Global value chain (GVC) is a critical factor shaping international trade today. The share of goods conceived, manufactured and consumed within the boundaries of a country is declining. Value chains are now geographically dispersed across countries and regions. This presents vast global opportunities for Indian MSMEs, if they position themselves strategically along the value chain. Sensitising Indian MSMEs to the unfolding business opportunities was a key objective of the Ficci MSME Summit 2013, held earlier this month in New Delhi.
FE was the media partner of this event. FE?s Verghis Chandy spoke to Sanjay Bhatia, chairman, MSME committee, Ficci, to get the summit theme, ?Integrating MSMEs with the Global Value Chain? in perspective. Excerpts:
The global economy is increasingly getting structured around GVC. What is the scenario in India?
With globalisation no country can become competitive without integrating itself with the global value chain. India is no exception. The main objective of any country in integrating with the GVC is either to cut costs or enhance market access or both. Countries should participate in the global supply chains by leveraging their competitive advantages in assets. It has been noted that usually developing countries offer low workforce costs and low-cost labour intensive processes, while developed countries bring on the table greater R&D and product designs.
Today, international trade or investment is actually aligned with the GVC, as each process or product completes a ?rung? of the GVC ladder. Hence, GVC works on the principle of mutually beneficial ?collaborations? at different levels. India is being actively pursued by global companies for services such as human resource management, customer support, accounting and finance, and procurement options for manufacturing key components and third country exports of turned products.
Which are the major GVC segments in the MSME sector?
The major GVC segments in the MSME manufacturing area are automotive and automotive components, textiles, engineering goods and chemicals. In the service sector it is knowledge process outsourcing, business process outsourcing and information technology outsourcing.
What are the challenges and opportunities in integrating with the global value chain?
As for challenges, companies across different industries are unable to identify their competitive strength within the value chain. Also, lack of critical dimensions necessary to support R&D cost and training restrict enterprises? ability to grow further in the value chain. The working capital shortage is another obstacle to expanding scale. Meeting the strict product and quality standards required for participating in the GVC is costly. Often countries impose different quality/SPS (sanitary and phytosanitary) assessment and the cost of compliance is burdensome for MSMEs.
But there are opportunities as well. Integrating with the GVC helps in knowledge gain and establishing link with customers and global buyers while creating scale for the efficient use of inputs. Technology transfer, backward & forward integration and pro-competitive effects are the spillover effects of GVC.
What can the government do to facilitate the integration process?
Development of the MSME sector is mainstreamed in India?s planning process. In order to foster the sector’s growth both central and state governments have come up with various schemes to help the MSMEs. But there is a lack of awareness among MSMEs on the schemes available. This information gap has to be bridged through awareness and coaching programmes. MSMEs have to be introduced to global standards and educated on targetting GVCs. The government can encourage multinationals and large corporations to develop key vendor capabilities to help the vendors move up the value chain and reduce transaction costs. The government can also create funds for facilitating R&D among MSMEs and facilitate ease of doing business, since compliance and regulatory hindrances are among the key challenges being faced by MSMEs.
Which country poses a threat to Indian MSMEs in the GVC space?
This space is dynamic and operates on the principle of ?learning curve?. Therefore, it won?t be correct to pinpoint a country as posing a threat to Indian MSMEs. However, if we look at sectors in the GVC, there are growing opportunities to ?fill the space? in the learning curve left vacant by some countries. China, for example, has moved on from its traditional competitive edge in textiles. The Indian textile sector should have consolidated its hold with MSME participation in this space. The critical factors here are the low cost of inputs and the ability to tap into synergies that are available across the manufacturing sector, with procurement being possible from multiple inputs across the value chain. China, under its processing trade regime, allows firms to buy/import inputs duty-free provided these are further used to produce processed goods destined solely for export promotion to developed countries. We need a ?national policy? that creates an ecosystem for clusters to link with one another and become part of the GVC.
What can MSMEs, on their part, do to join the GVC?
MSMEs need to understand their competitive strengths to leverage it with MNCs to get into their value chain. MSMEs should also focus on R&D and innovation, thus, creating intellectual assets which can be
leveraged for faster growth. They should employ new-age marketing techniques for reaching out to potential clients. Attempts should also be made to reduce production cost by adopting clean technologies and international quality standards in their production process.
There is an argument that the government should support only potential winners. Do you agree with this?
Today, we are looking at developing an ?entrepreneurship? base and the basic paradigm is to support ?ventures? as long as they are scalable and impact the economy in a positive way. Entrepreneurship by definition is an area which is risky. Ficci supports entrepreneurship development and is keen to engage private sector and private equity to engage more with MSMEs. In this way we will be able to complement the efforts of the government to develop the MSME sector and generate more employment. Both industry chambers and the government need to work together in this space.
