Global TNCs And Local SMEs In Bangalore: Subcontracting, Innovation And Economic Performance

Small and Medium Enterprises (SMEs) are one of the principal driving forces in the development of an economy because of its significant contribution in terms of number of enterprises, employment, output and exports in most developing as well as developed countries. But SMEs, particularly in developing countries like India, face constraints in the functional areas of technology, finance, marketing and human resources. Moreover these SMEs have been exposed to intense international competition since early 1990s because of globalisation. However, globalisation, the process of continuing integration of the countries in the world has opened up new opportunities for SMEs of developing countries to cater to wider international markets which bring out the need for these SMEs to develop competitiveness for their survival as well as growth. Subcontracting relationship of SMEs with Large Enterprises (LEs) is an important source of access to technology and other infrastructural resources for SMEs of developing countries enabling them to develop their capabilities and become competitive. In the era of globalisation, Trans National Corporations (TNCs) are expanding their production facilities to developing countries for availing the advantages of productivity and distribution more than ever and India is no exception. These TNCs which concentrate on core operations and outsource non core activities offer better scope for local SMEs to have subcontracting relationship with them. Superior work culture of these TNCs would be reflected in their subcontracting relationships with local SME suppliers since TNCs place much emphasis on their value chain to be organised according to international standards. The key issue is whether Indian SMEs have entered into subcontracting relationship with TNCs and if so what is the nature of these subcontracting relationships? Does this relationship with the TNCs offer more scope for receiving assistance of various kinds for subcontracting SMEs? What is the extent and diversity of this TNC assistance? Given the quantum of assistance, does it facilitate the innovations and economic performance of SMEs? These questions have been addressed in the study with reference to subcontracting SMEs of three major TNCs in the Indian automobile industrya Japanese TNC, a German TNC and a Swedish TNCall the three being located in Bangalore, India. A theoretical framework for subcontracting relationship between TNCs and SMEs is proposed focusing on TNC assistance, SME innovations and economic performance, based on literature review. The study is based on an Ex Post Facto Exploratory research using primary data collected from a sample of 81 SME subcontractors selected from the list of first level suppliers provided by the three TNCs. The relevant data were collected using a structured questionnaire by visiting the firms and having personal interviews with entrepreneurs/senior managers of the firms. An assessment of nature of the SME subcontractors and their subcontracting relationships with TNCs revealed that these SME subcontractors of the three TNCs are in different stages of TNCSME subcontracting relationship. The Swedish TNCSME subcontracting relationships are in the initial stage, the Japanese TNCSME subcontracting relationships are in the growing stage and German TNCSME subcontracting relationships are in an enduring stage of the relationship. Therefore they are alternatively referred to as initial stage SME subcontractors, growing stage SME subcontractors and enduring stage SME subcontractors. The assistance a subcontracting SME received from its TNC customer was measured using 20 item variables under 7 dimensions of assistance related to product, production process, managerial know-how, marketing, human resource, financial and purchase process. A model to measure the degree of assistance was formulated with these 20 item variables for measuring the seven dimensions of assistance. Confirmatory factor analysis was used to establish the validity of the model. The degree of assistance was calculated as a single summated score for each case by summing up the composite scores of the seven dimensions of assistance calculated using weighted average method. The assistance provided to SME subcontractors was more in the case of German TNC than those of Japanese TNC and Swedish TNC. Even though there was evidence of assistance from TNCs to SME subcontractors, these SMEs received more of product related and purchase process assistance whereas assistance for their production process, managerial know-how, marketing, human resource, financial requirements was not very high. This implies that subcontracting relationship of Indian SMEs with TNCs is confined more to a mere purchase supply relationship where both the parties are concerned about the basic requirements of purchase supply relationship like detailed specifications, proper feedback on product performance, advance information about future orders, preferential pricing and proper payment. Innovation of the subcontracting SMEs was measured based on six dimensions of innovation, namely, new product developments, product modifications, process improvements, informal R&D/NPD expenditure, informal R&D/NPD employees and raw material selection. Firms were classified into two groups as high innovators and low innovators based on the innovation score calculated using the six dimensions. To probe the role of TNC assistance in the innovations of subcontracting SMEs, a logistic regression analysis was performed using the equation with degree of assistance, capital and labour as explanatory variables and innovation level as criterion variable. Our analysis revealed the positive role of assistance in the innovations of SMEs. However, the positive role of this assistance was found to be decreasing as focus of our analysis shifted from the initial stage SME subcontractors to the growing stage SME subcontractors and then to the enduring stage SME subcontractors even when the assistance they received increased from one stage to the other. SME subcontractors operating in the initial stage of the relationships, who in general lack technological competence, rely more and make more use of the assistance, even when the assistance itself is low, for their innovative performance. As the relationship gets older, the SMEs may be able to enhance their inhouse competence using the assistance from the TNC and may make more use of their own resources for innovations along with the assistance from TNCs. Therefore, as SME firms begin to use more of their inhouse resources for their innovations, it is likely that the role of TNC assistance for SME innovations would decrease. Increasing positive role of labour for SME innovations as the relationship shifted from initial to enduring stages substantiate the argument of increasing utilisation of inhouse resources for innovations as relationship prolongs over a period of time. A comparative analysis of the economic performance of SME subcontractors revealed that the German subcontractors were having more labour productivity and value added to value of output and low capital productivity whereas Swedish subcontractors were having high capital productivity and low labour productivity and value of added to value of output compared to other two. In order to probe the role of degree of assistance on the economic performance of SMEs, a regression analysis was performed using the equation with degree of assistance, capital and labour as explanatory variables and value addition as criterion variable. The results revealed the contributory role of TNC assistance in the economic performance of subcontracting SMEs but this contributory role of assistance was found to be decreasing even when the assistance itself is increasing whereas the contribution of labour increased, as our analysis shifted from the initial stage to the growing and then to the enduring stage of relationships. The extent of assistance might be low at the initial stage of the relationship but the small and young SME subcontractors who in general, lack technological competence might be able to make more use of this assistance since the assistance from TNCs would be one of their major sources for technical upgradation and growth. As the relationship prolongs both contracting and subcontracting firms may rely on trust and build up close relationship which would enable the SMEs to enhance their sales to the TNC and receive more assistance. At the same time, some of the SMEs might even strengthen their inhouse resources due to TNC assistance which in turn could be further used for their economic performance. This could be the reason for the decreasing contributory role of assistance and increasing contributory role of labour for the economic performance of subcontracting SMEs as our analysis moved to more enduring relationships. Further analysis using other regression models revealed that the firms, which received more assistance from the TNC customers utilised labour more efficiently than firms which received lesser assistance. TNC assistance was found to be an important factor for the enhancement of labour productivity of subcontracting SMEs, especially for young and small firms operating in the initial stage of the relationship. The subcontracting SMEs were able to make use of the innovations which they could carry out with TNC assistance for their economic performance. Quantile regression analysis, performed to have a more comprehensive picture of the effect of degree of assistance on economic performance, revealed that that for SMEs having average factor productivities, the assistance from TNCs contributed less to their economic performance relative to those SMEs which had low and high factor productivities, respectively. Moreover, SMEs which had high factor productivities were able to make more use of their innovations for their economic performance. These findings clearly show that the TNC assistance enables subcontracting SMEs to enhance their innovations and economic performance. Initially, the SME subcontractors might receive less assistance but these SMEs who in general, have limited resources may make more use of this assistance for better performance and enhancing their internal capabilities. As the subcontracting relationship endures over a period of time, subcontracting SMEs would be able to enhance their performance and develop their internal resources which in turn could be further used for their performance. If that is so, even when the SMEs are able to receive more assistance from TNCs and deliver higher performance, the contribution of this assistance for their performance would decrease. Thus this diminishing role of assistance from TNCs in the economic performance of subcontracting SMEs supports the fact that SME subcontractors are able to improve their internal capabilities and competitiveness through long term subcontracting relationships with TNCs. An assessment of the relative importance of SME factors which encourage subcontracting of the SMEs with TNCs indicated that inhouse R&D efforts and technological capability, frequent and proper communication, financial stability, skilled manpower, reputation of the subcontracting firm etc. are the most important factors, indicating the importance of inhouse/internal resources of the subcontracting firms. An assessment of the factors with respect to improvement needed for these SMEs revealed that the entrepreneurs/managers of the SMEs had realised the need to improve their inhouse resources and develop their technological capabilities with enhanced skilled manpower and better machinery. Given the importance of internal resources of SMEs for forging subcontracting relationships with TNCs, Indian SMEs need to place utmost priority for enhancing their own technical and manpower resources. Results of our study underlines the need for a policy thrust to expand the coverage of subcontracting involving local SMEs with domestic economy based global TNCs. The promotion of linkages of SMEs with TNCs depends on two factors: (i) the availability of local SMEs who have the prerequisite capabilities in terms of quality, delivery and cost and (ii) availability of information of such SMEs and their capabilities for TNCs. This context calls for the simultaneous strategy of competitiveness enhancement of local SMEs to the required level and providing information about the available capabilities of SMEs to TNCs