Sustainable development is the need of the hour for our country, SMEs are considered to be playing a crucial role in promoting the sustainability. This paper makes an attempt to propose a conceptual framework of a sustainable performance of SMEs in India. The objective is to examine the extent to which entrepreneurial competencies, which are assumed to be formed by adequate economy of the country, could stimulate and enhance sustainable performance. Role of the government is also considered as an important external factor for creating a sustainable business atmosphere in the country.
Keywords: SMEs, sustainability, entrepreneurial competencies, adequate economy, government support
Introduction
The small and medium enterprises (SMEs) are contributing a lot to the economic growth of a nation. In developing countries, as some authors argue [1] , the contribution of SMEs towards employment generation is high because they tend to use more labour intensive production processes than large enterprises, boosting employment and leading to more equitable income distribution. In countries like India where there is a lot of difference in income levels and industrialization is not uniform, SMEs play a crucial role in employment generation. They also provide livelihood opportunities through simple activities in agriculture based economies, nurture entrepreneurship and support the building up of systemic productive capacities and the creation of resilient economic systems, through linkages with the large organizations.
The issues of sustainable development have attracted the attention of many scholars, policymakers, business practitioners as well as the community alike. This recent development in the interest on sustainability, especially within the commercial landscape, is not only the focus of the developed nation, but also the developing countries like India. SMEs are claimed to be crisis shock absorbers (Wiboonchutikula, 2002) that would act as buffer for a country’s economy at times when large organizations resort to drastic measure of laying off workers during the rough period of economic downturn. As such, promoting sustainable performance among SMEs is seen pivotal.
However, the contribution of the economic performance of SMEs is inconsistent and still less than Large Enterprises (MSME, 2011). The reasons may be because of SMEs are having limited resources if compared to Large Enterprises. SMEs are known to face various difficulties and constraints, leading many to close their businesses each year; particularly, within the early years of operation (Taylor, 1999; Jeffoate, Chappell, and Feindt, 2002). In India, despite various support mechanism made available to SMEs by the government, many still fail. It has been claimed that the failures were due to the lack of knowledge, ability, experience, insufficient capital, marketing, information, and technology among the entrepreneurs. These problems have created major stumbling blocks for SMEs to achieve sustainable performance.
Studies investigating the success factors of SMEs suggest that SMEs owners/managers are the core competence of the firm (Gibb, 2005). Their actions and inactions would influence firm performance substantially. On the other hand, government support especially in the developing countries, also play an important role in determining rules and policies which could affect SMEs performance. Government support is perceived as an important factor in predicting firm performance (Yusuf, 1995; Mohd Shariff, Peou, and Ali, 2010).
A review of SMEs literature in the context of India suggests that empirical research investigating the role of SMEs and factors leading to sustainable performance is rather scant (MSME, 2011). This paper endeavours to emphasize on the role of entrepreneurial competencies, which particularly derived from sufficiency economy philosophy, as well as the moderating effect of government support in developing sustainable performance of Indian SMEs. It is envisaged that the results of this study will be beneficial to many parties, including policy makers, entrepreneurs, government and agencies, venture capitalists, and academic scholars.
Small and Medium Enterprises in India
The small and medium enterprises (SMEs) sector contributes significantly to the manufacturing output, employment and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 40 per cent of the total exports of the country. The sector is estimated to employ about 59 million persons in over 26 million units throughout the country. Further, this sector has consistently registered a higher growth rate than the rest of the industrial sector. There are over 6000 products ranging from traditional to high-tech items, which are being manufactured by the SMEs in India. It is well known that the SME sector provides the maximum opportunities for both self-employment and jobs after agriculture sector. Recognizing the contribution and potential of the sector, the definitions and coverage of the Small Scale Industry (SSI) sector were broadened significantly under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 which recognized the concept of “enterprise†to include both manufacturing and services sector besides, defining the medium enterprises.
Performance of SMEs
The term SME is of relatively recent origin in the Indian context. SMEs were referred to as small scale industry or SSI. The SSI was officially created in the 1950s. Since 1954, the Government of India has consciously nurtured, promoted and developed SSIs through specific policies as a part of the overall industrial development strategy [2] . The contribution of SMEs to the economic development of India is significant. Their contribution in the total corporate sector is as follows: 45% of the total volume of production, 85% of employment, 40% of the exports and 92% in terms of enterprises. The SMEs contribute 8% of India's GDP. As per the Fourth All India Census of Small Scale Industries conducted in 2007, the SMEs have increased from about 80,000 units in the 1940s to about 26 million units. In the sports goods and garments sector their contribution to exports is as high as 90% to 100%. They constitute 90% of the industrial units in the country and also contribute to about 40% of India's exports [3] . In recent years, beyond the economic growth, there is a greater urgency for 'inclusive growth' in which SMEs are expected to play a critical role. The geographical and socio-cultural diversity of India with 28 states and 16 national languages, coupled with significant disparities in income, and co-existence of poverty and high affluence make the SME sector more critical for India. Out of the 26 million units, 64% are located in rural India (Fourth All India Census of SSI, 2007). Registration of SMEs has not been compulsory in the Indian context. The sector employs about 25 million persons. About 10% of this sector consists of women-owned enterprises. About 47% of the total SMEs were located in five states, with the remaining 53% being contributed to by 23 states. The role of SMEs in the context of balanced regional development and equitable distribution of income becomes relevant. The sector also contributes to about 7% of the GDP.
Though there were a variety of enterprises operating in India, no single definition of micro and small enterprises was available until the enactment of the Micro, Small and Medium Enterprises Development Act (MSMED) in 2006
Definition of SMEs
SMEs are defined in different ways in different parts of the world. Some define them in terms of assets, while others use employment, shareholder funds or sales as criteria. Some others use a combination of revenue and employment as a hybrid criterion. The MSMED Act of 2006 defines them as:
Enterprises engaged in the production/manufacturing of goods for any industry; and
Enterprises engaged in rendering/providing services.
Enterprises in the manufacturing sector are defined in terms of investment in plant and machinery (excluding land and buildings) and further classified into:
Micro enterprises - investment up to Rs. 2.5 million i.e. up to Rs. 2.5 million (approximately USD$60,000);
Small enterprises - investment between Rs. 2.5 million and Rs. 50 million; and
Medium enterprise - investment between Rs. 50 million and Rs. 100 million.
Service Enterprises: defined in terms of their investment in equipment and further classified into:
Micro Enterprises - Investment up to Rs. 1 million
Small Enterprises - Investment above Rs. 1 million & up to Rs. 20 million
Medium Enterprises - Investment above Rs. 20 million but below Rs. 50 million. (Development Commissioner MSME, 2009)
2. Materials and Methods
2.1 The Sustainable Performance
Sustainable development has recently been discussed as an influential concept for business and policy. However, it has been sparse within the entrepreneurship literature (Hall, Daneke, and Lenox, 2010). There appears to be no single set of sustainable performance measurement especially within the SMEs literature. Previous study suggests that the specific indicators for different business sectors have to be defined separately, on a case-by-case basis in order to reflect the specific business characteristics (Azapagic, and Perdan, 2000). Although many studies have reached to a consensus on utilizing the satisfaction in the achievement of social, environmental, and economic goals as performance measurement, it is difficult to apply environmental aspect especially in the beginning stage of business development (Schick, Marxen, and Freimann, 2002) due to the various constraints posed by the internal and external factors on the entrepreneurial ventures. Having noted that, Kantabutra (2007) has highlighted that business will be sustainable when it meets the conditions of delivering strong financial performance, having ability to endure economic and social difficulties over time, and being able to maintain a leadership position. Therefore, the sustainable performance in this study is defined as the extent to which the entrepreneur owner/manager can sustain the economic and social performance in the long run.
Also it has been highlighted that for performance measurement, multiple dimensions of performance is the most appropriate approach to measure firm performance (Murphy, Trailer, and Hill, 1996). In order to capture firm performance, financial measures, on the one hand, represent the economic performance which consists of cash flow, profitability, liquidity, solvency, and market share. On the other hand, non-financial measures represent social performance which consists of employee satisfaction, customer satisfaction, owner/ self-satisfaction, relation with suppliers, and relation with community. In addition, to measure the small firm performance, the subjective measurement is appropriate (Ahmad, 2007).
2.2 The Entrepreneurial Competencies and Firm Performance
Competency consists of the underlying characteristics such as generic and specific knowledge, motives, traits, self-images, social roles, and skills which results in venture birth, survival, and/or growth (Bird, 1995). The competency approach allows researchers to study the complex, multi-level, multi-disciplinary research. There are some empirical studies have shown that entrepreneurial competencies are not only increase competitive advantages; they are predicted to influence firm performance (Man, Lau, and Chan, 2002; Ahmad, 2007; Ahmad et al., 2010). Importantly, it is notable that the entrepreneurial competencies can be observable and measurable. These competencies are learnable, even in adulthood. The list of entrepreneurial competencies is therefore developed based on the previous literatures (Man, Lau, and Chan, 2002; Ahmad, 2007; Ahmad et al., 2010). It consists of opportunity, relationship, conceptual, organizing, strategic, commitment, learning, and personal competencies.
2.3 The Moderating Effects of Government Support on Firm Performance
North (1990) defines institutions as the rules of the game in a society and organizations are the players. He suggests that institutional frameworks interact with organizations by signaling which choices are acceptable and supportable. So, institutions help to reduce uncertainty for organizations. Since the institutional theory provides meaningful approach, it has recently been employed into the entrepreneurship research. Mohd Shariff, Peou, and Ali (2010) point out that governments can improve opportunities available to entrepreneurs as well as strengthen the cognitive environment by offering various supports, thus, increasing the ability of entrepreneurs to conduct businesses.
Following that argument, government is seen as a critical factor of business success (Hall, Daneke, and Lenox, 2010). Government provides various means to support business activities. Even though government support is carried out by numerous agencies through various programs, it is still limited comparing to the high demand on the part of SMEs. This study seeks to examine the perception of SMEs entrepreneurs in terms of the usefulness of the government support made available to them. Government support in this study is expected to improve the magnitude of the relationship between entrepreneurial competencies and sustainable performance.
3. Results and Discussion
Based on previous literature and the call to redirect the focus on the contribution and ability of entrepreneur owners/managers in generating successful business performance, a theoretical framework is advanced to postulate the link entrepreneurial competencies, their antecedent, the moderating effect of government support, and sustainable performance of SMEs. Specifically, the propositions are put forth as follows;
Proposition 1: Higher level of entrepreneurial competencies will be associated with greater sustainable performance among SMEs in India
Proposition 2: The usefulness of government support will significantly moderate the relationship between entrepreneurial competencies and sustainable performance of SMEs in India.
Figure 1: Conceptual Framework
Entrepreneurial Competencies
- Opportunity
- Relationship
- Conceptual
- Organizing
- Strategic
- Commitment
- Personal
- Learning
Government support
Sustainable performance
- Economic aspects
- Social aspects
Sufficiency Economy Philosophy
- Moderation
- Reasonableness
- Self-immunity
- Knowledge
- Morality
4. Implications
Based on the framework, the findings are expected to assist to relevant parties. Firstly, SMEs owners/managers can be enlightened of the critical competency areas that are needed to sustain business performance in the long run. Secondly, government and its agencies including the policy makers can provide the appropriate policy to promote the good business environment in particular for the SMEs. Thirdly, the bankers and venture capitalists can integrate entrepreneurial competencies in the assessment tool. This may help them in considering and generating loan/fund to the competent entrepreneurs. Last but not least, the scholars may further delve into the sufficiency economy philosophy, especially as important values that would eventually determine firm performance. This alternative approach may either directly or indirectly helps in promoting business sustainability in the country.
5. Conclusion
The thesis of this paper is that SMEs entrepreneurs are the key players in ensuring the sustainable performance of SMEs in India. Their embedded abilities will be reflected through competencies. These competencies that were building from the value of sufficiency economy philosophy would eventually lead to sustainable performance. Entrepreneurs, thus, have to equip themselves with the relevant competencies over time. Government inevitably is also an important institutional player to support the SMEs in achieving sustainable performance.
