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MSME Growth: Five Questions to Ask

‘If we want to know what a business is we have to start with its purpose. And its purpose must lie outside of the business itself. In fact, it must lie in society since a business enterprise is an organ of society.’

~ Peter Drucker, The Practice of Management

In 2001, two economists from World Bank, Simeon Djankov and Gerhard Pohl, created an index to measure how easy it is for a business to start, get permits, pay taxes, enforce contracts and exit. It was a ‘hit’! Their ‘Ease of doing business’ index has been keenly tracked by politicians, businesses, researchers and media; and has become an easy measure by which the business environment is judged. Economies — at national and state levels — compete with each other to improve their rankings. The underlying assumption is that improving the regulations that drive the rankings will lead to economic growth.

Good regulations: and in some cases, government intervention and support, are needed for growth, but they are not sufficient. To understand what drives — or impedes — the growth of MSMEs and industrial clusters, we have to ask five further questions.

How do grass-root entrepreneurs emerge? Stories of entrepreneurs are popular across the world. Most of these stories tend to be of people with big ambitions — Steve Jobs (‘Do you want to sell sugared water or do you want to change the world’[1]), Elon Musk (‘Make humans a multi-planetary species’[2]), to name a few. But the stories of entrepreneurs who keep the lights on, who keep the economy going by supplying the right products and services at the right time aren’t popular. Their stories are important too; because they represent the process through which a nation creates wealth. Typically, these entrepreneurs learn the basic technical and business skills by working in other micro or small businesses and eventually start on their own, often with the blessings of their employers[3]. In Tuticorin transport cluster, for example, many truck and fleet owners started their careers as helpers and drivers. Eventually, as they learnt the trade, they bought their own trucks, and gradually expanded their fleet. In Sivakasi, similarly, a typical printing press owner would have learned the basics of the printing business while working with another printer. It takes a cluster to bring up an entrepreneur.

How do businesses compete, cooperate and fill the gaps in the value chain? In his 1998 essay, Michael Porter writes [4], ‘Clusters are conducive to new business formation for a variety of reasons. Individuals working within a cluster can more easily perceive gaps in products or services around which they can build businesses.’ This characteristic provides the breadth and depth to a location. Sivakasi, a town known for fireworks, matches and printing industry, for example, started with fireworks, after the early entrepreneurs figured that the dry weather of the region would be conducive for making the product. Simultaneously, a related industry, matches took root and grew. Soon, some entrepreneurs saw an opportunity to supply labels for fireworks and matches and set up printing presses. Eventually, printing industry went beyond supplying labels to fireworks and matches industries and started producing a whole range of products including cheque books for banks and diaries for consumers. A few years ago Srinivasa Fine Arts, one among the printers, created diaries that sold at Rs 50,000 apiece, an indication of the value customers see in what many might dismiss as a humble product [5].

How do clusters attract and retain talent? The recent lockdown highlighted the dynamics between the workers and MSMEs in the various clusters [6]. In the early stages, a cluster gets going by employing local talent pool. However, as the companies grow in number and size, they depend on workers from outside. Some of the assumptions that hold good for local labour don’t hold good for non-local workers. Their costs, social lives tend to be different. Similarly, as micro-businesses grow to small businesses and small businesses become medium-sized businesses, there is also a growing need for formalisation.

What are the sources of trust within a cluster? In Trust, The Social Virtues and The Creation of Prosperity, Francis Fukuyama highlighted the role of trust (which enables people to conduct businesses informally and flexibly) in the prosperity of a society. In India, some of that trust has come from its community dynamics, as Harish Damodaran mentions in his book India’s New Capitalists: Caste, Business, and Industry in a Modern Nation. Similar dynamics have played in some of the industrial clusters. For example, the Nadar community plays a key role in the Sivakasi fireworks cluster, while Gowndar community plays an important role in Tirupur. In a study[7] on the knitted garment industry in Tirupur, Abhijit Banerjee and Kaivan Munshi found very large and systematic differences in levels of capital stock and the capital intensity of production in firms owned by people from two different community groups — Gowndars and outsiders, and these differences were explained by their respective access to capital.

How do banks and financial institutions relate to businesses? In Indian Models of Economy, Business and Management, P Kanagasabapathy writes, ‘Indian businesses, especially at the non-corporate level, largely function on the basis of faith and goodwill. Whenever an urgent need for finance arises, the businessmen always turn to other businessmen for help. They borrow from others, either with interest or without it, depending on their relationships. Usually, no security is demanded. It is completely the faith, based on personal relationships that enable the lender to lend funds. Such monetary transactions are there in almost all the places in different businesses across the country.’ The other side of the coin is the huge credit gap that is not being fulfilled by banking and financial institutions. A 2017 report [8] by IFC estimated the total addressable credit demand from MSMEs at Rs 37 trillion, 3.4 times more than the credit available. There are lessons to be learnt from how banks have made inroads into the MSME segment even as they managed the default risk. In a study of banks [9], Prashant Salwan says some banks used intangible resources, such as customer relations and best management practices dissemination, to reduce risks and NPAs.


[1] Odyssey: Pepsi to Apple by John Scully [2] Making Life Multiplanetary, SpaceX [3] Yann Philippe Tastevin: ‘From Ox-Carts to Borewell Rigs: Maintenance, Manufacture and Innovation in Tiruchengode’ [4] Clusters and the New Economics of Competition, Michael Porter, Harvard Business Review [5] Business Line, Economic Times [6] Lockdown 3.0: Tirupur collectorate swarmed by migrant labourers for travel passes, New Indian Express [7] How Efficiently is Capital Allocated? Evidence from the Knitted Garment Industry in Tirupur [8] Financing India’s MSMEs — Estimation of Debt Requirement of MSMEs in India, IFC [9] Co-creation: An Exploratory Study of MSMEs & Large Banks in India by Prashant Salwan, by Abhijit Banerjee and Kaivan Munshi

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