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    Minor Projecton

    Export Competitiveness of

    Indian

    Small & Medium

    Enterprises in

    Apparel & Textile Industry

    Submitted by

    ANUPAM BHOLA

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    FMS-1

    Department of Fashion Management StudiesNational Institute of Fashion Technology

    Gh-0, Near Info city, Gandhinagar

    ACKNOWLEDGEMENT

    In order to choose and carry out any research with a successful

    execution requires personal liking, interest, support, and most important

    guidance.

    I would like to take this opportunity to thank and I am highly indebted

    to my guide Dr. Benaya Bhushan Jena, course coordinator, PGFMS for his

    never-ending support and suggestions throughout the project, giving me

    direction and molding my minor project into final stage.

    I would like to mention the support, patience and help of my

    classmates, without which the execution of this project would have been

    difficult.

    Anupam Bhola

    FMS 0703

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    Contents

    CHAPTER 1 3

    Introduction .4

    CHAPTER 2 28

    Literature Review .6Problem Definition ..24

    Research Gap .. 24

    Objective of Study ..25Nature and Scope .26

    Hypothesis 27

    Research Methodology ..30

    CHAPTER 3 .31

    Conclusion 32

    Chapter 4 34

    Recommendation 34

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    CHAPTER 1

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    Chapter 1

    Introduction

    This paper deals with the competitive problems facing small and medium

    sized enterprises (SMEs) in developing countries. It concentrates on the

    manufacturing sector, where the competitive threat is felt most directly at this

    time and where there is enormous export potential. It draws on the

    experience of the advanced and newly industrializing countries, SMEs form,

    by number, the majority of manufacturing enterprises at all levels of

    development. In many economies they provide the bulk of employment. In

    some they are also substantial contributors to exports and innovative

    activity. In developed economies, SMEs tend to be in modern

    manufacturing and services, often in cutting edge technology based

    activities. It is generally the case, in all economies but particularly the more

    industrialized ones that SMEs learn most from each other and from larger

    enterprises.

    However, these market based learning mechanisms are often not enough to

    support technology development, particularly when competition intensifies

    and technical change becomes very rapid.

    Smaller enterprises have always been active in manufacturing, since beforethe dawn of the industrial revolution. Even with the advent of large-scale

    production, they have flourished in niches where economies are scale

    economies are unimportant or where flexibility, customization, locational

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    advantages, subcontracting to larger firms can offset their importance. They

    have also been able to reap scale economies in functions like marketing,

    information, training, and design and so on by co-operating with each other

    or clustering together.

    The small-scale industries sector plays a vital role in the growth of the

    country. It contributes almost 40% of the gross industrial value added in the

    Indian economy. It has been estimated that one million rupees of investment

    in fixed assets in the small scale sector produces 4.62 million worth of goods

    or services with an approximate value addition of ten percentage points.

    The small-scale sector has grown rapidly over the years. The growth rates

    during the various plan periods have been very impressive. The number of

    small-scale units has increased from an estimated 0.87 million units in the

    year 1980-81 to over 3 million in the year 2006.

    When the performance of this sector is viewed against the growth in the

    manufacturing and the industry sector as a whole, it instills confidence in the

    resilience of the small-scale sector.

    Year Target Achievement

    1991-92 3.0 3.1

    1992-93 5.0 5.6

    1993-94 7.0 7.1

    1994-95 9.1 10.1

    1995-96 9.1 11.4

    1996-97 9.1 11.3

    1997-98 * 8.43

    1998-99 * 7.7

    1999-00 * 8.16

    2000-01 (P) * 8.90

    P-Projected (April-December)

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    * Target not fixed at constant prices

    On the employment front the SSI Sector in India creates largest

    employment opportunities for the Indian populace, next only to Agriculture. It

    has been estimated that 100,000 rupees of investment in fixed assets in the

    small-scale sector generates employment for four persons. Cotton textile

    products (17) contribute the second largest per unit employment in India.

    The apparel sector, like weaving and finishing, is characterized by a large

    number of independent, small-scale firms. While it is not unusual for apparel

    manufacturing to be both relatively small-scale and independent from theupstream segments of the textile supply chain, Indias apparel firms tend to

    be smaller and more labor intensive than other major exporters. Unlike the

    other segments of the textile industry, the apparel sector is relatively new

    because, traditionally, most Indian garments were made in the home or on a

    custom basis by local tailors.

    Because of the predominance of very small-scale fabricators in the apparel

    sector, most apparel is produced on a contractual basis for large

    manufacturers/ exporters. The fabricators specialize in low-wage, labor-

    intensive sewing and have the flexibility to meet small custom orders but are

    much less competitive with large orders and those typically involving high

    levels of automation. It is not clear if the current structure of the Indian

    industry, with many small-scale firms that are not suited to meeting the

    needs of large international buyers in a timely manner, will remain

    competitive in the post-MFA world.

    The small and medium enterprises segment has lately emerged as a focus

    area for banks, financial institutions, industry and academicians.

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    Chapter 2

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    CHAPTER 2

    Literature Review

    SMES in India

    In the developing countries, SMEs contribute a lot to the GDP of the country

    and constitute the bulk of the industrial base1. For instance, in India SMEs

    accounts for almost 50% of private sector employment and about 80%of the

    total number of industrial output but still it contributes only 34% of the total

    exports from India.

    It is therefore essential to create and sustain a business environment that

    reinforces the international export competitiveness as a whole. It also has

    less than 10% of the FDI (Foreign Direct Investment)2the reason why SMEs

    make a much smaller contribution to value added in global market are

    manifold which will be taken in this report. Besides direct exports, it is

    estimated that small-scale industrial units contribute around 15% to exportsindirectly. This takes place through merchant exporters, trading houses and

    export houses. They may also be in the form of export orders from large

    1Unctad , SMEs and The Global Market Place,2006

    2compiled from smecentreofindia.com

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    units or the production of parts and components for use for finished

    exportable goods.

    Current scenario

    Small & medium enterprises3 definition laid by Govt. of India in terms of

    investment in Plant& Machinery

    SSI : up to 1 million rupees

    MSI : above 1 million rupees and up to 10 million rupees

    EMPLOYMENT GENERATION : 20 million

    OWNERSHIP PATTERN: 75% proprietorship, 19% partnership, 6%

    corporate &others.

    On the basis of raw materials used, 43% companies are into cotton and

    cotton based products, 16% each in man-made and silk, 13% in blendedand 10% use wool

    The main export destinations of SSI products under the readymade

    garments category are USA, EUROPE, CANADA, WEST ASIA, and NORTH

    AFRICA.

    3compiled from www.laghu-udyog.com

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    SMEs Region Wise And Distribution Across The Value Chain

    The geographical concentration of the sample companies reflects the

    concentration of textile manufacturers in the country. The North and South

    have maximum representation. Around 37% companies are located in the

    North, 33% in the South, 26% in the West and 4% in the East and further is

    the graph showing the distribution of SMEs companies across the value

    chain.

    In terms of the regional spread of these companies, the southern region

    showed a higher proportion of companies falling in the Rs 250 mn and

    above turnover bracket. The northern region had a high share of smallcompanies. The western region had a reasonably proportionate share of

    companies in the various revenue brackets

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    Of the companies engaged in the manufacture of home furnishing products,

    67% were located in North India. Fabric manufacturers had a strong

    presence in the South and North India, with a share of 34% and 31%

    respectively. Yarn manufacturers were concentrated mostly in the South,

    representing 59% of the yarn manufacturers.

    In terms of the finished goods, representation of garment and home

    furnishings manufacturers in the sample was largely from the North.

    Industrial textile manufacturers were more in number from the Western

    region.

    Regional Concentration of Companies Product-wise(as % of total companies)

    Region Fabrics Yarn Garment HomeFurnishing

    North 31.4 14.3 42.4 66.1

    South 33.9 58.7 25.8 13.6

    East 7.4 1.6 9.1 1.1

    West 27.3 25.4 22.7 19.2

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    Growth

    The companies in the sample were largely optimistic on growth prospects

    over the next two years. On an average, the players were expecting an

    average growth rate of 32% for the next two years, the garment firms beingthe most hopeful and expecting a 40% increase in sales. The other sub-

    segments that are expecting to do well are manufacturers of fabric and

    made-ups. In the last two years, the average growth for all companies in the

    sample was an average 28%. The Western region showed higher growth

    compared with the other regions.

    Technology Up gradation Fund (TUF)

    The numbers of companies that have availed of the TUF facility given by

    the government comprise 24% of the sample size. Of these, 53% are into

    yarn and fabric manufacturing. Another interesting factor is that nearly 73%

    of those benefiting from this Fund were small scale enterprises with

    investments in the range of Rs 10-50 mn. In terms of ownership, 37% of the

    companies were private limited companies.

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    Funding

    Funding Of the companies in the sample, 75% met their funding

    requirements from nationalized banks.

    Private Banks were next in preference for these companies, however with

    only a 13.5% share. Cooperative banks and MNCs were least preferred.

    There were 4% companies which utilized internal resources to meet their

    finances. Most respondents felt that availability of funds for future plans and

    working capital requirements was moderately difficult.

    Strength of the SMEs in India

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    SMEs always represented the model of socio-economic policies of

    Government of India which emphasized judicious use of foreign exchange

    for import of capital goods and inputs; labor intensive mode of production;

    employment generation; non concentration of diffusion of economic power in

    the hands of few (as in the case of big houses); discouraging monopolistic

    practices of production and marketing; and finally effective contribution to

    foreign exchange earning of the nation with low import-intensive operations.

    It was also coupled with the policy of de-concentration of industrial activities

    in few geographical centers.

    The Core Strengths

    High contribution to domestic production

    Significant export earnings

    Low investment requirements

    Operational flexibility

    Location wise mobility

    Low intensive imports

    Capacities to develop appropriate indigenous technology

    Import substitution

    Contribution towards defense production

    Technology oriented industries

    Competitiveness in domestic and export markets

    Limitations Faced by SMEs

    Low Capital base

    Concentration of functions in one / two persons

    Inadequate exposure to international environment

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    Inadequate contribution towards R & D

    Lack of professionalism

    In many developing countries, particularly the less industrialized ones,

    there is a sharp divide between modern and traditional SMEs. A significant

    section of SMEs in developing countries remains in traditional activities

    generally with low levels of productivity, poor quality products, serving small,

    localized markets. There is little or no technological dynamism in this group,

    and few graduate into large size or modern technologies. The SMEs perceive

    lack of infrastructure4 as the biggest hindrance to growth. The companiesraised concerns regarding labor issues and an equal proportion highlighted

    lack of institutional support as their priority concern. These companies were

    mostly from the North, South and East. The garmenting and weaving

    segments mainly showed labor as their principal concern.

    In many poor countries, there is also a large underclass of (formal and

    informal) micro enterprises that ekes out a bare survival. Some of these small

    and micro enterprises may be economically viable over the long-term, but a

    large portion is not. With import liberalization, changing technology and thegrowing demand for higher quality modern products, many traditional SMEs

    face the problems. The constraints faced by SMEs in developing countries are

    not only accentuated with ineffective policy design, but also by market failures

    in the region. Experts in development economics and industrial organization

    have therefore shown some empirical evidence that small firms in developing

    countries can grow and be competitive as well, through cluster formations.

    In many developing countries, particularly the less industrialized ones, there

    is a sharp divide between modern and traditional SMEs. A significant section

    of SMEs in developing countries remains in traditional activities generally

    with low levels of productivity, poor quality products, serving small, localized

    4 SME Rating Agency of India Ltd.

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    markets. There is little or no technological dynamism in this group, and few

    graduate into large size or modern technologies. In many poor countries,

    there is also a large underclass of (formal and informal) micro enterprises

    that ekes out a bare survival. Some of these small and micro enterprises

    may be economically viable over the long-term, but a large portion is not.

    With import liberalization, changing technology and the growing demand for

    higher quality modern products, many traditional SMEs face closure or very

    difficult upgrading.

    Even modern SMEs in many countries face very difficult competitive

    challenges in the emerging setting. The threat is one aspect of the larger

    competitive challenges posed by accelerating technical change,

    globalization and liberalization. The pace of change is so rapid, and its

    scope so wide, that some analysts see the emergence of a new

    technological paradigm (Freeman and Perez, 1990). Others, like Best

    (1990), point to the changing competitive context. Traditional modes of

    competition, based on low costs and prices, are being replaced by the new

    competition, driven by quality, flexibility, design, reliability and networking.

    This change is not just in advanced manufactures but also to mundaneconsumer goods like clothing, footwear and food products. Firms are

    specializing increasingly in different segments of the production chain,

    outsourcing segments and services to other firms to reap economies of

    scale and specialization. At the same time, most leading firms are

    broadening their field of technological competence to manage effectively the

    complexities of supply chain management and innovation.

    The new technological paradigm defines the world in which SMEs have

    increasingly to grow and compete. The paradigm is leading to large shifts in

    the location of productive and innovative activity and patterns of comparative

    advantage. It is a world increasingly driven by technological competence

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    within given activities and by a structural shift from low to high technology

    activities (those with rapidly changing technologies and high rates of

    research and development spending). Technology based activities are

    growing more rapidly in production and trade in all major developed and

    developing economies.

    TYPES OF FIRMS EMPLOYEES( in lakhs) PERCENT

    COMPOSITION

    Factory Sector

    -Large firms

    -SSEs

    62.5

    40.6

    21.9

    21.8

    14.2

    7.6

    Non Factory Sector

    -SSEs registered

    -SSEs not registered

    -Household

    224.2

    118.10

    38.10

    68

    78.2

    41.2

    13.3

    23.7

    TOTAL 286.7 100

    TOTAL SSEs 246.10 85.8

    The above Fig. shows the major employment provider in the manufacturing sector.

    Competitive problems facing SMEs

    SMEs in general tend to face three sets of competitive problems. Some are

    inherent to being small. Some reflect distortions in markets and institutions.

    And some are caused by policy intervention. The remedies to theseproblems clearly differ according to their nature and source.

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    The first set relates to disadvantages of small size per se. Where

    manufacturing, marketing, technological or other functions have inherent

    scale economies, small size imposes cost and innovative penalties on

    SMEs. However, these are structural features of the industrial scene they

    simply mean that SMEs have to specialize in different activities or processes

    from large firms. By doing so they can flourish and exploit their own

    advantages of flexibility and internal coordination. The relative advantage of

    SMEs is where scale economies are less marked, or where they can offset

    such economies by choosing technologies that allow them to offset their cost

    handicap by responding rapidly to changing conditions, finding niche

    markets or customizing their products. In the early stages of technological

    innovation, before the industrial structure has settled down, small firms can

    be more innovative than large firms can. Many electronics and software

    technologies illustrate this clearly. The spread of computer controlled

    equipment helps SMEs, since large investments in specialized machinery

    become less important in certain activities. Where SMEs cannot individually

    establish a competitive advantage, they can realize scale advantages by

    cooperating with other small enterprises, subcontracting from larger

    enterprises. As noted at the start, SMEs learn collectively from each other,large firms.

    The growing literature on clusters suggests that firms in close proximity (or

    able to establish information and other linkages across geographical

    distance) reap various agglomeration economies. Some of these are

    enjoyed by a simple act of being in the right place the availability of

    particular skills, materials or markets, saving transaction costs for buyers,

    the development of ancillary activities and institutions. Others need active

    collaboration.

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    Enterprises can jointly undertake functions where scale economies arise: for

    instance, training workers, designing new products, conducting quality

    control or research activity, storing and transporting goods, and so on. This

    generally involves setting up institutions, but it may involve others forms of

    collective action, to influence existing institutions or policy makers.

    Subcontracting to large firms, with or without a cluster, is also an effective

    way for SMEs to build on their advantages. As noted, the growing trend on

    the part of large firms to specialize, downsize and network has increased

    their reliance on small suppliers and contractors. In many industries, it has

    also made them more willing to integrate SMEs into their technological

    activities. The falling cost of information technology and communication

    enhances this tendency, and it makes extensive networking by SMEs

    themselves less dependent on geographical proximity. However, small size

    does impose certain disadvantages despite potential clustering and

    subcontracting.

    SMEs are at a handicap in activities where the risks involved are large,

    technology is exceptionally fast moving and based on massive R&D, or

    investments have to aim at global markets from the start. As noted, theiradvantages of flexibility and innovativeness diminish as technologies

    stabilize and large-scale production and marketing become more important.

    Clustering also has its limitations. Some activities may be too difficult to

    manage on a cooperative basis: where valuable proprietary knowledge,

    marketing branded products, tapping particular markets or creating very

    specific skills is involved. Many agglomerations do not develop into genuine

    clusters, but remain technologically stagnant, low productivity groups of

    traditional SMEs.

    This may be because of the larger environment in which they operate (say,

    with policy constraints of growth or low levels of general skill and technology

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    development) or because they are unable to undertake cooperative activity

    to enhance competitiveness. This may, in turn, reflect a lack of trust between

    SMEs, cultural traditions of non-cooperation, or the absence of an internal or

    external catalyst to collective action. Clustering can also have cost such as

    congestion, excessive duplication, free rider problems or domination by a

    few members that lead to inefficiency, lack of innovation or inflexibility.

    Clusters may breed inward-looking attitudes and deter members from

    seeking external alliances.

    Second, SMEs may face segmented factor markets. In other words, large

    firms may have greater or more privileged access to input, credit, labor,

    infrastructure, and information and technology markets. There are economic

    reasons for this: providers of productive factors find it easier, safer and

    cheaper to deal with a few large customers than a range of small and

    dispersed ones. It is difficult to collect detailed information on the latter. They

    are more difficult to monitor and the cost of enforcing contracts may be

    disproportionately large in relation to the size of the transaction. The best

    known case of this is in credit and capital markets, where the literature on

    information economics analyses how SMEs face problems created bymissing markets and asymmetry. However, there are similar tendencies in

    all other factor markets where transactions are discrete and involve direct

    relations between buyer and seller. In the present context, an important

    asymmetry is in the ability of SMEs to find, evaluate, purchase and master

    new foreign technologies. International technology markets are notoriously

    imperfect, and finding the right technology at the right price can be a costly

    and lengthy task. More important, learning to master a new technology,

    particularly one involving new skills, materials and methods, can be an

    uncertain and costly process.

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    The problems of technological mastery are far greater when, as in most

    developing countries, factor markets and institutions are themselves

    underdeveloped and unresponsive. Empirical research in less developed

    countries shows that SMEs are poorly placed to deal with technical change

    and upgrading (Lall, ed., 1999). Not only do they lack the information and

    resources to access new technologies and skills, they often do not know

    how weak they are. They may be unaware of competing technologies in

    other countries. They may not realize the nature of the new skills and

    techniques needed to keep up.

    They may lack the entrepreneurial knowledge and education to seek the

    technology or assistance needed. The problem is clearly much greater for

    SMEs in the traditional and rural sectors of developing countries, but

    information and skill problems affect SMEs everywhere. Even in highly

    industrialized countries like the USA and Japan, SMEs find it difficult to keep

    abreast of international technological and market trends.

    Third, policies and institutions relevant to manufacturing can be biased

    against SMEs. This is particularly the case in developing countries, wherethe widespread use of investment and import licenses and controls, directed

    credit, location incentives, infrastructure provision and so on may favors

    firms with better resources and connections. Corruption and rent seeking by

    bureaucrats and politicians generally enhances the ability of large firms and

    groups to exploit the system. Interestingly, some policies intended to favor

    SMEs also have undesirable effects on their dynamism and

    competitiveness. For instance, tax privileges given to smaller firms and the

    effective exemption of micro and informal enterprises from the tax system

    provide strong incentives to stay small rather than grow large. It can lead to

    a proliferation of units below the taxable size, some of which may be

    technically efficient but many are not. In countries like India where certain

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    industrial products are reserved for SMEs, it has led to the stifling of

    competition and retardation of technological upgrading. In areas of export

    strength like textiles, the Indian reservation policy has eroded an established

    area of national competitiveness.

    Some important key performance measures tracked about small medium

    enterprises in textile production are:-

    1 On line quality2 Off line rejects3 After wash quality4 Per cent defectives5 Lead time

    6 WIP7 Labor & machine productivity8 RM costs9 On time delivery10 Waste loss11 Over dues to debtors12 Labor costs13 Downtime

    Finally, most developing countries tend to provide much weaker support

    systems for SMEs compared to developed or newly industrializing ones. We

    describe elements of SME support systems in some of these countries.

    Industry Agency Administrative

    Department

    Large/Medium industries Dept. of IndustrialPolicy and

    Promotion and Dept. of

    Industrial Development,Ministry of Industry

    Small Scale Industries Small Industries DevelopmentOrganization

    Dept. of Small Scale,

    Agro &Rural Industries,

    Ministry

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    Of Industry

    Power looms Textile Commissioner Ministry Of TextileTraditional Industries

    Khadi and Village

    industries

    Khadi and Village IndustriesCommission

    Dept. of Small Scale,Agro &Rural Industries,Ministry of industry

    Handlooms Development Commissioner Ministry of Textiles

    Sericulture Central Silk Board Ministry of Textiles

    In practice, the small scale industry sector serves as a residuary sector in

    the sense that all units that fall within a prescribed investment limit and are

    not recognized in a particular sub sector are included in the small scale

    industries sector.

    SME Clusters in the Indian Context

    Size and heterogeneity in the cluster network:

    It has been estimated that there exist about 350 SME clusters in India.

    These clusters are overwhelmingly predominant with small industries and

    the share of medium and large industries in the sales turnover, production

    and employment is nominal. The size in terms of the number of units and the

    quantum of output of clusters may vary significantly. Some of them are so

    big that they produce up to 70 to 80% of the total volume of that particular

    product produced in India. For example, the township of Panipat produces

    75% of the total blankets produced in the country. Similarly Tirupur, a small

    township in the Coimbatore district of Tamilnadu contributes 80% of the

    country's cotton hosiery exports.

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    On the other hand some clusters are very small also, but they are so

    specialized that about 100 workers each may work in these clusters. For the

    purpose of the present study clusters which have minimum of 100 registered

    units in a particular location have been taken. There may be another 50-100

    unregistered units along with the registered ones.

    INDUSTRY GROUP NIC Code No. of Clusters

    Cotton Textiles 23 15

    Hosiery & Garments 26 10

    Wool, Silk & SyntheticFibre textile

    24 8

    The top six industrially developed states out of the 25 states in the country

    account for 54.3 % of the SSI units. Whereas 71% of the clusters are

    located in them. The common states among the two sets of data are

    Gujarat, Punjab, Uttar Pradesh and West Bengal. Surprisingly, the state of

    Madhya Pradesh which has the maximum number of small scale enterprises

    (12.7%) as per the IInd All India Survey of SSI seems to have very few

    clusters (1.4%). Traditionally certain communities viz. Gujaratis, Marwaris

    and Punjabis have been a rich source of entrepreneurial talent and this

    could be one of the reasons for the growth of clusters in Maharashtra,

    Gujarat, Punjab and Haryana.

    Subcontracting to large firms, with or without a cluster, is also an effective

    way for SMEs to build on their advantages. As noted, the growing trend on

    the part of large firms to specialize, downsize and network has increased

    their reliance on small suppliers and contractors. In many industries, it has

    also made them more willing to integrate SMEs into their technological

    activities. The falling costs of information technology and communication

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    enhance this tendency, and it makes extensive networking by SMEs

    themselves less dependent on geographical proximity.

    The Vision

    The vision is for the SME Sub-Committee to create a conducive business

    environment, which will lead to a competitive SME sector contributing to the

    creation of quality employment and improve the range of goods and services

    available to the people of India.

    In a small open economy like India it is vital that enterprises are able to

    function in an environment that has low transaction costs. Among other

    things, transaction costs are lowered by having robust institutional

    structures, an efficient regulatory environment, and efficient and appropriate

    PPPs.

    In an ideal market situation SMEs can overcome their fundamental

    weakness of poor economies of scale. In competitive environment

    cooperation and the use of flexible networks and clustering create

    advantages for SMEs and help to overcome limits to economies of scale.

    This can be in terms of sharing production processes, supply or distribution

    networks. A key requirement for this to happen is the existence of a

    business environment and regulatory framework that promotes competition

    and cooperation.

    The Government is primarily responsible for developing and maintaining a

    business environment and regulatory framework that is conducive to

    business. Because of their size and in comparison to large corporations,

    SMEs have less bargaining power when it comes to negotiating their

    regulatory environment. Moreover, the regulatory burden often impacts more

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    heavily on SMEs because of the indivisibility of government fees, levies and

    time taken to comply. Unnecessary regulations and costs can significantly

    raise the transaction cost of doing business. In general, the regulatory

    environment needs to be transparent, predictable, stable, consistent and

    timely in implementation. Overall, the economic environment, comprising

    policies, regulations and institutions needs to engender a climate of trust in

    which businesses can compete and cooperate.

    The vision of creating a conducive business environment for SMEs

    translates into several specific objectives. Implementing the objectives will

    require the SME Sub-Committee to work closely with the private sector in

    coordinating, information sharing and problem solving. The four main

    objectives are:

    (i) Increase entry of SMEs into the formal sector;

    (ii) Implement governance reforms for SMEs;

    Problem Definition

    Indias SMEs are performing below its actual capacity in terms of external

    trade, despite being favorable conditions.

    Research Gap

    Although the existing literatures discuss strategies available to small and

    medium-sized enterprises (SMEs), they do not address the plight faced by

    SMEs, namely resource limitations in their strategy formulation. Drawing on

    deductive logic, this paper identifies and conceptualizes financing and

    marketing strategies for SMEs and which specifically take into consideration

    the competitive reactions of bigger incumbent firms. Successful substitution

    calls for the SME to offer differentiated yet substitutable products to that of

    an incumbent so as to force accommodation by the latter. Free riding allows

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    the SME to enter a served market segment without having to incur market

    development expenses. Finally, strategic deterrence aims to deter a bigger

    incumbent firm from embarking on aggressive counteractions against the

    SME. This can be achieved by the formation of strategic alliances and/or

    incurring sunk costs in order to signal the SMEs commitments to stay in the

    market credibly.

    There are studies which discuss on similar issues but the research are done

    for SMEs in a generic market rather then a deep study in SMEs in Textile&

    Apparel sector .An understanding will be developed through my survey that

    Indias SMEs competitiveness could be world class by doing a research in

    this area.

    Objective of the Study

    To study the factors which are hindering the performance of SMEs. The

    competitiveness of Indias apparel sector is adversely impacted by an

    inadequate domestic supply of quality fabrics. Fabric imports are subject to

    high duty rates and other domestic taxes that increase the cost of imported

    fabrics. Another major weakness of the Indian apparel sector is a lack ofproduct specialization which, along with a limited fabric base, has limited

    Indias apparel production and exports to low value-added goods. With the

    aforementioned objective in mind, this study will first identify the structure

    and role of SMEs in Indian textile and apparel industry.

    While the focus of this paper is on SMEs, we also examine the overall

    business environment since (1) many policies that promote overall business

    competitiveness and private commercial contracting may also foster SME

    growth and (2) we seek to distinguish between the impact of SMEs in

    particular from policies that foster a competitive environment and private

    property rights protection in general. We examine an aggregate index of the

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    business environment that incorporates information on entry and exit

    barriers, effective property rights protection, and sound contract

    enforcement.

    We find some evidence that a business environment that promotes

    competition, private property rights, and sound contract enforcement boosts

    economic growth. The overall business environment index remains linked

    with economic growth even when controlling for the endogeneity of the

    business environment index. However, we find that the business

    environment does not influence the poor any more or less than the rest of a

    countrys population. These results are consistent with the view that a

    competitive, contractually sound business environment lowers poverty by

    increasing the overall level of GDP per capita, but the business environment

    does not influence poverty beyond its impact on overall economic

    development.

    Nature and Scope of Study

    Nature

    The research is elaborated to understand the export competitiveness of

    Indian small & medium enterprises in apparel & textile industry. It basically

    looks into the factors which affect the growth of Indian small & medium

    enterprises and that will lead to the competitiveness.

    Scope

    The study would be covering the three competing sectors of small and

    medium enterprises that make up the Indian textile industrythe composite

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    mill, power loom, and handloom sectorsand the apparel industry. The

    scope of the study will lead to the study of cotton, manmade fiber, wool, and

    silk textiles and apparel. Also the independent processing houses will be

    explored that carry outpost-weaving and knitting operations such as dyeing,

    printing, and finishing.

    Hypothesis

    The hypothesis that can be derived from the research questions are:

    1. Mass-production affects the export competitiveness of Indian small &

    medium enterprises2. Rapid and Continuous Technological Progress affects the export

    competitiveness of Indian small & medium enterprises

    3. Specialized, Custom-made products affect the export competitiveness of

    Indian small & medium enterprises

    4. Computerized Technologies affect the export competitiveness of Indian

    small & medium enterprises

    5. Liberalization of trade and investment flows affect affects the export

    competitiveness of Indian small & medium enterprises

    Research Methodology

    To measure the role of SMEs in the economy, I use a newly

    constructed database on the share of manufacturing employment accounted

    for by SMEs and construct two measures of SME size. While these are the

    most comprehensive indicators of SME size available for a broad cross-

    section of countries, they are not without their shortcomings. For instance, it

    would be useful to have information on SME employment beyond

    manufacturing, but cross-country data are unavailable for the share of SMEs

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    in other sectors, such as agriculture and services. Another potential problem

    is that we restrict our definition of SMEs to formal enterprises and exclude

    informal enterprises, which may represent an important component of output

    in some economies. In this case, however, I incorporate estimates of the

    size of the informal sector relative to the formal sector in the economy.

    In order to evaluate the competitiveness of Indian textile and clothing

    exports of SMEs, the study has analyzed the competitive performance of

    Indian exports of the identified products in the US and EU markets. It has

    also been used to highlight the role of emerging trade policy environment-

    specifically, the role of discriminatory rules of origin in. Regional Trading

    Arrangements [RTAs], tariff peaks and environmental and labor standards-

    as market access issues relevant to textile and clothing exporting countries.

    The research is of an analytical nature where the data is collected from the

    secondary source (such as newspaper, magazines, etc.).The tools used for

    analysis are Microsoft excel, pie-charts.

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    CHAPTER 3

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    CHAPTER 3

    Conclusion

    Exporting is considered to be one way of stimulating growth of SMEs

    gradually improving the quality standards of SME products and capturing

    more global shares. Boosting the contribution of small and medium

    enterprises in total exports of India is vital to Indias future economic growth.

    Export competitiveness of SMEs in textile sector in India can be promoted

    in following manner:

    Independent SMEs specializing in specific niches and highly profiled

    production; SMEs that link up with TNCs or domestic firms and SMEs that

    are part of clusters and networks in order to reinforce their competitiveness.

    Special emphasis has been put on linkages between TNCs and SMEs as a

    way to enhance the export competitiveness of SMEs owing to the leading

    role that TNCs are increasingly playing in world production, trade and

    finance and to rising numbers of SMEs that are being included ininternational chain of production. This could suggest that much of growth of

    exports in future will be situated in and around TNCs systems. Linking up

    with TNCs is increasingly perceived as a way for SMEs to solve their

    traditional problem of access to certain critical resources, the most important

    of which are finance, technology and managerial skills, as well as to new

    markets. While linking with TNCs could benefit for SMEs, it can entail risk

    and cost that may be needed to be addressed through appropriate policies

    and measures.

    In this paper we have examined the cluster concept and its impact on SME

    development in India in particular. The first step was to make broad

    analyses on the definition of cluster from different perspectives. Based on

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    the Indian contest, where institutional framework and infrastructure are

    poorly developed, we adopted Schmitz's approach that considers

    geographical proximity as being an important factor for cluster development

    in developing countries. In making our own deductions, we further

    considered competition and learning as two important elements needed in

    Indian clusters because they are the benchmark for the private sector

    development in the region. Furthermore, the analytical approach was also

    used to make an in-depth explanation on cluster concepts and these were

    further related to the scenarios in Indian clusters. In this context, however, it

    was analyzed how the size of the market and the quality of their products

    play an important role in cluster development. The relationship between the

    stocks of economies of scale and scope within the cluster and the growth

    rate of the cluster was also discussed. This was followed by the discussions

    on why upgrading is important for the cluster and the role of value chain in

    SMEs upgrading. The role of institutions in cluster development was

    extensively analyzed. We have been able to build-up the historical

    background of the clusters and on the other hand the clusters are informal in

    nature. The networks in the clusters are learning networks deemed to

    reduce growth constraints through sharingknowledge

    , information and hand-tools in order to improve performance and reduce costs. However, to what

    extent these constraints have been reduced through cluster formation

    requires further empirical evidence. The relationship between private

    savings and accumulation of production capital on the one hand and the

    transformation process from trading to manufacturing in industrial

    development on the other. We have also shown the international linkages of

    the enterprises. The linkages were developed through long term trade

    transactions that were transformed to manufacturing. This paper further

    analyzed the multilateral actions among institutions and organizations

    deemed to maintain competition and improve performance in the cluster.

    Limitations of the clusters in the region were also examined.

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    The significance of SMEs for employment and income generation has led to

    various government attempts to support their development. For example, a

    2000 law in Colombia obliges the public sector to favor procurement of

    goods and services from SMEs. In India, there are various schemes,

    including exclusive procurement of certain products and a price preference

    for others when procured from SMEs, streamlined registration procedures,

    and extension and support services. In South Africa a framework for

    government policy is provided by the National Strategy for the Development

    and Promotion of Small Business in South Africa, and the subsequent Small

    Business Enabling Act (1996). This allows for several supportive structures

    and investment incentives. But there remains scope for building support for

    SMEs into other related policy areas. For example, aspects of the South

    African policies on black economic empowerment (BEE), which set targets

    that seek to increase procurement from black owned businesses, do not

    give special consideration to SMEs, so the targets can be met by helping a

    few major suppliers to transform their ownership structure, rather than

    undertaking the more complex but higher-impact process of increasing

    sourcing from black-owned SMEs. SMEs have also attracted private

    support. For example, in Chile, the industrial association SOFOFA hascreated a Corporate for the Promotion of Small Enterprises, which provides

    credit to micro enterprises to create employment, train workers and instill

    good management practices. The South African financial sector has

    developed a BEE charter, which includes a measurable focus on supporting

    black SMEs.

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    Chapter 4

    Recommendations

    1. Customer-orientation: An approach in which project efforts are driven by

    meeting customer needs and demands rather than supply push by support

    institutions.

    2. Collectivity: Support is likely to be more effective when it is provided to

    groups of SMEs rather than individual producers. Group-based assistance is

    not only more cost effective and practical than individual support; it can also

    lead to the establishment of linkages between SMEs that can lead to

    increased efficiency and interactive learning.

    3. Cumulativeness: One-off improvements are of limited use. Being

    competitive is not a state but a process that requires continuous

    improvements. This in turn requires that firms (or clusters of firms) build up a

    capacity to continuously upgrade their products, processes and production

    organization and become more self-reliant in this respect. A similar criterion

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    of self-reliance is now also applied to some support programmes

    themselves, in that they must evolve institutional forms of (usually collective)

    self-help that will, over time, start to function independently from an external

    aid agency.

    4. Capability focus: Although the non-availability of appropriate hardware

    (i.e. machinery and equipment) can sometimes be a crucial constraint on the

    competitiveness of SME, the development of the capabilities is as important.

    Usually, SME need to acquire enhanced knowledge and skills about how to

    choose, use and improve technology.

    5. Context: A supportive macro-economic environment is of the utmost

    importance. In the current context, supportive is primarily defined in terms

    of the presence of growing and technologically dynamic markets that

    constantly provide new potential opportunities for technological upgrading of

    SME.

    6. Complementarily: The content of the assistance has to be tailored to fit

    the general level of economic and technological development of theeconomy in question. This may appear obvious, but older projects did suffer

    from such lack of fit. For example, many low-income countries tried to

    promote subcontracting schemes prematurely. Only now, it is only in the

    relatively advanced economies of Southeast and East Asia such as South

    Korea where the weaknesses in local subcontracting is emerging as a

    bottleneck. This is the sort of demand-pull environment where there is a lot

    of scope to build technological support programmes for SME around

    backward linkage development in the economy in general.

    6. Concentration: Earlier programmes often lacked effectiveness because

    the institutions delivering them were spreading their efforts too thinly in

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    terms of the number and variety of economic activities. Thus, it was very

    difficult to build up in-depth expertise about the technological and market

    characteristics of specific industries and the main actors in these industries,

    how SMEs are positioned in these industries and what their main industry-

    specific problems might be. Research and assistance should concentrate on

    commodity-specific sub sectors.

    By giving considerable weight to the study of interactions between firms of

    different sizes and at different stages in the supply chain, this approach can

    provide a more thorough insight into the competitive context in which the

    target enterprises operate.

    7. Competence and credibility: The thin spread of technical assistance

    projects and programmes was not the only factor responsible for the

    inadequate expertise of agencies. The quality of many projects also suffered

    due to inadequate professional and educational background of the

    assistance personnel. In recent assistance interventions a trend towards

    professionalisation of assistance is noticeable, especially in the more

    advanced developing countries in Asia. This has also improved their

    credibility to beneficiaries and other actors whom they need to involve intheir projects and programmes.

    8. Coordination: Early assistance efforts also suffered from lack of

    coordination between different service providers and support activities. This

    is most evident in the East and Southeast Asian countries where

    governments have tended to establish very elaborate and wide-ranging

    support structures for SME, encompassing many different financing, training,

    and consulting projects and programmes. The responsibility for these

    programmes would be distributed widely over different governmental

    institutions and departments. Inefficiencies in assistance delivery were

    common because of duplication of effort. To make matters worse,

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    programmes would frequently be revamped, merged with other initiatives, or

    replaced with new ones. Such obvious lack of transparency must have been

    a nightmare for many potential beneficiaries. It must have been a big effort

    simply to find out how the support structure worked and where to turn for

    which type of assistance. In recent years, one sees that governments in

    these countries have begun to improve matters by introducing one window

    assistance delivery (Meyanathan, 1994).

    9. Carrot-and-stick approach: We have seen that the flawed incentive

    structure both for the assistance providers and the beneficiaries was

    perhaps the single most important cause of failure in the early SME

    technology (and other types of) support projects. A more effective approach

    is a combination of carrots, i.e. potential rewards that will motivate the

    participants to take action, and sticks, i.e. a set of sanctions that come into

    operation when they fail to do their best. The design of a balanced

    combination of carrots and sticks is a difficult task. It generally requires that

    one not only pays attention to economic aspects but also to the institutional

    and socio-political context within which projects are to be implemented.

    References

    Books

    Unctad , SMEs And The Global Market Place

    Advani, A. (1997), Industrial clusters: A support system for

    small and medium sized enterprises, World Bank, PrivateSector Development Department, PSD Occasional Paper No.

    32.

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    'Big change in small scale', Business India, January 2-15,

    1995.

    'Industrial Clusters in Less Developed Countries : Review of

    experiences and Research agenda', Khalid Nadvi and Hubert Schmitz,

    Discussion paper, 339, Institute of Development Studies.

    'Long-term supplier Relations and Product-Market Structure,

    Susan Harper, Case Western Reserve University, Oxford University

    Press, 1992.

    'Modern Small Industry, 1972 and 1987-88, Aspects of Growth

    and Structural Change', J.C. Sandesara, Economic & Political weekly,

    February 6, 1993.

    Mighty oaks from little acorns : Can Micro-Enterprise serve as

    the seedbed of Industrialisation?', Barbara Grosh, Syrancuse University

    and Gloria Somolekae, University of Botswana.

    'Principles for promoting clusters & networks of SMEs', John

    Humphery & Hubert Schmitz, No. 1, Discussion Paper, UNIDO (SME

    Programs), October, 1995.

    'Small Firms and their helpers : Lessons on Demand', Tendler

    Judith and Monica Alves

    Amorim, Massachusetts Institute of Technology, Cambridge,

    USA, World Development, Vol. 24, No. 3, 1996.

    'Supplier Participation and Worker participation : Is there a

    linkage ?', Susan Harper, David I. Levine, Department of Economics,

    Case Western Reserve University, Cleveland

    Newspaper

    Economic Times

    The Times Of India

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    Journal

    The Indian Textile

    Bharat Textile

    Websites

    www.dsir.gov.in

    www.icrier.org

    www.smallindustryindia.com

    www.dnb.co.in