Engines of Growth-nov2011

INFOCUS | INDIA-CHINA | SME | COVER STORY

Engines of Growth

Chandni Chowk to China Entrepreneurship is in abundance in India and China, but for SMEs to truly succeed it essentially requires an enabling environment equipped with efficient and effective support systems.

W

hen Akshay Kumar resettled from Chandni Chowk to China in the movie, he didn’t realize that he was also exhibiting Indian entrepreneurial skills, besides the usual Bollywood masala. The Indian entrepreneur’s skills and commitment to succeed have been well established in the form of legendary Indian institutions like Infosys, TATA, Reliance, etc. Likewise, the Indian SMEs have established themselves as engines of growth for India by catering to the needs of international markets. SMEs in China have also achieved rapid and sustainable growth over the past two decades. Such growth has increasingly contributed to Chinese economic development, as a result of which it has emerged as the manufacturing hub of the world.

Status of SMEs in India & China Globally there is no accepted definition of SMEs. Different countries use different criterion. But most definitions are based on investment ceiling and employment. According to a World Bank, there are more than 60 definitions of small and medium industries used in 75 countries. The most commonly used definitions relate to either size of employment and/or quantum of capital investment/fixed assets. Historical past reveals that in most countries, including India and China, SMEs start as proprietorships and then transforms into small business units and then grow to medium size units.

In India, the MSMEs (erstwhile SMEs) are classified into the following: (i) enterprises engaged in the manufacture or production of goods

pertaining to any industry and (ii) enterprises engaged in providing or rendering services. In 2004, the Government of India enacted the Micro Small & Medium Enterprises Act to make it in tune with global practices and to provide opportunities for technological upgradation.

On the other side, China’s definition of SMEs is broadly classified on the basis of employment, revenue and investments. The Interim Categorizing Criteria on Small and Medium-sized Enterprises (SMEs) published in 2003 and based on the SME Promotion Law of China sets the guidelines for classifying SMEs. The definition further classifies the enterprises on the basis of activity, such as industrial sector, construction sector, wholesale and retail trade sector, transportation and delivery services sector, besides hotels and restaurant sectors. This explanation

covers 99 per cent of all Chinese enterprises, contributing almost 60 per cent to the national GDP and account for 82 per cent of employment opportunities.

The SMEs are an important part of both the Indian and Chinese economies. The Fourth Census revealed that registered MSMEs in India in the manufacturing sector are of the order of 9.47 lakhs, i.e. 61.96% of the overall registered MSMEs. The number of service enterprises is 5.81 lakhs i.e. 38.04%. As far as unregistered MSME sector is concerned, manufacturing enterprises are of the order of 63.68 lakhs i.e. 25.92% and the remaining 182.04 lakhs (74.08%) belong to the service sector. Aggregating the registered and unregistered MSMEs, the manufacturing enterprises are of the order of 28.03% while the remaining 71.97% belong to

Definition of MSMEs India

Manufacturing Sector

Micro enterprises Small enterprises Medium enterprises

Investment in plant and machinery does not exceed Rs 25 Lakh More than Rs 25 Lakh and less than Rs 5 Crore More than Rs 5 Crore and less than Rs 10 Crore

Service Sector

Micro enterprises Small enterprises Medium enterprises

Investment in equipments does not exceed Rs 10 Lakh More than Rs 10 Lakh and less than Rs 2 Crore More than Rs 2 Crore and less than Rs 5 Crore

PD Kaushik

Adviser - Legal Affairs, ICEC

INFOCUS | INDIA-CHINA | SME | COVER STORY

Globally there is no accepted definition of SMEs. Different countries use different criterion. But most definitions are based on investment ceiling and employment. According to a World Bank, there are more than 60 definitions of small and medium industries used in 75 countries

the service sector. The number of women managed enterprises of the aggregate MSME sector reached a figure of 21.30 lakhs against 10.63 lakhs as recorded in the 3rd census for the MSE sector.

The performance of Chinese SMEs is far more progressive. In 2007 a total of 4,459 large companies accounted for 0.19 per cent of the total number of enterprises registered in the country; 4,2291 medium-sized businesses, or 1.78 per cent; and 2,327,969 small enterprises, or 98 per cent, of the total. Overall, SMEs made up for 99.7 per cent of the total number of companies operating in China at the time. Business revenue of SMEs accounts for 60.42 per cent of total earnings; small enterprises 6.54 trillion, or 23.70 per cent. The industrial income of SMEs accounts for 66.28 per cent; 11.77 trillion of the small enterprises are about 37.29 per cent. The SMEs are increasingly playing an important part role in employment generation. Large enterprises in China employ 20,877 thousand individuals or 18.11 per cent of the total employment; medium enterprises 35,464, or 30.76 per cent; small enterprises 58,947, or 51.13 per cent.

Commonality & Divergence There are quite a few commonalities and divergences between Indian and Chinese SMEs. At the macro-level, like the role and scope of SMEs in their respective economies, government recognition of the importance and vulnerability of SMEs, etc, are quite a common phenomenon for both countries. However, there are wide number of issues that exhibit wide divergences.

A simple SWOT analysis for instance gives a fair picture of commonalities and divergences existing between SMEs in India and China.

The SME contribution in terms of employment generation is the most common phenomenon for both economies. However, labour productivity is a major divergence. China exhibits high labour productivity which is its strength as compared to India; in fact the mind set and behaviour of labour is considered a serious weakness for Indian SMEs. Likewise, restricted access to capital or lack of adequate credit facilities is a common weakness for SMEs in India and China.

The present WTO regime requires opening up of domestic market, lowering of tariffs,

Indian SMEs: Status Report & Change Category of industries

Chinese criteria of definitions

Small (Industrial)

<300 employees, or annual revenue <30 million RMB, or assets <40 million.

Medium (Industrial)

300-2000 employees, annual revenue 30 million – 300 million RMB, assets < 400 million RMB. All other industrial units with lesser levels, classified as small enterprises.

Medium sized enterprises in construction

600-3000 employees with annual revenue 30 to 300 million RMB and assets 40 to 400 million RMB. All other units with lesser values classifies as small enterprises.

Medium sized enterprises in retail trade

100-500 employees or with annual revenue 10 to 150 million RMB. All other units with lesser values classifies as small enterprises.

Medium sized enterprises in whole sale sector trade

100-200 employees or with annual revenue 30 to 300 million RMB. All other units with lesser values classifies as small enterprises.

Medium sized enterprises in transport sector

500-3000 employees or with annual revenue 30 to 300 million RMB. All other units with lesser values classifies as small enterprises.

Medium sized enterprises in delivery services sector

400 to 1000 employees or with annual revenue 30 to 300 million RMB. All other units with lesser values classifies as small enterprises.

Medium sized enterprises hotels & restaurants

400-800 employees or with annual revenue > 30 but less than 150 million RMB. All other units with lesser values classifies as small enterprises.

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Parameters

III Census (2001-02)

IV Census (2006-07)*

1. Total No of enterprises (Lakhs)

1,05,00,000

2,61,00,000

2. No of manufacturing enterprises (Lakhs)

44,46,000 (57.74%)

73,15,000 (28.03%)

3. No of service enterprises (Lakhs)

60,75,000 (57.74%)

187,85,000 (71.97%)

4. Employment (Lakhs person)

2,49,33,000

5,97,29,000

5. Percentage of rural enterprises

55

54.38

removal of quantitative restrictions etc, which means that SMEs will have to face tougher competition in domestic and foreign markets.

Their goods have to meet tougher quality and environmental standards. In view of their insufficient capitalisation, lack of access to capital, knowhow and information as well as low skills of work force, SME’s need assistance by way of policy support and measures from government and other organisations. The SMEs in both countries in most of the cases do not have information on WTO regime and need extensive sensitisation and nurturing.

Unlike India, which neither have quality transport infrastructure nor good telecom connectivity, China has excellent telecom facilities which help SMEs to get connected to international markets for expediting their business.

High quality transportation systems in China comprising railways, waterways and roadways, as well as efficient transporting equipment have helped SMEs in transporting raw materials to the enterprises as well as finished goods to respective destinations.

Indian and Chinese SMEs, on the whole,

have not been regarded as internationally competitive compared with those in the more technologically advanced economies. They may face consumer ire if deficiencies in technology, capital, and skills for management are not improved by forging closer cooperation with their counterparts in other economies.

At a breathtaking pace, China has firmly established its position as “the world’s factory.” It enjoys such a huge manufacturing-cost advantage over other countries, not only on account of low-cost labour, but the bigger factor is the unique manufacturing spoke and hub called “supply clusters.” These interconnected groups of companies in close geographical proximity to one another are a big source of lowering the product cost. It has helped supply chains with a big business advantage. Indian SMEs have experienced the “manufacturing spoke and hub phenomenon” in only few cases only, like the Tirupur cluster.

Indian SMEs are over dependent on the domestic market. Thus, lack of adequate efforts to enter the export market. Entrepreneurs mostly remain content with the domestic market as a

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INFOCUS | INDIA-CHINA | SME | COVER STORY

Strengths

Weakness

India

China

India

China

Employability Exports Decentralisation Flexibility Innovativeness Command over language

Recognition of SMEs Labour Productivity Employment Conducive Labor Laws Literacy Level Univ-Industry Coop Entrepreneurship Value chain clusters Blue collared employ.

State of the art infrastructure

Low literacy levels Plethora of labor laws Size of MSMEs Outdated technology Mindset of workforce Lack of credit Lack of info on mkt Weak WTO knowledge Inadequate infra.

Over dependence on domestic market

Rural-urban income inequality Restricted access to capital Language barrier Lack of organisation

Opportunities

it is quite evident that SMEs in both countries confront similar and dissimilar types of constraints and opportunities.

However, SMEs in both countries also exhibit fairly rich experience for collaboration and cooperation to benefit each other in the long run

Threats

India

China

India

China

Access to technology Availability of raw material Diversification Incr. Global mkt. share Strengthening cooperation

Open regionalism Access to global market.

Conducive bus environment Peer group effect Interdependence & Regional Integration

Consumer ire Changing taste & preferences Excessive flow of imports

Lack of competition Uncertainties of opportunities.

Asia-Pacific market Withdrawal of subsidies Consumer ire

result of which their contribution to Indian exports is roughly 40%, but at the same time its share of exports in the world market is less than 1%. On the other hand Chinese SMEs are over dependent on the export market and their vulnerability was exposed recently during the global economic slowdown.

Thus, it is quite evident that SMEs in both countries confront similar and dissimilar types of constraints and opportunities. However, SMEs in both countries also exhibit fairly rich experience for collaboration and cooperation to benefit each other in the long run.

Critical Issues Despite playing a strategic role, the SME sector in both countries suffers from various problems. The SME sector is heterogeneous, dispersed, and mostly unorganized, because of which entrepreneurs and artisans/workers face difficulties in accessing government schemes.

The recent global and domestic economic slowdown further exposed the weaknesses of SME sector in both countries, more particularly the exporting firms. The SMEs have a long way to go and still lack the spark and lustre, and besides the compelling need of identifying current challenges, it is required to find effective ways of addressing these concerns, some independently and some jointly. The various expedient issues which can contribute to the competitive advantages of the sector are: 1. Policy Measures 2. Financial Support 3. Infrastructure 4. Capacity Building Initiatives 5. Other Issues

Other policy related issues may include establishing state of the art infrastructure, achieving economies of scale and pro-SME procurement policy as practiced in China. For instance, a set percentage of government contract compulsorily go to SMEs. Similarly, much potential of small firms to grow and nurture innovativeness is shaped by the kind of infrastructure, both physical and economic, available and can be accessed at reasonable costs. Unfortunately, the ramifications of infrastructural constraint faced by small firms remain one of the most neglected areas of enquiry. Moreover, the nature and implications of such infrastructural absence or inadequacy could be deeply varied as between small enterprises located in urban areas and those in rural and semi-urban areas.

Likewise, policies regarding incentives for SMEs investors, improved credit facilities, safety nets against delayed payments, technology upgradation and capacity building, improved access to global markets, etc, are common for both countries. For instance, SMEs generally suffer from weak marketing. Most SMEs do not have

One the major strengths of SMEs in China are the recognition of the importance of SMEs by the government and the proactive policy for establishing a pro-SME business environment.

However, the Chinese experience can be a lesson for policy makers in India, especially by addressing the rigidity of antiquated labour laws.

The problem of the outdated and archaic labour laws makes it extremely difficult for entrepreneurs to start businesses and the ones already started, in running them, and in case of failed ventures almost impossible to shut it. The body of legislation that shapes the industrial and labour environment in India is huge. There exists a crisscrossing network of chaotic and often-contradictory laws, such as the Minimum Wages Act, 1948; Trade Unions Act, 1926; Contract Labour Act 1970; Weekly Holidays Act, 1942 and Beedi and Cigar Workers Act, 1966, Industrial Disputes Act, all of which need overhaul. |36| India-China Chronicle ď&#x201A;§ November 2011

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INFOCUS | INDIA-CHINA | SME | COVER STORY

money to invest in market research and are unable to carry out design and technical improvements to keep up with market demands. Unable to take up aggressive marketing, like big industries, they cannot invest in advertising and packaging and find markets despite good quality and competent prices. This limits their ability to tap markets and attract consumers.

The SME financing continues to be most important challenge for the creation, survival and growth of SMEs in India and China, especially the innovative ones. Shortage of working capital is widely recognized as the biggest hurdle in the growth of unorganized and organized SMEs.

The high cost of credit to SMEs also impacts the competitiveness of their products. Securing bank credits, difficulties in documentation for bank loans, and lack of collateral security are bigger problems in majority of developing countries in Asia, including India and China.

Besides, SMEs face a number of challenges which make it difficult for them to access international markets. Some of the major challenges faced by SMEs in accessing global markets are: • Market information • Price competitiveness • Cost of transport • Availability of professional management skills

• Non-tariff barriers • Domestic regulations (for services exports) Among medium enterprises, cost of production is a major concern as they are able to gather market information easily, compared to micro and medium enterprises, which are not well educated about global markets and sometimes also lack the resources to gather market information.

It is true that SMEs in India and China suffer from lack of core technologies and intellectual property rights, poor cooperation between large and small firms, limited access to finance, lack of preferential policies, etc. However, experience of both countries can benefit each other through cooperation and collaboration. Some of the suggestions for both governments are: a) Strengthen service quality among SMEs – The respective governments must ensure that initiatives funded with public money are responsive to business demands, address market failure, and provide value addition. It must also see to it that the business support network provides the targeted service to businesses. Policymakers, both at the national and regional levels, must recognize that the process of business growth has significant policy implications for government services, and determine ways to address these implications. Besides, from ensuring that employers get high-quality training from colleges and private institutions, such service providers are often the key for many small firms.

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b) Learn from each other’s experience – It is imperative to learn from each other. For instance, interface between university and industry is a strength of SMEs in China, which needs to be replicated in India to build strong in-house technology development and adaptation resource. Likewise, India has considerable experience in energising rural markets through institutions and bridging rural-urban inequalities, perhaps China can gain from the Indian experience. c) Develop an Industrial Value Cluster (Hub & Spoke) Plan to Enhance SME Competitiveness – Respective governments should provide a policy framework that would serve as a guide in the setting up of industrial clusters of small enterprises. Such a framework should indicate how such clusters could be formed, provide public funds for SME clusters, and set up promotional institutions that will enhance technological collaboration among SMEs, university and research institutions. The same framework should provide business support, specifically for innovation; cultivate markets; and foster human resources, among others. It should also build financing institutions for SMEs. Where SMEs are concerned, the countermeasures to develop SME clusters should be as follows: • Improve small town infrastructure – Improved and low-cost infrastructure, such as energy, transportation, communications, and Internet, is vital to SE clusterNovember 2011  India-China Chronicle |39|

INFOCUS | INDIA-CHINA | SME | COVER STORY

ing. Small town infrastructure development could be pursued gradually but steadily while ensuring that SEs continue to produce and develop while getting the services that they need.

• Develop the industry that has competitive power – Small towns specializing in production, trade, and tourism industry should develop potentially competitive industries.

• Undeveloped small towns should develop the industry using locally available resources and potential regional markets.

This can be achieved through the industrial chain’s extension and new product research and development, external scale economy and healthy competition and cooperation within the SME cluster. d) Implement the macroeconomic regulation and supply the local government service. The government should draw up a preferential policy for the development of SMEs, help SMEs to choose appropriate region and adjust their development direction. The

local government should help cultivate entrepreneur spirit. The entrepreneurs of small-medium sized enterprise cluster have been regarded as important human resources in the development of the enterprises. It is necessary to create a suitable environment for \entrepreneur development and supply a preferential policy, complete law system, fair market rules and so on. The point is to build a culture of the local society to promote competition and cooperation in order to cultivate an innovative entrepreneur efficiently. e) The policy for SME development should focus its priority on financing. Some of the measures which could be taken up on priority basis are: • Expand the list of SME financing tools to include fiscal, banking, security market, commercial credit, and private financing sources • Build policy bank of SME • Develop a credit guarantee system • Encourage utilization of foreign direct investment and expand external markets • Develop a second board market

• Provide a finance and taxation support system for the promotion of SMEs’ technological innovation f ) Complete the technological innovation system for SMEs -- Extend fiscal and monetary support for technological innovation to SMEs that meet industry standards.

Strengthen the technological innovation system with enterprises as the core hub, and facilitate collaborative efforts among industry, university, and research institutions.

Government should promote the networking, interaction and collaboration among key innovation players, foster technological innovation alliances, establishing innovation relay centers to make it easier for SMEs to access applicable innovation resources, lower their information, transaction, and organizational costs of innovation activities. The essential elements of a complete technological innovation system rests on1) Innovative Technologies with Good Market Potential 2) Entrepreneurial Team 3) Idea 4) Products 5) Innovation Fostering System 6) Funding System 7) Free and fair Market Create innovation source – In particular, reinforce the development of technology-based SME community and lower the risks and costs of innovation activities undertaken by technology-based SMEs. Develop innovation clusters and reforesta-

tion – Guide the random innovation activities of SMEs to follow the national development strategy so as to build up innovation ecosystems representing national competitiveness. g) Encourage upgrading of the value chain, including technology-based export promotion, that is, from OEM (Original Equipment Manufacturing) to ODM (Own Design and Manufacturing) & OBM (Own Brand Manufacturing) etc.

The SME financing continues to be most important challenge for the creation, survival and growth of SMEs in India and China, especially the innovative ones. Shortage of working capital is widely recognized as the biggest hurdle in the growth of unorganized and organized SMEs.

Once again, coming back to the movie, today entrepreneurship is nurtured from Chandni Chowk to China. But it is also worth mentioning that entrepreneurship alone cannot succeed, it also requires an enabling environment and other support systems. Though Akshay Kumar in a Bollywood masala movie can do anything and get away with anything. But in the movie Chandni Chowk to China, he would not have succeeded in his mission without collaborating with the locals, or in other words the requisite support systems. Likewise, entrepreneurship is in abundance in India and China, but for SMEs to truly succeed against all odds, it essentially requires an enabling environment equipped with efficient and effective support systems.  November 2011  India-China Chronicle |41|