Economies worldwide need to capitalise the positive aspects of globalisation and mitigate its negative consequences. Given the right impetus and attitude, SMEs can be the growth engines of the Indian economy, says K. Rangarajan, Head, Centre for SME Studies, Indian Institute of Foreign Trade

Globalisation has many faces. However, it is easily comprehended in economic and financial terms. In this sense, it deals with the broadening and deepening linkages of national economies into a worldwide market for goods, services and capital. Perhaps the most prominent face of globalisation is the rapid integration of production and financial markets over the last decade. As a result of advancements in telecommunications and information technology, the last decade has seen dramatic increases in trade linkages and cross-border capital flows, as well as radical changes in the form, structure and location of production. It has to be underscored that the process of globalisation and liberalisation has assisted firms in operating across national boundaries, thereby affecting the pace and the whole process of industrial development. Companies have increasingly realised that the opening of global markets through trade liberalisation is not only making it easier to extend their operations beyond national boundaries, but also providing greater potential for expansion and growth. However, the benefits of trade liberalisation are not uniform across industries or sectors or geographies. This is because the situation requires competitive capacity and additional resources for investment, in addition to technological and marketing linkages to promote rapidly-changing and high-quality products and services that call for suitable global production networks.

SMEs in a fix

Despite the adverse effects of the economic crisis in 1997, countries worldwide continued with their commitment to liberalisation and globalisation. Small and medium enterprises (SMEs) emerged strong at this time and today account for a large percentage of industrial establishments in Asia. Currently, these SMEs are facing a serious shortage of capital, markets and professional management, to name but a few problems.
To help out, India has started and continued special programmes for the development and technology upgradation of SMEs. These programmes provide emphasis on the development of physical infrastructure, especially public utility, research and development and technicaloriented infrastructure, which are particularly needed by the SMEs and human infrastructure. Moreover, efforts to move from resource-based and labour-intensive types of industries to skilland knowledge-based and medium- and hightechnology industries have also continued along with liberalised foreign investment policies to attract more foreign direct investment and portfolio investment.
As globalisation is likely to continue irrespective of the current global economic slowdown, the implications for industrial development and restructuring in line with the requirements of globalisation are wide-ranging and include both opportunities and challenges. In the current context, a critical long-term policy challenge is how to manage globalisation and create new sources of growth by increasing SME exports. The enormous potential for SMEs to contribute to economic development will be undermined if SMEs are not able to take advantage of the opportunities and competitive pressures that a global economy brings. The main issue that the government faces is how to assist them to be competitive.

Solutions in sight

Evidence suggests that a high percentage of net job creation and a much long-term economic dynamism are attributable to a small proportion of SMEs that are growth oriented and entrepreneurial. Providing these SMEs with international opportunities is important because they are potentially a major source of long-term sustainable economic growth. In many cases, most of the products made by these SMEs have a strong "services" element; an important implication, therefore, is that internationalisation requires some form of physical presence through foreign direct investments, or by alliances and franchises.
In theory, open regionalism will open further opportunities for increased trade, and thus for even more contribution to economic growth. In practice, there is a long way to go to free trade. But inroads have been experienced in terms of reduction of trade impediments to these SMEs. The main issue for SMEs is how to identify and take advantage of opportunities and how to resolve or avoid impediments quickly and cheaply.
Mentioned below are issues that need to be considered and addressed.

Access to markets Relatively minor impediments can be a major barrier to SME international trade. These may be attributable as much to cultural differences and business practices, as to intentional government policy.

Simplified custom procedures Standardising customs procedures and allowing electronic submission and handling of documents has been effective in reducing transactions costs associated with SME international trade.

Human resource development SMEs engaged in international trade need better management skills, especially in areas of risk management, cultural understanding, export management, and trade financing.

Swift resolution of disputes SMEs cannot usually afford to engage in prolonged and expensive legal disputes.

Trade finance and credit guarantee SMEs frequently have difficulty in obtaining trade finance and credit guarantees at rates approximating the real risk. Some economies have special SME credit providers or programmes to help address the problem.

Trade facilitators A number of government, public and other non-profit associations play an important role in facilitating SME trade. For example, Export Promotion Councils established as autonomous bodies under the Ministry of Commerce and Industries, Government of India, play an important role in linking SME suppliers to larger markets. Even SMEs themselves can often act as specialist facilitators to other SMEs via networking groups.

Export promotion and assistance Many economies in the region provide export assistance to increase the competitiveness of their SME exporters. It is possible for these measures to have distorting effects on the pattern of trade and resource use.

Tariff and non-tariff restrictions Undesirable tariffs and non-tariff restrictions on their products must be removed to enhance the export potential of SMEs as they are most vulnerable to trade protectionism and exchange rate fluctuations. With current developments, there is a need for India to set up focal points for SMEs at the national level that are linked to other similar focal points in neighbouring countries in the region and even outside the region. Such linkages provide for quick and efficient information exchange on trade and investment opportunities for SMEs. Such focal points could also provide training and information on sources of technology and finance and act as instigators for setting up and strengthening linkages among SMEs under cooperative marketing, joint manufacturing arrangements, and linkages of various kinds between SMEs and large enterprises, both domestic and foreign.
India should also encourage a comprehensive set of selective support measures for linkages between SMEs and large enterprises. Business associations should also figure importantly in facilitating such linkages, as well as networking of SMEs, as this can play an important role in supporting SMEs in marketing their products. Networking is of many types. However, vertical (aimed at finding complementary activities in the development of a new product) and knowledge networks (associations geared at solving a common technology or market information) are more relevant in the current context. Currently, the business associations mainly function as ‘bargaining–nodes’ with the government for incentives and subsidies.

Need for attitude reform

Furthermore, the globalisation process has called for a drastic re-orientation in terms of domestic economic policy issues, calling for a change in the government’s role towards SMEs. One of the principal measures in support of SMEs would have to involve the attenuation of macroeconomic and sectoral policy biases against SMEs that have accumulated over the years under the protectionist regime. The elements of these policies and their consequences are fairly well known. Trade and exchange rate policies in support of rapid industrialisation efforts often give rise to overvalued exchange rates that make the exports of SMEs non-competitive in international markets. Tariffs and taxation are important policy elements in all countries. The fiscal policies of India under the Reserve Bank of India have been seen as saviours in tough times, including the current global financial meltdown. This needs to continue without aping the over-enthusiastic or shallow policies of the West or the East.
SMEs should also re-orient themselves towards growth rather than remain as small units and try to protect themselves with the incentives and subsidies provided by the government.

Finally…

• At the national policy level
Facilitate to create schemes for improvement of infrastructure and upgrading of processing technology to benefit SMEs
Use the updated databases of SMEs along the value chain to implement target-oriented schemes and also to measure efficacy

• At the regional and sectoral levels
Encourage collective action to tackle problems common to SMEs, including marketing. Promote establishment of proactive business associations at sectoral and cluster levels

• At the enterprise level

Stimulate greater management commitment to process efficiency, cleaner production and social responsibility; and
Along the supply chain, developing new relations and partnerships with clients and speeding up the cycle time of transactions. Linking SMEs within the total business network should be the thrust

SME Whitebook • 2009-2010

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