SPECIAL ARTICLE
Global Value Chains of MNCs and Indian SMEs
Promoting Linkages
M H Bala Subrahmanya , Muralidharan Loganathan
The rapidly expanding global value chains of
multinational corporations are increasingly dominating
international trade, which emerging economies like
India can hardly afford to ignore. The limited presence
of Indian small and medium enterprises in the GVCs of
MNCs can be traced back to a negligible share of
internationalised SMEs, which is primarily due to a weak
innovation base, owing to weak networks of SMEs,
particularly weak inter-firm linkages. These issues
can be overcome by building and strengthening
regional innovation systems and by establishing a
multipurpose science and technology commission in
the clusters of SMEs.
M H Bala Subrahmanya (bala@iisc.ac.in) and Muralidharan Loganathan
(muralidharan@iisc.ac.in) work in the Department of Management
Studies, Indian Institute of Science, Bengaluru.
86
I
n recent decades, international trade is increasingly domi-
nated by global value chains (GVCs) of multinational corpo-
rations (MNCs). More than two-thirds of international trade
now takes place within such GVCs, up from 60% in 2001 (Dollar
2019), but another estimate puts it at 80% of global trade
(West 2018).1 In the process of the steadily growing clout of
MNC-led GVCs, developed countries have further strengthened
their dominance and control over global trade (Dollar 2019).
However, newly industrialised countries, such as Taiwan, South
Korea, and Singapore, and emerging economies like China,
Malaysia, Thailand, and even Indonesia and Vietnam—which
have become well-entrenched in the GVCs of MNCs—have also
been experiencing dramatic advances in living standards and
economic growth (Dollar 2019). Thus, internationalisation led
by the steadily expanding GVCs has been rapidly reshaping the
competitive environment of business in the global economy. It
has opened national markets to new competitors, resulting in
threats as well as opportunities for both large and small firms.
Needless to say, these developments have implications in the
form of challenges as well as opportunities to the Indian econ-
omy, particularly its small and medium enterprises (SMEs).
SMEs in India are highly diversified in terms of products,
size/scale, nature of entrepreneurship, location and techno-
logical sophistication (Ministry of MSMEs 2019). They account for
a substantial proportion of India’s exports, with respect to many
individual products as well as at the aggregate. And, in the
globalisation era, their exports as a proportion of their production
has seen a steady and moderate growth (Bala Subrahmanya
2011). In 2018–19, nearly half of India’s exports came from
SMEs (Soni 2019). Therefore, it would not be inappropriate to
contend that SMEs are at the forefront of internationalisation
in India and therefore deserve attention.
However, this achievement has a flip side as well: exporting
SMEs accounted for 47,000 units, that is, just 3% of the total
units (hardly 5% of the total manufacturing SMEs) in the regis-
tered SME sector in 2005–06 (Ministry of MSMEs 2012). According
to a recent estimate, there are 1,27,000 exporting SMEs,
accounting for a meagre 0.20% of the total (6.339 crore) SMEs
in India (Hindu Business Line 2019). Given this, Indian SMEs
are unlikely to have any significant presence in the GVCs of
MNCs. This gives rise to two pertinent questions: (i) Why have
Indian SMEs not been able to seize the opportunities emerging
from the rapidly expanding GVCs of MNCs? (ii) What must be
done to enable Indian SMEs to access and exploit the GVCs of
MNCs for their advantage and the country’s overall benefit, in
august 7, 2021 vol lVi no 32 EPW Economic & Political Weekly

the medium to long run? These two issues have been analysed
in this paper.
GVCs have emerged as the new paradigm for the organisa-
tion of production globally. This is reflected in the fact that
most production processes across the world are vertically frag-
mented, as a result of the unbundling of production processes
and functions, and their sourcing from multiple geographical
locations (Zachariadis 2019). The emergence of GVCs is the
global phenomenon of international fragmentation of produc-
tion, where different stages of production (for example, design
and research and development [R&D], production and assembly
and sales and marketing) can be established in distant geo-
graphical locations (Paczos and Rincon-Aznar 2019). As a result,
very few products are still made in one country, rather most
products are made “in the world,” with different parts and
components coming from different countries, as their produc-
tion processes are widely spread all over the globe (West
2018). While the seeds for GVCs might have been sown as far
back as in the late 1970s itself (as argued by West [2018]), they
have gained visibility and attention only since the 1990s.
Globalisation, Information Technology and GVCs
Two developments have undoubtedly contributed to this
phenomenon: (i) globalisation, and (ii) the information and
communication technology (ICT) revolution. “Perfect globali-
sation” would mean “perfect and free movement” of input
factors (that is, land, labour, capital/investment, technology
and entrepreneurship) and output (that is, trade) between
countries. The world will certainly not move anywhere near
perfect globalisation, as land (ownership) will not move freely
(due to developing economies) and free movement of labour is
undesirable (for developed countries). However, the world is
witnessing intensifying “imperfect globalisation,” character-
ised by the freer movement of capital/investment, technology
and entrepreneurship together, led by foreign direct invest-
ment (FDI) and freer international trade. In the process, rela-
tively free movement of labour between countries has also
been facilitated.
These are, in turn, attributed to a steady dismantling of
controls and regulations for FDI in the global economy in gen-
eral, and in developing and erstwhile socialistic countries,
in particular. An increasing number of countries the world
over have steadily adopted policies to attract FDI since 1991
(UNCTAD 2000). In 2017, 65 countries adopted at least 126
policy measures, of which 84% were favourable to foreign
investors, as they liberalised entry conditions in a number of
industries such as transport, energy and manufacturing, apart
from simplifying administrative procedures, providing incen-
tives, etc (UNCTAD 2019). Another reason is a gradual slashing
of tariff and non-tariff barriers on trade, thanks to the World
Trade Organization (WTO), since 1995. Trade weighted aver-
age tariffs declined significantly by 2017 relative to 2008, for a
variety of products under natural resources, agriculture and
manufacturing for different geographical regions, and both
import restrictiveness and export restrictiveness have been
eased considerably almost all across the world (UNCTAD 2019).
Economic & Political Weekly EPW august 7, 2021 vol lVi no 32
SPECIAL ARTICLE
Figure 1: A Typical GVC Involving Complex Integration Strategy
Country 1
MNC Headquarters
• Administration
• Management
• Strategy
• Finance
Country 7 Country 2
• Services • R&D affiliate
Local subcontractors/vendors Local subcontractors/vendors
Country 6 Country 3
• Marketing and distribution • Design affiliate
Local subcontractors/vendors Local subcontractors/vendors
Country 5 Country 4
• Production affiliate • Production affiliate
Local subcontractors/vendors Local subcontractors/vendors
Source: Authors’ analysis.
Technological advancements due to the onset of the ICT revo-
lution are steadily facilitating cross-national convergence of
consumer demand globally, by means of a steady increase in
per capita income across countries, cultural and educational
exchanges and radical innovations in communication technol-
ogies encouraging social networks and tourism (UNCTAD
1993). This has necessitated mass production for global mar-
kets with respect to a variety of industries, such as automo-
biles, consumer electronics, semiconductors, pharmaceuticals,
etc. This holds good even for clothing and textiles (West 2018).
At the same time, ICTs have been increasingly enabling frag-
mented and flexible production networks spread across regions.
A production process is broken down so that different steps/
stages can be carried out in different countries (Dollar 2019).
New transport and information technologies, in fact, facilitate
the organisation of firms’ global production networks and
innovation processes. Firms organise their production processes
on a global scale, taking advantage of the specific resources of
different countries (Cook 2003). The rapid progress in ICT has
also provided an essential tool for the coordination of what
have become very complex GVCs.
This has led MNCs to increasingly adopt a complex inte-
gration strategy as a means of efficiency seeking FDI. A
complex integration strategy is a globally spread value chain
of a MNC. In a complex integration strategy, MNCs are both
horizontally and vertically integrated, establishing affiliates
in some foreign countries to conserve on transport cost and
establishing affiliates in others to take advantage of factor
price differentials (Yeaple 2003). As a result, no part of
the value chain located in any one country is independent
by itself, rather it forms a part and parcel of the whole
system (called GVC) spread across countries. A typical GVC
involving a complex integration strategy of a MNC is presented
in Figure 1.
87
SPECIAL ARTICLE
The overall rationale behind the adoption of a complex inte-
gration strategy is enhancing efficiency through cost reduction.
Thus, the location of a part of the value chain of a MNC in a
particular country is determined based on cost and efficiency
considerations only, that is, a component of a value chain will be
located in that country where it can be carried out most effi-
ciently or cost effectively. Overall, firms make components in the
most cost-effective location and value is added at every step
along the way, resulting in a finished product that is assembled
with inputs from multiple countries (Daria and Deborah 2016).
Nature and Significance of GVCs
Accordingly, GVCs are of various kinds and dimensions. For
example, in automobiles, there are three main hubs of auto
production—North America, Europe, and East Asia. R&D and
design mostly take place in Germany, Japan, and the United
States (US), with China beginning to play a significant role.
Each of these hubs combines production in high-wage economies
with parts and components from lower-wage, emerging market
economies (Dollar 2019). The vastness and complexity of a
GVC can be understood from the example of Apple’s China
GVC, which in 2015 included 198 companies and 759 subsidiaries,
336 (44.2%) of which were located in China (West 2018). In
fact, breaking up the production process offers new opportuni-
ties for the integration of both developed and developing econ-
omies, with potential benefits for each, but with adequate
homework as well (Dollar 2019).
Given this, GVCs are dynamic in nature. Due to better socio-
economic and digital infrastructure, R&D investments and
human development leading to upgradation of skills, a country
can move up the GVCs, which implies the development of more
technologically sophisticated value chains. In the process, a
country may shift from a labour-intensive GVC production to a
capital-intensive GVC production. In fact, currently, some of
China’s labour-intensive GVC production stages are migrating
to lower-cost locations in the region (ADB 2017).
Another significant feature of GVCs is that each part of them
would indulge in trade with local firms in the domestic market
or regional markets, as and when necessary and advantageous.
In general, firms that are part of global or regional value chains
tend to display high levels of innovation, greater efficiency
and increased productivity. This underlines the imperative-
ness of innovation, efficiency and productivity on the part of
firms that intend to integrate themselves with GVCs. Given
this, participation in global or regional value chains can be
beneficial in fostering a firm’s growth and internationalisation,
irrespective of its scale and size (European Parliament 2019).
GVCs, in fact, offer increased opportunities for local firms by
fostering their growth and internationalisation, irrespective
of scale and size.
This has particular relevance for SMEs. By penetrating or
linking with GVCs, SMEs can take a first step ladder, which,
through spillovers and knowledge transfers, can often lead them
to fetch higher value-added assignments, through product inno-
vations and market knowledge. Internationalisation provides
the right conditions for SMEs to enhance productivity, while also
88
enabling the spillover of technological and managerial know-how
and facilitating accelerated innovation (Zachariadis 2019).
Precisely for this reason, a majority of the SMEs in the developed
world contribute to exports: while their share in the value of
exports, on average, stood at 34%, their contribution (in terms
of number of exporting units in total number of SMEs) was as
high as 78%, at the beginning of the previous decade (WTO 2016).
But not all SMEs will be able to take advantage of the opportu-
nities that emerge from the rapidly growing GVCs through
linkages (as they will not have even a threshold level of com-
petence to get linked to GVCs). Due to internal as well as external
barriers emerging from not only smaller scale and lower levels of
sophistication but also market failures, leading to more limited
access to finance, SMEs often face greater difficulties in inter-
nationalising their activities than their larger counterparts.
This holds good for developing countries as most of their SMEs
have low levels of integration in GVCs, with few backward and
forward linkages in production. Trade participation of SMEs in
developing countries is low, with exports accounting for 7.6%
of manufacturing sales, and SMEs with fewer employees take
longer to access international markets than larger firms (WTO
2016). Further, for those that do manage to penetrate and inte-
grate into the GVCs, the magnitude and nature of benefits will
critically depend on the SMEs’ entry point and position in the
global production networks and the links that they can devel-
op within those networks (Zachariadis 2019).
All these have implications for the Indian economy, parti-
cularly its SMEs. If an emerging economy like India has to
make a visible mark on global production networks similar to
China and other emerging economies, it is imperative to
enable domestic firms to penetrate and link with the GVCs. In
India, SMEs being at the forefront of internationalisation,
though in a limited way, it is essential to examine and explore
the promotion of SME internationalisation through GVC link-
ages, steadily and consistently. This assumes significance as it
is one of the objectives of the “Strategy Action Plan” recently
unveiled by the Ministry of MSMEs (2018).
Status of SMEs in India
SMEs in India constituted 633.9 crore enterprises, employed over
11.1 crore persons, accounted for 45% of total industrial pro-
duction, and 30% of the country’s gross domestic product in
2017–18 (Ministry of MSMEs 2019). SMEs contributed to about 40%
of total exports in 2017–18, which went up further to 48.10% in
2018–19 (Soni 2019). While these figures do look impressive in
the context of the economic structure of the country, they
mask the SME sector’s major deficiencies and limitations.
The Indian SME structure is predominantly comprised of
microenterprises (99.47% of the total SMEs), followed by
small-scale enterprises (0.52%) and medium-scale enterprises
(0.01%) (Ministry of MSMEs 2019). On an average, each of
these SMEs employed 1.75 persons per unit: it varied from 1.71
persons per unit in microenterprises to 9.65 persons per unit
in small-scale enterprises, and to 35 persons per unit in medium-
scale enterprises. This makes it clear that a substantial chunk of
Indian SMEs is suboptimal by scale. Of course, new technologies
august 7, 2021 vol lVi no 32 EPW Economic & Political Weekly

and globalisation may have reduced the importance of economies
of scale in many activities, but many of the traditional problems
facing SMEs, such as lack of finance, technological obsolescence,
constrained managerial capabilities, low productivity, etc, become
more acute in a globalised and technology-driven environ-
ment directly affecting their competitive ability (OECD 2000).
A majority of microenterprises in India being proprietary by
nature of organisation, not likely to be operated by power,
would form part of the traditional industries. Such enterprises
would be characterised by less-educated entrepreneurs, oper-
ating with obsolete technology, low employee skills and know-
ledge, limited access to institutional finance, and limited
marketing/management expertise. They are likely to be relying
on local skills, utilising local resources and meeting local needs.
In many cases, the owner-cum-manager of these enterprises
might simply lack time for anything beyond its day-to-day
operations and sales. Even if they are able to find time, they
lack the necessary information sources to do anything beyond
(Bala Subrahmanya 2018).
One method of overcoming the inadequate expertise and
paucity of resources is to complement internal strength with
external support. But a considerable proportion of the SMEs
will not be in a position to scout for identify, access and devel-
op any kind of external linkages, leave alone obtaining appro-
priate external links for technical/marketing advice and
technology/marketing support. Further, a firm lacking internal
capabilities often will not be able to link with its customers
and perceive the market needs appropriately. As a result, a
considerable proportion of such SMEs would lack both techni-
cal strength and market perception, the much-needed virtues
for developing networks and penetrating global markets. Such
SMEs will be forced to confine their activities only to produc-
tion and marketing locally in silos.
In the Indian context, this assumes critical importance due
to the sheer magnitude of suboptimal-sized enterprises. In
developed countries, there is a positive relationship between
enterprise size and export participation, with lower rates of
participation for microenterprises (9%) and small-scale
enterprises (38%) than for medium-sized (59%) and large-
scale enterprises (66%) (WTO 2016). In Australia and the US,
SMEs that export tend to grow even faster, create more jobs,
and pay higher wages than similar businesses that do not
(Export Council of Australia 2018; Office of the US Trade
Representative 2020). How to modernise and graduate the
dominant microenterprises into small enterprises and sub-
sequently into medium enterprises (to ensure a larger share of
the latter two relative to the former) has remained a major
challenge for policymakers. This assumes significance because
a steadily growing share of small- and medium-scale enter-
prises in the SME sector would hold promise to enable their
integration into GVCs of MNCs.
Internationalisation, Innovation and Networking
This leads to the question, are our small- and medium-scale
enterprises adequately integrated into the GVCs of MNCs? If
not, why? As indicated earlier, empirical data reveal that only
Economic & Political Weekly EPW august 7, 2021 vol lVi no 32
SPECIAL ARTICLE
a minor fraction of Indian SMEs (in the registered sector) is in-
ternationalised. If SMEs have to internationalise and integrate
themselves with the GVCs on a considerable scale, they have to
be competitive, efficient and productive, which require them
to be innovative because one of the principal determinants of
SMEs’ competitiveness is innovation (Pachouri and Sharma
2016). However, innovation (which needs to be radical in na-
ture) is widely absent in the SME sector, implying a low innova-
tion capacity of Indian SMEs, and this is reflected in
India’s very low ranking in the global innovation index (81 out
of 141 countries) (Pachouri and Sharma 2016).
An earlier study in the context of SMEs of Karnataka revealed
that a majority (about 52%) of the (1,358) surveyed small-scale
enterprises carried out innovations, but were predominantly
incremental in nature in the form of improvement of existing
products/processes, and the primary objectives were quality
improvement and cost reduction, in response to competition.
The development of new products/processes (mostly new to
the firm and not necessarily new to the world) accounted for a
minority (Bala Subrahmanya 2005). Therefore, new products
and patents hardly emerged from the sector.
A recent nationwide study, covering 9,001 SMEs out of a total
of 2,08,415 firms (of all sizes) across 26 states and five union
territories of India, based on the Annual Survey of Industries
(ASI) 2009–10 database, revealed that 35.37% of them were
engaged in innovative activities (Nath et al 2014). But these
innovations were mostly in the form of introducing new
machines, followed by improvement of the quality of existing
products, process and product innovations. Those who
claimed to have undertaken product innovations accounted
for 32% of the innovative firms, which amounted to about 11%
of the total surveyed firms. Predominant types of innovation
are in the “new-to-the-firm” category (Nath et al 2014). This
substantiates that radical innovation is largely absent in
Indian SMEs.
Innovation does not occur in silos, and therefore, SMEs operat-
ing in silos are unlikely to innovate. If innovation among SMEs
has to thrive, they need to be networked in the local/regional
markets. Innovation emerges with close interaction between
a firm that wants to pursue innovation and the support sys-
tems that assist the firm in securing the required resources for
innovation (Pachouri and Sharma 2016). There is a positive
association between networking and innovation (Rogers
2004). Thus, innovation cannot develop in isolation, but
through interactions between different actors, such as firms,
universities, government, and institutions (Pino and Ortega
2018). Networks can offset many of the internal resource defi-
ciencies, which SMEs are commonly known for (OECD 2004;
Ludmila and Stanislava 2015). Collaborations and networks
lead to positive sum gains in internal activities and have posi-
tive welfare effects. That is, partners can together obtain mu-
tual benefits through knowledge transfers and sharing of so-
cial capital, among others, which they could not achieve inde-
pendently (Burlina 2018).
Networks can be in the form of vertical linkages with customers
and suppliers or horizontal linkages with academic/research
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SPECIAL ARTICLE
institutions, government-led SME promotion agencies, industry
associations, other SMEs in the same sector/cluster, etc. Of
these, vertical linkages in the form of industrial subcontracting
or inter-firm linkages between large firms and SMEs assumes
significance as it offers a “ready shortcut” to enhance produc-
tivity and other non-price determinants of domestic and inter-
national competitiveness (Wattanapruttipaisan 2002). But even
here, statistics are disheartening in the Indian context.
Inter-firm networking in the form of ancillarisation of SMEs
accounted for a meagre 0.52% in 1987–88, which improved by
almost 10 times to reach 5.08% by 2001–02 in the registered
SME sector (DCSSI 1992, 2004). The involvement of non-
governmental organisations and small-scale industry associa-
tions in the promotion of subcontracting exchanges since
the mid-1990s would have contributed to this improvement
(Bala Subrahmanya 2004). Since then, the number of inter-
firm networked SMEs might have gone up, but the extent of
inter-firm linkages between SMEs and large firms is well below
the potential (Planning Commission 2002). Further, in India,
formal sector subcontracting is positively related to the size
of the informal sector, only for the most modern informal
activities, supporting the view that subcontracting is related to
informal sector modernisation (Moreno-Monroy et al 2012).
This brings out that the vast majority of the SME sector is
unlikely to have developed inter-firm networks, thereby debili-
tating the sector’s potential to innovate.
The above analysis reveals that Indian SMEs have a limited
presence in the GVCs of MNCs due to their weak internationali-
sation which, in turn, is due to their weak innovation base,
owing to their weak networks, particularly due to weak inter-
firm linkages. This could further be attributed to weak internal
strength of SMEs at large, and/or weak or no external support
availability, locally/regionally. The status of Indian SMEs in
the GVCs of MNCs and the responsible causal chain are sum-
marised and depicted in Figure 2. This brings out that to
exploit the SME sector’s potential and transform it, efforts
must be made to strengthen the SMEs locally, to enable their
penetration and reach globally. Local networks and support
systems in the form of a regional innovation system can
contribute to strengthen SMEs through networking, innovation
and internationalisation, to join the GVCs of MNCs. This requires
an elaboration.
Figure 2: Indian SMEs in the GVCs of MNCs—Status and Causal Chain
Indian SMEs:
Weak internal
strength Weak networks Weak
including weak innovation
Weak inter-
inter-firm linkages nationalisation
Weak external base
support
Source: Authors’ analysis.
Regional Clusters and Innovation Systems
The ability and potential of SMEs to network and innovate would
depend on internal strength and/or on the strength and vibrancy
of the region(s) in which they operate. This is because firms
succeed if they benefit from the specific advantage of their envi-
ronment comprising diverse supportive elements (Cook 2003).
90
Regions, especially when they have developed clusters and
appropriate administrative machinery for supporting innovative
enterprises, represent more meaningful communities of eco-
nomic interest, define genuine flows of economic activities and
thereby enable firms to take advantage of appropriate linkages
and synergies for their benefit (Cook 2003).
However, not all regions need to comprise clusters and not
all regional clusters need to encourage innovations. A regional
cluster is a concentration of “interdependent” firms within the
same or adjacent industrial sectors in a small geographical
region such as a town or a city (Isaksen 2001). The inter-
dependence may be purely for production and marketing
operations, among others, and it would hardly induce any
innovation. Further, regional clusters are mainly seen as a
spontaneous phenomenon; a geographic concentration of firms
often developed through local spin-offs and entrepreneurial
activity (Isaksen 2001). A regional innovation system (RIS), on
the other hand, is much beyond a regional cluster of firms. It
has a more planned and systemic character (Isaksen 2001). In
general, a RIS is defined as the institutional infrastructure
supporting innovation within the production structure of a
region (Asheim and Coenen 2005). A strong RIS is one with
systemic linkages between external and internal sources of
knowledge production (universities, research institutions, and
other intermediary organisations and institutions) and firms,
both large and small (Cook 2003).
A RIS usually consists of firms of varying sizes (in diverse
industries) and universities interacting with each other for
knowledge generation and technology transfer, supported by a
regional government and conducive culture, within an institu-
tional framework. Both universities and firms will interact with
the external world; the former with global research networks,
and the latter through trade and investment. The system will
also comprise local innovation assets such as venture capitalists,
R&D institutions, human resource providers, etc. This framework
supports the generation, exploitation and dissemination of
knowledge, and thus supports innovative activities on a regional
level (Cooke and Piccaluga 2005). A typical RIS is presented in
Figure 3 (p 41). When RIS grows and gains visibility, FDI flows in,
as part of the latter’s global location strategy (Iasksen 2001).
Most regional clusters, unlike a RIS, do not have systemic
innovation characteristics (Cook 2003). Therefore, the change
from a regional cluster to a RIS requires a strengthening of a
region’s institutional infrastructure, that is, more knowledge
organisations (both regional and national) are required to be
Limited
presence in the involved in innovation cooperation. As a result, RISs can be
GVCs of MNCs made a tool to create a supportive system of innovation on a
regional scale for the benefit of local firms (Isaksen 2001). RISs
play a crucial role in building national competitiveness as they
reduce transaction costs, correct market failures and decrease
risks, allowing participants to increase productivity (Pekka-
rinen and Harmaakorpi 2006). Precisely for this reason, by the
turn of the millennium, governments in every advanced econ-
omy were promoting RISs as a means of boosting national com-
petitiveness (Cook 2003). It is against this backdrop that the
context of Indian SMEs needs to be examined.
august 7, 2021 vol lVi no 32 EPW Economic & Political Weekly
 SPECIAL ARTICLE

Figure 3: Regional Innovation System

External Global production

Technology transfer networks
decision-makers
activity

Regional
governance
subsystem
Local innovation assets (example: clusters)
Exports
Learning

Businesses (knowledge utilisation subsystem)

Universities (knowledge generation subsystems)

Demand for technological knowledge

Regional investment
Dissemination

Regional culture
Global research
networks

Source: Cooke and Piccaluga (2005).

Figure 4: Regional Innovation System for SMEs in Bengaluru

• Directorate of Industries and Commerce • MNCs

• Snall Scale Industries Development Corporation/ • Public sector undertakings
Small Industries Marketing Corporation • Private companies
• Technology Research Centre/Karnataka Council for • Industry associations
Technology Upgradataion • Angel/venture capital/private equity/private sector
• Small Industries Development Bank of India/State banks
Financial Corporation Regional Government Industry
• Exclusive small-scale industries branches of
public sector banks

R&D Centres Academia

• MNC R&D affiliates • Academic research institutes

• Public sector R&D institutes • Engineering institutes
• Domestic private company R&D labs • Management institutions
• Science, art and commerce colleges

Source: Authors’ analysis.

As of now, there are 388 SME clusters in India, of which 112
(about 29%) clusters are located in eight metropolitan cities,
such as the National Capital Region (comprising New Delhi,
Faridabad, Gurugram, Noida and Ghaziabad), Ahmedabad,
Mumbai, Pune, Bengaluru, Hyderabad, Chennai and Kolkata.
Even the remaining ones are located in major cities of different
states across the country, such as Agra, Aligarh, Amritsar,
Aurangabad, Belgaum, Bhavnagar, Coimbatore, Cuttack,
Ernakulum, Hubli, Indore, Jaipur, Jalandhar, Kanpur, Kolhapur,
Ludhiana, Madurai, Mangaluru, Mysuru, Nagpur, Patiala, Rajkot,
Salem, Surat, Vadodara and Varanasi, which together accounted
for 100 SME clusters (about 26% of the total) (DCMSME 2020).
The metros and other cities together would account for a
majority of the registered SMEs in the country. While the
former (eight metropolitan cities) are most likely to comprise
Economic & Political Weekly EPW august 7, 2021
RISs of varying strengths, the latter (26) cities may just
comprise regional clusters but have the potential to develop
into a RIS. The pertinent question is, what kind of a RIS do we
have in our metro cities? Is there anything to learn?
The Case of Bengaluru
Among the metros, Bengaluru stands apart, as it was considered
one of the 46 “Global Hubs of Technological Innovation” as far
as back as in 2001, and it is the best known global start-up hub
of the country (Bala Subrahmanya 2015). Over a period of
time, it has seen the emergence and growth of various compo-
nents of an effective RIS (Bala Subrahmanya 2017a). Given
this, the RIS of Bengaluru (as relevant to SMEs) can be broadly
depicted as given in Figure 4. The Bengaluru RIS comprises an
active regional government, a vibrant industry comprising
vol lVi no 32 91
SPECIAL ARTICLE
firms of varying sizes of multiple industry clusters, including
MNCs (many of them are Fortune 500 companies), academic
research institutes, science, engineering and management
institutions, public sector R&D organisations, R&D affiliates
of MNCs and domestic private sector enterprises, and active
industry associations, including SME associations. Firms in the
city are engaged in exports and imports as well as FDI inflow
and outflow, apart from collaborations. Academic research
institutions do engage in collaborative research with global
research universities, apart from domestic industry. Thus, it
offers a fertile ground for nurturing networks, including inter-
firm linkages as well as for promoting innovations. How do
SMEs benefit out of it? Do SMEs in the Bengaluru RIS network
and innovate?
SMEs in Bengaluru do take advantage of their RIS, primarily
for networking. Networking through vertical linkages in the
form of supplier–customer relationship development is common.
An earlier empirical study focusing on industrial subcontracting
revealed that Bengaluru has a significant presence of auto
component SMEs, which are linked to auto majors, such as Bosch,
Toyota and Volvo, among others, located in Bengaluru. These
SME subcontractors were able to receive product related and
purchase process assistance, apart from marketing support,
from the MNCs which facilitated the SMEs to carry out techno-
logical innovations and improve their economic performance.
The higher the degree of assistance, the higher were the levels
of innovation and economic performance. Thus, a subcon-
tracting relationship with MNCs proved beneficial to local SMEs
as a means of technological innovation and enhanced economic
performance (Kumar and Bala Subrahmanya 2010). Ex ante,
SME subcontractors did not know much about the relation-
specific productivity gain, but after forming the link, they
gained knowledge about the quality of the link.
A subsequent empirical study covering the SMEs of auto
components, electronics and machine tools industries in
Bengaluru revealed that SMEs did engage in vertical linkages
(with large firm customers) as well as horizontal linkages
(with R&D organisations, higher education institutes, and oth-
er SMEs of the same sector), as a means of external support for
undertaking technological innovations. Such SMEs were char-
acterised by minimum internal technical competence in the
form of the technical education background of the chief execu-
tive officer or a technically qualified manager, an exclusive de-
sign office, and were able to carry out both product and pro-
cess innovations more frequently (Bala Subrahmanya 2013).
This brings out that “opportunistic SMEs” do find values in the
RIS, and take advantage of it to develop networks for under-
taking innovations, as required.
A recent study on engineering industry SMEs of Bengaluru
(comprising machine components, electromagnetic equipment,
precision components, fabricated metal products, material
handling equipment, and electronic products) brought out
that SMEs did establish network linkages, vertically with sup-
pliers and customers, and horizontally with R&D organisations,
industry associations, government agencies, and even SME
competitors in the city (Singh and Bala Subrahmanya 2018).
92
SMEs interacted periodically with their customers the most
(for product specification, product feedback, advanced order
information, knowledge exchange, new ideas on product/
technology), followed by their suppliers (for raw material selec-
tion, updating manufacturing process, quality control systems,
machinery and equipment).
In addition, they interacted with R&D organisations or uni-
versities for research expertise to overcome technical prob-
lems encountered in their day-to-day operations; interacted
with SME associations for market awareness, awareness on tax
and legal matters, training programmes, and for lobbying
and mediating; and with government agencies to know the
policy-related developments and incentives and benefits,
from time to time. Some even interacted with other SME com-
petitors in the same sector, for exploring new market avenues
for common products jointly. Interactions through vertical
linkages, obviously, were much more than interactions
through horizontal linkages, and interactions with competi-
tors accounted for the least (Singh and Bala Subrahmanya
2018). Such networked SMEs were able to carry out innova-
tions in the form of improved products/process and new
products/processes, though incremental innovations in the
form of improved products/processes rather than radical in-
novations (new products/processes) accounted for a majority.
It is noteworthy that more innovative SMEs were able to
achieve a more intensive (higher degree) internationalisation
(Singh and Bala Subrahmanya 2018).
Another important dimension of the RIS of Bengaluru is the
support that SMEs derive from their MNC customers to reach
the international markets: almost 40% of the internationalised
SMEs from Bengaluru could initially enter the global market
with the help of their local MNC customers. Further, when local
SMEs are able to satisfy their local market-based MNCs with the
quality of their intermediate products, they gain confidence to
penetrate the global market for their expansion, particularly
in the developed world (Bala Subrahmanya 2017b). MNCs,
followed by other networks, form an important channel of
internationalisation for Bengaluru SMEs; this has been sub-
stantiated by another study (Santhosh and Bala Subrahmanya
2019). The strategy and experience of Bengaluru RIS-based
SMEs can be a lesson to emulate elsewhere in the country.
However, emulating Bengaluru RIS, even remotely, if possible,
can only be a long-term strategy.
Lessons, Inferences and Conclusions
In fact, support to SMEs has to be provided not just at the start-
up phase, but in subsequent stages of its life cycle as well, in-
cluding the internationalisation stage. In most industrialised
countries, governments increasingly provide support from
incorporation to internationalisation. For instance, in the
United Kingdom, the main goal of innovation policy is to help
more and more new firms emerge, survive, and enable them
to identify and successfully exploit opportunities in foreign
markets (World Bank 2010). Among the emerging economies,
the network and innovation support extended through a R&D
public service platform by Shanghai Municipality’s Science
august 7, 2021 vol lVi no 32 EPW Economic & Political Weekly
 SPECIAL ARTICLE
Figure 5: Shanghai R&D Public Service Platform locally would largely enable the emergence of “innovation
Equipment
flourishing environment” for the benefit of SMEs to steadily
sharing
Scientific Resource penetrate the GVCs of MNCs through internationalisation. A
figure sharing security proposed model for facilitating the integration of Indian SMEs
with the GVCs of MNCs is presented in Figure 6.
International trade, and thereby domestic economic growth,
Science and
technology Testing base will increasingly be influenced by the rapidly expanding GVCs
cooperation
literature of MNCs. Given this, and SMEs being at the forefront of the
Business innovation services
internationalisation of our country, their limited presence in
the GVCs and its causal factors need to be understood in the
Management
Professional right perspective. The limited presence of Indian SMEs in the
decision-making
technology GVCs of MNCs can be traced back to a negligible share of inter-
support
nationalised SMEs, which is primarily due to a weak innova-
tion base, which in turn is due to weak networks of SMEs, par-
Entrepreneurship Industry testing
ticularly weak inter-firm linkages. All this owes to the absent/
Technology transfer weak RISs in the SME clusters across the country, apart from
Source: World Bank (2010: 78).
internal resource constraints. This can be countered by build-
Figure 6: RISs Enable SMEs to Penetrate GVCs of MNCs ing and strengthening RISs. We have
Vertical lessons to learn from the RIS of
linkages with Bengaluru and its SMEs, though it
customers and
suppliers could be a long-term strategy.
As an alternative, a multipurpose
R&D public service platform requires
More radical/
Increased
to be set up to strengthen the regional
Increased incremental Increased
A strong and
regional product/ inter- penetration of clusters across the country to
vibrant RIS GVCs of MNCs
networks process nationalisation facilitate networking and innova-
innovations
tion of SMEs. Accordingly, there is a
need for a novel approach towards
Horizontal
the SME policy of the country. There
linkages is a greater need to stress on build-
with higher
education
ing the RISs across SME clusters in
institutes, R&D the country, for the benefit of SMEs
organisations,
industry
to enable them to build networks
associations through inter-firm linkages, among
and other
SMEs
others. This would facilitate SMEs to
Source: Authors’ analysis.
carry out product/process innova-
tions so as to enter the international
and Technology Commission in China appears noteworthy markets to join the ever-growing GVCs of MNCs. If appropriate
(Figure 5). It aims to provide a wide variety of support services to measures are not taken at the earliest by the policymakers
SMEs, similar to those found in developed countries. Such a involving the key stakeholders of the economy (government,
support system must be created in each of the regional clusters in industry and academia), the current status of Indian SMEs in
India, to enable the networking of SME s for innovation to the global economy would only continue. Any amount of
penetrate the international markets to join the GVCs of MNCs. “tinkering with the system” in the form of more concessions,
A key factor for providing efficient support for SME network- incentives, and benefits (which is the current policy pattern)
ing and innovations is that it is delivered in an integrated and would hardly alter the status quo.
coherent way with a maximum degree of flexibility. This calls
for organisations operating with sufficient autonomy and in a Note to ReadersI
flexible manner for delivering the needed support to innovators,
such as legal, financial, technical, etc (Aubert 2004). Further, Dear Readers,
to unfold the innovation potential of the vast SME sector We have made some changes to our online access policy.
successfully, it is imperative for policymakers to understand Starting 2 January 2021, the full text of the content published in the Economic &
Political Weekly is available to read on the website only for paid subscribers.
the specific needs of the local SMEs, with a focus on clusters
However, the editorials and “From the Editor’s Desk” column in the latest issue
(Chaminade and Van-Lauridsen 2006). To conclude, network each week, and all content on Engage will continue to be free for all to access.
and innovation policy support to offset the internal deficiencies We hope that you will support the Economic & Political Weekly by purchasing a
of SMEs by providing “accessible and productive innovation subscription plan. Details can be found here: https://www.epw.in/subscribe.html
infrastructure” for firms at different stages of their life cycle
Economic & Political Weekly EPW august 7, 2021 vol lVi no 32 93
SPECIAL ARTICLE
Note
1 These are intra-firm trade for MNCs but inter-
national trade for countries.
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