Pedigreed European brands – from Rolls Royce to BMW, from Armani to Marks and Spencer – all evoke awe inspiring respect and admiration. And that’s the case with many expensive European brands glittering in the lives of the rich and famous across the world since many decades (from Rajiv Gandhi’s classic Rolex to Saudi King Abdullah’ pristine fleet of Rolls Royces). 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 2/3rds 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. As big venture investments are hard to come by, EU is depending to a large extent on furthering the promise of SMEs and especially the potential of startups and entrepreneurships to take the economy forward and create jobs. It’s not as if the Union did not realize 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 doing away with impediments faced by budding entrepreneurs – like high entry barriers and taxation. The stress is now being given on certain specific business lines, like crafts and micro-enterprises, education and training entrepreneurship, audiovisual media, social economy and women entrepreneurs.
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. Similarly, in France, President François Hollande led the inception of a new bank called Banque Publique d’ Investissement (BPI) only for SMEs. When talking about SMEs, it would be a crime to ignore Mittelstand (the German nomenclature for SMEs), one of the most successful models of SMEs globally. Most German businesses are small and medium-sized companies and thus fall under the category of Mittelstand. Talking in numbers, Mittelstand 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 realize 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! In a scenario like ours, where the global recession has seriously impaired our economy and big ticket investments have almost dried up, it’s time we fall back on SMEs and take cue from the global lessons.
It makes me wonder, if Europeans can do it with SMEs, why are Indians so dependent on FDIs and big ticket investments? It’s true that SMEs cannot match the salary benefits provided by MNC firms or big Indian conglomerates – but like I mentioned earlier, only a small proportion of our educated population is actually employed in these kind of corporations! SMEs can certainly provide livelihood to a sizeable number of unemployed youths not only in urban centers but in hinterlands as well. The burgeoning number of educated youths in our cities can find themselves a place in SMEs – but only if we really encourage their growth and imbibe them at the topmost level in our industrial policy. In the rural belt, promoting SMEs is now of paramount importance. Farm workers are generally most deprived and are in the marginalised sections of our socio-economic backdrop. They are robbed of standard benefits and concepts like minimum wage rights are literally unheard of. The growth of SMEs in villages on the basis of benchmarked industrial policies could be genuine resolvers to this issue, as these firms could be made culpable by law to provide their employees with minimum working conditions and wage levels. Standard SME policies must be incorporated and implemented specifically in the agriculture, horticulture and non-forest produce segments; 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.
- 13 June 2013 |
- Dr. Arindam on Indian Economy