Opinion in lead

Nudging small businesses towards innovation

Micro, small and medium enterprises (MSMEs) play a crucial role in Nepal’s economy given that the majority of the population are overwhelmingly dependent on small businesses for livelihood. Developing the capacity of these MSMEs is well-recognized in policy papers as a means for sustainable and inclusive development. However, the lack of proper support programmes in action has prevented these businesses from scaling up.

According to the National Economic Census 2018 (NEC) conducted by the Central Bureau of Statistics, there are 923,356 commercial establishments in Nepal (including both registered and non-registered) that employ 3.2 million individuals. MSMEs represent 98 percent of industrial establishments, 57 percent of employment (83 percent of industrial jobs), and 80 percent of industrial GDP. The prominence of small businesses in Nepal’s economy is also reflected in the data that 99.8 percent of the total commercial establishments are the firms that employ 1 to 99 workers. Likewise, SMEs contribute 22 percent to Nepal’s GDP. These MSMEs have a low capital base, poor access to technology, and inadequate knowledge and information regarding business opportunities and marketing. Information asymmetry, dearth of skills, lack of access to basic production and processing technology, ineffective branding, inadequate digital payment network and limited e-commerce footprint are constraining the ability of MSMEs, including women-led ones, to export, expand exports and diversify products and markets.

Most of the government policies of Nepal have identified the importance of integrating small businesses and their development as a key to Nepal’s progress. The Industrial Policy (2010) acts as a guiding document for MSMEs as it includes several provisions that aim to strengthen small enterprises. The Policy aspires to augment the competitiveness of these firms and enhance their market access through enhancing managerial capacity and creativity, promotion of knowledge and skills, and adoption of appropriate technology; instituting investment/development fund; preparing district entrepreneurship development plan; developing industrial clusters; establishing product development centres; assistance for the use of the collective mark; promoting SME products; and establishing incubation centres.

However, most of these policies and programmes are geared towards micro and small grassroots enterprise development—aimed at poverty reduction rather than entrepreneurship development. Although such poverty reduction programmes to help necessity-based entrepreneurship are necessary, policies need to recognize the importance of facilitating opportunity-based enterprise development. For the opportunity-seeking small businesses helping them incorporate innovation programmes— access to finance, enhance skills training and access to innovation activities, strengthen value chain development and help create sufficient production and supply networks —can provide them with resources to expand their market and scale-up.

Not that there is a vacuum in that space at the policy level. Nepal’s National Science, Technology and Innovation Policy 2019 focuses on hard innovation. In addition to helping traditional MSMEs, this policy particularly has focused on facilitating information and communication technology (ICT)-based enterprises. It aims to develop knowledge-based entrepreneurship through the development of human resources in research and development, the adoption of cutting-edge technology, and investment in infrastructure. Digital Nepal Framework 2019 has provisions for fostering innovation in the digital sphere, such as a start-up accelerator programme, and the development/promotion of e-commerce and IT-enabled services ecosystem.

However, both these policies have failed to acknowledge potential gains from imitating/adapting basic technology developed elsewhere, or adapting basic organizational changes tried and tested in similar contexts. It appears that the focus has always been on start-ups—that too digital ones. Encouraging small businesses to integrate digital tools and technology in the traditional businesses could not only expand the businesses of Nepal’s existing digital companies but will maximize the efficiency of the small businesses as well.

No wonder, Nepal performs poorly in terms of innovation capability. Judging from the index of global competitiveness computed by the World Economic Forum in 2019, Nepal’s innovation ecosystem is very poor, along with other pillars of competitiveness. It ranked 112nd out of 141 economies in terms of innovation capability and ranked 98th out of 141 economies in another pillar of the innovation ecosystem—business dynamism. In terms of entrepreneurial culture, one of the two sub-pillars of business dynamism, Nepal ranked 103rd out of 141 economies.

The small businesses may lack resources—time, money, skill and information—to introduce innovative technologies or may even be reluctant considering the costs associated. This is where the government could step in and facilitate the adoption of innovation by subsidizing the cost of adoption, providing necessary information and/or imparting training.

Considering the role of small businesses in Nepal’s economy and the importance of innovation in fostering enterprises’ productivity, it is about time that innovating technology adaptation by MSMEs be integrated into national policies.