What is the issue?
- The productivity of a firm increases with the efficiency with which labour and capital are utilised and it is naturally high for large-scale operations.
- So, small firms manufacturing products that can be mass-produced, is a bad model.
What is the most appropriate business model for small firms?
- The best business model available to small firms is competing on the basis of innovation-driven niche and differentiated products.
- According to general economic development theory, the 3rd stage is ‘innovation’-driven economies, where companies compete by producing and delivering new and different products and services by using the most sophisticated processes.
- But, India has a weak ecosystem for the development of such products.
What can we do to support small units?
- To start with, follow the example of Mittelstands, the innovation-driven SME based in Germany.
- Mittelstands contribute more than half of German economic output and corporate investment and are global leaders in in sectors such as machinery, auto parts, chemicals and electrical equipment.
- At the heart of Mittelstand success is a personalised ecosystem supported by government, academia and the private sector in terms of industry-ready innovations, skilled manpower and market development.
- Industry-ready innovation: Germany has a network of 67 research institutions which work in close coordination with Mittelstands, German universities, and the government.
- These research institutions complete 6,000 to 8,000 result-oriented contract research projects for immediate use by Mittelstand.
- It receives funding from the public sector and through contract research earnings. Such efforts are also backed by the government.
- Supply of skilled manpower: Germany’s apprenticeship system ensures that 80% of trainees in Germany receive a high quality of training in the Mittelstands.
- This way they employ about 28 million people which account for 60% of all German industrial jobs.
- Market development support: The German economics ministry implements high-quality market development programmes through the use of trade missions, research reports, buyer-seller meets, export credit and investment guarantee programmes.
Can the Mittelstand model be applied to any MSME sector?
- Micro units and the service sector must be removed from consideration as these are not ready for the transition.
- Micro and services sector units have not acquired the critical mass in terms of level of investments, availability of skilled manpower and use of technology to benefit from product innovation.
- Thus, the Mittelstand model can be applied only to manufacturing units in the small and medium sector.
What could be done?
- The Government currently has a number of programmes. Thus it helps MSMEs get credit from banks; it promotes productivity centres, testing, skill upgradation and training facilities etc.,
- The measure for assessing the efficacy of this system should be: How many new innovative products have been introduced by MSMEs in the past few years through the use of this system?
- We may consider consolidating this structure and benchmark each service with those provided by Germany.
- Tying up education institutions with local small and medium manufacturing units will help each unit introduce modern technology, management practices, and also make students more employable.
- On the regulatory front, setting up Export Single Window will allow a large number of units to export directly without getting bogged down by commercial and regulatory processes.
- Establishing an ecosystem on the German pattern will create a pipeline for the development of MSME-relevant innovative products which can be exported effortlessly.
Source: The Indian Express
