MSME productivity: Ask small enterprises in the developing world what they lack, and the answer is usually finance. Surveys by multilateral banks in Africa confirm this with tedious regularity. Development banks then pressed commercial lenders to push credit towards small firms. The result was often default and closure, not growth.
Finance given to firms that lack the capacity to use money well can destroy value. Money is often the last thing small firms need, at the end of a sequence that policy in India and elsewhere too often runs backwards.
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MSME productivity, not MSME numbers
Micro, small and medium enterprises make up more than 90% of firms in the world. In India, they account for 60-65% of employment. In Africa, they provide roughly three-quarters of jobs and 30-40% of output. A country that adds nearly a crore people to the workforce every year cannot transform without raising productivity in this sector.
The policy question is not how to create more small firms. It is how to create more productive small firms.
The problem has resisted decades of effort for two reasons. Small-firm lobbies often seek protection from competition rather than the tools to compete. Governments oblige with rules that sit uneasily with employment growth. The second problem is the clutter of prescriptions: finance, technology, infrastructure, market access and management training are all offered, often without a sequence. Africa, where enterprise development remains at an early stage on most fronts, shows the order in which support works.
Markets before MSME credit
Small firms that do well in Africa usually sit in or near markets. Some are traders. Others are rice millers or garage mechanics, including thousands clustered at a single road junction in one West African capital. Proximity to customers is not a convenience. Without a market there is no sale. Without daily contact with buyers, producers do not know what to make.
Firms stranded away from markets, and dependent on middlemen, cannot see demand. They can respond neither to a shift in price nor to a change in taste. Market access is therefore the first stage of enterprise development, not a late addition to a credit scheme.
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Product, brand and MSME management
Market success brings imitation. Clusters attract copycats, prices fall and profits shrink towards subsistence. The instinctive response is to improve production efficiency. That is often the wrong move. Efficient production of a product nobody wants has little value. Central planning proved that at continental scale, with factories making unwanted goods at great cost.
A struggling cluster first needs a better product. A more sellable product then needs a brand, partly to slow copying and partly to open new channels of distribution. The pandemic exposed this weakness. Many small firms forced online for the first time found that they had no brand name to put on a screen.
Growth next runs into the limits of the founder. A workshop of five can run on eyesight. The owner sees each worker and each rupee. A firm of twenty needs records: cash flow, inventory, wages and orders. An owner who cannot read a manager’s tables cannot manage expansion.
This is where training earns its place. Randomised trials show that management training can raise productivity, though the effect on employment is weaker. That is less surprising once the sample is examined. Random selection mixes ambitious firms with the survival-minded majority. In one European transition economy, 85% of micro firms tracked over five years did not want to grow. Sustained mentoring works better than one-off courses. When the mentor leaves, the gains often fade.
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MSME finance after capability
Infrastructure and finance deliver only near the end of this ladder. A firm with a sellable product, a brand and the capacity to manage growth can use serviced industrial space, reliable power and a loan for machinery. Offered earlier, the same inputs are wasted. In some cases, they push a weak firm into debt.
Government has work to do at both ends. Early on, it must provide marketplaces, land and electricity. Africa remains the least electrified continent. Where city planning suppresses clusters, enterprise development is blocked before it begins. Later, public support can shift to finance, industrial estates, technology transfer and access to larger markets. Education runs through the whole sequence.
India’s MSME sequencing problem
The reluctance of micro entrepreneurs to grow is often read as lack of ambition. It is usually rational caution. Poor infrastructure, unreliable suppliers, hiring risks and the fear of running out of cash make smallness a hedge. A bank account can be emptied by the first employee ever hired. An unpaid order can kill a workshop.
Informality deepens the trap. A firm on unauthorised premises cannot raise funds or hire educated workers. It also dares not become visible enough to grow. India’s recent reform of classification thresholds, which lets enterprises expand investment and turnover without losing small-firm benefits, eases the shift from micro to small. That passage matters for job creation.
Indian enterprise is further along the ladder than much of Africa’s. Many firms are building brands, absorbing management capability and approaching the stage at which credit and infrastructure can pay. That is why sequencing matters now. Support offered in the wrong order wastes public money and breeds bankruptcy. Offered in the right order, market, product, brand, management and finance, it can move firms from survival to income and durable employment.
Before handing over the cheque, policy must ask three questions. Is there something worth buying? Does the firm know how to sell it? Does the owner know what to do with the money? Sequence is policy.