Globalisation and SMEs

What has been the impact of globalisation on small and medium sized enterprises? New Delhi-based Prastut Consulting conducted a study during the CII India Global Summit of SMEs  held in November 2004, and found that more and more SMEs are preparing to go global.

In the new age of globalisation, size does not matter. Small and medium-sized enterprises (SMEs) are often hailed as being drivers of economic growth. Globalisation is characterised by an increase in cross-border strategic alliances, mergers and acquisitions (M&As) and other types of business networking. This presents new international opportunities for SMEs. Cross-border business networking allows SMEs to expand their markets and distribution channels,  realise economies of scale and scope in products and processes, and provides opportunities for sale and licensing of technology-based assets. Undoubtedly, governments too can enable SMEs to realise the benefits of global restructuring by facilitating in providing a conducive business environment that is open towards foreign investment and trade. Small firms that offer niche products and have access to advanced technologies are benefiting by becoming partners in international strategic alliances and cross-border mergers and acquisitions. Some have also turned into specialist suppliers to multinational enterprises (MNEs), and are participating in actual and virtual business networks at a global level.

However, not all SMEs have been able to grab the opportunities that globalisation offers. The extent to which SMEs have integrated into the global economy varies significantly from one sector to another. While small firms in traditional services still predominantly serve local markets, some, especially knowledge-based small firms, have been extremely active in cross-border strategic alliances through the 1990s. In the past decade, there have been at least 2,400 international alliances involving SMEs. The most prominent alliances have been in knowledge-based sectors such as software, telecommunications and computer-related services. SMEs in pharmaceuticals, particularly small biotechnology firms, have also been very active in global markets. Although there have been some cases of alliances between SMEs, most alliances involve both large and small firms.

CII-Prastut Study

The opportunities available to SMEs have never been greater. Small companies that are enterprising, innovative and nimble are able to move faster than bigger companies and the SME sector in India is beginning to recognise this fact. In November 2004, the Confederation of Indian Industry (CII) organised  the India Global Summit of SMEs which was attended by more than 300 delegates, representing Indian as well as foreign SMEs. The Summit focused on the future development and growth of SMEs and discussed key issues such as enabling policies, the role of finance and innovative measures for risk sharing, value addition through information and communication technology and global outsourcing opportunities. Prastut Consulting Pvt. Ltd. conducted a survey among the participants of the study to gauge their perceptions about  the opportunities and barriers that face SMEs as a result of globalisation. Respondents included SMEs from several sectors, including garments and leather, food processing and packaging, engineering products, electrical and electronic components, drugs and chemicals, IT and ITeS, auto components, plastic and rubber and textiles. The sample (59) comprised 29 per cent companies with an annual turnover of less than Rs 100 million, 19 per cent companies with a turnover of between Rs 100 and Rs 300 million.

One World, One Community

Perceptions about globalisation differ from one sector to another. For some globalisation is synonymous with "using only the most efficient means of production to deliver best quality products to consumers". For others globalisation is "the challenge of producing quality products at the cheapest price". It is also perceived to be a process that has led to the "expansion of the boundaries of the business" and resulted in "sourcing from the least expensive buyer from across the globe". As Arjun Batra, chairman Rassik Woodworth, an export organisation, puts it, globalisation is when national boundaries cease to matter and "you learn to live like one big community, that's when you can preserve and utilise your resources."

Nearly 66 per cent of the participating SMEs perceive globalisation to be a free flow of trade based on the economic principles of demand and supply. Most of the respondents  perceive globalisation to benefit "sale" of products rather than "sourcing" of resources.

Impact of Globalisation

Manufacturers feel that the most significant impact of globalisation has been the rise in competition in the industry. The other significant impact is the increase in the bargaining power of buyers. Though globalisation has led to opening up of new markets and new opportunities, these benefits have been offset by the increased competition and the greater bargaining power of buyers.

Industry Readiness

Some industries, more than others, have been better prepared to face the impact of globalisation. The auto components industry for instance has been among the first to be globalised, which has meant access to the best technologies, export channels, use of best means of production. As a result the whole world is a marketplace. In the telecom industry too, globalisation has ensured high awareness about technology. Strategic tie-ups are being used by telecom SMEs to tackle Chinese competition. The telecom sector is prepared to 'globalise' on all key aspects, including technology, systems, human resources as well as products. For the light engineering industry, globalisation is a recent phenomenon which has resulted in lowering of prices of products. Many SMEs who were not prepared for the onslaught of cheaper imports suffered as a result. Export-oriented companies have responded to globalisation over a period of time. The packaging industry is exploring new markets. A majority of the SME participants (47.5 per cent) feel that globalisation is a new phenomenon; 29 per cent feel that they are somewhat globalised; 8.5 per cent are of the opinion that they are completely globalised (mainly IT companies) whereas13.6 per cent feel that they are not yet to go global (mainly steel and pharma SMEs).

Some organisations (79 per cent) say that have developed products that are globally competitive. Nearly 61 per cent have set up the necessary infrastructure for information and communication. However, technology acquisition (51 per cent), training of human resources to deliver to global clients (47 per cent),  development of vendors and sources of raw material (53 per cent) and setting up of systems to optimise processes needed to be globally competitive (53 per cent) are areas where SMEs are still lagging behind.

Changing Image of India

SMEs in this sector feel that globalisation has led to a new-found recognition and appreciation of made-in-India products. India's successes in knowledge-based industries has created a new perception of India - that of an "intelligent country" - and this has positive implications for business development say Indian SMEs. On the other hand, in the hype about India's capabilities in the service sector, the manufacturing prowess of the country has not been highlighted. This poses a barrier for many made-in-India products in the global market.

Factors that Support Globalisation

Free flow of information, breaking down of technological barriers, uniform quality of products in different countries, homogenity of customers and their needs across countries, strong capital markets in the SME country, economies of scale, mergers and acquisitions, availability of trained manpower globally and infrastructure are cited by SMEs as the key factors that support globalisation. Government policies, in some sectors such as information technology, have aided in globalisation of SMEs. In the light engineering sector, cost-efficient labour has contributed towards competitiveness of Indian products in the global market. Apart from these quality and delivery commitments are key to successful integration into the global economy.

Barriers to Globalisation
Labour reforms are a must if Indian companies are to benefit from globalisation, feel SMEs. Despite lip service to the single-window facility by the Indian government, the situation on the ground has not improved. SMEs have to depend on a network of brokers and agents which poses huge barriers to competitiveness of these companies. The light engineering goods industry is particularly concerned about this issue. Export policies in the packaging industry are also not conducive for a globalised market. Several issues that continue to pose barriers to globalisation include lack of infrastructure, ineffective legislation, WTO issues, and lack of an enabling environment. SMEs are of the opinion that there needs to be a body that can represent their views and concerns and interface with policy makers. Faster resolution of issues would create a more conducive environment for SMEs to integrate into a global market. Export related infrastructure is a significant concern that needs to be addressed urgently.

One of the key barriers to globalisation is the SME's lack of exposure to global markets, the needs of customers and awareness about market conditions. Information about new markets, consumers and opportunities that exist is a felt need gap for many SMEs and this needs to be addressed through interactions with embassies, workshops and market research.

Conclusion

SMEs are aware of the advantages that globalisation has to offer. But some barriers, including infrastructure, lack of a facilitating environment in terms of  government policy and inadequate development of human resources, have prevented SMEs from adopting the globalisation route. The emphasis among SMEs is on technology, improving quality and creating globally competitive products.

[Icfdc.com, 20 December 2004]