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  • Purvi Agarwal

Economic diplomacy through small and medium-sized enterprises: The case of India, Europe and the UK

The practice of Economic Diplomacy and SMEs

Economic diplomacy (ED) is essentially an instrument for carrying out the foreign policy and national interests of a country. Through mechanisms such as dialogue, trade agreements, different multilateral institutions and think tanks, it strengthens political diplomacy. ED is defined as formulating and advancing nationally determined policies relating to foreign trade, investment, movement of labour and services, and negotiation of economic interests by the state and forums. In today's era of globalisation and interconnectedness, where approximately 57% of the world's GDP is dependent on trade, economic exchanges between countries are inevitable. National economic performance is dependent on international factors, so countries cannot stay in isolation. In the context of a global economy, pursuing economic prosperity requires active participation in global supply networks and ED ensures the same. 

Small Medium-Sized Enterprises (SMEs) are organisations that have a size and revenue falling below a certain level and can vary across multiple sectors like local retail shops, independent eateries, consulting firms, tutoring centres, gyms, fitness studios and so on. Often, governments provide flexibility to them in business and provide better access to loans and favourable taxes in exchange for the employment, innovation, diversity and economic growth SMEs contribute to their country; additionally, building more competition and improving the quality of goods and services provided to consumers. They also serve as a channel in fostering bilateral trade technology transfer, and cross-cultural collaboration; one such  case is of the Europe India centre for Business Industry (EICBI) under which there have been over 2400 companies from Europe, India and United Kingdom partaking in activities promoting business opportunities across various sectors over the past few years. Every year this institution nominates next-generation leaders who contribute to their area of work and create an impact in building stronger connections in the India EU / India UK corridor, this substantially contributes to small enterprises and encourages their participation in societal progress. 

Economic Diplomacy - small sized - India, EU and UK - EICBI - Europe india Centre for Business and Indsutry

Indian Small Medium Sized Enterprises  

While the particular requirements for classification as a SME vary by country, the Ministry of Micro, Small, and Medium Enterprises (MSME) in India classifies them based on investment in plant and machinery/equipment as well as yearly sales. Micro enterprises spend less than one crore rupees on equipment and have a turnover of less than five crore rupees; small enterprises spend no more than ten crore rupees on equipment and have a total sales of no more than fifty crore rupees; and medium enterprises spend no more than fifty crore rupees on equipment and have a turnover of no more than 250 crore rupees. The contribution of MSMEs to India's total economic output, or Gross Value Added (GVA), was 30.5% in 2019–20, 27.2% in 2020–21, and 29.2% in 2021–22. This indicates the portion of the country's overall economic activity that came from MSMEs during these respective years. The Ministry of MSME noted that a thriving entrepreneurial ecosystem is a policy imperative for realising the potential of the sector and ensuring sustainable growth of the sector. (SME Chamber of India.). The MSME act, 2006 aimed to develop a framework to provide enabling policy environment and enhance competitiveness among the enterprises, this act was able to tackle major challenges. The Indian government has managed to enhance small firm participation in the sectors of agriculture, tech and defence by providing subsidiaries, improving infrastructure and technology and capacity building.

SMEs as pillars of business industry in Europe and Britain

The European Union specifies their criteria in EU recommendation 2003/361, mentioning that enterprises comprising less than 250 employees are medium-sized, while those comprising less than 50 and 10 employees are small and micro enterprises, respectively. SMEs serve as the foundational pillar in the economic landscape of Europe, constituting 99% of the entirety of businesses within and employing two-thirds of the active working population which is approximately 100 million individuals. These enterprises contribute significantly to Europe's Gross Domestic Product (GDP), representing over half of the region's economic output. Further, SMEs play a pivotal role in the augmentation of value across diverse sectors within the economy. As the EU bank, the Europe Investment Bank (EIB) provides long-term finance for sound, sustainable investment projects in support of EU policy goals in Europe; in 2015 it provided loans for a total amount of 19.8billion Euros helping to create and sustain more than 3 million jobs in Europe’s SMEs (EIB, 2022).

Similar to Europe, the UK considers a staff headcount of under 250, 50 and 10 people as Medium Small and micro enterprises respectively. As per 2022, these enterprises account for 61% of Britain's employment and 7% of business turnover while an impressive 99% of all businesses are SMEs and in 2021, 27% of SME owners/directors were from minority ethnic background; out of which 27% again are Indian and 5% were minority ethnic led small firms without employees out of which 14% were Indian (Hutton, 2022). The statistics clearly imply that the interests of both Indian and British diplomats lie in small firms, through this New Delhi might have a leverage on the ongoing Free Trade Agreement negotiations wherein they desire increased professional visas from London. The inclusion of small businesses in industrial policy was absent until the establishment of the Committee of Inquiry on Small Firms and their report in 1971 which concluded that there is negligence on part of the government for small firms and that there shall be a Small Firms Division within the Department of Trade and Industry.The United Kingdom government currently, focuses immensely on the development and policy regulation of small businesses with a Minister for Small Firms It’s action plan for small business, launched in 2004, aims to make the UK ‘The best place to start and grow a business’ by focusing on themes like building an enterprise culture, encouraging startup growth, improving access to finance, and so on. Additionally, there is considerable scope for academia and research in Britain for the progress of small firms, as the community gathers relevant information for implementation of policies.  

India, European Union and United Kingdom Bilateral SME relations

MEA, India, released a document named India-EU Connectivity Partnership stating that they would encourage private sector cooperation between India and Europe. For people to people connectivity, it aimed to ‘Support connecting the European and Indian innovation ecosystem, by targeting SMEs and start-ups, to co-create and co-develop in view of finding innovative and technology-driven solutions to connectivity challenges.’(Ministry of External Affairs, 2021). The Europe India Centre for Business and Industry pursues number of engagements and activities in the India EU corridor to enhance bilateral trade & diplomatic relations for the benefit of business sector between the two nations. Further its intents to educate and impower SMEs for better growth, promote product and services and assist them achieve sustainable growth. 

Similarly, in the India UK corridor, Europe India Centre for Business and Industry (EICBI) acts as a bridge to exchange information on other business opportunities in various sectors as well as investment promotion in both the countries. Additionally, the upcoming India-UK FTA is set to hugely benefit women led enterprises and enhance competitiveness of SMEs owned. Recently UK Business and Trade Secretary Kemi Badenoch has stated that they ‘closed a Trade and Gender Equality chapter in which we have agreed to undertake cooperation activity’, She personally hopes that every region of India and the UK takes advantage of this deal.In a notable initiative, following the UK-EU Trade and Cooperation agreement, the SME Brexit Support Fund granted up to £2,000 for training and professional advice in relation to import and export related aspects. The trade agreement itself contains a chapter on SMEs designed to promote the participation of SMEs in the agreement. 

Economic diplomacy through SMEs proves to be an important tool for countries looking to develop international connections and boost economic growth. India, the EU, and the United Kingdom clearly indicate that SMEs are major drivers in the global economic environment and creating collaborative endeavours and providing extensive employment. Micro, Small and Medium enterprises are without doubt substantial blueprint for a sustainable and thriving global economic order.

(Purvi Agarwal is a research fellow at Europe India Centre for Business and Industry.)




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