Credit constraints in Indian MSMEs and impact innovation

Abstract

Historically, innovation and new product development have played a key role in the development of economies. This innovation could be in multiple forms, process, product, could even take the form of research and development. However, for innovation to take place, financial resources to support the same are of utmost importance. While financial resources could mean a wide range of things, in this project, we focus on credit which is very integral to most businesses’ operations around the world. Credit constraints which play a crucial role in the investment decisions, especially in terms of innovation, across industries, is of interest to us in this study. When banks give out loans, they assess risk to decide on what interest rate to offer the loans at. Creditworthiness is usually not a huge problem when it comes to large players. They easily manage to find a way around it even when there is a problem. However, when it comes to medium and small players, the problem is more prevalent and needs better solutions. This problem leaves the small and medium players with low degree of access to credit. What's interesting is how this affects the progress of innovation in an economy and subsequently the overall development. Small and medium scale industries have an important role to play when we talk about disruptive innovation. Althoughit may sound counterintuitive at first when someone says that more innovation happens in small firms as compared to large firms. Large firms and corporations with established and proven product lines and business models suffer from the problem of inertia when it comes to innovation as it involves a lot of uncertainty. This is also the reason why we often come across stories in newspapers that talk about large firms acquiring small firms and startups. This way, by acquiring proven and successful innovators, large firms mitigate the risks associated with innovation. However, if enough financial resources are not made available to the firms that work on disruptive products and technologies, that translates to the economy as a whole lagging behind.