http://www.nextbillion.net/blogs/2007/10/22/guest-post-anand-k-jaiswal-on-the-role-of-small-and-medium-enterprises
By Professor Anand Kumar Jaiswal
Prahalad’s argument is that MNCs should play a proactive and important role in tapping "base of the pyramid" (BOP) markets. However, most initiatives catering to the needs of BOP customers have come from local entrepreneurs and SMEs. In India, participation of MNCs in BOP markets is mostly limited to products such as fast moving consumer products that are technologically less sophisticated. SMEs have shown better record in understanding the needs of BOP customers and fulfilling them effectively.
Micro finance is one area where local organizations in developing countries have been far more successful in reaching out to BOP customers. Grameen Bank in Bangladesh and organizations such as BASIX and nationalized banks in India have been instrumental in making micro credit an effective tool for fight against poverty. MNCs participation in micro finance in developing countries has been minimal.
BOP markets pose a different kind of challenge to multinationals. For example, in India rural markets are spread over 600,000 villages. About 82 percent of the rural population lives in villages with a population less than 5,000 (Swamy, 1999). Reaching out to this population is not easy, given the poor physical infrastructure. Large areas are not connected with roadways. The thin dispersal of rural markets poses serious challenges in terms of logistics, product shipment, delivery of stocks and reaching out to retailers. Lack of communication network and power unavailability are common (Venugopal, 2002). Further, because of low purchasing power, BOP customers buy lower volume of products on each purchase occasion, pay a lower price and consume smaller quantities on a per capita basis and hence transaction cost is much higher. These factors make it difficult for MNCs to achieve manufacturing and distribution efficiencies through increase in product volume. The high cost structure of MNC operations compounds the problems in BOP markets.
In general, SMEs are better placed than MNCs in serving BOP customers owing to their low overheads and small scale of operation. In fact SME involvement is more feasible and desirable. SMEs play a crucial role in economic development. They contribute towards large scale employment generation. Recent research has shown that in countries like India and China SMEs are leading the economic growth and development. It is estimated that in 2002, SMEs contributed about 60 percent of industrial output in China. Further, they provide employment to 75 percent of urban workforce (Economic Times, 2006). With focus on bottom line, MNCs prefer lean organizations with minimum workforce. As Prahalad himself has admitted not even 1 percent of the world population is employed by MNCs (Prahalad and Hart, 2002, p.10). This indicates that the contribution of MNCs in generating employment opportunities is marginal. Strong presence of SMEs has other advantages too. As they are more close to markets and have greater understanding of consumers, SMEs are often far more innovative in developing products suitable for BOP consumers despite resource constraints and lack of advance technology. They have been proved to be better in preserving local culture and often are more sensitive to environmental and ecological considerations.
Whether MNCs can cater to BOP markets in a similar way like SMEs is an important question. It is well accepted that performance of SMEs and local firms suffer as a result of the growing presence of MNCs owing to factors such as MNCs’ initial lower local content of inputs, their siphoning off local demand and their capacity to attract and recruit superior workforce by offering better pay packages (Aitken and Harrison, 1999, quoted in World Bank, 2002). MNCs’ dominance of BOP markets may result in weakening and possible closures of SMEs, the impact of which on employment opportunities and livelihood for low income communities can easily be predicted.
Role of Government and Social Organizations:
Though Prahalad has argued for BOP initiatives by the private sector, it is unlikely that the private sector alone can solve all the problems of BOP population. One should not ignore the role of government. The governments have critical role in creating system and regulatory framework for meaningful engagement by the private sector in the BOP markets. In areas like education and healthcare, government and private sector can complement each other. Through public sector banks in India government has provided banking services in remote rural areas where private sector organizations were reluctant to go. NGOs, not-for-profit and other types of social service organizations which are professionally managed and are operationally efficient can contribute in serving BOP population. Unlike large corporations, for these organizations profits serve as a means for sustenance, they do not have to continuously please shareholders and hence can play an important role in touching the lives of billions of the poor.
References:
Guest Post: Anand K. Jaiswal on the Role of Small and Medium Enterprises
Submitted by Rob Katz on October 22, 2007 - 11:04.
By Professor Anand Kumar Jaiswal
Prahalad’s argument is that MNCs should play a proactive and important role in tapping "base of the pyramid" (BOP) markets. However, most initiatives catering to the needs of BOP customers have come from local entrepreneurs and SMEs. In India, participation of MNCs in BOP markets is mostly limited to products such as fast moving consumer products that are technologically less sophisticated. SMEs have shown better record in understanding the needs of BOP customers and fulfilling them effectively.
Micro finance is one area where local organizations in developing countries have been far more successful in reaching out to BOP customers. Grameen Bank in Bangladesh and organizations such as BASIX and nationalized banks in India have been instrumental in making micro credit an effective tool for fight against poverty. MNCs participation in micro finance in developing countries has been minimal.
BOP markets pose a different kind of challenge to multinationals. For example, in India rural markets are spread over 600,000 villages. About 82 percent of the rural population lives in villages with a population less than 5,000 (Swamy, 1999). Reaching out to this population is not easy, given the poor physical infrastructure. Large areas are not connected with roadways. The thin dispersal of rural markets poses serious challenges in terms of logistics, product shipment, delivery of stocks and reaching out to retailers. Lack of communication network and power unavailability are common (Venugopal, 2002). Further, because of low purchasing power, BOP customers buy lower volume of products on each purchase occasion, pay a lower price and consume smaller quantities on a per capita basis and hence transaction cost is much higher. These factors make it difficult for MNCs to achieve manufacturing and distribution efficiencies through increase in product volume. The high cost structure of MNC operations compounds the problems in BOP markets.
In general, SMEs are better placed than MNCs in serving BOP customers owing to their low overheads and small scale of operation. In fact SME involvement is more feasible and desirable. SMEs play a crucial role in economic development. They contribute towards large scale employment generation. Recent research has shown that in countries like India and China SMEs are leading the economic growth and development. It is estimated that in 2002, SMEs contributed about 60 percent of industrial output in China. Further, they provide employment to 75 percent of urban workforce (Economic Times, 2006). With focus on bottom line, MNCs prefer lean organizations with minimum workforce. As Prahalad himself has admitted not even 1 percent of the world population is employed by MNCs (Prahalad and Hart, 2002, p.10). This indicates that the contribution of MNCs in generating employment opportunities is marginal. Strong presence of SMEs has other advantages too. As they are more close to markets and have greater understanding of consumers, SMEs are often far more innovative in developing products suitable for BOP consumers despite resource constraints and lack of advance technology. They have been proved to be better in preserving local culture and often are more sensitive to environmental and ecological considerations.
Whether MNCs can cater to BOP markets in a similar way like SMEs is an important question. It is well accepted that performance of SMEs and local firms suffer as a result of the growing presence of MNCs owing to factors such as MNCs’ initial lower local content of inputs, their siphoning off local demand and their capacity to attract and recruit superior workforce by offering better pay packages (Aitken and Harrison, 1999, quoted in World Bank, 2002). MNCs’ dominance of BOP markets may result in weakening and possible closures of SMEs, the impact of which on employment opportunities and livelihood for low income communities can easily be predicted.
Role of Government and Social Organizations:
Though Prahalad has argued for BOP initiatives by the private sector, it is unlikely that the private sector alone can solve all the problems of BOP population. One should not ignore the role of government. The governments have critical role in creating system and regulatory framework for meaningful engagement by the private sector in the BOP markets. In areas like education and healthcare, government and private sector can complement each other. Through public sector banks in India government has provided banking services in remote rural areas where private sector organizations were reluctant to go. NGOs, not-for-profit and other types of social service organizations which are professionally managed and are operationally efficient can contribute in serving BOP population. Unlike large corporations, for these organizations profits serve as a means for sustenance, they do not have to continuously please shareholders and hence can play an important role in touching the lives of billions of the poor.
References:
- Aitken, B and Harrison, A (1999). “Do Domestic Firms Benefit from Foreign Direct Investment? Evidence from Venezuela,” American Economic Review, 89 (3), 605-618.
- Economic Times (2006). “Start-Ups Propel India, China Growth,” December 7, 2.Swamy R K (1999).
- “Guide to Market Planning,” R K Swamy / BBDO Advertising Ltd.
- Venugopal, Pingali (2002). “Accessing rural markets,” Unpublished paper, XLRI Jamshedpur: 1-43.
- World Bank Policy Research Report (2002). “Globalization, Growth and Poverty - Builiding an Inclusive World Economy,” A co-publication of the World Bank and Oxford University Press, January.
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