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How competitive are Chinese and Indian SMEs in a globalized economy?

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ManufactureIn the newly developing or newly industrialized countries, SMEs generally employ the largest percentage of the workforce and are responsible for income generation opportunities. These enterprises can also be described as one of the main drivers for poverty alleviation. In the manufacturing sector, SMEs act as specialist suppliers of components, parts and sub-assemblies to larger companies because these items can be produced at a cheaper price compared to in-house production of the same components. However, the input of poor quality products can adversely affect the competitiveness of these larger organizations.

Because of the globalization of markets, technological advances and the changing needs and demands of consumers forced the nature of competitive paradigms to change continuously. These changes drive firms to compete along different dimensions such as designing and developing new products, adopting smart approaches to manufacturing, implementing quick-to-market distribution, purchasing cutting-edge communication and developing appropriate marketing strategies. Superior manufacturing performance leads to competitiveness with most studies reporting that an organization's competitiveness can be measured within particular financial parameters.

Challenges ahead for SMEs

Global competition confronts the majority of purely domestic SMEs, whose products and sales are extremely localized and/or segmented. Trade liberalization increases the capacity of well-established foreign manufacturers and retailers to penetrate both remote and underdeveloped markets. Against this development, local businesses find it increasingly difficult to survive or even maintain their current position in their respective markets.

In such a demanding environment, the capacity of a firm to maintain reliable and continually improving business and manufacturing processes is critical to ensure long-term sustainability. Firms are frequently oriented towards serving local niches or developing relatively narrow specializations. These enterprises often operate under the constraints of scarce resources, a flat organizational structure, a lack of technical expertise, a paucity of innovation, reduced intellectual capital and the like. The flat structure of SMEs leaves employees frustrated because they are often unable to realize either their short- or mid-term career goals. In this setting, enterprises find it difficult to employ and retain high-calibre staff.

Major constraints in the competitiveness of SMEs are access to adequate technologies, excessive costs of product development projects, a lack of effective selling techniques and limited market research. In addition, other constraints include an inability to meet the demand for multiple technological competencies, information gaps between marketing and production functions, and lack of funds for implementing software such as ERP systems.

With the exception of a few top-performing businesses, the majority of SMEs in China do not possess sufficient self-accumulated capital to meet their capital requirements. As such, it appears that a finance gap exists for Chinese SMEs, which limits or constrains their potential for growth. In 2006, Ernst and Young identified additional challenges that include weak intellectual property protection, making capitalizing on innovation difficult. A shortage of management talent, underdeveloped technology transfer systems and lack of stability in the regulatory environment are also hurdles for SMEs.

Constraints on Chinese SMEs - like the low level of technology, a lack of skilled workers, the low level of management expertise, the lack of access to international markets, unsupportive legislations, ineffective incentive policies, and lack of financing - are constant headaches for SME managers. In India, managers of SMEs face major pressures to reduce costs, improve product quality, and deliver goods and services on time. Moreover, Indian SMEs operate generally in an unsupportive environment.

“Cultivating existing relationships and building new ones with other SMEs as well as stakeholders up and down the supply chain will help improve the competitiveness of SMEs and enhance their sustainability.”

Promotional policies for SMEs by Indian Government

India has evolved as an extensive institutional network over time for the promotion of small scale industries (SSI). This network extends from the national to state and district levels. Different institutions are Small Industries Development Organization, Small Industries Service Institutes (SISIs), National Small Industries Corporation, National Institute of Small Industries Extension Training, Small Industries Development Corporation and State Financial Corporation and District Industries Centres. These institutions assist small firms in marketing, exporting, importing, adopting technology and the like.

To meet the challenges of international competition and to promote exports of SSI products, the following promotional schemes are being implemented:

  • Small Industries Development Bank of India implements schemes for technology development and modernization of SSI units.
  • SISIs organize workshops on ISO-9000 certification and awareness about quality.
  • Establishment of tool rooms helps in providing tooling, dies, moulds and fixtures to small-scale units at a very low price to enable firms to produce quality goods to meet the requirements of the markets.
  • Process-cum-Product Development Centres take up jobs from SSIs for specific product development as well process development to improve the quality of products, reduce cost of product and enhance marketability of goods.
  • The government helps enterprises market their products by organizing international exhibitions, sponsoring delegations from different SSI sectors to visit various countries, and by providing pertinent information related to sales opportunities available in international markets.
  • Export promotion from the small-scale sector has received the highest priority from the government – every policy formulated for achieving growth in exports have a number of incentives available to small-scale exporters.
  • With a view to encouraging the small-scale units to produce “quality goods”, National Awards for Quality Products are given to outstanding small-scale units.
  • A new scheme for technology upgrading for industrial clusters has recently commenced. The scheme includes a diagnostic study of the clusters, the identification of technological needs, types of technological interventions and the wider dissemination of information and technology within the clusters. Recently, the Indian Government raises the capital subsidy given to SMEs by 15 per cent for technological upgrades.

Promotional policies for SMEs by the Chinese Government

In China, the focus of policies in the mid-2000s was to improve the operating environment of SMEs. The Chinese SMEs Promotion Law, which came into effect in 2003, was a milestone in policies and laws specific to SMEs. It clarified the status of SMEs in the national economy and the responsibility of the corresponding government departments. According to this law, the government would support firms actively, improve the quality of service for SMEs, create an environment where enterprises could compete fairly, and promise to encourage the development of SMEs with more effective policies, especially in the fields of finance and taxation.

Throughout this latest in the string of reforms, by 2006, China placed an emphasis on proactively supporting the development of SMEs. The main mission for the government in this period was to implement the SMEs Promotion Law, which seeks to improve policies and measures for development, remove institutional barriers, create a level playing field, promote scientific and technological innovations, and upgrade and optimize the industrial structure to enhance the overall quality and competitiveness of SMEs. Due to these reforms and policies, Chinese SMEs have grown quickly in size, number, financial status and profitability.

During this Promotion Law period, two factors played decisive roles. The first factor was the speedy development of the township enterprises. Most of township enterprises were small to medium in size and therefore, became a key force in driving the development of Chinese SMEs. The second factor was the rapid growth of non-public sector of the economy, notably the swift emergence of privately owned SMEs.

Some of the recent initiatives taken by the Chinese government to promote SMEs include:

  • Income tax policies for small enterprises – the government lowered the tax rate from 33 per cent to 18 per cent for those enterprises with an annual profit of less than RMB 30,000 (approximately USD 3,600), and to 27 per cent for those with an annual profit of between RMB 30,000 and RMB 100,000 (approximately USD 12,000).
  • Taxation policies to promote employment – if a new urban job agency in its first year of operation find jobs for urban residents, of which more than 60 per cent are unemployed workers, the agency is eligible for an exemption from business income tax for three years.
  • Taxation policies for high-tech enterprises – high-tech enterprises are exempt from enterprise income tax for two years, counting from the year they begin operations.
  • Taxation policies for service industries – for new enterprises engaged in transportation, post and telecommunications, consultation, information and technological services are all exempt from income tax for one year from the date of establishment.
  • Fiscal policies – since 1999, the Ministry of Finance's innovation fund for technology-based SMEs has supported and encouraged technological innovations. In addition, financial and credit policies proactively support the business initiatives of SMEs.

Strategy development for competitiveness

SMEs in both countries today face tough and challenging times in improving performance. The factors of cost, quality, product range and delivery of services are important areas for development and improvement. To sustain a fair level of competitiveness in both the domestic and global markets, SMEs must strive to utilize information and communication technologies to reach the right markets in cost-effective ways. SMEs in both countries should concentrate on developing HR initiatives and implementing quality improvement techniques.

Part of this process involves improving management talent and techniques as well as improving the level of equipment, technology and innovation capabilities within Chinese and Indian SMEs. In addition, cultivating existing relationships and building new ones with other SMEs as well as stakeholders up and down the supply chain will help improve the competitiveness of SMEs and enhance their sustainability. Improving upon management styles, developing new sales strategies and using cutting-edge marketing methods will also improve the competitiveness of SMEs in both countries. However, the governments of India and China should continue to provide and develop further efficient administrative and legal institutions, quality infrastructure and reduce bureaucratic hurdles at every opportunity.

June 2011.

This is a shortened version of “The competitiveness of SMEs in a globalized economy” which originally appeared in Management Research Review, Volume 33, Number 1, 2010.

The authors are Rajesh K. Singh, Suresh K. Garg, and S.G. Deshmukh.