Why Indian MSMEs should see the world as their target market

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India’s MSME ecosystem is vast. According to some estimates, there are around 6.4 crore MSMEs, employing around 23 percent of the Indian labour force. At the same time, these MSMEs struggle to grow over their lifecycle, with 85 percent classified as 'dwarfs'—more than ten years old and employing fewer than 100 people. This problem is also particularly pronounced as the average 40-year-old MSME manufacturer usually employs the same number of people as the average 5-year-old manufacturer. In contrast, in the US, older companies employ eight times as many people on average. The US scenario is a symptom of a healthy economy. Most successful and productive firms should grow in size, while less efficient producers should find other areas of economic activity they are better at. This is one of the basic principles underlying economic growth.

Our regulatory glass ceiling is a big reason scaling with age does not happen in India. Formal and large firms attract greater regulatory scrutiny from a system ill-disposed to private sector activity. This regulatory cholesterol most impacts those firms that want to grow. Tiny firms escape scrutiny; huge ones can manage it, but the middle becomes a no-man's land. Research has found that medium-size firms are missing in India compared to other countries. While government and policy reformers have to focus on reducing this regulatory cholesterol, MSME firms are one important and often overlooked factor in breaking this glass ceiling. Evidence from countries like China shows that when a groundswell of economic activity from MSMEs starts, it incentivises them to demand a more conducive business environment, and true and sustainable change occurs.

So the question then becomes: How do we get this driver of economic activity and reform to get going? One key is to orient our MSMEs towards global markets. Contrary to popular belief, at least for MSME-dominant industries, the domestic market size is tiny compared to the global market size, often less than two percent. In comparison, our working-age population is up to 20 percent of the global working-age population. This means that the effective size of the Indian market per MSME is minimal despite its large population. High competition and small market size are far from an ideal growth environment.

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Exporting is thus crucial for Indian MSMEs to break away from dwarfism and unlock their true growth potential. Exporting can help them tap into new markets and expand their customer base, increasing revenue and profits. It is also clearly documented that competing globally has enormous implications for innovation and quality improvement. While Japanese goods are the byword for quality today, when they started exporting, Japanese goods were popularly known as being of shoddy quality. Competing in the global market is what necessitated improvements in quality. South Korean and Chinese goods have gone through the same trajectory. Indian manufacturers, too, can test themselves against the best in the world and come out on top in growing the Indian economy and improving the standard of living in India.

There was a time when the small size of MSMEs would have been a problem when targeting global markets. This is no longer true. E-commerce platforms like Amazon and new aggregators like Zetwork, GlobalFair and Lal10 have made acquiring and servicing customers easier. Global sourcing giants like IKEA and Walmart have committed to increasing sourcing from India, and MSMEs are considered key elements of the supply ecosystem. Several government schemes on financing, market access support, and export promotion exist that provide incentives, tax rebates, investment, and operational subsidies to MSMEs. A few major bilateral free trade agreements have been signed recently, and more are in the works to increase access to global markets. The imperative to de-risk global supply chains from China makes this the best time for MSMEs to look to increase their share in global markets.

A mindset shift is one of the most important changes needed to take advantage of these opportunities. Indian entrepreneurs must be willing to step up and set their sights on becoming competitive in global markets. The exciting thing is that competitiveness will come from a focus on collaboration with their partners, employees, and policymakers. With the right vision and execution, India's MSMEs can power our next wave of growth and reforms.

The author is Ravi Venkatesan, the Global Alliance for Mass Entrepreneurship (GAME) founder and a board member of the Foundation for Economic Development.

The thoughts and opinions shared here are of the author.