The Gist of Yojana: January 2015

The Gist of Yojana: January 2015

Technological Innovation in Manufacturing SMES: A Decisive Means of Competitiveness

Of late, technological innovation has been assuming increasing importance as a means of competition between nations across the world. This is because technological innovation has the potential to induce growth of individual firms at the micro level and give a new direction to industry growth at the macro level. It has emerged as a major explanatory factor for why growth rates vary between firms, regions and nations. Therefore, technological innovation is considered as the prime factor of economic change.

Among different sectors of an economy, manufacturing industry sector has helped to drive economic growth and rising living standards for nearly three centuries and continues to do so in developing countries even now.
In fact, it is the manufacturing sector which has been always at the forefront of accelerating economic growth and transforming economic structure of nations through innovation and productivity growth.

What is more significant is that, there is empirical evidence to show that a number of SMEs in wide varieties of sectors across countries do engage in technological innovations, which playa crucial role in enhancing their economic performance (Hoffman, et al, 1998). Small firms are considered more efficient at performing innovative activities and are, in fact, the major source of innovations (Breitzman and Hicks, 2008; International Finance Corporation, 20 I 0). That is why, small firms are alleged to be the seedbed of the new initiatives from which will emerge the successful businesses and industries of the future.

Technological Innovation: Meaning and Importance

Technological innovation is a concept that is sufficiently complex, multi-dimensional and impossible to measure directly (Hansen, 2001). Therefore, technological innovation has been defined in various ways. But the most widely quoted definition of technological innovation refers to OECD (1997): “A technological product innovation is the implementation/ commercialization of a product with improved performance characteristics such as to deliver objectively new or improved services to the consumer. A technological process innovation is the implementation/adoption of new or significantly improved production or delivery methods. It may involve changes in equipment, human resources, working methods or a combination of these”.

In developing countries, however, the concept has been given a wider meaning. Cooper (1980) defined innovation as the introduction of a process or product that is new to the economy of a particular developing country, regardless of whether it has been used before elsewhere.

As the above discussion indicates, technological innovation can be of different kinds. But the most notable dimensions of technological innovations are: (i) radical innovations (an altogether new product or new process to the world is introduced by a firm) and incremental innovations (improvements are made to the existing products/processes); (ii) product innovations and process innovations. Further, technological innovation is just one form of innovation. Innovation may take place in any other functional area of management such as marketing innovation, financial innovation and organizational innovation, among others.

By virtue of its relationship with competitiveness, technological innovation emerges as a major factor promoting competitiveness and economic growth. It contributes significantly to the building up of national competitiveness. Improvements in national innovative capacity are not a zero sum game. If many nations can improve their technological innovation capability, all will enjoy more rapid growth in productivity and with it, an improved standard of living.

But it is important to understand what prompts firms to undertake ‘technological innovations? The available literature on the determinants of technological innovation of firms is diverse and complex (Bala Subrahmanya, 2001). However, broadly, there are two major approaches to describe technological innovations: they are classified as “demand-pull” and “technology-push” theories of innovation:

On the one hand, economists have often emphasized the role of demand in prompting firms to undertake technological innovations. They argued that ‘necessity is the mother of invention’ and without a market need, an innovation is unlikely to emerge and even if it emerges, it will not be successful. Thus, it is the market demand that is primarily responsible for innovation.

It is essential to understand that innovation is a two-sided or coupling activity. Therefore, the above discussed two dimensions of determinants of innovation can be compared to the blades of a pair of scissors.
It is the role of the entrepreneur to link innovative product/process ideas to the potential market in such a way that commercial application or production takes place. Thus, technological innovation is a matching or combining process and the matching takes place in the minds of imaginative entrepreneurs. The matching process is not a ‘one-off event’. It is a far more continuous process during the whole of the experimental development work and introduction of the new product or process into the market.

In general, only a small fraction of SMEs innovates even in developed countries. This is because a large majority of them is hardly aware of the benefits of innovation. Even if they are aware, many of them suffer from internal constraints in terms of technical, managerial and financial resources, employee skills and knowledge. As a result, many of them will have neither motivation nor adequate capability to undertake innovations. One way of overcoming the inadequate expertise is to complement internal efforts with external support. But a considerable proportion of the SMEs will not be in a position to scout for, identify, access and exploit appropriate external advice and support.

Where SMEs have some “threshold level of internal strength”, they supplement their internal resources by seeking, obtaining and exploiting external support. External support for SME innovations can emerge from either vertical linkages or horizontal linkages or both. Vertical linkages refer to relationship with suppliers and customers. This is particularly the case in industries which provide scope for inter-firm linkages - linkages between SMEs and large firms. ‘Where large firms (including MNCs) are the customers of SMEs (which are sub-contractors to the former), the former tend to provide not only output marketing support but also assistance for procurement of inputs, supply chain assistance, finance, human resource training, production and operations, technical inputs, and even technology.

Horizontal linkages, on the other hand, can be policy driven or competition driven. Some SMEs, particularly in industries which do not offer scope for linkages with large firms, seek external support from government promoted SME institutions, or research institutes, due to policy encouragement. SME institutions often provide only technical inputs or information on the sources of better technology but nothing else. But research institutions either collaborate or undertake innovations for SMEs in their labs. Some other SMEs, due to competitive pressure, might seek cooperation with similar SMEs of the same industry in the same cluster or city, to undertake joint R&D and innovations. Horizontal cooperation among SMEs contributes to “collective efficiency”, the competitive advantage derived from local external economies and joint action.

Innovative SMEs, which obtain external support for their innovations, tend to achieve either process innovations characterized by cost reduction, quality improvement, or improved versions of existing products, or product innovations in the form of changes in product designs/dimensions to suit customer needs or altogether new products (much more than those which have carried out innovations solely due to self-efforts). Such SMEs are able to experience a larger share of innovated products in their total sales. Further, such SMEs are able to achieve a higher sales turnover growth over a period of time.

Policy Implications for Indian SMEs

SMEs occupy a place of strategic significance in Indian economy. In 2012-13, there were almost 47 million SMEs which generated more than 106 million employment and contributed more than Rs.l,28,000 crore worth of exports. India’s SME sector is diverse as it produces more than 6000 products ranging from traditional items to sophisticated industrial products (Ministry of MSMEs, 2014). Perhaps India has the second largest and diversified SME base (next to China) in the global economy today.

Other things being equal, vertical linkages in the form of inter-firm collaborations between SMEs and large firms (including MNCs) should be encouraged, by facilitating the latter to overcome information asymmetry through periodic arrangement of buyer-seller meetings at the state- level. In addition, an “Inter-Firm Collaboration Portal” may be set up with all the required information on the manufacturers of intermediate products (SMEs), provision for free registration for both buyers (large firms) and sellers (SMEs), information on (i) requirements for inter-firm collaboration, (ii) possible benefits arising out of such a collaboration, (iii) “success stories” of inter-firm collaboration from India and abroad, etc. This portal should be widely publicized.

Horizontal collaboration involving industry-institute interactions should be promoted for the benefit of SMEs. The vast network of engineering institutions across the country should be facilitated to move closer to local SMEs through collaborative work for innovations. This would mutually contribute to the up-gradation of quality. Particularly, engineering student projects should be linked to local SME technical problems towards ascertaining solutions. This exposure might even encourage innovative entrepreneurship to emerge gradually from our engineering institutions.

To conclude, systematic and consistent policy efforts are imperative to exploit the innovation potential of the vast and growing SME sector in India. This can enhance SME competitiveness and thereby enable them to contribute more intensively to the economic prosperity of our nation in the future.

Innovation and Globalization

Globalization IS not something, which is confined to social, economic and political spheres. The ICT revolution has led us to the reality of viewing the world as a ‘village’ with seamless communication channels and ways of reaching people across the globe. The impact of globalization has penetrated into the very social institution of science and technology (S&T) and the way in which knowledge is produced, owned, developed and marketed. The locus and structure of research and development (R&D), which is at the very core of this knowledge matrix (known as innovation process) has been transformed under the impact of globalisation. R&D and innovation have not only become buzzwords in our every day life-world but have come to playa significant part in the science, technology and innovation policies. Whether it is the case of exploiting new science based technologies (such as nanotechnology, biomedical, electronic and material sciences) or in meeting the challenges of SMEs, poor and vulnerable people, climate change and sustainable development or even in the entertainment and leisure industries, R&D and innovation has come to playa very significant role.

Historically speaking, TNCs and the government sponsored strategic research in North America, Western Europe and Japan (Triad) have been a dominant source of R&D and innovations. Much of the technological innovation and introduction of various consumer products in the world emanated from these global corporate giants. The whole process of scientific research, R&D and innovation was a closely guarded and hierarchically structured profitable enterprise, mainly confined to the corporate headquarters of TNCs.

Firstly, up to the middle of 1980s, much of the R&D and innovation was sourced from the respective home country base of T Cs. The R&D units and laboratories of these firms, which moved out of their home base was in a large measure restricted to the Triad region. Beyond the Triad region in the developing world, they established support laboratories. Comparative advantages of lower costs to ‘re-package’ R&D coming out of home base, foreign country’s innovation capacities, its market and adaptation of technology processes, among other factors, characterize these types of support laboratories. In any case, they are mainly involved in technology transfer linked to local adaptation of designs, styles and tinkering with original innovation process (adaptive R&D). The know ledge flows may be characterized as a ‘one way’ internationalization of R&D. The decade beginning late 1980s and the 1990s witnessed a new trend of going beyond support laboratories and technology transfer to performing R&D abroad beyond the Triad region in a significant way. TNCs established R&D units, which may be labeled as locally integrated laboratories (Pearce and Singh 1992; Pearce 2005). These type of laboratories were involved in the production and consumption of R&D for local, national and global markets including links with manufacturing and marketing entities. Hence, a new phase emerged with the extension of support laboratories to locally integrated laboratories (that is the globalisation of R&D), wherein, TNCs set up various types of regional, global and corporate technology and R&D units beyond the Triad regions in the developing world (Reddy 2005; 2011).

From the ‘one-way’ pattern of R&D and technology transfer to host country locations, the trend transformed into ‘two-way’ knowledge flow. R&D performed beyond Triad regions had begun to feed into the process of innovation, technological changes and creation of new products emanating from the TNCs.

The decade since the 1990s paved the way for yet a new trend. Business and knowledge process outsourcing, R&D and technical services outsourcing and moving other institutional and organisational operations to foreign locations began to surface in a big way by the end of 1990s (Turpin and Krishna, 2007). This era witnessed the introduction of new economic reforms which promoted liberalisation and foreign direct investment (FDI) in financial institutions, services, retail and a host of sectors including R&D. The first decade of 21st century witnessed over US $ 110 billion FDI flow into Asia every year.

Secondly, as we progressed into the first decade of the new millennium, the rise of Asia propelled by China and India and emerging BRICS, gave rise to new middle class demands. The new consumerism and harmonizing and globalising life styles on a worldwide scale (for instance, in automobiles and electronic data processing technologies), meant additional burden of demand pattern on R&D, technological change and innovation process. New designs and life style products emanating from R&D labs became obsolete or classified as ‘old generation’ even before reaching production and consumers. Such is the pace at which global R&D and innovation is moving with markets driven by middle and rich classes of the world in the 21st Century. Unable to sustain the market demand pattern, the corporate model of R&D and innovation pursued within home country locations within physical boundaries of the corporate firm begun to fast erode (The Economist 3 March 2007). The ICT revolutions coupled with advances in electronics and telecommunications have dismantled geographical barriers creating a new innovation potential at different levels of the value chain.

The most revealing aspect of a new trend of innovation is exemplified by the way in which global firms and TNCs such as Apple, Motorola, IBM, Siemens, Intel, Adobe, G.E, among others, generate surplus from the global supply of R&D, innovation and manufacturing chains that is globally distributed. Further, there is convergence of technologies, fields of research with non-science and technology factors in finance, banking, social, cultural, entertainment, among other sectors. All crucial components or factors of innovation are becoming impossible to locate them in one place or location in the corporate home country R&D sites in North America and Western Europe. Specialised knowledge potential and its availability is no more concentrated or a monopoly of a big firm or TNC.

Thirdly, the rise of Asia as the new growth engine of world economy has also begun to show signs of a new geography of innovation. According to National Science Board Science and Engineering Indicators 2014 of the National Science Foundation (NSF) between 1999 and 2009, for example, the U.S. share of global R&D dropped from 38 per cent to 31 per cent, whereas it grew from 24 per cent to 35 per cent in the Asia region during the same time. According to 2014 estimates of NSF, in 2011, East and Southeast Asia region, including China spent about the same (about 31.8 per cent) to that of North America (32.2 per cent) and even more than that in Europe (24.0 percent).

The new geography of innovation points towards some Asian economies that have begun to show signs as new sources of specialized know ledge and innovation ‘hot spots’ of learning. The concepts of frugal and reverse innovations, which overlap with each other in varying forms, originated in a large measure from the experiences of India, China and other Asian countries. Reverse innovation refers broadly to the process whereby the goods are developed as inexpensive models to meet the needs of developing nations (for example Jaipur foot, eye surgeries and lens by Aravind Eye Clinic in India) and then engineered to suit the consumers for the world at large. Frugal innovation refers to ‘achieving more with fewer resources’ for more people.

The concept of Globalisation of innovation goes beyond a range of knowledge-based products. Emerging economies are partnering big science and high technology programmes in EU and US. India, China, South Korea and others like Russia are partner to various EU based big science and innovation programmes such as International Thermonuclear Experiment Reactor (ITER); EU version of Global positioning System called Galileo project; Facility for Antiproton and Ion Research (FAIR); ICT and nano technology. The head quarters of Human Genome Organisation and its President, for the first time, got located in Singapore in the last few years. Similarly, India and China are partnering US in various new science and innovation programmes. Whether it is in the area of big science and innovation or market driven technological innovations, globalization of innovation has dismantled the divide between nations. Given the increasing interdependence between nations and firms in systematic knowledge production that is geographically distributed, learning and catching up in innovation has become an interactive process. Globalisation of innovation is leading us to co- production of knowledge and co- innovation.

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