Chapter Notes

MSME and Business Entrepreneurship

This chapter explores the world of Micro, Small, and Medium Enterprises (MSMEs) and their vital connection to entrepreneurship in India. These businesses form the backbone of our economy, creating jobs and driving growth from small towns to big cities.

Introduction

Micro, Small and Medium Enterprises (MSME) are crucial for India's development. They act as a vital link in the country's industrialisation by boosting production, creating employment, and increasing exports. MSMEs are everywhere, using local raw materials and skills to build the economy.

Here's how significant they are to India's economy:

• They contribute approximately 29.7% of the GDP.
• They account for 49.66% of India's exports.
• They are the second-largest employer after agriculture, providing jobs to nearly 60 million people.

MSMEs produce a vast range of products, from simple consumer goods to highly sophisticated components for major industries. They often serve as ancillary units for large industries, forming an essential part of the value chain.

The Indian MSME sector is diverse, including both 'traditional' industries like handlooms, handicrafts, coir, sericulture, and khadi, and 'modern' small-scale industries.

Micro, Small and Medium Enterprises

The Government of India defines MSMEs based on two key parameters: the amount of investment in plant and machinery and the annual turnover. This definition helps focus on businesses where capital is scarce but labour is plentiful.

The classification is as follows:

• Micro Enterprises: Investment up to ₹1 crore AND turnover does not exceed ₹5 crore.
• Small Enterprises: Investment up to ₹10 crore AND turnover does not exceed ₹50 crore.
• Medium Enterprises: Investment up to ₹50 crore AND turnover does not exceed ₹250 crore.

Interestingly, Micro enterprises make up over 99% of all MSMEs, highlighting the importance of very small businesses in our economy.

To provide a single legal framework for these enterprises, the government enacted the Micro, Small and Medium Enterprises Development (MSMED) Act in 2006. This act addresses key issues like definition, credit, marketing, and technology upgrades for the entire sector.

Village Industries

A village industry is defined as any industry located in a rural area that produces goods or provides services, with or without using power. The key criterion is the fixed capital investment per worker, which is specified by the central government.

Cottage Industries

Cottage industries, also known as rural or traditional industries, are not defined by capital investment. They are typically family-run enterprises, often based on traditional skills passed down through generations.

Role of MSME

MSMEs play a fundamental role in the socio-economic development of India. Their promotion has always been a key part of the country's industrial strategy.

Here are their major contributions:

• Balanced Regional Development: MSMEs account for 95% of the industrial units in India. Because they can be set up anywhere using local resources, they help spread the benefits of industrialisation to every region, preventing development from being concentrated only in big cities.
• Employment Generation: After agriculture, MSMEs are the largest employers in India. They are labour-intensive, meaning they create more jobs per unit of capital invested compared to large industries. This is a huge advantage for a country with a large population like India.
• Variety of Products: They supply an enormous range of goods, from everyday items like soaps, stationery, and garments to sophisticated electronic equipment, pharmaceuticals, and engineering products. Handlooms and handicrafts from this sector are also major export earners.
• Promotion of Entrepreneurship: MSMEs provide a platform for people with skills and business ideas to become entrepreneurs. Starting a small business requires less capital and has fewer formalities, encouraging more people to start their own ventures.
• Low Cost of Production: By using locally available and less expensive resources, MSMEs often have a lower cost of production. Their overhead expenses are also typically low, giving them a competitive edge.
• Quick Decision Making: Being small organisations, decisions can be made quickly without the long consultation processes found in large corporations. This allows them to adapt fast and seize new business opportunities.

Problems Associated With MSME

Despite their potential, MSMEs face several significant challenges that can hinder their growth.

• Finance: This is one of the most severe problems. MSMEs often start with a small capital base and struggle to raise more funds. Banks are often hesitant to lend without sufficient collateral, and these businesses may fall prey to exploitation by local money lenders. A lack of adequate working capital is also a common issue.
• Raw Materials: Procuring good quality raw materials is another major hurdle. MSMEs have low bargaining power due to small purchase quantities and cannot afford to buy in bulk. They may have to compromise on quality or pay high prices, which affects their production.
• Managerial Skills: Most MSMEs are run by a single person who may have strong technical knowledge but lack skills in other areas like marketing or finance. They usually cannot afford to hire professional managers to handle different functions.
• Marketing: Effective marketing is crucial for generating revenue, but it is often a weak area for small businesses. They frequently have to depend on middlemen who may pay low prices and delay payments. Direct marketing is often not feasible due to a lack of infrastructure.
• Quality: To keep prices low, many MSMEs compromise on quality. They lack the resources to invest in quality research, maintain industry standards, or upgrade their technology. This becomes a major disadvantage, especially when competing in global markets.
• Capacity Utilisation: Due to poor marketing or low demand, many MSMEs operate below their full production capacity. This increases their operating costs and can lead to business sickness and closure.
• Global Competition: In today's globalised world, MSMEs face stiff competition not just from large domestic industries but also from multinational companies, which are giants in terms of size, resources, and business volume.

MSME and Entrepreneurship Development

Entrepreneurship is the process of setting up one's own business. The person who sets up the business is called an entrepreneur, and the business unit they create is called an enterprise.

Entrepreneurship is vital for any country's economic development. In a developing country like India, entrepreneurs initiate the process of development by creating jobs and wealth. With opportunities from globalisation expanding, entrepreneurship can help India become a super economic power.

Characteristics of Entrepreneurship

• Systematic Activity: Entrepreneurship is not a matter of luck. It is a purposeful and step-by-step process. The skills and knowledge required can be learned through education, training, and experience, proving the myth wrong that entrepreneurs are "born, not made."
• Lawful and Purposeful Activity: The goal of entrepreneurship is to conduct a lawful business. The purpose is to create value for both personal profit and social gain.
• Innovation: Entrepreneurship is creative. It involves introducing new products, discovering new markets, finding new sources of raw materials, or implementing new technologies. Innovation helps in creating value, saving costs, and enhancing revenue.
• Organisation of Production: An entrepreneur identifies a business opportunity and mobilises the factors of production—land, labour, capital, and technology—to create a productive enterprise. They may not own these resources but have the idea and the negotiation skills to bring them together.
• Risk-taking: Entrepreneurs take calculated risks. While starting a business is riskier than a salaried job, they are confident in their abilities to turn challenges into success. They avoid situations with excessively high risks (as they dislike failure) and low risks (as the challenge is gone).

Intellectual Property Rights (IPR)

Intellectual Property (IP) refers to creations of the human mind, such as inventions, literary and artistic works, designs, symbols, and names used in business. Just like physical property, IP can be owned, sold, or rented. The legal rights that protect these creations are called Intellectual Property Rights (IPR).

IP is divided into two broad categories:

1. Industrial Property: Includes patents (for inventions), trademarks, industrial designs, and geographical indications.
2. Copyrights: Includes literary and artistic works like novels, poems, films, music, paintings, and architectural designs.

Unlike physical property, IP is intangible—it cannot be identified by its physical parameters.

Why is IPR Important for Entrepreneurs?

• It encourages the creation of new and path-breaking inventions.
• It provides incentives to inventors and creators for their work.
• It prevents loss of income by ensuring that the creator's permission is needed for distribution.
• It helps creators and owners get recognition for their work.

Types of IPs

IPRs are essential for fostering creativity and economic growth. They give creators control over their work and incentivise them to invest in research and development.

• Copyright: This is the right to "not copy." It protects the original expression of an idea in literary, artistic, musical, or cinematographic works. Protection arises automatically once the work is created, though registration is useful in case of disputes.

• Trademark: A trademark is a word, name, or symbol that identifies the goods of one company and distinguishes them from others. It represents a company's reputation and goodwill. Registration is not mandatory but helps establish exclusive rights.

• Geographical Indication (GI): A GI is a sign used on products that have a specific geographical origin and possess a quality or reputation due to that origin. Examples include Darjeeling Tea, Nagpur Orange, and Kashmir Pashmina. GIs protect the collective goodwill of a region.

• Patent: A patent is an exclusive right granted for an invention—a product or process that provides a new way of doing something. To be patentable, an invention must be:

  1. New: Not already known to the public.
  2. Non-obvious: Involves an inventive step.
  3. Capable of industrial application: Can be made or used in an industry.
  Example

  Alexander Graham Bell invented the telephone, which was a new creation. In contrast, Newton discovered gravity, which already existed. Inventions can be patented, but discoveries cannot. A patent lasts for 20 years.

• Design: This protects the aesthetic appearance or eye-catching features of an article, such as its shape or pattern. Protection is valid for 10 years and can be renewed for another five.

• Plant Variety: This protects new varieties of plants bred and developed by farmers. It helps conserve plant genetic resources and promotes the growth of the seed industry.

• Semiconductor Integrated Circuits Layout Design: This protects the design of semiconductor integrated circuits, which are the integral parts of computer chips.

• Traditional Knowledge (TK): This refers to the knowledge, innovations, and practices of local communities passed down through generations, such as the Indian medicinal systems of Ayurveda and Yoga. The Traditional Knowledge Digital Library (TKDL) was created to prevent wrongful patenting of India's traditional knowledge.

• Trade Secret: This is confidential information that gives a business a competitive edge. The most famous example is the recipe for Coca-Cola, which is known to only a few people.

For any business, especially a startup, protecting and managing its intellectual property is critical for success and growth. It allows new ventures to monetise their ideas and establish a competitive edge in the market.