Contribution Of Smes To National Economies Commerce Essay

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Small businesses, over the past many decades have come to be recognized as the backbone of national economies. A study of the data given in Table 1 shows that small business organizations constitute a major chunk of national economies in all countries across the globe. The Indian government and industry unofficially and many times, officially considers China as the default benchmark for national growth and development. A comparison of the figures for India and China in Table 1 shows that SMEs in China are a far more significant and vibrant sector compared to India.

The emerging global economic environment is characterized by open economies, more economic integration of national economies, ever decreasing protectionist policies by governments, accelerated growth of technology and all this has created avenues and opportunities of growth for SMEs. These very same factors however also make SMEs far more susceptible to the detrimental effects of changes and ripples in the global economic environment. This phenomenon was at ample display during the recent global economic downturn.

As the emerging global economic environment throws up opportunities and challenges, it is also evident from Table 1 that growth and development in any country cannot be categorised as being sustainable and inclusive if the SME sector in that country is not able to compete and grow. Any discussion on the abilities of SMEs to manage and market themselves has to necessarily begin by considering the unique characteristics of SMEs. These unique characteristics differentiate management and marketing of SMEs from the conventional forms of management and marketing seen in their larger counterparts (Carson, 1990). This unique nature of managing SMEs results from unique factors like the dominance of individual style of functioning and preferences of an individual (the owner-manager/entrepreneur) on the decision making personality of the enterprise. The attitude and perceptions of the owner-manager or the entrepreneur are further heavily influenced by among other things, her demographic profile, cultureof the place, nature of society, size of the enterprise and the stage of its development, limited resources (financial and knowledge), lack of specialist expertise (entrepreneurs tend to be generalists) and the limited impact any move by any such enterprise will have on the market (Das 2008).

Such characteristics of SMEs, their lack of resources and the prevalent styles of decision making and implementation makes it impossible to transplant best practices from larger organizations to SMEs with an aim to create and sustain competitive advantage for them. This is truer in the case of marketing as the lack of marketing resources is one of the most evident differences between SMEs and larger organizations.

SME marketing is haphazard, informal and opportunistic because of the way an owner manager does business; they make most decisions on their own, respond to current opportunities and circumstances and so decision making occurs in a haphazard and apparently chaotic way, according to personal and business priorities at any given point in time (Scase and Goffee, 1980). Clearly such limitations will influence and indeed determine the marketing characteristics of an SME. SMEs do not conform to the conventional marketing characteristics of marketing textbook theories; instead their marketing is characterised by the limitations discussed earlier. Thus, SME marketing is likely to be haphazard, informal, loose, unstructured, spontaneous, reactive, built upon and conforming to industry norms.

The emerging business scenario is by default and design moving towards more open markets and is already exposing small businesses in India to the hypercompetitive business environment both in the international as well as the domestic market space. Irrespective of whether a business chooses to access markets beyond the political borders of India, they have to compete with aggressive domestic and international players of all sizes and possessing varied capability sets for the domestic customer too.

Under such circumstances, marketing strategies, policies and practices of small businesses become key determinants of their ability to compete and thrive.

The Small Business Sector in India

Small enterprise promotion has continued to remain an important and integral part of Indian development strategy much before the First Five-Year Plan, even dating back to 1938 when the National Planning Committee documents were being prepared. The concerted policy emphasis upon small firms as a vital vehicle of progress draws upon this sector's crucial historical role in generating substantial employment and income at the regional level and acting as a shock-absorber during periods of economic crisis. The small enterprise sector has continued to contribute immensely in creating large scale job opportunities across space and, in the process, helped reduce inter-regional and rural-urban disparities in growth. The remarkably diverse range of products manufactured in this sector (estimated to a staggering over 8000 distinct products), often available at affordable prices, has successfully catered to a calibrated yet vast domestic market.

After pursuing at least four decades of 'controlled' industrialisation - protecting infant industry and supporting an import-substitution strategy - in 1991, through the formal pronouncement of economic reforms of the Indian economy, the hitherto protected small enterprise sector began to come to terms with the imperatives of globalization. An increasing emphasis upon external orientation, competitiveness and networking with agencies within and beyond the sector and nation seemed to have been the bedrock of current policy paradigm; the recent policy framework corroborates this notable shift in focus. It may, however, be pointed out at this stage that till as late as October 2006, by when the Micro, Small and Medium Enterprises Development (MSMED) Act came to be legislated, the 'medium' category never had been formally defined; albeit, especially, in certain sub-sectors and regions many dynamic small enterprises had been operating at a much higher level of investment in plant and machinery and market reach.

Size and Contribution of SMEs in India

As per the most recent Third All India Census of Small Industries (GoI, 2004), the sector is dominated by smaller / tiny units. Of the total estimated size of the sector with over 10.5 million units (both registered and unregistered in both manufacturing and service enterprises), the tiny units account for 99.5 per cent of the so-called small-scale industry (SSI) units numbering over 4.4 million. In fact, as between the last two small industry censuses (the most recent one being for the year 2001-02 and the previous one for 1987-88), the average size of the firm in terms of employment has declined from 6.3 to 4.6, suggesting a rise in the smaller sized firms over the 15-year period.

Table 2: Definitional Investments Ceiling Criteria for SSI in India, 1985-2006


Upper limit of the historical/original value of plant and machinery (Rs. Millions)






































10.0/ 50.0*





(Das 2008)

1 EOU: Export Oriented Unit. This category was introduced in 1991.

2 SSSE: Small Scale Service Establishment. This category was introduced in 1985.

3 SSSBE: Small Scale Service and Business Enterprise. This category has replaced SSSE since 1991.

* Since February 2006, the investment limit for 69 new items of Food and Allied, Plastic, Chemicals, Glass and Ceramic and Auto Parts industries was raised to Rs. 50 million. Also for all items in the Drugs and Pharmaceuticals sector (whether reserved or not) the investment ceiling has been raised to Rs. 50 million. However, the Micro, Small and Medium Enterprises Development Act, 2006, being operational from 02 October 2006, fixed the ceiling for all small enterprises at Rs. 50 million and for SSSBEs at Rs. 20 million.

Considering the preponderance (and rise) of smaller units, at least since the mid-1980s or so, the policy support seems to have been favouring relatively larger sized enterprises, as may be comprehended from Table 2. While such a massive raise in the investment ceiling (from Rs. 6 million in 1991 to Rs. 50 million in 2006) was supposed to dissuade small from being dependent upon concessional state funds, the measure also explicitly encouraged capital-intensive small enterprise development. Interestingly, as the size of employment has never been part of the criteria used for the official definition of small enterprises, the hike in investment ceiling in recent times could, gradually, render employment creation as a secondary or even non-issue for small enterprises.

Table 3 presents data on key variables concerning the small scale industries in India during the period 1990-2006. The figures (including their annual growth rates) do clearly indicate a consistently growing small enterprise sector, whether in terms of the number of units, output, investment or employment. The official data, nevertheless, have been subject to criticism on grounds of being 'grossly inflated' figures. If such bloated figures bring about a sense of complacency in policy circles, it is a matter of concern.

Table 3: Aspects of growth of SSI in India, 1990-2006




Production (Rs. Millions)



Total SSI Units (in millions)

Fixed Investment

Current Prices

Constant Prices (193-1994)

Employment (Million)













































































3,067,710 *






3,363,440 *
















The Issue of Marketing in Small Businesses

In recent years, there has been a considerable increase in the research relating to marketing practices of small businesses (Gillmore et al., 2001; Blankson and Stokes, 2002; Hill, 2001; Siu, 2000; Siu et al., 2004; Morrison, 2003; Lee et al., 2001). Most of these reports have pointed out the importance of marketing in the sustainability of the small firms. According to various recent studies conducted by researchers, small business owner managers and entrepreneurs are unable to use conventional marketing strategies due to the complicated collage of limitations characterizing most small enterprises. In addition, amll business owner-managers act and believe in a different way from conventional marketing decision-making practices in large companies (Gillmore et al., 2001).

In a survey conducted by the All India Management Association (Sengupta and Chattopadhyay, 2006) among 872 SSI (Small Scale Industry) units pointed out that in manufacturing, growth fell by 8.1 per cent in 1998-2002. Over 70% of the respondents considered problems faced in marketing as the main reason (Jain, 2003).

In their paper Carson and Quinn, (Carson and Quinn, 2003) state that Entrepreneurial Orientation (EO) and Market Orientation (MO) are considered key factors in ensuring firm longevity in the new competitive landscape. Small enterprises are usually started by reliable and highly motivated individuals, with vision and ambition, features which if integrated with a marketing orientation should increase the firms' chance of success (Kenny and Dyson, 1989). Initially, marketing challenges are faced by the small and young firm, which can and will ultimately decide its future (Romano and Ratnatunga, 1995). Small business success is dependent not only on the presence of products and markets, but also on the effective marketing of those products within those markets (Smith, 1990). While the underlying principles of marketing are equally applicable to large and small firms alike, a lack of sophisticated marketing is perceived to be problematic for smaller firms (Cromie, 1991).

While the successful small firm is seen as "a prime example of a marketing-oriented business" (Willsmer, 1984), so far as the company will typically be close to its customers and flexible enough to respond quickly to changing customer needs, operationalisation of a marketing orientation will be determined by dimensions including management capability and key individuals' backgrounds (Liu, 1995). The marketing characteristics of small firms also include: the fact that small firms are faced with different market and competitive circumstances (Stasch and Ward, 1987); are believed not to (in general) engage in marketing or innovative practices although their organic organizational structure should facilitate innovation more readily than the more bureaucratic structure of many larger firms (Cannon, 1991); have inherent production and pricing flexibility, but generally lack strong brand names and market power ; have less goal conflict, various sorts of flexibility, an imbalance between production and marketing, and are ineffectual in the use of marketing techniques (Brannen, 1983). As revealed by Beverland small enterprises do not adopt the long term approach to meet customers' needs but instead they normally depend on crisis management, instinct of owners or managers and they usually take actions to handle immediate competitive pressures (Beverland and Lockshin, 2004).

Generally, as small firms are flexible so they can respond more quickly than large organizations to the changing market requirements, this flexibility forming an imperative competitive strength (Heathfield, 1997). Additionally, small firms face marketing problems which are a function of the general characteristics of small firms including: a limited customer base; limited marketing activity, expertise and impact; an over dependence on the marketing ability of the owner/manager; reactive rather than planned marketing, in which marketing plans are only produced to secure loans, (LaBarbera and Rosenberg, 1989); A further difficulty for the smaller firm is that fixed costs usually absorb a higher level of sales revenue, resulting in proportionally less for marketing expenditures (Stokes, 1994).

Evidence suggests that small firm owner/managers rarely rely on formal training to negate a deficiency in marketing expertise (Hankinson, 1991). Small firms typically spend discreetly on marketing expenditures, and utilize few of the available marketing techniques (Stokes, 1995). Many of the more prearranged procedures necessary for "formal" marketing techniques would in fact lessen against the inbuilt and advantageous flexibility of the small firm (Murray and O'Driscoll, 1996). Many owners/managers rely on previous experience and common sense, adopting a marketing orientation without the accessories through staying close enough to their customers to identify changing needs, and flexible enough to adapt to those changing needs (Stokes, 1994). Within the small firm, the boundary between marketing and selling becomes very unclear, as most small firms' marketing takes place during the selling process and for many small firm owner/ managers the opinion is that selling is marketing (Carson and Quinn, 2003). Sometimes the small firms really face the difficult time by going through the marketing activities. Carson observed from the research, that SMEs find the pricing difficult, relying on what are perceived to be industry norms for guidance, irrespective of their own firms' individual circumstances (Carson et al 1998). They also invest proportionately less on sales training than larger firms, indicating that the small firms studied invested approximately one third as much time in sales management training as larger organizations (Carson and Quinn, 2003). Another identified major insufficiency within small firms' marketing to be the inability to forecast future demand for products, resulting in an inactive reaction to changes in the marketing environment (Ong, 1997).

The small firm's marketing practice comprises informal, instinctive, and selling focused. Implementation of marketing principles is challenging with evidence of specific weakness with respect to pricing, planning, training and forecasting. There can be little doubt that evidence of marketing practice, as prescribed in text books, is rarely found in the small firm (Stokes, 1994). "Owner-managers need to be generalists rather than specialists (Fuller, 1994), and this means that: "Formal marketing may be interesting to the entrepreneur but it is unlikely to relate closely enough to his/her situation specific requirements or to solve company problems" (Carson, 1993). Marketing activity within the small firm will be related to the owner/manager's attitude to, experience of, and expertise in marketing (Carson and Quinn, 2003). Whereas Siu stated that insufficient knowledge about marketing in small business remains and a small business marketing theory specifically related to the understanding and knowledge of strategic marketing is needed (Siu and Kirby, 1998).

Objectives of the Study

The research objectives proposed here primarily involve clarification and understanding of the issues related to marketing and strategy in small business organizations. A critical assessment of available literature showed that a distinct gap in the available body of knowledge did exist. Most studies on the subject were based on wither the European countries, USA or oriental economies in Asia like China and Japan. But the fact remains that the success of SMEs will play a decisive role in India as it does elsewhere and one of the most critical factors determining the success or failure of SMEs is their marketing abilities and in abilities.

To acquire an overview of the marketing paradigm prevalent in SMEs in India.

To investigate marketing decision making processes prevalent in SMEs in India and the influences on the decision making process,

To establish the extent of market orientation of SMEs in India and to gain insight into its role in shaping SME marketing activities,

And to study the effect of cluster development initiatives on the marketing of SME products and services in selected clusters.


The selection of an appropriate methodology is very important since the results of the research mainly depend on the method selected. An appropriate method would give more valid end results (Silverman, 2005).

This proposed study seeks an understanding of how small business owner-managers approach marketing, the major issues they face and the possible moderating influences on their decision making. The study further aims to study the interaction of firm marketing and external variables like technology and third party intervention.

In studies similar to the one being proposed, large firm models applied to small firm settings have been criticized, and small firm researchers are thus urged to conduct studies that are sensitive to the unique characteristics of small businesses. Despite extensive work on small business management across the globe, there still remains a relative lack of understanding of issues, challenges, the very nature and evolution of small businesses (Churchill et al., 1986; Brockhaus, 1987; Bygrave, 1989).It is then argued that in the light of such limited understanding, the emphasis should be placed on empirical research of a phenomenological nature. This would the necessitate employing a qualitative approach where the aim is to explain rather than predict phenomena (Leavy, 1994) and to understand things rather than measure them (Gordon and Langmaid, 1988). Furthermore qualitative methods are considered to be particularly suitable for gaining an understanding of decision making in small and medium-sized firms (Carson et al., 1998).

Qualitative research offers a variety of methods. Based on the specific aims of this research, in-depth interviewing was deemed to be the most appropriate means for collecting the relevant data. In-depth interviews are thought to be one of the best methods to investigate an individual's behavior or attitudes (Tull and Hawkins, 1990); and semi-structured or unstructured interviews have been found to be particularly effective for collecting data from owner-managers of small enterprises (Curran and Blackburn, 1994).

Therefore for the purpose of this study, in depth interviews and surveys based on semi structured questionnaires will be used. These methods will be complemented by extensive secondary survey for relevant literature and data.

Research Methodology

As discussed, a qualitative design will be employed. In depth interviews of small business unit owner-managers shall be used to collect data in conjunction with a structured questionnaire. An in depth analysis of the available literature on the subject and observation of the practices followed by the small businesses shall also be done.

Population and Sample

The population for the proposed study shall be micro and small business as classified by MSME, government of India, registered in Mohali, Chandigarh, Panchkula and New Delhi in Punjab and Haryana and Ernakulum in Kerala.

The list of micro and small businesses registered at the said locations shall be obtained from the concerned government department. This list shall then act as the sampling frame and random sampling will be used to draw the requisite sample. The sample size shall be determined based on the population and the standard error expected.

Data Analysis and Interpretation

Sound research requires a systematic and rigorous approach to the design and implementation of the study, the collection and analysis of data, and the interpretation and reporting of findings. Particular methods or procedures in and of themselves, however, are insufficient to ensure the quality of research (Popay & Williams 1998, Smith 1990)

Qualitative analysis is a process of reviewing, synthesizing and interpreting data to describe and explain the phenomena or social worlds being studied. As Tesch states, the differing analytical procedures can be grouped into content, discovery and meaning-focused approaches (Tesch 1990). No matter which approach is used, just as with data collection methods, the rigour of the analytical procedures depends on their adequacy and transparency.

It is argued that for the purposes of policy level and strategy research in SMEs, emphasis should be placed on empirical research of a phenomenological nature (Churchill et al., 1986; Brockhaus, 1987; Bygrave, 1989). These are exemplified in the meaning-focused approaches emphasize meaning comprehension; that is, understanding the subjective meaning of experiences and situations for the participants themselves, as opposed to how these meanings might fit with researchers' conceptions (Davidson et al 1997).

Typically, this approach to data analysis attends to unique themes of meaning within the data, as well as common themes of meaning across data (Tesch 1990). The analytical procedure typically involves two levels of analysis: first, to review, identify and code recurrent themes within data for each participant; and second, using similar steps, to identify common themes and areas of divergence across participants. Finally, it usually entails bringing identified themes back together into meaningful relation with each other; developing, as it were, a narrative or structural synthesis of the core elements of the experiences described (Davidson et al 1997).

Appropriate statistical tools will be used for the final analysis of the data. Software packages SAS ver. 9.0 and SPSS ver. 17 will be used where needed. Validity and reliability control will be maintained at each stage of research and wherever necessary, the validity and reliability will be evaluated.


Since the proposed study will be primarily qualitative in nature and as qualitative research claims to represent participants' own perspectives, or subjective experiences of their worlds, it is important to consider the extent to which the qualitative research report reflects the perspectives of those it claims to represent. The proposed study will ensure correct representation and interpretation by measures such as the use of quotations (i.e. participants' own words) juxtaposed with the writer's description and interpretation helps the reader to evaluate the authenticity of the researcher's claims about the data. Authenticity in representation will be further enhanced by evidence that participants were engaged in the interpretive process, or gave feedback on the researcher's interpretation. Evidence will also be presented that different, or competing views were listened to. Evidence will also be presented that dialogue among those views in the report was conducted and considered, to ensure openness on the researcher's part to the possibility of different views and an effort to explore and represent them.

Implications of the Study

Global wealth has almost doubled since 1990 (World Bank). India too jumped on to the liberalization, privatization and globalisation bandwagon in 1991 and there is sufficient evidence to suggest that growth and development has bounded since then. But the fact still remains that the development has occurred in clusters and that majority of the Indian population still remains insulated from this growth.

As has been mentioned earlier, there is still a limited understanding of managerial issues faced by small businesses. This situation is further exacerbated in the case of developing countries like India due to the critical role success or failure of small businesses will play in an acceptable for of national development and the limited amount of academic and non academic research work on issues faced by small businesses. We still do not have a credible model of marketing for small businesses in India and we will not be able to adapt or borrow any such model made in the future on the basis of research conducted in other countries. This is because of the unique nature of India and the unique opportunities and problems faced by its people.

At a time when almost 40% of the Indian population still remains below the poverty line, sustainable and inclusive development will and should remain the prime agenda for any government at the centre. Any sustainable development which will also be inclusive in nature will necessarily depend upon the vibrancy and success of the SMEs in India. As marketing is one of the major issues that can hinder that from happening, it is therefore plausible that this study will provide valuable inputs to policy makers and entrepreneurs.