The productivity of a firm increases with the efficiency with which labour and capital are utilisedand 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.
