TDICI) started (it is initiated by ICICI in association with UTI)and other players also
entered the field. Their main focus on development commercialization and untried
technologies. State Bank of India (SBI) and Canara Bank took the lead in promoting venture
financing among the public sector banks form 1996.There has been an increased level of
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activity in the venture capital industry. SIDBI venture capital (SVCL) launched in 2004,
SME growth fund, it is a wide focus new venture capital fund with a large corpus of Rs.500
corers dedicated to SME seeks with an aim to meet the long term risk capital requirement of
innovative and technology oriented units in this sector.
Karnataka Information technology venture capital fund (KITVEN) which is
specifically for information technology area has assisted 13 companies with investment of
Rs.12.08 corer in 1999. Most of them started and recovered with 80% of finance. The other
leading banks also render the services to SMEs, like Punjab National Bank, Bank of Baroda,
Central Bank of India, Oriental Bank of commerce and corporation Bank. However the
Indian prime Minister recently addressed the entrepreneur conference, about indigenous
technology and its more important application in SMEs sector. But the reality is only with
in the hands of the bankers. Hence the bankers should come forward freely and assist the
SMEs. In the present scenario the bankers are not able to perform independently .The
government should ensure that policies are in the favor of bankers which will facilitate the
SME’s growth and also avoid the hindrance to bankers performance.
Conclusion:
A few concluding remarks for this research paper can be given here. Today
organizations are knowledge based and their success and survival depends on technology
enhancement, research and development, financial resources etc. Technological development
is an essential factors to perform well in the competitive global environment, otherwise the
industry has to face several challenges in this winning situation. SME’s have to adopt cluster
system to share their knowledge and information and also chances to minimizing material
cost to compete in the global market. Now-a-days almost all the industries are adopting cost
cutting strategy. Besides the SME’s have to support to contribute more economy in Indian
business for which the government can bring about an effective policy formulations and
regulations for upgrading research and development and financial supporting to all SME’s
sectors in India. This will pave the way for SME’s to shine in the world market.
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