Today success and worth of a business depend more on its intellectual capital than on its physical. Therefore, Knowledge Management (KM) has become a critical input in the growth of SMEs. Globalisation of supply chains, rapid technological advances, superior returns on intellectual capital, growing importance of knowledge-intensive industries make KM a strategic tool in the growth and success of businesses. Access and integration of SMEs with regional, national and international supply chains require bridging the gaps between the requirements of supply chains and efficiency of SMEs' KM system besides their capability. KM-enabled SMEs are essential for competitive and sustainable growth. In developing countries, a vast majority of SMEs are suffering from market failures due to insufficient provision for integrated, reliable, relevant and solution-oriented business information. SMEs need support for effective linking with global markets both for their inputs and outputs. Businesses leveraging knowledge resources can make decisions faster and closer to point of action. It also helps in mitigating risk, exploiting business opportunities and better understanding of market signals. Economic globalisation and explosive growth in flow of information have transformed the basic tenets of SSI development strategy followed since independence. Protection, developmental initiatives in terms provision for infrastructure and credit and fiscal incentives are now proving to be less efficient and helpful in sustainable growth of SSI units. Structural changes and realignment in the economy, import liberalisation, fierce competition and increasing quality consciousness make run-of-the-mill units less viable. This is reflected in poor financials of SFCs and steep decline in number of SSI accounts with public sector banks from 32 lakhs in mid-1990s to 17 lakhs in FY 2005.

Gaps in KM have resulted in both supply-side and demand-side constraints in growth of SSI. Supply-side constraints include:

  • Informational asymmetry relating to viability and return on investment in SME projects increases the risk of adverse selection for banks.
  • Very often KM in banks is confined to compilation of data. Contextualising and converting these data into actionable-knowledge is required for evaluation of knowledge-intensive/ innovative/ new product oriented projects. Credit assessment in such ventures required to be knowledge-driven rather than tangible security-driven.
  • Though banks have rating modules still their lending decisions are biased by availability of tangible security. Gaps in their KM system hamper objective assessment of an enterprise's worth and overall viability. Consequently, credit flows to knowledge-based SMEs remain tight.
  • Demand-side constraints which adversely affect investment by SMEs include:
  • Informational infirmities and gaps aggravate the uncertainties about cost pattern and return on investment, choice of technology, scale of production and overall business viability which discourage capital investment by small entrepreneurs.
  • Vast majority of SMEs do not have requisite resources and expertise to develop the infrastructure which is necessary to access and transform the vast amount of available information into intelligent insight.
  • Some SMEs have the potential but lack of enabling environment hampers global connectivity for their products.
  • Information available with different institutions being non-convergent, incomplete in many respects and generalised in nature restrict its utility to the sector.

Many countries have instituted KM strategy for their SMEs. Portugal's development of informational portal for SMEs envisages on-line access to SMEs for addressing their specific needs. Singapore's SME policy envisages realisation of its vision of an "intelligent island" aimed at remaining relevant to the global knowledge-based economy.

Working closely with MNCs generate positive impact for potential SME-suppliers in understanding supply chain requirements, identification of opportunities, improvement in operational efficiency and enhancing learning experience. Inflow of FDI can have beneficial developmental effect with more and better linkages between MNCs and SMEs, e.g., automobile component manufacturing SMEs in our country. Well-developed SMEs attract FDI inflow which helps in strengthening MNC-SME linkages. Large FDI inflows to China with progressive integration of SMEs there with international manufacturing system has greatly helped in transforming the country into a global manufacturing powerhouse.


To move ahead, an integrated knowledge network and information super-highway for SMEs that links all relevant national and international information sources become basic necessity. To enable SMEs to keep pace and alignment with the dynamism of knowledge-based economy, promotional, developmental and financing institutions, industry associations, chamber of commerce etc. have to commit resources and assistance to make the KM strategy tangible and economically viable.

The gaps in knowledge management are affecting investment in the sector. Low capital accumulation affects employment generation, long-term competitiveness, production capability and SMEs' access and integration into globalised supply chains. These require substantial investment. The world over it is the SMEs which play a major role in innovation, revitalisation of economy and creation of new jobs, but propelling SME-growth in India requires a sound Knowledge Management strategy for the sector.

About the Author:

The author is DGM of SIDBI; having years of experience in the field of SMEs in funding and working with them.

Note: The views expressed in the article are personal. (Published in Financial Express March 3, 2006)