The Brief: Pallavi Roy on the Competitiveness and Capabilities of SMEs in Nepal

[00:00:10] - [Shreeya Rana]
Namaste and welcome to Pods by PEI, a policy discussion series brought to you by Policy Entrepreneurs Inc. My name is Shreeya Rana. In this episode, Pallavi and I talk about the role of SMEs to accelerate inclusive economic growth, the organizational capabilities that SMEs should develop in order to expand their competitive base,

[00:00:31] - [Shreeya Rana]
the policy options that decision makers should keep in mind while targeting economic growth, and how firms with low productive base tend to collude with politicians when they are forced to comply with regulations. Pallavi Roy is a reader in international economics at the Centre of International Studies and Diplomacy at SOAS University of London. Her research focuses on the application of institutional economics and in particular the political settlements framework to problems of industrial policy, anti corruption, commodity markets, the political economy of clientelism and economic development. She is also the joint lead for the Research and Evidence on Nepal's Transition Project, a four year research implemented by SOAS, Yale University, Governance Lab, and PEI. We will also talk about some of the relevant findings our own survey was jointly implemented by SOAS and PEI as part of the larger study on federalism through the application of the Political Settlements Framework, a framework we discussed in our last episode.

[00:01:37] - [Shreeya Rana]
We hope you enjoyed the conversation.

[00:01:41] - [Shreeya Rana]
Welcome to Pods by PEI Pallavi. So before we get into the details of the SME survey, I think it would also be helpful for our listeners to first get a sense of what the global context of economic growth is and sort of set the tone of our conversation to explain why it's necessary to talk about SMEs when we talk about economic growth. So, Pallavi, when we hear of countries successfully moving from a low income country to a middle income or a high income status, What are the key economic factors that aid this transition? And what has the role of SMEs been in this transition?

[00:02:17] - [Pallavi Roy]
You asked the question, Shri, haven't you? So I mean, there are a whole raft of factors that help in economic transition, but we're talking about SMEs right now. We're talking about SMEs. So, I I think the reason why SMEs are sort of, the the policy person's darling or the economic transition researcher's darling is because SMEs are exactly what they say on the tin. They're small and medium enterprises.

[00:02:43] - [Pallavi Roy]
They are actually pretty much the engine of growth for any emerging economy, for for any aspirational, emerging economy which wants to transition to a sort of, you know, middle income, high income status. You know, sometimes we tend to think about, what makes up a complex economy, what makes up a successful economy, and we think of big behemoth companies, technology companies, R and D specific, you know, glass and chrome buildings, free coffee on tap and wellness sessions for employees. And all that is extremely important. But that happens after a certain step where you actually create the building blocks. And those building blocks cannot be created till you have a broad enough base of small firms employing enough people.

[00:03:28] - [Pallavi Roy]
And that small, that base of small firms employing enough people is essentially what the SME sector is all about. I'm simplifying. I mean, don't don't want to go geek heavy. There are there's lots of really intense economic theory behind all of this. But it's exactly to create that sort of fundamental economic structure on which you can build.

[00:03:48] - [Pallavi Roy]
You need a certain structure of economy where you have a layer of firms that generates enough employment, for for enough people across, across the country that then allows you to be stable enough to move forward to the other levels where you then move into R and D, you move into high-tech. And it's these small firms that make up the fundamental structure which move ahead. But without getting that, you can't leapfrog. So it's about getting the building blocks right. Sequencing is is in one sense quite important.

[00:04:20] - [Pallavi Roy]
But if you think about what an SME does, it's about employing enough people. It's not about being very specific. It's not about having a very specific of skills, fairly general set of skills in terms of how to organize machines, in terms of how to do maintenance. And I'll come to why it seems simple, but it's actually quite a difficult task for the average developing country, including Nepal. Nepal is no exception.

[00:04:42] - [Pallavi Roy]
So it's that inclusive employment generating structure that you want which is best achieved through SMEs especially for developing countries like Nepal. So as

[00:04:52] - [Shreeya Rana]
you know, Nepal already has that vision. It it has that plan to move into a middle income country by 02/1930. Now, Pallavi, what do you think is the role of SMEs, and in particular SMEs, to accelerate this transition and sort of promote this inclusive growth? Absolutely.

[00:05:11] - [Pallavi Roy]
Just just to link it back to the first question also that you asked, because it also also pertains to Nepal. What you're really looking at is growing the economy enough, have a broad base of of employment productive firms that can actually contribute to your tax base. You might say what is the link between an SME and a tax base? But if you think of Germany, you might first think of BMW and you think of Mercedes. But do you know what actually supplies a BMW or Mercedes?

[00:05:37] - [Pallavi Roy]
It's actually a whole host of SMEs. Now most of us in South Asia wouldn't recognize those SMEs as SMEs because we think of SMEs as sort of almost, you know, cottage, artisanal units, but that's not what we are after. The German economy, the strength of the German economy is actually built on these SMEs, very high end SMEs, which end up supplying to these final manufacturers who are called original equipment manufacturers. And that's pretty much everybody's idea of the ideal dream. Not every country can get there, but we can aspire to go at least some part of the way which works to our specific economic context.

[00:06:11] - [Pallavi Roy]
And in in Nepal, the context is now I don't want to sound like a pessimist. Political economists, we are we are often charged with being pessimists simply because we talk real stuff, but, you know, reality helps you kind of, work to the best kind of policy, I'd say, even though it's boring. But, the reason why why this is therefore important in the Nepal context specifically is if you think of the region that Nepal is in South Asia, it is a very rapidly growing part of of, the developing world. And when I say developing, really mean, in terms of income. It's got no other value judgment attached to it.

[00:06:48] - [Pallavi Roy]
It's developing because it's still a low to middle income, actually, it's a low middle income part part of the world. But in a very high growth area with neighbors like China, with neighbors like India and Bangladesh who have very, very productive firms who are able to not only produce very successfully for the domestic market, but also for the export market. And if you if you look at if you, you know, walk into the average superstore here in, you know, the Kirana store here in Kathmandu, a lot of your, goods that we purchase are either Chinese or Indian, increasingly Bangladeshi. Where does that leave the Nepali firm? So not only is Nepal a lower middle income country, it is also in a challenging economic environment where it's surrounded by countries that not only produce goods at, you know, the lower end of the price spectrum well, they also produce goods at the higher end of the price and quality spectrum well, and I'll come to why this is important.

[00:07:44] - [Pallavi Roy]
But Nepal, therefore, is sandwiched between between countries which seem to do everything very well. Where does that leave Nepal? And which is why it's it's quite important for us to get that that mix of what SMEs Nepal should be aiming forward towards or what kind of SME policy that, we should be looking towards. And the other thing that that also compounds the problem for Nepal is what is one of Nepal's strength? Its remittances, its migrant workers actually ends up at one level hindering economic development.

[00:08:15] - [Pallavi Roy]
It's it's extremely important as as a sort of, way to bring in, you know, to gap gap your foreign exchange deficit. It's extremely important to provide that that sort of economic stability Even, you know, even after a dip during COVID, they might not have recovered, but remittance numbers mean a lot to Nepal's economy. But what that means is that a lot of your workers have left Nepali's chores. What has therefore, that has contributed to very high wage rates in this country compared to, Bangladesh and and India. Certainly, I'm not bringing China into the equation because it's not not geographically, it's, a little out of reach.

[00:08:52] - [Pallavi Roy]
So you have a situation where your wages are high, but you also don't have very capable firms. And we'll unpack this idea of capable firms. So in a sense, it's a bit of a realist double whammy, but does that mean that nothing can be done? In fact, there are a whole lot of opportunities. There are there are certain very embedded context specific opportunities that Nepal can exploit in tourism, in light manufacturing, in agro processing, which need to be focused on to develop this SME base.

[00:09:18] - [Shreeya Rana]
So inclusive growth, I'm glad you touched upon So inclusive growth is definitely a challenge, and it's something that cannot be overlooked for sure. So while most of the research on SMEs which have been conducted in Nepal is still limited to just identifying major hindrances to SMEs and it's very focused on reiterating the lack of access to formal banking finance. But your approach is not just that. It's not limited to just that. It goes beyond that and for good reasons.

[00:09:48] - [Shreeya Rana]
So maybe you could give us a little more background on what this research approach is that you've applied to studying SMEs in Nepal. Absolutely.

[00:09:56] - [Pallavi Roy]
Now this comes, from the from the research of professor Mushtaq Khan who you've you've heard last week. So that actually makes my life easier. Thank you very much. And, I'm gonna refer back to some of the framework that that he's actually used. Now all researchers like to think that their their framework is the best framework.

[00:10:12] - [Pallavi Roy]
Now we're making no such at all claims, but it's certainly not the conventional framework. Because the conventional framework, while it's important, is not what is sufficient for a whole lot of developing country context, and that's that's certainly, includes Nepal. The conventional approach is usually about bank finance and skills training. And somehow if you just add these two together, here be magic, and you get this whole raft of very productive SMEs in any country. It's been tried and tested.

[00:10:41] - [Pallavi Roy]
And as I said, it's definitely important to do, but after a certain amount has already been done before. If, as I said, it's about that sequencing, if that building block hasn't been, put in place, if that fundamental layer of what a firm ought to be hasn't actually happened, then doing something that's more conventional and more regular is actually going to miss the bus. There is a gap that you actually haven't filled. And what is this gap that we are, actually trying trying to fill? This is about developing organizational capability.

[00:11:12] - [Pallavi Roy]
Now if you remember, I forget forgotten when. When was it the first question or the second question? You know, these are small things that you think are very simple. But if you think about it, if you're if you're putting a worker in front of a machine, an imported machine, and machines are free to import, just think of this as a thought experiment. You you import a machine that makes garments, let's say, or shoes.

[00:11:33] - [Pallavi Roy]
And you you put a worker who's never really worked in a factory before, and you tell her that, well, now operate. I'll just give you training. You operate. Well, that's training. I've given you a finance to to buy, that that particular piece of machine.

[00:11:46] - [Pallavi Roy]
Chances are how she will operate that machine and how someone in Bangladesh is going to operate that machine is extremely different. Now, possibly when I put it that way, it becomes clearer. The Bangladeshi garment worker is used to working with that machine. She's used to working in an environment where there is an assembly line, where things can go wrong, where, you know, parts per million. Okay.

[00:12:08] - [Pallavi Roy]
So parts per million is not in garments, but maybe in cars. You know, things like parts per million, what your what your failure rate is, you know, what quality assurance is. She already knows. It's there at the back of her brain packed in. For the average Nepali worker who's never been exposed to that, how do you get her to start looking at the machine differently in the same way that the Bangladeshi worker is able to look at the machine and process it?

[00:12:32] - [Pallavi Roy]
Now that's very basic, but that very basic also has to be taught to the average Nepali worker. Now Bangladesh also started off at the very same place that Nepal is in today. In fact, probably far worse or or even in India or any sort of postcolonial, country that that today is trying to transition to being a capitalist economy. So, essentially, it's how do you build in that capability of how an organization is run at that micro level. That's the kind of capability building that we are talking about.

[00:13:05] - [Pallavi Roy]
So it's not something that's very techy, wizy and geeky and R and D specific. It's also not something very generalized. If you want to focus on agro processing, if you want to focus on light manufacturing and you know from province to province it'll be different perhaps and this is my guess a worker in Bhagmaty will have more to do with machines than a worker in Sudur Pashtem, if you were to set up in Sudur Pashtem. So even within the country context, these kinds of organizational context become very, very specific. So that's the kind of training that we're talking about.

[00:13:39] - [Shreeya Rana]
So what you're trying to say is that there's a different set of capabilities that is distributed across these different provinces, across different developing countries, across different sectors. Is that what you're trying to say?

[00:13:52] - [Pallavi Roy]
So it's it's yes. Not that there's a different set of capabilities, but that we need to build according to a set of capability requirements. Does that make sense? Yeah. Right?

[00:14:02] - [Pallavi Roy]
So it it the capabilities don't exist yet. Mhmm. But given the context, you need to build in those certain capabilities. Now, this is not to say that Nepal shouldn't aim towards the really high-tech kind of industry. There have already been investments in, you know, cloud computing, etcetera.

[00:14:18] - [Pallavi Roy]
And there should always be space for that. But one should also look at where else there is the opportunity, and that would be in the sort of middle technology sectors like the ones that I just talked about. So it's creating capabilities depending on that context. That's what's, extremely important. So but before before, you know, I talk about anything further and what makes it a little more different from the other bits of financing, let me just say that there are three kinds of knowledge if you look at this this whole, sort of literature on what kind of knowledge you need to develop firms.

[00:14:50] - [Pallavi Roy]
One is, you know, of course, what we called codified skills. Codified knowledge, it's formal education. You go to school, you get a degree, you become an engineer or you become a chartered accountant. That's codified, that's formal, that's education. The other is what is called skills training, the more more general bit of it.

[00:15:07] - [Pallavi Roy]
And all of this, which comes through what is called learning by doing. Literally, you know, the case of the Bangladeshi worker, she knows what's to be done because she's been on the job. She comes in every day. She's actually learning by being on that job. Now all of these have, you know, roots in sort of economic thought, that there have been economic thinkers like Al Polanyi or or Kent Arrow who've who've talked about these things.

[00:15:29] - [Pallavi Roy]
But the idea of organizational capability actually picks up from there and says there's something beyond obviously, everybody knows that codified that that the formal knowledge is important. Everybody has now begun to understand that this learning by doing what's called the tacit knowledge, what's implied, not something that can be learned formally is also important. But the building block that I was talking about, how, for instance, firms in Nepal will develop, just how to run the machinery, inventory management, what to do when a machine breaks down. The fundamental basics, which seems simple, but in the example that I gave you of the Nepali worker versus the Bangladeshi worker, that fundamental to be taught to the Nepali worker or even in an African context, that is organizational capability development, which is a sort of third element in in the kind of skills or the knowledge that's required to to actually run an economy and start a firm. So, Pallavi, you talked about the three kinds of knowledge.

[00:16:26] - [Pallavi Roy]
Why is it important for us to focus more on the organizational capabilities? To put it very simply, the reason why countries need to develop their organizational capabilities at the firm level, and remember we're talking about the firm, it's the individual firm. Once the individual firm starts, that's when you're building up that that structure towards towards a much more complex capable productive economy. The one reason why you want to do this is you want to become competitive. Now competitive has a whole lot of meanings.

[00:16:55] - [Pallavi Roy]
You know, this is the Oxford English Dictionary meaning. There's there's there's there's something, you know, sort of free market, economics meaning. But what we mean here in terms of being being competitive is something extremely specific, which is it could be any product, and you are a domestic producer of of that particular product, but, you know, you do assume that that product is being made at this present moment by somebody in China, by somebody in Vietnam, you know you know, somebody in Bangladesh or or India, for instance. And as a Nepali producer, it's not just enough for me to be able to produce that that particular product. I have to produce it at the price and at the quality.

[00:17:36] - [Pallavi Roy]
The same price and the same quality that the producer outside is producing at. Because if I have to compete, there's no point in me giving you something at the same price, you being the consumer Shriya, giving you something at the same price, and of a lower quality and of the same quality, but at a higher price. A lot of people seem to think that, oh, you just need to compete on price. But it's equally important to compete on the quality aspect of it. So you need to be able to give me the same price and the quality that the same producer who's actually the the leader in in the world is producing at.

[00:18:14] - [Pallavi Roy]
And the only way you can do that is by making sure that your organizational processes of production is as simple as that, is productive enough to be able to produce to that level of price and quality. So that is organizational capability and why it's it's so important. And now that, again, I said, sounds simple, but that needs to be financed. But it's not the same kind of bank financing that one is talking about. And why is it that not the same kind of bank financing that one is talking about?

[00:18:49] - [Pallavi Roy]
And here, it gets really interesting. It it not only links to sort of the larger political settlements, distribution of power, ability to discipline approach, it also gets a little into sort of human psychology. And I'll I'll quickly come into why that's important. Think about what the financing is is, about here. The financing is not to buy a machine.

[00:19:10] - [Pallavi Roy]
The financing is is not to buy, let's say, a brand. The financing is basically, as I said, you know, you have to produce to the same price and the same quality. The financing is essentially about the fact that I when I start off, I am not going to be as competitive as the same producer in Vietnam, right? I will have to spend some time learning to be as competitive. While I'm learning to be as competitive, I'm loss making.

[00:19:37] - [Pallavi Roy]
Now who is going to finance that loss? For a bank, a bank isn't able to compute financing this kind of loss. A bank can sell your machine as collateral, but a bank doesn't quite know how to finance period of loss. Why would a bank in heaven's name finance a period of loss? That's the difficulty.

[00:19:58] - [Pallavi Roy]
Okay, so here the state has to step in. Now, the state has to step in and here the state the role of the state of policy is extremely important because the state has to step in and say, okay. So the private sector is not going to do this. I will come in as the state. Here's the money.

[00:20:14] - [Pallavi Roy]
Now, as soon as I've got the money, you'd expect that it is in my interest to be profitable. You know, self interest is all about everything, incentives, etcetera. And so you the state goes away. And somehow that money is used up, but the firm never becomes profitable. And that's where it actually leads into something that's that's behavioral, which is which is called, you know, satisficing behavior, which is suffice and satisfy.

[00:20:39] - [Pallavi Roy]
I love the word because I think sometimes I'm a bit of a satisficer, but don't tell anybody that. So it it's essentially that, which is I'll be satisfied with and that's that's sufficient. I really don't need to be profitable. I'm getting this nice fat, sort of payment, like a subsidy from the government. Why should I bother being profitable?

[00:20:58] - [Pallavi Roy]
This is where the role of the regulatory body or the, you know, authority which is providing that policy policy in the sense of financing that period of loss while I become as profitable as a Vietnamese manufacturer. It the ability of that agency, in this sense, the government, let's say, or the state, to be able to discipline the person who's receiving this finance to bear this loss making period. The state has to have the ability to enforce, and here we can plug the political settlements framework in because this is the political settlements framework is essentially about the enforcement capability of the state. If the state also doesn't want to enforce or isn't powerful enough to enforce, there will not be any enforcement, and that period of loss making will continue forever. So you need an element of compulsion.

[00:21:43] - [Pallavi Roy]
Incentives aren't enough. You need to compel. Let me give you a simple example of school. Now you think that you go to school and your self interest is in learning. You know, I I learn about all kinds of vague things in in geography, Harmattan in Africa, and different kinds of deserts, and different kinds of volcanic rocks and mountains.

[00:22:00] - [Pallavi Roy]
And really, how is that going to help me earn a living if I'm not going to be a geologist, but I still have to learn it? You'd expect, okay, you know, it's knowledge, self interest, learning. I bet you, Shriya, you too, I know certainly for myself, you'd go home and just, you know, listen to your other favorite podcast, whichever that might be. But unless the teacher actually takes an exam, are you going to be reading different kinds of volcanic rocks, sedimentary, and I've forgotten. I'm trying.

[00:22:25] - [Pallavi Roy]
I'm really trying hard, but no, I've forgotten. Okay. So base basic point being made here is, unless somebody takes an exam, somebody compels you, you're not going to be learning. It's very simple. But what is so simple is one of the most difficult policy implementation problems that we don't talk about.

[00:22:44] - [Shreeya Rana]
So what you're telling me is that SMEs are made to comply, but in fact, they haven't built those necessary capabilities for them to comply and sort of not push back the whole government intervention and rely on just having government produced incentives.

[00:23:04] - [Pallavi Roy]
So this is not to say that all SMEs would do it, but this is behavioral. You would if you did not have a compulsion on you. Right? That's that's the point that we are trying to make. It's not that some SMEs certainly will, but if you have an easier way out, where you're actually being competitive because, you know, somebody's offsetting the loss, you are being able to produce at the price and the quality of Vietnam, not on your own, but because somebody else is helping you.

[00:23:28] - [Pallavi Roy]
Well, then the tendency would be, in nine cases out of 10, to continue being that. And, you know, if at that point I took away that financing, you would not be able to compete. But till I give you the threat that I'm taking away the financing in the next two years, if you're not going to turn around and do this on your own, I'm just going to continue like this forever. So this is this is what is called, you know, the infant industry never grew up. This is this is a tale that development economists love telling their students, which is infant industries exactly like this.

[00:23:59] - [Pallavi Roy]
You know, industries that never existed in developing countries, steel, paper, chemicals, etcetera, were given a lot of subsidies and they never became competitive because they just sat on the subsidy. So this infant industry never grew up and that can also happen at that at that SME level. Compelling and being able to compel is extremely difficult but an important part of what a state should be able to do.

[00:24:21] - [Shreeya Rana]
So is that something you've observed through your research in, Nepal, for instance?

[00:24:28] - [Pallavi Roy]
So if to to say whether, you know, the the Nepali state hasn't had the kind of, sort of industrial policy history in that sense as, let's say, the the Indians have had or certainly the Chinese have had, or or even the Pakistanis have had. But in whatever attempts that one has seen, there there are several policy packages being given out, but one doesn't see the sort of outcome of those policy packages to the required extent. To the amount that the money has gone in, we really haven't seen the sort of social returns in terms of better investment, more export, more manufacturing. And it and it's a combination of many things. It's a combination, of course, of not being able to discipline, but it's equally the the non disciplining is linked to the fact that these firms haven't been able to develop their organizational capability for whatever reason.

[00:25:14] - [Pallavi Roy]
So Palavi, while we talk about SMEs, I think it's also important to talk about large firms and especially when we talk about government schemes and government subsidies. You do see a lot of large firms capturing those subsidies. Now, what are the most damaging impacts that these large low capability firms colluding with politicians at the higher end, what what sort of outcomes have you observed through your research? Across the world, and, you know, Nepal being no exception, these are always very damaging outcomes. Because, you know, this is

[00:25:52] - [Speaker 2]
extractive, the corruption that's happening, the rent seeking that happens as as, you know, was explained last week. This is always damaging. This always impedes competition. So somebody out there who could have actually done better, who probably has the organizational capability but not the political clout, is being kept out. And because these firms and I know in Nepal it's called cartelization with with these kind of sort of oligopolistic structures exist in in developing countries.

[00:26:20] - [Pallavi Roy]
These firms do have the compulsion to become more and more productive and use their resources to be invested in more developmental ways, as we call it. So using political connection for these kinds of reasons to sit on a subsidy or, as we say, capture a subsidy is always going to be very damaging.

[00:26:40] - [Shreeya Rana]
So, Palavi, even in our survey, we found that a lot of the firms, they had some sort of political connection, be it at the local level, the provincial level, or even at the federal level. Why do you think that we are picking up this pattern where the SMEs feel that they need to have some sort of political connection? I think,

[00:27:00] - [Pallavi Roy]
to me, the most obvious answer is, and I and and this is also borne out by some of the key informant interviews that we did actually, Shreya. And this was some very interesting research that I don't think has been done on on Nepali SMEs in a while. So we're very excited about it. So the reason why a lot of SMEs use their political connections is they were really making up for the lack of productivity and and more importantly, competitiveness. The fact is that on their own, they are not able to be as profitable as they would like to be.

[00:27:29] - [Pallavi Roy]
So what they then need to do is reach out to their political connections to smooth over the things that they would normally have to actually do on their own, if they didn't have these these political connections. So in in what sense? Let's say for registrations, land registrations or some some kind of licensing, let's say. Not all of it is regulatory. Some some people would say, well, that's because, you know, there are regulatory hurdles.

[00:27:54] - [Pallavi Roy]
There's lots of red tape and there's bureaucracy and there's corruption and and SMEs can't can't manage that. But in some cases, they're actually using the political connection simply as a way of smoothing out the fact that they're just not able to make enough money, to do those things on their own, essentially. So there's there's a bit of both on that side, certainly. But we we generally think that this finding was one of the most interesting, that SMEs, even at that level, end up using their political connections to actually stay afloat or or do better, whichever way you look at it.

[00:28:27] - [Shreeya Rana]
So other than having political connections, what other characteristics have strongly emerged across other research that need to be developed for SMEs to be more competitive?

[00:28:39] - [Pallavi Roy]
So I think one of the striking findings from from our SME, research that would mirror what what other firms in other countries have also gone through is that many of the firms, I think about 76.7% of the firms surveyed, claimed that they learned to organize their business through trial and error. And they're already doing this on their own. Now this is exactly the kind of financing that's required. A lot of firms do not end up being profitable because this is actually a very difficult and vulnerable bit of their business cycle. This is exactly when they need, their support the most, you know, financial support the most.

[00:29:17] - [Pallavi Roy]
And ironically, but logically, this is exactly when they don't get the support. Because this is their weakest, they don't have a developed market or product, they don't have enough of a consumer base. No bank is going to be lending, to a firm at this stage of their learning cycle, if if we put it that way. So what we are saying exactly to this point is let's fund firms here. So this is one of the features that we were picking up.

[00:29:42] - [Pallavi Roy]
And equally what we were picking up, what I think we would call a sort of proxies for lack of a of competitive ability were things like, well, I'm not bank ready. Or, I find it very difficult to remain sustainably profitable or I find it difficult to withstand pressure from my competitors. These are all ways of SMEs who will never articulate it as I'm not competitive, but will look at it as other kinds of constraints. But, you know, as economists, we look at it from from this particular lens. These are actually, if you want, signals of firms saying, well, I am not competitive enough.

[00:30:22] - [Pallavi Roy]
So to me, these were some of significant features. And, that's that's absolutely very, very striking, but not surprising.

[00:30:32] - [Shreeya Rana]
Yes. And when talking about capabilities, I think you made a point on the constraints that these SMEs face. So you also mentioned that there are many mechanisms that have been instated. A lot of these development partners have developed programs to cater to SMEs. A lot of these programs are also focused on building capacity through skills training.

[00:30:53] - [Shreeya Rana]
Now what do you think is, the right approach? Or do you think that this is the right approach to make SMEs more competitive? The skills training is

[00:31:04] - [Pallavi Roy]
hotly debated. There's no doubt about it. And there are people who will say it's absolutely the only thing that's required. That's the magic bullet. And there are actually a growing lot of us who say, yes and no.

[00:31:15] - [Pallavi Roy]
It's something that's required, but it's required molded in a particular way and delivered in a particular way. And actually, in our framework, and that's also what is very specific about our framework and that's what we are trying to push policymakers in this particular direction, that skills training on its own, just generally sort of training workers on any kind of, say, footwear making machine isn't going to be helpful if it isn't embedded in a particular organization that that worker is then going to be fed back into. So what we therefore say is you need to do skills training programs in tandem with programs or policies to organizational capability. You're talking about firm development, then you should also be doing skills training which is context specific to that that particular firm. And, you know, it could could be to maybe a cluster of SMEs, how it how you delivered is a very, very interesting policy question that, you know, if if one had solved, it would, think, make somebody a lot of money, but that hasn't really been solved as yet.

[00:32:13] - [Pallavi Roy]
But it is a very interesting policy question. Just to crack that answer would be would be quite something. So, you know, for instance, Bangladesh is a really good example. It's a very good laboratory for for these kinds of experiments in that sense and and a lot that Nepal can can learn from is that, you know, where skills training has actually been successful. Know, skills training providers I'm just gonna make it really short because it's a whole big research that we've done for another program called the anti corruption evidence research.

[00:32:39] - [Pallavi Roy]
But essentially, that skills training that's done in tandem with the garment manufacturing firm that needs these workers, the training was much more successful. These firms would actually absorb workers rather than just doing any kind of general training that's happening for for large scale, you know, just training which is very general in just how to use a machine. If it's geared to what the firm needs, that's the kind of skills training that we are talking about. But it's bespoke in a manner of speaking. It's difficult to do in a manner of speaking.

[00:33:13] - [Pallavi Roy]
It needs a different kind of mindset to think about it done very generally, but that's what's actually required. So, Pallavi, we're almost at the end of our episode, and I've had a wonderful time with you. I really hope so.

[00:33:26] - [Shreeya Rana]
I certainly did. So, Pallavi, how do you suggest that the policymakers and development partners use this framework for effective policy interventions so that we build those competitive base of our SMEs and we progress towards a more inclusive economic growth.

[00:33:43] - [Pallavi Roy]
I think the way to think about it is really summing up what I'd said about, firm capability development in financing that period of loss making and financing high effort in in learning by doing to develop organizational capability and how that is financed. So that's not gonna come from conventional finance, bank finance. It's not gonna come from private equity or venture capital funding. It's a very different kind of need. It's not sexy, but it has to be done.

[00:34:07] - [Pallavi Roy]
And developing and designing that is extremely important and the skills, training that we talked about. In the last question, I I did talk about, you know, the Bangladeshi, skill sector. That that was different kind of context. It was about reducing corruption in skills training. But the learning essentially is that you need to develop the organization's capability and and train workers who are skilled working for that same organization.

[00:34:30] - [Pallavi Roy]
So taking that the the two in tandem. So using developing organizational capability and skills training together. So these would be the two aspects, the financing aspect of it and and the sort of, organizational capability and skills development aspect of it. So that's the policy. And you brought about, you know, you you mentioned inclusive economic growth.

[00:34:47] - [Pallavi Roy]
And I think one very important thing that people don't think of, people think of imitation as a bad thing. But if you think about it, at the end of any kind of program like this, if you have a swathe of firms who are not part of any such policy help and policy program and you know policy package really, if you actually have 10 firms completely independent of any kind of policy help imitating the first few firms who got this policy help and becoming successful, that is your touchstone of being successful with the policy because this is imitation being done without any help. You've actually helped create employment, You've helped generate a more productive base. You've ended up adding to the economy and that's actually becoming more inclusive. So imitation doesn't have to be a dirty word.

[00:35:35] - [Pallavi Roy]
It is not always about the fake Calvin Klein bag that people, certainly Calvin Klein will probably or the designers will not be happy about. But it could be in the Nepali context, it could be, you know, bespoke BNBs, let's say, you know, on on hiking trails. You don't need maybe 30 and, you know, it's a different market segmentation question. We won't get into that. But maybe you've created 10, green, very bespoke BNB experiences in Nepal.

[00:36:05] - [Pallavi Roy]
Your first 10 were part of a policy program. Your next 10 are not. They imitate the first 10. And that's where you actually have that magic answer that your policy has been successful. You've ended up growing the share of the by.

[00:36:20] - [Pallavi Roy]
So I would like to end on this kind of a positive note that it is possible. And this is this is really the sort of, as I as I said, the the test to see whether this kind of a policy intervention has been successful.

[00:36:33] - [Shreeya Rana]
Thank you so much, Palavi. You made some really comprehensive arguments, and you really brought up some very nuanced experiences from all of your research. And I do hope that the SMEs learn from imitating. Thank you very much. Thanks, Shriya.

[00:36:50] - [Shreeya Rana]
And with that, it's a wrap. Thanks for listening to Pods by PEI. I hope you enjoyed my conversation with Pallavi on the role of SMEs in promoting inclusive economic growth. Today's episode is part of The Brief. It was produced by Sarub Lama with support from Nirjin Rai, Khushi Hang and Shedon Kansakar. The episode was recorded at PI Studio and edited by Shedon Kansakar.

[00:37:18] - [Shreeya Rana]
Our theme music is courtesy of Rohit Shakya from Zindabad. If you liked today's episode, please subscribe to our podcast. Also, please do us a favor by sharing us on social media and leaving a review on Spotify, Apple Podcasts, Google Podcasts, or wherever you listen to the show. For PEI's video related content, please search for Policy Entrepreneurs on YouTube. To catch the latest from us on Nepal's policy and politics, please follow us on Twitter tweet2pei and on Facebook policyentrepreneursinc.

[00:37:53] - [Shreeya Rana]
You can also visit pei.center to learn more about us. Thanks once again from me, Shriya Rana. We'll see you soon in our next episode.