Think small to make it big
Pedigreed European brands – from Rolls Royce to BMW, from Armani to Marks and Spencer – all evoke awe-inspiring respect and admiration. These brands, marketed globally by a horde of European MNCs, also got visible support from governments in Europe under the premise that the larger these iconoclastic brands and MNCs grew, the more would grow Europe’s employment base. But as has now been evidenced empirically, contrary to common perception, MNCs and such brands have really not turned out to be the proverbial gold mines for European economies.
Far from it, as the situation stands now, multinational enterprises employ less than 1 per cent of the European industrial workforce; greater than 99 per cent of the workforce is employed in Small and Medium Enterprises (SMEs). That is a humungous difference and shows that SMEs are the real backbone of job creation in Europe contributing to two-thirds of all private sector rosters and more than half of business value-added in EU. Even in R&D and innovation charts, the place of SMEs in Europe is right at the top. They are mostly micro-firms providing jobs to a few more than a handful per unit; and yet, the spread of the SME segment is so wide that it has emerged as the previously unheralded citadel of the European economy. Especially now, when the chips are down, SMEs are coming out to be veritable saviours and sustainers of the employment landscape in the continent.
It’s not as if the Union did not realise this. In 2006, the Competitiveness Council (responsible for promoting SMEs in EU) set a number of goals to be achieved through SMEs (like simplifying processes of commencing a start-up, cheaper and faster start-ups, and larger volumes of start-ups); by December 2008, the targets were renewed with more ambitious benchmarking. The policy efforts also tried to reduce bankruptcy rates, and did away with impediments faced by budding entrepreneurs – like high entry barriers and taxation.
Even when seen globally, SMEs have a major role to play. Going by an OECD report, the SME segment accounts for over 50-55 per cent of the total GDP and employs around 60 per cent of workforce in developed nations while employing 95 per cent of total workforce in developing and under-developed countries. In many developed nations, SMEs were gradually made more competitive and productive by giving them topmost priority. Unlike what happens in India, SMEs were included in their national development strategy. Such initiatives allowed SMEs to gain momentum and attract huge investments. In UK, in 2001, a unique SME development policy was pioneered titled ‘Think Small First’ and was embedded with the national policy.
China, last month, launched its biggest over-the-counter equity trading platform to increase access to finance for domestic SMEs along with easing regulations for listing, as compared to regulations required by conventional companies to get listed on stock exchanges. To further improve the productivity of SMEs, China has developed policies to encourage establishment of SMEs and development of industrial clusters (replicating the success of SEZs) and has also professionalised the management and the service system in SMEs. Mittelstand (the German nomenclature for SMEs), is one of the most successful models of SMEs globally. The Mittelstand group comprises more than 3.5 million companies (around 99 per cent of all German companies) and accounts for 19% of total exports by German firms and is the prime reason for lower youth unemployment in Germany compared to many other European countries.
Ironically, a startup SME requires more investment in poor nations compared to a rich nation. An SME investor needs to invest 75 per cent of per capita GNI in mid-income nations compared to an investment of 10 per cent of per capita GNI in a rich nation.
It’s high time that our Planning Commission and MoF realise the enormity of SMEs and the vast population base that can be assisted by these enterprises. The focus for our policy makers, instead, is on FDIs, FIIs and multi-million dollar investment initiatives, which encompasses a minuscule section of our population. It’s no wonder that few would know who is the Union Minister heading India’s Ministry of Micro, Small and Medium Enterprises; or that such a Ministry even exists! When will our economic elites shed their pigeonhole outlook and compulsion with MNCs and glitterati and look beyond instead for more practical and mass-covering solutions!
SMEs can certainly provide livelihood to a sizeable number of unemployed youths not only in urban centers but in hinterlands as well. The growth of SMEs in villages on the basis of benchmarked industrial policies could be genuine resolvers for our marginalised sections, as these firms could be made culpable by law to provide their employees with minimum working conditions and wage levels; this could also stem the flow of rural migrants to Tier I cities and as well as extend them a healthy livelihood. The key to all this is the change of attitude by our government. It took Europe some decades to realise the potential of SMEs; it shouldn’t end up taking India many more to do the same.
The author is a management guru and director of IIPM Think tank