Review of the research paper titled “Auto SMEs in Bangalore: Does Innovation Promote Employment and Labour Productivity?”
The paper forms part of a research project on “The Influence of Technological Innovations on the Growth of Manufacturing SMEs” sponsored by the Department of Science and Technology, government of India. Published by M H Bala Subrahmanya (bala@mgmt.iisc.ernet.in) Senior Professor of Economics at the Indian Institute of Science, Bangalore.
It is well known that SMEs have a major contribution for employment generation to absorb large labour force in any economy and their promotion will lead to an increase in their employment generation capacity. It holds true for Indian context as well. What is significant is that Indian SMEs have undertaken innovation as a strategy to increase competitiveness. Even government policy also points towards promoting innovation in the MSME policy. Given this backdrop, the article examines, three questions viz., will innovation help in enhancing competitiveness of the SMEs, the impact of innovation on the employment growth, and on the labour productivity growth. The issue has been probed with reference to auto component SMEs in Bangalore, which has received recognition as a hub of innovation.
The data was gathered based on 60 structured questionnaires covering the characteristics of the SMEs, educational background of the entrepreneurs, dimensions, objectives, achievements and outcomes of technological innovation, proportion of innovated products on total sales, data on economic variables such as employment, investment, sales turnover etc. Further based on a pilot study, an item analysis was done for the questions excluding a) opinion on policies, b) dichotomous questions and c) descriptive questions, which yielded a Cronbach’s alpha of 0.653. Due to absence of a detailed official database of SMEs in Bangalore, it relied on the database of SMEs associations such as Karnataka Small Scale Industries Association (KASSIA) and Peenya Industries Association, among others.
It is found that 69 out of 72 SMEs covered have carried out innovation in previous 5 years. Of these, 65 have done informally and 4 formally, resulting in the improvement of product quality, reduction of cost and diversification of products to improve competitiveness. Further, it is being shown that share of innovated products in total sales of SMEs has increased with 20% of the SMEs covered identify 5 to 10% share innovated, 40% of the SMEs identifying 10 to 20% of share while 5 SMEs identifying 25 to 50% contribution of innovated products in the total sales whereas 10% of SMEs could not identify contribution of innovated sales in the total sales. Further, majority of the innovated SMEs that carried our product and process innovation converted it into sales and hence, sales growth. This increase in the sales growth leads to an employment growth as data on the percentage of employment growth in the SMEs in the year from 2001-02 to 2005-06 is proportional to the increase in sale of innovated products. So, it is established that percentage increase of innovated sales in the total sales of SMEs and their corresponding increase in the employment growth. However, the increase of innovated sales in a present year does not individually lead to an increase in employment growth. Factor such as sale of previous years influence employment growth in subsequent year.
Next issue on hand is, whether labour productivity improves when employment grows? By regression analysis on data of 2001-02 to 2005-06, it is shown that capital intensity growth has a statistically significant positive influence on labour productivity but positive influence of innovated sales on labour productivity is not significant. This gives an indication that labour productivity grows because of capital intensity, not of innovation. The sales of innovated products does not have a significant positive relation to labour productivity since SMEs have a very low percent of technical labour, so the innovation as a strategy does not help them directly with respect to labour productivity, tech labour if any enters consider SMEs as a training ground for further higher roles, so they depart early as they get skilled i.e. the SMEs are not able to retain tech labour and finally, the innovation done by SMEs are only incremental in nature as per a particular consumer demand.
The quality of the upgrade in innovation plays a critical role as the innovation in SMEs is exclusively done by external support in 25% while only 10% in case of exclusive internal support, shows that innovation is not done on their own but according to the consumer demand and which at times is limited to specific product only and of lower in quality.
Since primary focus of the SMEs is to enhance competitiveness with objective of product quality improvement, cost reduction so, employment generation and labour productivity growth takes less consideration. For increase in labour productivity, SMEs can employ strategies to retain most of the trained labour and imbibe the art of managing labour optimally. The Government role here becomes important as it can introduce training programmes on innovation management for SMEs and not to take a blinkered view in their policy design that innovation only can result in growth in employment and labour productivity.
However, there are limitations as it is a study which considers that the impact of innovation is only applicable to automotive manufacturing SMEs and not to other sector of SMEs. Therefore, the conclusions may vary depending on the sector of SMEs. Normally statistical tests require a large sample size to ensure that sample is considered representative and can be generalized to all SMEs and here we have a sample size of 72 SMEs. Also, there is a lack of previous research on the topic and more study on the topic is needed.
To put it succinctly, the study highlights that innovation is the key tool to enhance the competitiveness of SMEs, particularly of auto component sector in Bangalore. Findings indicate that majority of SMEs have incorporated innovation, leading to higher sales, improved product quality and sales growth. However, while innovation leads to employment growth, its impact on labour productivity is inconclusive. The study suggests that labour productivity is influenced by capital intensity rather than innovation. Furthermore, SMEs struggle to retain skilled technical labour, limiting the long-term benefits of innovation.
Considering these findings, it becomes essential for SMEs to focus not only on innovation for competitiveness but also on strategies for labour retention and efficiency. Government’s intervention in areas of innovation management can enhance the sustainability and overall growth of SMEs in India.
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