Barriers to Innovation in Indian MSMEs

Innovation plays a critical role in shaping the industrial and firm competitiveness of any nation. Innovation is often discussed in the setting of developed countries, but the rise of emerging economies such as India has generated a new interest in understanding innovation in developing economies.

India is ranked very low in the global innovation index (81 out of 141 countries), which in a way reflects the low innovation capacity of Indian firms and Indian small and medium-sized enterprises (SMEs) in particular. The Government of India classifies SMEs as a part of the MSME (micro, small, and medium-sized enterprise) sector.

It is critical to ensure that SMEs in India remain competitive both nationally and globally. One of the principal determinants of SMEs’ competitiveness is innovation. Developing economies such as India face a formidable challenge in this regard due to limited government capacity to foster innovation support mechanisms. Modern concepts such as cluster development are often underutilized or ignored. Government policy—which touches upon virtually every aspect of innovation including access to finance, technology, market knowledge, and building of R&D and educational institutions—remains one of the most crucial factors in SME innovation.

India updated its Science, Technology and Innovation Policy in 2013. It is important to note that the policy has provided a big impetus to build an innovation ecosystem and to enhance the role of the private sector to do the same. The Government of India, under the Ministry of MSME, runs various schemes and programs to support technological innovation in Indian SMEs. The support extended by the government includes financial subsidy and incentives to buy machinery, file trademarks, and gain access to tools training, and expert advice, among others.

BARRIERS TO INNOVATION IN INDIAN SMES

To improve the innovation performance of SMEs, it is very important to understand the key barriers in the innovation ecosystem. The barriers to innovation are classified in six categories: people, financial, information, government policy, infrastructure.

The need for specialized skills in the form of scientists, technicians, or engineers is more apparent in the case of R&D innovations. Non-R&D innovations, such as organizational and marketing innovations, also require specialized skills and staff who are well versed in management and marketing practices. More than 85% of innovative small and medium firms see unavailability of skilled workers as a barrier to innovation, making it one of the foremost challenges in SME innovation. SMEs are generally unable to recruit a highly skilled workforce due to financial constraints and lack of adequate infrastructure. This includes internal management. The lack of the right internal management can adversely impact both the firm’s innovation capability and its overall performance due to lack of direction, rising inefficiencies, and absence of market focus, among others. More than 38% of innovative small and medium firms perceive internal management as a barrier to innovation. The situation demands more targeted capacity building programs focused on a company’s internal management and its relevance to innovation. There also seems to be a need for a system where SMEs have access to a pool of skilled people for conducting specialized work while addressing concerns about trade secrets.

Finance as a Barrier to Innovation- the financial barriers mainly involve the availability of internal and external finance and the cost of innovation. More than 87% of innovative small and medium firms see limited availability of finance from both within the enterprise and external sources as a barrier to innovation. The cost of innovation is a key barrier for more than 75% of the innovative small and medium firms. This clearly shows that financial constraints remain one of the biggest barriers to SME innovation. SMEs in India face a multifold and vicious circle of financial challenges in pursuing innovation. Firstly, the cost of innovation itself is high; secondly, SMEs lack the financial resources to implement innovation; and lastly, access to finance from external financial institutions seems to be limited, creating further bottlenecks. Therefore, there is an urgent need to address this formidable challenge by bringing down the cost of innovation and increasing the availability of innovation capital through banks and other support mechanisms.

Information as a Barrier to Innovation- Timely access to valuable information is critical for SMEs to gain strategic advantage in pursuing innovation. The inability to access key market information can seriously impair a firm’s performance. The information barriers refer to access to information on technology and markets. More than 75% of the innovative small firms and 86% of the medium firms face barriers pertaining to technology information and information on markets in India. This points toward another serious challenge, the need to upgrade Indian SMEs’ access to information about markets and technology. The inability to access such information not only affects SMEs’ global competitiveness and exports but also limits their domestic market share. There is a need for the government to take adequate steps, maybe in partnership with local industry associations, to disseminate key market and technology information while focusing on strengthening SME–market linkages.

Government as a Barrier to Innovation- Government policy and the government in itself exert a strong influence on the innovation capacity of SMEs. The government has a critical role to play in every sphere of innovation including access to finance and technology, capacity building and human resources, market linkages, availability of research facilities, and access to key information, among others, via different policies and schemes. It would not be wrong to say that the government is the single biggest factor governing the innovation ecosystem of SMEs, especially in the case of developing economies such as India. Nearly 68% of the innovative small firms and ~75% of the innovative medium firms see government policy and meeting government regulatory requirements as a barrier to innovation in India. The perception of the government as a barrier, rather than a facilitator, for such a large number of innovative SMEs is a very serious issue. The Indian innovation survey does not give any detail about the exact responses and reasons for this perception. India is still ranked 130th globally in the World Bank’s ease of doing business index for 2015, which reflects the burdensome regulatory environment in which SMEs operate. The high costs involved in meeting a large number of regulatory requirements tend to negatively affect the innovation capacity of the firms. The role of the government and the likely impact of its MSME policies on SMEs’ innovation is discussed in detail in the forthcoming sections.

Infrastructure as a Barrier to Innovation - Availability and access to infrastructure is crucial for R&D-based innovations. The ability of a firm to use laboratories and research facilities inside and/or outside the premises exerts a significant influence on its capability to develop R&D innovations. Close to ~50% and ~60% of the innovative small and medium firms, respectively, do not have access to adequate infrastructure and test labs and see it as a barrier to innovation. The limited availability of shared testing laboratories and research facilities is also seen as a barrier to innovation by more than ~35% of innovative small and medium firms. This points toward the acute shortage of research infrastructure, including testing laboratories, for SMEs in India. It is unlikely that SMEs would have sufficient financial muscle to invest in the development of quality in-house research and testing laboratories. Therefore, it is imperative for government and industry to facilitate the development of more shared research and testing laboratories, especially in key manufacturing clusters.

Market Factors as a Barrier to Innovation- Market factors have an important role to play in innovation. Market characteristics such as competition, protectionist nature, dominance and monopoly, and demand, among others, affect a firm’s ability to innovate, especially product- and market-related innovations. Of the innovative small and medium firms, 50%–58% see protectionist measures for introducing new products and processes and lack of new opportunities to enter niche markets as barriers to innovation. More than half of the innovative small and medium firms also face the barrier of uncertain demand for innovative products and services. Given the uncertain demand, SMEs would be reluctant to invest their resources in developing new products and would focus instead on improving their production and quality processes. Innovative products generally are aimed at a niche market that is often not clearly visible or present, and hence tackling these market-related challenges becomes very important. This also greatly hampers product and design innovation, which at times plays a critical role in elevating the exports and global market share of the SMEs. The uncertainty in demand again points toward the weak market linkages and thin integration of Indian SMEs in the global value chain. The protectionist nature of the market, due to either a monopolistic nature or intellectual property rights (IPR) issues, presents a tough challenge for SMEs. IPR in general remains an area of concern and development among Indian SMEs. There is a need to focus on capacity building programs to train SMEs to identify market potential and devise an appropriate entry strategy while addressing the IPR issues.

SCIENCE, TECHNOLOGY, AND INNOVATION IN THE INDIAN CONTEXT

The use of the word “innovation” in the national science and technology policy lexicon is rather new. India’s Scientific Policy Resolution 1958 sought the “cultivation of science and scientific research in all its aspects.” The focus was on “early and large scale development of science and technology” for the wealth and prosperity of the nation. The 1983 Technology Policy Statement focused on the need for technology competence and self-reliance. It also mentioned technology acquisition and transfers, as well as a critical facet that was hitherto missing from policy debate in India—implementation. The idea of innovation was inserted in the Science and Technology Policy 2003 with a view to strengthening the national R&D infrastructure and creating a “national innovation system.” Innovation implies science- and technology-based solutions that are successfully deployed in the economy or the society. Also mentioned was the need to develop and leverage India’s traditional knowledge, as well as to generate and manage India’s intellectual property resources. Monitoring for speedy implementation of the policy was also given weightage.

The most recent Science, Technology and Innovation (STI) Policy 2013 in India is the most comprehensive policy statement from the point of view of India’s STI policy framework. It mentions the deepening of the science and technology system in India, and recognizes that the “instrument of policy” has not given due importance to innovation. India accordingly declared 2010–2020 as the “decade of innovation” and took the important step of establishing the National Innovation Council. It also alludes to the need to understand that science, technology, and innovation are not disconnected from each other—they need to be integrated for new value creation. In addition, the policy focuses on creating an innovation ecosystem that is inclusive, and it promotes mechanisms like “small idea–small money” and “risky idea funds” to support incubators. The policy also talks about “STI driven entrepreneurship” with viable and scalable business models. Another important point is the policy’s focus on promoting academic and industry linkages. In terms of the manufacturing sector, it emphasizes high-tech exports while recognizing the low R&D intensity among SMEs.  Several positive changes that were envisaged in the STI Policy 2013 have been realized. These include an increase in India’s gross expenditure in research and development from under 1% of GDP in 2013 to 2% of GDP, which had been a national goal for some time before the policy was in place. 2 For this to happen, the policy expects private sector R&D investment to at least match public sector R&D investment, compared with a ratio of around 1:3 in 2013. India’s considerable progress is reflected in global rankings; it ranks 9th in the number of scientific publications and 12th in the number of patents filed. While these show considerable maturity of the science and technology ecosystem, the fact remains that the Ministry of Science and Technology understands the technology landscape in quite broad terms.

ENABLERS OF SME INNOVATION

Innovation has many enablers that are related to both internal and external environments. The internal environment covers the company’s operations, market strategy and vision, skills, creativity, and quest for innovation, among others. The external environment includes industry factors, policy environment, support mechanisms, availability of skilled labor, etc. The intensity of the effect of internal and external environmental factors on innovation is likely to vary depending on the stage of economic development of the country, industry maturity and sophistication, and direction of government policy. The data from the India Innovation Survey suggest that the internal environment of SMEs is the key enabler of innovation. The majority of the innovative SMEs use internal sources for pursuing innovation. The acquisition of new machines as the most dominant form of innovation can be seen as a result of SMEs’ internal push and motivation to improve productivity. Among non-R&D innovations, the significant use of organizational and marketing innovation showcases the entrepreneurial spirit among Indian SMEs. To add to that, internal financing remains the major source of innovation financing among SMEs in India. These facts and observations infer that the intrinsic zeal to innovate and remain competitive in the market plays a major role in innovation for India’s SMEs. The role of internal factors becomes even more crucial in a scenario where government policy in itself is seen as a major barrier to SME innovation, as it is in India. This also suggests that innovation may always persist in some form or other independent of the external environment. On the external front several challenges are observed. These include access to requisite information, policy gaps between requirements and what is offered, and the magnitude of the challenge from the government’s viewpoint. Enablers on the government policy front include designing systems and schemes that enable upgrading of the existing firms or cluster of firms and helping them compete in the domestic and international economy. These schemes have to be routed through institutions that have the scale to enable proper institutional support to MSMEs. Platforms like the National Innovation Foundation, which seeks to map innovations and work with innovators to help them scale up their innovation, thus is a good model for addressing this anomaly by bringing together the investor and the innovator on the same platform.

CONCLUSIONS

Despite the numerous challenges, the SME sector in India has performed well. There are distinct barriers to innovation, the most important of which seems to be government policy. This leads to the adage that “entrepreneurs grow not due to the government in India, but despite the government.” However, a deeper analysis leads one to conclude that the government is trying to facilitate the growth of SMEs by promoting various schemes and programs to facilitate innovation in the sector through its distinct institutions. The Science, Technology and Innovation Policy 2013 has had an impact but the institutional functioning of the government, Council of Scientific and Industrial Research labs, and individual firms often does not match. The scale of operations in both the public labs and the private research institutions need to be ramped up for greater reach and support to SMEs. Another major finding is that some programs, like the Cluster Development Program, can be expanded to provide greater access to more individual firms within the cluster. Modernization and technology upgrading along with innovative methods of capacity building and marketing of products are necessary. A holistic and separate innovation policy for the SME sector can also be made to promote innovation. The policy, institutions, and supporting framework have to be improved to remove SMEs’ perception that government is limiting their success. Over time, this can be done with the proactive participation of experts and policy makers to benefit India’s SMEs.