Integrating MSMEs in the GVC will help in creating millions of jobs, thereby leading to global growth.
MSMEs can double as incubators of innovation and facilitators in replication
MSMEs constitute over 90% of total enterprises in most economies and are credited with creating employment opportunities, new business models, increasing trade, and alleviating poverty through micro-franchising.
Role of MSMEs in the global economy
According to BSDC, sustainable business models could open economic opportunities worth $12 trillion and create 380 million jobs by 2030, with more than 50% being located in developing countries like India. During COVID-19, all sectors’ GDP sensed a drop, but the export trade sector in MSME was not affected. Instead, it increased significantly. As a result, the share of MSME in exports and impact on the global economy is growing rapidly and is expected to provide jobs to 120 million people.
Need for MSMEs in India
A large share of MSMEs is informal enterprises serving as a source of livelihood for the segment of the population lacking social protection, right to work, and decent working conditions. This informal employment needs to be supported by formalising MSMEs that will uplift the poor and marginalised populations, thereby increasing a country’s economy.
With over 63 million MSMEs contributing to 31% of GDP and 45% is the second-largest employer in India, which is still rising, requires adequate support from the government to increase the standard of living of Indian people (Economic Times,2021)
Significance of integrating MSMEs in the Global Value Chain(GVC)
According to the Global Partnership Financial Inclusion, formal MSMEs account for 45% of total employment in emerging economies. Across the globe, small businesses are significant drivers of growth, job creation, competition, and innovation. These are greater in developed economies than in developing economies, which leads to an interesting contrast in the contribution of MSMEs in developed and developing economy ecosystems. MSMEs are impacting GVC in two ways. First, MSMEs in the developed economies tend to focus increasingly on high-value adding activities like R&D, Branding, and Innovation. In contrast, the MSMEs in developing economies focus on low-value-adding activities like Manufacturing. With MSME-GVC integration, Indian MSMEs will gain a foothold in global markets by diversification, contributing to globalisation.
Impediments to GVC integration
• The majority of MSMEs across different industries are unable to identify their competitive strengths within the value chain, nor do they fully understand that this identification is important to optimise their participation in global value chains.
• Firms explicitly point to the lack of time and resources to understand the evolving global context and devise a market strategy.
• MSMEs stress that they do not have the critical dimension necessary to support adequate R&D costs and personnel training, particularly in situations involving increased participation in the GVC.
• Fulfilment of strict product and quality standards required for participation in GVCs is difficult and costly since they have to increase to private standards set by contractors that differ one from another. This makes the costs of compliance burdensome.
• To move up the value chain, MSMEs need to take up a larger and more complex set of tasks, ranging from contributing to product development to the organisation.
• The majority of MSMEs are unaware of the availability of technology solutions and tools that cater to their marketing needs.
• The majority of the micro-enterprises are yet to evolve into small and medium enterprises that do not have a Scale of economies to be on par with GVC levels and standards.
Toward a smoother integration of MSMEs into GVC
• Larger enterprises can incentivise MSMEs. For example, Multinational companies should demonstrate the value of a “sustainability premium” by paying a higher price for a product produced sustainably. They can encourage smaller firms in their supply chains to focus on sustainability standards. They can further benefit from investing in MSMEs to access new markets.
• Public Service Units(PSU) which can adhere to GVC values can support consortiums or collaboration models to support MSMEs
• Establishment of coherent and transparent regulatory frameworks from state and central governments
• Piloting and scaling up micro-credit and loan guarantee solutions
• Encouraging and facilitating universal access to ICT and basic infrastructure to enable MSMEs to close and even leapfrog informational and financial gaps
• State and central can encourage cluster development initiatives for micro and small industries
• Raising finances on alternative means, including private equity, can provide a trigger for MSMEs for faster, inclusive growth.
• MSMEs need to have a strong policy or support with specially designed certification procedures to be more inclusive in GVC.
The efficiency of GVC integration
MSME entrepreneurs, with their in-depth knowledge of the demands of local communities, have the ability to transform scientific and technical innovations into replicable development solutions. MSMEs can be not only incubators of innovation; they can also facilitate its replication.
Even though India has a high density of MSMEs, who have been consistently contributing to the growth of the Indian economy, there needs to be an extra impetus towards enabling Indian MSMEs to effectively integrate with global companies and contribute further towards Indian economic growth. The success of integration lies in the efficacy of Policy execution from the grassroots level, accompanied by awareness and extension.
MSMEs can be not only incubators of innovation; they can also facilitate its replication.
