Research and Development: Next game changer in SME sector

As India proceeds to tread a path of industrial advancement, it will have to take into account R&D as a significant game changer, especially for priority sectors. R&D has a significant role to play when it comes to improving individual and institutional performance, and the Indian SME sector is no exception to this rule.  With increasing competitive pressure, the need of the hour for the Indian SME sector is to gain global exposure and awareness of technological advancements.

As per Ministry of Science & Technology and Earth Sciences, India spends about 0.9% of its GDP on R&D as compared to US which spends 2.79%. India still lags BRIC nations where R&D spend is more than 1% of GDP.

Research & Development not only ensures a better understanding of the market dynamics, but also a firm’s own strengths and weakness to align with the market forces. By adopting R&D, SMEs can embrace two very critical aspects – INNOVATION & INDEGINIZATION. These are critical factors for not only business growth but also for overall economic growth of India.

For instance, Indian Pharma sector has evolved from being an importer of drugs to being globally competitive and producing around 22% of global generic drugs out of which 40% are exported. This indigenization has been possible through extensive research, foreign collaboration, government funds and policies like the Patents Act. This is a great example and the government is trying to replicate the same for India’s Defence Sector – encourage weapon procurement from home manufacturers and discourage dependency on imports, which is as high as 15% of global arms imports making India the largest importer of weapons.

FACTORS CONTRIBUTING TO LOW ADOPTION OF R&D IN INDIAN SMEsIt has been observed that SMEs are hesitant to invest heavily in R&D as they are low on capital and preoccupied with increasing sales which prohibits them to focus on a R&D backed environment.Cost implications, cash crunch for a substantial number of SMEs, and risk and lack of awareness limit R&D.Many firm specific cultural, social and financial factors affect the decision of SMEs towards R&D along with narrow focus on market specific orientation and consumer satisfaction.As per the World Bank’s enterprise Survey data, it was found that 46% of Indian SME’s undertook internal R&D than external support. This is mainly due to high cost of external R&D. The firms are only able to work on internal R&D to fix an existing problem. There is a need for hiring skilled labor like scientists, engineers to work on all research parameters.Another major hindrance faced by the SMEs is the non-availability of basic infrastructure like power across the country.

GOVERNMENT INTIATIVESA strong and steady government support is essential when it comes to fostering research & development in any economy. Following are the steps taken by the Indian Government to promote a R&D environment.To develop young budding talent in the country, the Government has opened Jawaharlal Nehru Centre for Advanced Scientific Research and National Centre for Biological Science in the R&D hub Bangalore.Indian Council for Fertilizers Research is planned to be launched by the Government to encourage development of new fertilizers and nutrients which will boost the growth of agriculture sector in the country.The government has been providing direct incentives for augmenting in-house R&D activities of a firm irrespective of size. Any industrial unit receiving recognition from the Department of Science & Industrial Research for its in-house R&D center is provided tax-deduction equal to the revenue and capital expenditure spent on R&D. Recently, this deduction has been increased to 150 percent of the research expenses.

RECOMMENDATIONSSelf-driven research organization: The government must establish or collaborate with self-driven research firms to focus on producing quarterly or six monthly reports with analysis on market dynamics of different industries in which SMEs operate, addressing SME specific analysis. These reports will help SMEs stay updated with prevalent market trends. The firm can also get involved in collecting feedback from SMEs on the issues which require analysis and help SMEs to discover the market or the industry and target audience better.

Tax relaxation for third party R&D: SMEs must be encouraged to embrace R&D services with R&D firms by providing relaxation on taxes of the service.

Incentive led approach: For SMEs who undertake R&D activities and are able to utilize the service to produce better quality products or provide better quality service must be rewarded with incentives.

CONCLUSIONR&D is an empirical means to achieve all the goals for a SME. They have internalized innovativeness and adaptability owing to their dynamic nature and agility to survive despite several challenges. If SMEs were to combine these attributes with action oriented R&D programs and government support, the rewarding outcome would certainly contribute to India’s economy.