Small and Medium Enterprises (SMEs) have been considered one of the ‘driving forces’ of modern economies due to their multifaceted contributions in terms of technological innovations, employment generation, export promotion, etc. Of these, the ability of SMEs to innovate assumes significance because innovation lends competitive edge to firms, industries and ultimately, economies. Therefore, technological innovation has the potential to spur growth of individual enterprises at the micro level and aggregate industries and economies at the macro level.
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Given the above, this paper attempts to understand issues such as what factors drive SMEs to innovate, what is the nature of SME innovations, what the achievements of SME innovations are and what the outcomes of these achievements are. Overall, this paper attempts to address the question: does SME innovation facilitate the growth of firm size? This question has been probed in the context of SMEs in Sunrise Sector of our economy.
This paper probes the drivers, dimensions, achievements, and outcomes of technological innovations carried out by SMEs in the food processing industries in India. The Food Industry is divided into organized and unorganized wherein the maximum contribution is made by small and unorganized. Hence the focus of the study will be organized food processing sector. The research methodology is empirical study for this the evidences will be collected, in the form of case studies as evidences, through secondary data. Further, it ascertains the growth rates of innovative SMEs in comparison to non- innovative SMEs in terms of sales turnover, employment, and investment. The study will confirm that the Innovative SMEs have shown better and sustained growth.
Keywords: Technological Innovations, Sales Growth, Organized Food Processing, Agriculture.
Innovation is a new way of doing something or “new stuff that is made useful”. It may refer to incremental an emergent or radical and revolutionary changes in thinking, products, processes, or organizations. Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice. In many fields, such as the arts, economics and government policy, something new must be substantially different to be innovative. In economics the change must increase value, customer value, or producer value. The goal of innovation is positive change, to make someone or something better. Innovation leading to increased productivity is the fundamental source of increasing wealth in an economy. Those who are directly responsible for application of the innovation are often called pioneers in their field, whether they are individuals or organizations.
A convenient definition of innovation from an organizational perspective is given by Luecke and Katz (2003), who wrote:
“Innovation . . . is generally understood as the successful introduction of a new thing or method . . . Innovation is the embodiment, combination, or synthesis of knowledge in original, relevant, valued new products, processes, or services.
Innovation typically involves creativity, but is not identical to it: innovation involves acting on the creative ideas to make some specific and tangible difference in the domain in which the innovation occurs. For example, Amabile et al. (1996) propose:
“All innovation begins with creative ideas . . . We define innovation as the successful implementation of creative ideas within an organization. In this view, creativity by individuals and teams is a starting point for innovation; the first is necessary but not sufficient condition for the second”.
For innovation to occur, something more than the generation of a creative idea or insight is required: the insight must be put into action to make a genuine difference, resulting for example in new or altered business processes within the organization, or changes in the products and services provided.
“Innovation, like many business functions, is a management process that requires specific tools, rules, and discipline.”
From this point of view emphasis is moved from the introduction of specific novel and useful ideas to the general organizational processes and procedures for generating, considering, and acting on such insights leading to significant organizational improvements in terms of improved or new business products, services, or internal processes.
In the organizational context, innovation may be linked to performance and growth through improvements in efficiency, productivity, quality, competitive positioning, market share, etc. All organizations can innovate, including for example hospitals, universities, and local governments.
While innovation typically adds value, innovation may also have a negative or destructive effect as new developments clear away or change old organizational forms and practices. Organizations that do not innovate effectively may be destroyed by those that do. Hence innovation typically involves risk. A key challenge in innovation is maintaining a balance between process and product innovations where process innovations tend to involve a business model which may develop shareholder satisfaction through improved efficiencies while product innovations develop customer support however at the risk of costly R&D that can erode shareholder return. Innovation can be described as the result of some amount of time and effort into researching an idea, plus some larger amount of time and effort into developing this idea, plus some very large amount of time and effort into commercializing this idea into a market place with customers.
Joseph Schumpeter defined economic innovation in The Theory of Economic Development, 1934, Harvard University Press, Boston.
The introduction of a new good – that is one with which consumers are not yet familiar – or of a new quality of a good.
The introduction of a new method of production, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially.
The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.
The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created.
The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position
Whether innovation is mainly supply-pushed (based on new technological possibilities) or demand-led (based on social needs and market requirements) has been a hotly debated topic. Similarly, what exactly drives innovation in organizations and economies remains an open question.
Programs of organizational innovation are typically tightly linked to organizational goals and objectives, to the business plan, and to market competitive positioning. One driver for innovation programs in corporations is to achieve growth objectives.
As Davila et al. (2006) note, “Companies cannot grow through cost reduction and reengineering alone… Innovation is the key element in providing aggressive top-line growth, and for increasing bottom-line results” (p.6)
In general, business organizations spend a significant amount of their turnover on innovation, such as making changes to their established products, processes and services. The amount of investment can vary from as low as a half a percent of turnover for organizations with a low rate of change to anything over twenty percent of turnover for organizations with a high rate of change.
The average investment across all types of organizations is four percent. For an organization with a turnover of one billion units, this would represent an investment of forty million units. This budget will typically be spread across various functions including marketing, product design, information systems, manufacturing systems and quality assurance. The investment may vary by industry and by market positioning.
The latest index was published in March 2009. To rank the countries, the study measured both innovation inputs and outputs. Innovation inputs included government and fiscal policy, education policy and the innovation environment. Outputs included patents, technology transfer, and other R&D results; business performance, such as labor productivity and total shareholder returns; and the impact of innovation on business migration and economic growth.
SMALL AND MEDIUM ENTERPRISES (SMEs) IN INDIA
With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for small scale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a long time, though this list of products is decreasing due to change in industrial policies and climate.
SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode of production; employment generation; non concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import-intensive operations. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers.
It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to achieve the following objectives:
High contribution to domestic production
Significant export earnings
Low investment requirements
Location wise mobility
Low intensive imports
Capacities to develop appropriate indigenous technology
Contribution towards defense production
Technology – oriented industries
Competitiveness in domestic and export markets
At the same time one has to understand the limitations of SMEs. In spite of these limitations, the SMEs have made significant contribution towards technological development and exports. SMEs have been established in almost all-major sectors in the Indian industry such as:
Chemicals & Pharmaceuticals
Engineering; Electricals; Electronics
Textiles and Garments
Leather and leather goods
Computer Software, etc
As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have been passing through a transitional period. With slowing down of Economy in India and abroad, particularly USA and European Union and enhanced competition from China and a few low cost centers of production from abroad many units have been facing a tough time. Those SMEs who have strong technological base, international business outlook, competitive spirit and willingness to restructure themselves shall withstand the present challenges and come out with shining colors to make their own contribution to the Indian economy.
FOOD PROCESSING INDUSTRY
Present Status and Future Prospects of Indian Food Processing Industries
As per the Ministry of Food Processing Industry as data source, the food processing sector is highly fragmented industry, it widely comprises of the following sub-segments: fruits and vegetables, milk and milk products, beer and alcoholic beverages, meat and poultry, marine products, grain processing, packaged or convenience food and packaged drinks. A huge number of entrepreneurs in this industry are small in terms of their production and operations, and are largely concentrated in the unorganized segment. This segment accounts for more than 70% of the output in terms of volume and 50% in terms of value. Though the organized sector seems comparatively small, it is growing at a much faster pace.
India’s Position in World’s Production
Largest producer of milk in the world (105 million tonnes per annum)
Largest livestock population(485 million tonnes per annum)
Second largest producer of fruits & vegetables (150 million tonnes per annum)
Third largest producer of food grain (230 million tonnes per annum)
Third largest producer of fish (7 million tonnes per annum)
52% cultivable land compared to 11% world average
All 15 major climates in the world exist in India
46 out of 60 soil types exist in India
20 agri-climatic regions
Key Growth Drivers of Food Processing Sector in India
Increasing spending on health and nutritional foods.
Increasing number of nuclear families and working women
Functional foods, fresh or processed foods
Organized retail and private label penetration
Changing demographics and rising disposable incomes
Key Opportunities in Food processing Sector
Processable varieties of crop
Investments in infrastructure through Public Private partnership (PPP)
Mega Food parks
Integrated cold chain
Food safety Management Systems
Key segments in the food processing industry
Fruits & vegetable processing
Fruits and vegetables is one of the most important and fast growing sub-sectors of the food processing sector. Over the last few years, there has been a positive growth in ready-to-serve beverages, fruit juices and pulps, dehydrated and frozen fruits and vegetable products, tomato products, pickles, convenience vegspice pastes, processed mushrooms and curried vegetables reasons being increase in consumption by nuclear families, working women, students and single employees staying alone.
There are abundant investments opportunities are there in expanding the export market. An increasing acceptance of new products with market development efforts has been witnessed lately given the fact that there is a good international demand for certain fruits and vegetable products. The Indian food processing industry is primarily export oriented. India’s geographical situation gives it the unique advantage of connectivity to Europe, the Middle East, Japan, Singapore, Thailand, Malaysia and Korea. In 2008-09, India’s export of fresh fruit and vegetable was estimated at US$ 0.79 billion and in case of processed fruits and vegetables it stood at US$ 0.68 billion.
In meat and meat processing sector, poultry meat is the fastest growing animal protein in India. The estimated production of meat was 6.5 million tonnes during 2007-08. India exports more than 500,000 million tonnes of meat of which major share is buffalo meat. Buffalo meat production during 2008-09 is estimated at 2.8 million tonnes and out of this about 21% is exported. Indian buffalo meat is witnessing strong demand in international markets due to its lean character and it’s near organic nature. India is the 6th largest exporter of bovine meat in the world.
In 2008-09, India’s export of meat products (including buffalo meat, sheep/goat meat, poultry products, animal casings and processed meat) stood at U$ 1.25 billion.
India is number one milk producing country in the world with an estimated production of 105 million tonnes in comparison to world milk production of 693 million tonnes during 2007-08.Buffalo milk is estimated to account for 57% of the total milk production in India.
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India has a unique pattern of production, processing and marketing/consumption of milk, which is not comparable with any large milk producing country. Approximately 70 million rural households in the country are engaged in milk production. Over 11 million farmers are organized into about 0.1 million village Dairy Cooperative Societies (DCS). About 35% of milk produced in India is processed. The organized sector (large scale dairy plants) processes about 13 million tonnes annually, while the unorganized sector processes about 22 million tonnes per annum. In 2008-09, export of dairy products was estimated at US$ 0.21 billion.
In India nearly 10 million people, living in 4,000 coastal villages and more number of interior villages, depend on fisheries sector. The export of marine products has steadily grown over the years – from a mere US$ 0.84 million in 1961-62 to US$ 1,849.08 million in 2008-09. Marine products account for approximately 1.1 % of the total exports from India.
Frozen shrimp continued to be the single largest item of export in terms of value accounting for about 44% in the total export earnings. In terms of quantity, fish accounted for the major share at 40% (shrimp 21%).European Union (EU) was the largest market during the year 2008-09 with a percentage share of 32.6% followed by China 14.8%, Japan 14.6% , USA 11.9%, South East Asia 10%, Middle East 5.5% and Other Countries 10.6%.
Grain processing sector
India during the year 2007-08, accounted for 8.73% of the world’s oilseed production of 7.63%; 7.31% of the world’s oil meal production of 6.74%; 7.53% of the world’s meal export of 6.78%; 6.03% of the world’s oil production of 5.86%; 9.22% of world oil imports of 9.58% and 9.33% of the world’s oil consumption of 9.28%.
On the export front, export of oil meals, oilseeds, minor oils (fats) and castor oil during the financial year 2007-08 is reported at 62.6 lakh tonnes valued at US$ 2.32 billion against the exports of 58.9 lakh tonnes valued at US$ 1.39 billion in the previous year.
The solvent extraction processing of oilseed, oilcakes and rice bran during 2007-08 is reported at 121.2 lakh. However, the overall production of solvent extracted oils during 2007-08 form rice bran, oilcakes & minor oilseeds and soybean is reported at 19.4 lakh tonnes.
Consumer food industries
Consumer food industry includes pasta, breads, cakes, pastries, rusks, buns, rolls, noodles, corn flakes, rice flakes, ready-to-eat and ready-to-cook products, biscuits etc. Bread and biscuits constitute the largest segment of consumer foods. India’s biscuits industry is the largest among all the food industries and has a turnover of around US$ 0.64 billion. India is known to be the second largest manufacturer of biscuits, the first being USA
Indian consumer food industry is classified under two sectors: organized and unorganized. Bread and biscuits are the major part of the bakery industry and cover around 80 percent of the total bakery products in India. Biscuits stand at a higher value and production level than bread. This belongs to the unorganized sector of the bakery industry and covers over 70% of the total production.
Major Players in Indian Food processing:
Parle Products Pvt. Ltd.
Agro Tech Foods
Perfetti India Ltd.
Cadbury India Ltd.
PepsiCo India Holdings
Nestle India Pvt. Ltd.
Britannia Industries Ltd.
Hindustan Lever Limited
MTR Foods Limited
Godrej Industries Limited
Gits Food Products Pvt. Ltd.
Dabur India Ltd.
Foreign Direct Policy in Food processing Industry: 100% FDI is allowed under automatic route in food processing industry and food infrastructure including food parks, distillation & brewing of alcohol, cold storage chain and warehousing. The total inflow of Foreign Direct Investment in food processing sector during the last five years since April 2004-March 2009 is US$ 409.41 million.
Future Outlook: Indian food industry expected to grow to US$ 280 billion by 2015 and generate an additional employment for approximately 8.2 million people. Also, food consumption in India is estimated to grow at a CAGR of 5.32 % by 2013.Futher, it is expected that processed food output will grow at a strong 7 % CAGR in terms of value from 55.6 billion US$ in 2005 to 95.6 billion US$ in 2013.
Foreign Direct Investment in Food Processing Industry: The total inflow of FDI in FPI sector during the last five years since April 2004-March 2009 is Rs 1892.02 crore.
Key Dimensions of Growth
Strengths in Food Processing
India has plenty of natural resources that provide it a competitive advantage in the food processing industry. Due to it’s unlike climatic conditions, it has a wide ranging and large raw material base appropriate for food processing industries.
The semi processed and ready to eat packaged food segment is comparatively new and constantly changing. India’s cost advantage in manpower can be used to set up large low cost production bases for domestic and export markets. If one is to add on significant investments that have come into the country, food processing industry is in a favorable position.
The well established R&D and technical expertise of Indian research institutions like Central Food Technological Research Institute, Central Institute of Fisheries, National Dairy Research Institute, National Research and Development Centre etc have been a great support for food processing sector in India.
The government has introduced several steps to enhance the growth of food processing industry. In order to further enhance investment in the food processing industry, several policy initiatives have been initiated in the recent past.
The initiatives include
Full repatriation of profits and capital.
Immediate approvals for foreign investments up to 100 per cent.
Import duty would be zero for 100 per cent export oriented units. Reduction in customs duty on packaging machines.
Income tax rebate granted (100 per cent of profits for 5 year and 25 per cent of profits for next 5 years) for upcoming industries like fruits and vegetables.
Government gives financial aid for establishing common facilities in Agro Food Park.
Full duty exemption on all imports for units in export processing zones.
At present most of the processing in India is manual. Usage of Technology like pre cooling facilities for vegetables, controlled atmospheric storage and irradiation facilities is very negligible.
Modernizing and bringing in state of the art technology should be given paramount importance by both existing and upcoming manufacturers.
Supply Chain Management
According to estimates nearly 20 to 25 per cent of the production is lost during various stages of cultivation. Adding to this factor are issues like poor quality of seeds, planting material and sub standard technology in increasing productivity. Hence there is an urgent need for backward linkages with the farmers with the help of techniques like contract farming to improve the quality of the produce.
It is nothing but an agreement between the food processor (contractor) who would mostly be a very big organized investor and the farmer, where the farmer is under contractual agreement to plant the contractor’s crop in his land, The farmer also agrees to cultivate and deliver to the contractor a portion of the produce, calculated on the basis of expected yield and contracted land usage at a pre determined price. The contractor also provides technology and training to the farmer.
This is a tremendous advantage to both the farmer and contractor. It guarantees to the farmer a regular source of income and guarantees qualitative output for the contractor.
In the case of certain processed food like snack foods, the customer would look for innovation, new varieties and brand loyalty. Neat and attractive packaging would also help by making the product more visible.
Another factor to be given due importance is the pricing. Consumers are extremely price sensitive and due attention should be given to this factor.
It is believed that the food processing industry can do to the rural economy what the information technology industry has done for urban India.
The Indian food processing industry is forecasted to grow at 9% to 12% in the coming years.
The industry has set a goal of increasing its share in the global processed food trade from 1.6% to 3% within the next 8 years.
India having an advantage of a strong agricultural base should tap this potential favorably and become a preferred sourcing destination for food products globally.
The fruit and vegetable processing industry in India is highly decentralized. A large number of units are in the cottage/home scale and small scale sector, having small capacities upto 250 tonnes/annum though big Indian and multinational companies have capacities in the range of 30 tonnes per hour or so. The prominent processed items are fruit pulps and juices, fruit based ready-to-serve beverages, canned fruits and vegetables, jams, squashes, pickles, chutneys and dehydrated vegetables. More recently, products like frozen pulps and vegetables, frozen dried fruits and vegetables, fruit juice concentrates and vegetable curries in restorable pouches, canned mushroom and mushroom products have been taken up for manufacture by the industry. The processing level in India is estimated to be around 2%, as compared to about 80% in Malaysia, 30% in Thailand, and 60-70% in the UK and USA
India’s share in the world trade of horticultural processed products too, is miniscule – less than 1 per cent. This compares very unfavorably with countries like Malaysia (83%), Philippines (78%), Brazil (70%) and US (70%). India’s major exports are in fruit pulp, pickles, chutneys, canned fruits and vegetables, concentrated pulps and juices, dehydrated vegetables and frozen fruits and vegetables.
Supply chain efficiencies together with a focused approach to enhance exports are the key to ensure that India is able to successfully tap new product/market opportunities. India has the potential to achieve a 3% share in the world trade of agricultural and food products by 2015.
India is the world’s second largest producer of food next to China, and has the potential of being the biggest with the food and agricultural sector. The total food production in India is likely to double in the next ten years and there is an opportunity for large investments in food and food processing technologies, skills and equipment, especially in areas of Canning, Dairy and Food Processing, Specialty Processing, Packaging, Frozen Food/Refrigeration and Thermo Processing. Fruits & Vegetables, Fisheries, Milk & Milk Products, Meat & Poultry, Packaged/Convenience Foods, Alcoholic Beverages & Soft Drinks and Grains are important sub-sectors of the food processing industry. Health food and health food supplements is another rapidly rising segment of this industry which is gaining vast popularity amongst the health conscious.
India is one of the world’s major food producers but accounts for less than 1.5 per cent of international food trade. This indicates vast scope for both investors and exporters. Food exports in 1998 stood at US $5.8 billion whereas the world total was US $438 billion. The Indian food industries sales turnover is Rs 140,000 crore (1 crore = 10 million) annually as at the start of year 2000. The industry has the highest number of plants approved by the US Food and Drug Administration (FDA) outside the USA
The food processing sector in the country with its vast potential has emerged as one of the major driver of economic growth. It is encouraging to note that while the country’s GDP growth rate had increase from 3.5 per cent in 2002-03 to 9 percent in 2006-07; the food processing sector has grown from 7 per cent to 13.1 per cent during the same period.
India is a country of over 1.10 billion consumers, there is a large untapped domestic market of 1,000 million consumers in the food processing sector and 200 million more consumers are expected to shift to processed food by 2010.
Case Study: Mrs. Bector Cremica Group
Three decades ago in 1978 when Mrs. Bector had established a small enterprise, today known as Cremica Group a $90 Million company, is flagship bearer in food retailing and food services industry. Company is exporting to 50 countries including Africa, the USA, UK and the Middle East.
Cremica Group included Cremica Frozen Foods, EBI Foods, Mrs. Bector’s Desserts and Cremica Agro India. Its products include biscuits, sauces, bread spreads, ready to eat curries and syrups catering to the needs of the food processing industry that seems to be one of the reasons of its being the largest player in food services business in India.
Since 1996 Cremica has been supplying buns, ketchups and toppings to McDonald’s – its key business partner. It has also partnered with Cadbury’s ITC and EBI Foods, a UK based firm. Its clientele today includes some of the premier names of the food processing industry like Cafe Coffee Day, Taj Group of Hotels, Spencer, Pizza Corner, Pizza Hut, Dominos, Jet Airways, Air India, Big Bazar, Spencer, Barista and HUL.
As a company’s policy to assists its customers succeed in the marketplace by helping them develop new products, substitute ingredients with local alternatives and reformulate existing products, company had came a long way. The company’s value proposition lies in the fact that it can deliver better quality products at the same price. Its core competence in this business arises from its extensive product development and R&D capabilities, its team of experienced food technologists and its plants, which are specifically designed for food service applications.
Company had been innovative and rejuvenating its existing products with launch of products and services in India and Internationally. For example their sauces are being exported to Australia. In 2009 they launched a new range of chip-dips and bread spread in the ethnic Indian range and these are going abroad to a number of countries.
Earlier, company was producing liquid condiments like sauces, Mayonnaise, Toppings and Syrups with its partner company, the erstwhile Quaker Oats Inc of the United States, but in 1999, Quaker Oats withdrew from the joint venture.
Cremica’s liquid condiments and biscuits are very popular.
Cremica’s automated biscuit plant has a monthly capacity of producing 10,000 tonnes of biscuits. Its dominant role in the biscuits segment arises from its excellent quality, widespread distribution and extended range. Almost all the divisions of the company are growing fast. With the positive response from the market the