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Small Business Experiences

Small and Medium Scale Industry in India and the Model of Japan edited by Konosuke Odaka and Yukihiko Kiyokawa;

BOOK REVIEWEconomic & Political Weekly EPW october 4, 200831Small Business ExperiencesM H Bala SubrahmanyaSmall and Medium Scale Industry in India and the Model of Japan edited by Konosuke Odaka and Yukihiko Kiyokawa;Allied Publishers, New Delhi, 2008; pp 354, price not mentioned.Small and medium enterprises (SMEs) occupy a place of strategic importance in Japan as well as in India. However, the former is characte-rised by technological sophistication, un-like the latter where technological obsole-scence across industries is common. Fur-ther, the multilayered subcontracting relationship between firms of different sizes involvingSMEs is an outstanding fea-ture of Japanese manufacturing, whereas subcontracting in Indian manufacturing has not made any deep inroads despite policy support of different kinds. Does it mean thatSMEs of the two economies are poles apart and India has nothing to gain from Japanese experience? This question assumes significance particularly because of the growing Japanese investments in Indian automobile industry, which marked a beginning with the Maruti-Suzuki joint venture in 1982. The answer to this ques-tion is provided by this book, which is a product of joint research project imple-mented by the Institute of Economic Growth, Delhi and the Institute of Eco-nomic Research at Hitotsubashi Univer-sity, Tokyo. SME DevelopmentThe book under reference is an edited vol-ume containing 13 chapters contributed by a total of 13 different experts. Odaka, in his introductory remarks, traces the role of government policy (which laid an emphasis on standardisation of products for exports and technology development) and the growth of subcontracting in the development of SMEs in Japan. But histori-cally, conditions for SME development in India are markedly different from that of Japan asSMEs serve mainly local markets in a protective environment. In the proc-ess there are little incentives for them to become innovative and achieve technol-ogy development. This does not mean that there will be resistance to outside inter-ference and that any outside interference is bound to fail in the IndianSME context. This is brought out by the case of one of the subcontractors of Maruti Udyog, which had technical tie-up with a Japanese company. The subcontractor not only adopted Japanese technology, but also the Japanese style of management based on the subcontracting system, successfully in Indian conditions. This was further sub-stantiated by a survey of 14 independent Indian manufacturing companies: about 85 per cent of these companies had adopted Japanese style of management and of these, 92 per cent companies were satisfied with its effectiveness, which were higher compared to other leading Asian econo-mies, including China and the newly indus-trialised economies (NIEs). Thus, Odaka’s analysis brings home the point that the Japanese method of organisation control has proved workable in India, despite an entirely different social environment.SSI GrowthIn chapter 2, Verma deals with the struc-ture and growth of small-scale industries (SSI) in India at the macro level followed by a micro study covering electronics in-dustry in Noida, and has explained some aspects of SSI in Japan. Verma attributes the emergence of SSI to: (1) locational influences, (2) process influences, and (3) market influences [as argued by Staley and Morse 1965]. But the structure and growth of SSI in their early stageswouldbe determined by a combination of factors, which include: (1) fixed investmentper establishment, (2) capital/labour ratio, (3) wage rate, and (4) ratio of gross value added (GVA) to gross value of output (GVO). The size distribution of SSI in India, according to the second census, reveals that micro enterprises account for a sub-stantial share of totalSSI units and employment as well as investment and production. To substantiate that SSIs generally tend to start in the form of micro firms, he presents correlation analysis results between number of units, value of fixed capital, number of employees, gross value added and value of exports on the one hand, and fixed investment per unit, capital/labour ratio, ratio ofGVA to GVO and wage rate on the other. However, but for two, none of the values are statistically significant in Table 2.4, to support the inferences. Similarly, none except three is statistically significant in Table 2.6. Based on a survey of 20 electronic SSI units, Verma brings out that majority have availed some or the other govern-ment support but have difficulties in obtaining long-term/short-term finance. Their problems do not confine to just finance, but material procurement as well. They have put little efforts for moderni-sation as their market focus is on lower and lower middle income groups where quality consciousness is limited, if not nil. Referring to Japanese industrial structure, Verma indicates that units in the lower categories account for the majority of establishments, but make a small contri-bution to employment and production. Unlike India, their small establishments graduate into medium-sized and large-sized establishments over time. At the micro level, JapaneseSMEs have much stronger infrastructural support to rely on and grow in size.Japanese SMEsInoue deals with the structure and functions of small business with specific reference to subcontracting system andgeographical concentration, which have uniquely contributed to the com-petitiveness of Japanese manufacturing (chapter 3). The definition of SMEs emerged in Japan for the first time with the enactment of Small and Medium Enter-prise Basic Law, 1963. SMEs are defined in terms of number of employees and capital assets with respect to manufacturing, wholesale and retail trades. SMEs domi-nated the Japanese manufacturing sector as well as the wholesale and retail trades, in terms of number of establishments and workforce. The relative contribution of small business is largely determined by the rate of business start-ups and rate of closures, the latter exceeded the former in
BOOK REVIEWoctober 4, 2008 EPW Economic & Political Weekly32the early 1990s due to: (1) overseas expansions and purchases of large firms leading to a reduction of purchases from SMEs, and (2) the self-employed could not find successors. Other important features of Japanese small business are their inferior working conditions, absorption of less educated, older and largely female workers, with lit-tle scope for skill enhancement, leading to lower wages relative to large firms, all of which together caused the emergence of industrial dualism. A neat description of multi-layered “pyramidal structure” resembling Japanese subcontracting sys-tem, where SMEs play a crucial role is an important feature of the book. Japanese small business story would remain incom-plete without making reference to indus-trial agglomerations, particularly those based on network of SMEs in the metal and machinery industries, located in big cities. This has been amply justified with the de-scription of Ota ward of Tokyo, which is known for its flexible industrial system and industrial workers’ proficiency. Ota is considered one of the major pillars ofJapanese machinery and metal indus-try,which is primarily responsible for the global competitiveness of Japanese manufacturing. Further, Ota has inter-national reputation for its product inno-vations done by its skilled workers [Bala Subrahmanya 2008].SSIs in IndiaIshigami describes India’sSSI policies and their impact on the sector since independ-ence in chapter 4. He gives an account of the evolution of SSI policies with a focus on promotion till the late 1960s and a shift towards protective measures after the Fourth Five-Year Plan. India’s SSI policy took a new direction in the 1990s, particu-larly by relaxing the managerial environ-ment of SSIs. After a description of SSI pol-icies, Ishigami explains the definitions of SSI in India over a period of time (which should have come, if at all, at the begin-ning of the chapter). However, the analy-sis of SSI policy impact on the sector lacksclarity. On the whole, this chapter appears to be haphazardly structured.According to Goldar, technological backwardness ofSMEs is a major hurdle for the development of subcontracting in India (chapter 5). He attaches considerable importance to their technology upgrada-tion to facilitate their rapid growth in the new competitive environment since 1991, as a means of employment generation. This assumes significance because eco-nomic liberalisation has only given scope for large firms to become more capital-intensive with adverse effects on employ-ment growth. IfSMEs of Japan have acquired technological expertise of their own, that could be attributed to their own efforts and parental support as part of the subcontracting system as well as adequate government support at the prefecture level. India’s SSI policy, comprising both promotional and protective measures, though encouraged the growth of the sector, has many undesirable conse-quences such as low levels of technology, inefficiency, widespread sickness, slow growth of subcontracting, etc. Even the technology upgradation and moderni-sation schemes of the government have limited impact, as brought out by some of the empirical studies. Therefore, Goldar argues for the repeal of protective meas-ures which impede technology progress, enlarge the scope of technology upgra-dation schemes, and provide funds for the development of technology support institutions, particularly inSSI clusters.Financial InstitutionsTeranishi and Nagase deal with the growth of financial institutions and small business finance in Japan, with a focus on the uniqueness of Shinkin banks, which provide capital to small enter-prises with great efficiency in chapter 6. The source of this high efficiency is their ability to realise economies of scale on the back of the expanding local markets, and to generate information about individual companies and local affairs effectively, which differ from the information gathered by other types of financial institutions.Bhavani analyses the determinants of employment generation in IndianSSI based on firm level data pertaining to modernSSI, in chapter 7. Bhavani, in gen-eral, attributes the high labour absorption inSSI to four factors: (1) they use old tech-nologies, which are invariably more labour-intensive, (2) they prefer relatively labour-intensive techniques of produc-tion,due to the availability of cheap labour and production of low quality prod-ucts aimed at the lower end of the market, (3) they employ inefficient workforce resulting in more employment of such workers, and (4) they are mostly engaged in the manufacture of products, whose production process is labour-intensive. However, based on her empirical analysis, she ascertains that more absorption of labour in IndianSSI was primarily due to the employment of inefficient labour on the one hand, and poor quality products, on the other. In chapter 8, Fox examines the nature and significance of SME employment in Japan during 1970-90, He analyses the persistence of enterprise-size wage differ-entials and brings out the implications of SME sector for Japanese economy as a whole. Apart from the differences in “labour quality” employed, differences in capital-labour ratio and differential accessto finance explain the wage differ-entials betweenSMEs and large firms. For the Attention of Subscribersand Subscription Agencies Outside India It has come to our notice that a large number of subscriptions to the EPW from outside the country together with the subscription payments sent to supposed subscription agents in India have not been forwarded to us. We wish to point out to subscribers and subscription agencies outside India that all foreign subscriptions, together with the appropriate remittances, must be forwarded to us and not to unauthorised third parties in India. We take no responsibility whatsoever in respect of subscriptions not registered with us. MANAGER
BOOK REVIEWEconomic & Political Weekly EPW october 4, 200833The wage differentials aggravated during recessions due to laying-off of unskilled workers by large enterprises, who invaria-bly found jobs inSMEs. Empirical data support this hypothesis indicating the downward movement of labour (from large firms toSMEs) in periods of severe downturn. Thus the continued predomi-nance of SME employment even in times of recession was attributed to its wage flexi-bility and high labour absorption resulting in less open unemployment. Job ConsciousnessKiyokawa explores the issues of labour quality and labour management in the context of pottery industry based in Khurja town of Uttar Pradesh (chapter 9). Based on survey data gathered from a sample of 100 pottery units, using discri-minant analysis, Kiyokawa examines the role of religion and occupational status as the determinants of job consciousness and family orientedness or gender conscious-ness. His analysis brings out that some religions or value systems do exert some influence on job consciousness and fam-ily orientedness, but such an influence does not seriously disturb labour man-agement because economic factors ultimately prevail in job consciousness in the longrun.SubcontractingGupta and Goldar discuss the rationale for subcontracting promotion in Indian industry, policy initiatives undertaken in this respect, and the progress of sub-contracting followed by a description of the results of a survey based study in chap-ter 10. Subcontracting (of non-core opera-tions to SMEs) is advantageous for large firms because that would provide them comfort to minimise their labour force, focus on core assembly operations, which call for more sophisticated technology and deal with market fluctuations better. Policymakers had adopted various direct and indirect strategies to promote sub-contracting in Indian industry such as (1)reservation of certain component pro-duction for SSI, (2) exclusive definition of ancillaries with a higher investment limit, (3) bureau of public enterprises guidelines to promote ancillaries of public enter-prises, (4) setting up of subcontracting exchanges, and (5) phased manufacturing programmes (PMPs) which forced large firms engaged in assembly operations to procure parts and components within the country. However, all these measures had only a limited impact as sub-contractors accounted for just about 28 per cent of the SSI. The survey results reveal that large firms go for sub-contracting of low value and simple technology involved items, to minimise costs.SME subcontractors receive regular orders and varied levels of assistance (the most important being technical assist-ance). Prices are generally fixed through negotiations. But the major problem faced by large firms relate to product quality and that of subcontractors relate to delayed payments. Siddharthan describes the trends and composition of technology imports into India, with a focus on Japan, in chapter 11. Lump sum payments involving primarily SMEs dominate the technical collaboration between Japan and India. Further, since1991, with the increase in foreign direct investment (FDI), transactions of Japanese firms with IndianSMEs appear to have increased. But there is limited evidence ofSME involvement in the analysis, to support the inclusion of this chapter in the book. In chapter 12, Hattori examines the fac-tors which contributed to the success of Maruti Udyog in India. Similar to Suzuki in Japan, Maruti gradually and steadily expanded its business with the periodic introduction of new models. Maruti adopted the management style of Suzuki, without much difficulty. Further, Maruti introduced the parts procurement system,similar to Suzuki, by procuring parts and components from a variety of sources including its own subcontractors, independent parts makers and even imports. Suzuki’s production system was suitable for manufacturing cars in con-ditions where supporting industries had not yet matured. Suzuki technology made possible the introduction of cheap but distinctive high quality cars using non- specialised components and parts, and indicated a possible way forward for car manufacturing in developing countries like India. It transferred not just hard technology needed for the production of parts and assembling but soft management know-how about the organisation of a car manufacturing industry. That sums up the reason why Maruti Udyog became a successful ven-ture as we know all today. In the final chapter 13, Odaka and Kiyokawa sum up the earlier chapters’ discussions and findings, make reference to some omissions and limitations and have pondered over the future. As they have rightly said, the comparison of the development experience of SMEs in the two countries points out the importance of socio-economic environment as well as shifts in policy emphasis from social protection to managerial rationalisation. To conclude, the merit of the book lies in the fact that it brings out the dispari-ties in the (1) level of development achieved bySMEs, (2) policy approach and emphasis, (3) subcontracting system inindustry involving firms of different sizes, in the two countries. In addition, it throws light on the kind of learning that Indian automobile industry in general, and subcontracting SMEs in particular, could achieve due to technological-cum-managerial assistance received from Suzuki Corporation. However, the book does not give the experience of smooth coherent reading due to interspersing of chapters dealing with divergent issues. Further, overall editing job could have been done better by reducing repetitions, if not eliminating altogether. For example, Indian definition of SSI has been dealt with in three different contexts. Finally, as the editors themselves have admitted, the studies covered in the book pertained to the late 1980s and early 1990s and more developments concerning IndianSMEs have taken place since then. Therefore, the book could have been publishedat least, a decade back, if not earlier.Email: bala@mgmt.iisc.ernet.in ReferencesBala Subrahmanya, M H (2008): ‘Nature and Strategyof Product Innovations in SMEs: A Case Study-based Comparative Perspective of Japan and India’, Innovation: Management, Policy and Practice, Australia, Vol 10, No 2 (forthcoming).Staley, E and R Morse (1965): Modern Small Industry for Developing Countries, McGraw-Hill Company, New York.

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