Unlocking MSME potential

Digital tools are crucial for expanding their reach and unleashing growth

The development of micro, small and medium enterprises (MSMEs) has been the centrepiece of India’s economic strategy to achieve inclusive growth and productive job creation. Over the years, different policy initiatives have attempted to encourage and support MSMEs by providing subsidised credit, technical assistance, excise tax exemptions, and preference in government procurement. Despite the multitude of incentives, MSMEs continue to face barriers to growth and experience challenges in accessing finance, markets, skilled labour, and technology. Given these bottlenecks, most MSMEs have struggled to expand, and the enterprise landscape in India continues to be dominated by micro-enterprises that typically create low-paying and low-value added employment opportunities.

To harness the potential of MSMEs as engines of inclusive growth, a re-thinking of MSME development strategies is required. Digital technologies that have the potential to boost productivity and growth of MSMEs should be a key element of such a strategy. Global evidence suggests that technology can enhance operational efficiencies, innovation, access to international markets and credit, and promote enterprise productivity and growth. Given the rapid expansion of India’s digital economy, in particular the growth of e-commerce, one key issue that merits attention is how MSME participation in e-commerce can enable them to compete and grow by making it easier to overcome geographical barriers and reach new customers by lowering the market entry and doing business cost. Empirical evidence on the engagement of India’s MSME sector with e-commerce platforms is limited thus far.

In a recent study titled “Leveraging E-commerce for Growth of MSMEs” (https://icrier.org/pdf/E-commerce_MSME_Annual-Survey.pdf), we conducted a comprehensive primary survey involving over 2,000 MSMEs to understand how e-commerce can be leveraged to enable their growth in India. The survey combines data from enterprises that are integrated with e-commerce platforms and those that are not, across six product categories, namely sports goods, toys, processed and preserved food products, apparel, furniture and handicrafts. The survey covered the cities of Ahmedabad, Bhubaneshwar, Delhi, Jaipur, Lucknow, Ludhiana, Jalandhar, Agra, Meerut, Saharanpur, and Chennai. Importantly, all the enterprises included in the sample are registered on the Udyam portal, a government facility that provides firms with a permanent registration and basic identification number.

The findings of the survey suggest that the main reason MSMEs join e-commerce platforms is to gain access to a broader customer base and expand market reach. Improved market access is the most widely reported benefit of integration. Most enterprises reported an improvement in their total sales and profit margins after integrating with e-commerce platforms. Many firms mentioned that they had invested in training employees and purchasing new equipment, machinery and software ever since they joined e-commerce platforms. Integrated MSMEs also reported launching new products, making improvements in existing product design and adopting new business practices and organisational methods. It appears, therefore, that integration with platforms may have fostered investment and innovation at the firm level. However, only a relatively small share of integrated firms reported hiring new employees after joining e-commerce platforms. This may be due to the fact that the use of online marketing practices may have saved firms labour inputs in some areas even though they may have created jobs elsewhere through an expansion in sales.

In addition to capturing information on the key performance indicators of firms, the survey also captured important characteristics of the businesses and demographics of business owners to undertake a comparative analysis of MSMEs that transacted on e-commerce platforms and those that did not. First, the survey found that firms with younger and more educated owners are more likely to be integrated with e-commerce platforms. Second, women-owned MSMEs are not far behind male-owned firms in terms of integrating with e-commerce platforms, despite the underrepresentation of women in the MSME landscape in general. This could be attributed to the fact that barriers faced by women in accessing traditional markets on account of social and cultural norms ease when retailing through platforms. Third, integrated MSMEs report a higher share of permanent employees in their workforce compared to non-integrated firms. Fourth, a greater proportion of export-oriented firms integrate with e-commerce platforms compared to firms that do not engage in exports, suggesting a positive relationship between firms’ export orientation and digitalisation. Given that the more productive firms in the economy are likely to be engaged in export activity, such firms are perhaps better placed to harness the benefits of online sales and are, therefore, more likely to join e-commerce platforms.

The selective adoption of e-commerce by MSMEs is noteworthy and has important implications for the industrial structure. If it is the more productive firms in the economy that first adopt modern digital tools like e-commerce, which  subsequently enable them to grow by making deeper inroads into markets, then inequities can emerge between integrated and non-integrated MSMEs. It is also important to note that digital technologies are rapidly transforming consumer expectations and MSMEs need to adapt to remain competitive in the digital economy.

Policymakers and other stakeholders must be mindful of these potential inequities and work to bridge the divide between the integrated and non-integrated firms. Analysis from the survey suggests that potential reasons for not integrating with e-commerce platforms include informational barriers to the adoption of new technologies and limited capability of firms to profit from e-commerce. Addressing these gaps will require investments in technology, digital skills, and information that enable firms to adopt e-commerce successfully. Additionally, enhancing the competitiveness of non-integrated MSMEs by providing them with infrastructure services, financial services, managerial and business skills, and enterprise support and training will better position them to harness the benefits of e-commerce adoption.

The writers are, respectively, professor and senior fellow at Icrier