Challenges to Indian micro small scale and medium enterprises in the era of globalization

The past decade have observed a quick globalization of economic activity and this globalization process has increased the significance of cross-border cooperation in terms of innovation. The innovation activity is being done in terms of obtaining inputs for innovation (ideas, finance, skills, technologies) from overseas and in take advantage of its outputs (products and services, patents, licenses, etc.) in overseas markets.

A collective number of firms, countries and other economic actors are taking part in today’s international economy. Globalization is proving to be a boon in a more efficient allocation of resources across countries, including increase in productivity, efficiency, average incomes, wages, greater competition, lower prices, increased product variety and quality. Globalization is providing organizations with a superior competitive position and lowering the operating costs. Lastly, globalization has led to diversification of resources, creation of new investment opportunities by opening up additional markets, and accessing new raw materials and resources.

Against this backdrop, the Brazil, Russia, India, China, South Africa (BRICS) countries have become significant players in the world market. In the context of the Indian Economy, the Indian MSMEs are desperately wanting to enter the global market and establish a key position for their products.

There has been a number of studies which talk about the role of MSMEs in a competitive environment. Some of them are briefly discussed below.

According to Dalberg (2011), MSMEs account over 95% of firms and 60–70% of total employment, 55% of GDP in the Organization for Economic Cooperation and Development (OECD) economies. Mesut Savrul et al. (2014), analyzed the fact that the size of the MSMEs have put them in a disadvantageous position. However, for Small and Micro Enterprises (SMEs) to compete in global platform, e-commerce can help them to overcome the several obstacles and barriers that limit or prevent them from getting into e-commerce. Globalization brings risks and hence SMEs are unlikely to survive in their current form. They need to improve their standards and quality, cost competitiveness and other management practices (Hwang 2007). It is up to the SMEs to implement competitive business operational practices and strategies. However, the choices available to SMEs are associated with the quality of institutions, markets and organizations. And it is the productivity and efficiency of the institutions, markets and establishments that boost or dampen SMEs to take their signs for learning novel ways of doing business, compare their own competitive features with their rivals, including launch of new innovations into their business plans. (OECD 2004:9). The other studies include study by Mukherjee (2001) who presented an outline of the role of SMEs, challenges posed by the several global forces, changes in the policy environment of SMEs, selected World Trade Organization (WTO) agreements in the context of SMEs, possibilities of legitimate cover of protection under WTO rules and policy recommendations. Naik (2002) analyzed the post-liberalization business environment for the Small Scale Industries (SSI) and mentioned that the present global scenario has become harsh for the SSI sector because of the increased internal and external competition. Subrahmanya (2004a, b) highlighted the impact of globalization and domestic reforms on the small-scale industries sector. The study advised that the focus must be turned to technology development and strengthening of the financial infrastructure in order to make Indian small industry internationally competitive in the global market. Sudan (2005) described the challenges in Micro and Small Scale Enterprises Development and Policy issues arising different questions related to Micro and Small Enterprises (MSE). The study concluded that all the policies which were opted by the Government of Indian were the efforts made to form a dynamic MSE sector. Rathod (2007) evaluated the impact of globalization on SSIs, identified the barriers and constraints faced by SSI. The study recommended that there was a need for simplified legal and regulatory framework, good governance, sufficient access to credit and finance, need of sufficient infrastructure and a competitive environment. Mali (1998) observed that SMEs and micro enterprises have to face increasing competition in the present scenario of globalization. To cope with the current scenario, they have to improve themselves in the fields of management, marketing, product diversification, infrastructural development, technological upgradation. Lastly, new small and medium enterprises moving from slow growth area to the high growth area have to form strategic alliance with the entrepreneurs of the adjoining countries. Subrahmanya (2004a) investigated the impact of economic reforms on small scale industries. And recommended that small scale industries in India should progress on the technological front and also improve the financial infrastructure to compete at the international level. Shastri et al. (2011) analyzed the implications of globalization and domestic economic liberalization of small-scale industries and analyses its growth performance in terms of units, employment, output and exports. They concluded with policy recommendations to ensure the sustenance and competitive growth of small scale industries in India. Grant Thornton and FICCI (2013) stressed that it has become necessary for the MSME sector to demonstrate greater competitiveness and position themselves strategically along the value chain in the context of present challenges. IBEF report on MSME (2013a, b) has reported that MSME landscape has matured over time and moved up the value chain and have evolved from the manufacturing of traditional products to much more hybrid products to the value-added services segment. Chandraiah (2013) focused on economic policy introduced by government of India in 1991 and gave a thrust towards the globalization process. He further stated that the policy shift at the command of IMF and World Bank has led to unequal competition between the Multinational companies and small Indian enterprises and there is a need to promote the MSME sector. Lahiri (2012) analyzed the definitional aspect of MSMEs and explored the opportunities enjoyed and the constraints faced in the era of globalization. Further, he highlighted that MSMEs in India faced a tough situation due to extreme completion from large industries. Sonia and Kansai (2009) studied the effects of globalization on MSMEs during pre and post liberalization from 1973 to 74 to 2008–09 and concluded that MSME failed to put up an impressive performance in the post reform era. Ghatak (2009) argued that the key restrictions affecting MSMEs are access to credit, technology and red tapism and concluded that the key matters should be removed to make the MSMEs perform better. Harvie (2010) emphasizes that SMEs need to improve their international competitiveness, particularly in terms of Research & Development, improved quality control, and skills. He also argues that governments should promote the development of local parts and supplier industries. This is likely to be an effective strategy to expand the domestic content of Multinational Company operating in a country. The development of networks of domestic suppliers, along with access to and availability of finance, together with increased linkages between SMEs and large firms, are critical. Asian Development Bank (2009) highlighted a few constraints such as limited access to finance, scarce medium and long-term finance, restricted connectivity to markets, insufficient physical infrastructure, underprivileged women entrepreneurs, and absence of credit rating information system for SME borrowers in context of MSMEs. Lastly, Das and Joseph (2013), discussed that India is a home to a number of natural industrial clusters mainly dominated by SMEs and subcontracting has been promoted through a number of measures such as learning, innovation and competitive building systems. However, the real outcome is yet to come.

Absence of appropriate technology will reduce the potential of MSMEs and they will lag behind the other rivals in the global market. The other disadvantages will be lower demand for the product, substitution to other superior quality products produced by rival firms and lower profit margin (sometimes losses leading to shutdown).

Technology is increasingly seen as business enabler and is a vital tool for bringing in process efficiencies and higher degree of standardization. In order for MSMEs to develop a competitive advantage to venture into the international market and operate there, the Indian MSME needs to establish themselves in the domestic market. There should be a strong focus on implementing the new age technology, developing (indigenous technology) as well as technological collaboration with global partners to play a crucial role. Technology is a key differentiator for the MSME sector to remain globally competitive.

The Government of India (GOI), and other MSME leaders have recognized the problems associated with technology and other related challenges (lack of infrastructure, human resources and access to capital, etc.). These challenges need to be eliminated to sustain a healthy growth of Indian MSMEs and further enhance their contribution in the global market. With the GOI launching several MSME schemes,³ small enterprises in the rural areas are yet to take full advantage of the best practices available at the technological front. Technology as a game changer and better assistance in doing further business is yet to be realized. With the increase of technology related schemes, there has been a rise in technology adoption.

With agility and dynamism, the Indian MSME sector has shown admirable innovation and adaptability to the recent economic downturn and recession. For example, the GOI, have recently adopted the clustering and networking approach to help these MSMEs to improve their competitiveness in the toughest times. Indian MSMEs are also implementing new and innovative information and communication technologies on a large scale like Software as a Service, and Infrastructure as a Service to cope up with difficult situations. In spite of these measures the Indian MSMEs are facing great challenges in the era of globalization and liberalization. Some of the notable challenges are listed below:

The strategies taken to improve the manufacturing ability of the MSME sector is expected to improve the competitiveness of their products and enhance the exports. Measures such as higher value addition, cluster development, skill development and training, thrust on standardization and quality, access to affordable credit, impetus for innovation would be essential measures to promote the competitiveness of the Indian MSMEs.

The aim of this study was to make an in-depth analysis of how Indian MSMEs can withstand itself in the global market despite the numerous challenges in the various forms. It was found that there are a number of challenges prevalent in the Indian Economy such as high cost of credit, difficulty of procurement of raw materials at a competitive price, inadequate infrastructural facilities, and lack of skilled manpower. A case study of the Indian Coir industry was taken. It revealed that although exports have increased in the global market, the export earnings have not increased much over the last years. The Coir industry is facing stiff competition from the synthetic exporters (especially China). To overcome such problems, investment in better technology over the time is a viable solution to promote the coir product in the global market. In is generally seen, that technological development helps to differentiate a product from its competitors/rivals product. The GOI has taken several measures from time to time for technological development of the Indian MSMEs so that it can improve its competitiveness in the international market. To counter the other challenges too, new schemes and programs such as Make-In India, Skill India and Digital India have been launched over the years.

The findings indicate that in spite of focusing in the development of technology based products the other important challenges also needs to be addressed simultaneously. Challenges such as access to credit, development of adequate infrastructure (power, electricity), supply of raw materials and training of laborers to be hired by the MSMEs also do exist. Hence, all these challenges are required to be addressed simultaneously for the overall success of Indian MSMEs in the export market. Lastly, the study will guide the MSMEs who are yet to enter the global market as to what are the tentative challenges, how they can be overcome and how can the GOI assist them in entering the global market in the long run.

To remain competitive and increase the share in the globalized world, the Indian MSMEs need to consistently upgrade their technology in the ever-changing globalized world. The Indian MSMEs may employ external consultants or resort to other measures on a continuous basis. Indian MSMEs can also opt for technology transfer such as vertical technology transfer¹⁰ or horizontal technology transfer.¹¹ The horizontal technology transfer is the most common phenomenon among the MSMEs since it can accomplish multiple tasks through the horizontal technology transfer. Therefore, it is expected that through diversified use of technology apart from using the other important factors of production, the MSMEs can enhance their productivity, reduce their costs, expand their scale of production, resort to new product development, increase their product sales and market share and most important penetrate into the global or international market. Lastly, if the Indian Economy is to sustain a growth rate of 8 to 10% in the coming decade, a strong and vibrant MSME sector is vehemently required. Indian MSMEs have the potential to become global enterprises. Constant efforts in various forms and active GOI support/schemes should definitely boost the Indian MSMEs to become international players in the coming decade.

India should increasingly embrace a network of innovation and increase their partnership with other research institutions, universities and other organizations. The MSME, are not coming forward for adopting IPR as a business strategy and a means for enhancing competitiveness and becoming an efficient player in the global. There is widespread lack of consciousness about IPR as a tool for creating a competitive edge in the trade & technology market and for value addition to the business. The Indian MSME sector needs more information, orientation and facilities for protecting their intellectual powers and show a positive approach towards creation, protection and management of IPR to compete in the global market and experience a business growth. This will further motivate and enable towards the launching of the IPR proposal in the Indian Economy.

According to studies conducted, very few organizations or clusters under the MSME sector use ICT to their advantage. MSMEs need to understand that the benefits outweigh the costs of ICT adoption. ICT adoption can help introduce greater process efficiency in MSMEs and help to focus on the core focus areas of innovation. The development of an efficient ICT infrastructure as well as improved interoperability and standards are important to access global markets as they facilitate information exchange and communication as well as participation in e-commerce platforms (BIAC, B20 China, World SME Forum, SME Finance Forum 2016; OECD 2017a).

Developing countries are investigating significantly in their education (mainly basic) and training systems. However, linkages between education and training strategies and SME enterprise development strategies are still weak. The education and training systems influence the level of entrepreneurial activity. There should be an increase in training programmes by the industry associations to upgrade the skills of the workers on a daily basis with introduction of new technology. Further, labor laws should also be simplified.

There is also an urgent need to administer and invest in the Human resource (HR) function¹² within the Indian MSMEs. The Indian MSME need to significantly invest in HR functions to compete in the global market. The role of human resources in enhancing firm efficiency and effectiveness is well established. According to the resource based view of management, irrespective of the firm size, employees are strategically important and indispensable resources to achieve an organization’s objective.

Lack of critical infrastructure and poor supporting facilities and inadequate access to important services like water, power supply, and road & rail connectivity have increased the operational costs of MSME making them less competitive. Use of solar or renewable energy needs to be encouraged in rural areas. To upgrade the infrastructural facilities, the Ministry (MSME) has adopted the cluster development approach as a key strategy for improving competitiveness of Indian MSME.

The Indian tax system has been criticized along several lines as to be deemed undesirable for the business environment, number of payments required, and procedure for filing payments and non-uniformity across states associated with taxation (Ease of Doing Business Index, International Finance Corporation, World Bank 2014). The Ease of Doing Business¹³ has significantly improved from 131st position among 190 countries to 130th position in 2018. The improvement of the Ease of doing business can be indicated as a good indicator for the conducive performance of Indian MSME.

Lastly, the Government of India is fully aware of the challenges of globalization and has taken appropriate measures for preparing the MSME to meet the challenges of liberalization and globalization. All these combined future measures will help the Indian MSMEs get improved access in the global markets.

The Limitation of this research lies in the fact that there are data limitations. A primary survey of some selected Indian MSMEs could have helped us in the better understanding of how actually MSMEs operate in the global environment. In future, a study can always be conducted through a sample survey where some selected MSMEs are covered. Henceforth, data about their age, expertise, sales, import of raw materials, tools, research and development expenditure, other service based variables like (Information Technology professionals, advertising and marketing expenditure) can be collected. Lastly, an econometric exercise could be done to examine the likely impact of the variables on the competitiveness of the Indian MSMEs. In future, a more empirical exercise with minimal data limitations could be a possible extension of this study.