ISLAMABAD: The small and medium-sized enterprises in Pakistan rely on internal source of financing which is not sufficient to undertake internal and external research and development, says a new study published by the Asian Development Bank (ADB).

In comparison, Indian SMEs used both internal and external financing for accelerating their innovation output and were found marginally better in terms of undertaking research and development (R&D).

The study investigates the impact of research on the innovation performance of SMEs in India and Pakistan.

The study indicates that Indian SMEs undertake more R&D and introduce more product and process innovations than Pakistani SMEs. However, SMEs in both the countries exhibit weak collaboration with other firms. Moreover, they were mainly engaged in incremental innovation due to the low level of patent protection.

Similarly, public support for innovation activities in the form of grants, subsidies or tax credits are low in both the countries. Furthermore, Pakistani firms are more constrained in terms of access to external finance.

Regarding the estimation results, the study reveals that SMEs engaged in R&D may have significantly better innovation performance. This outcome was found stronger in India as Pakistani firms are reluctant due to high costs and risks associated with innovation efforts. Overall, the negative relationship between firm size and innovation output suggests that SMEs in both countries may be facing resource constraints.

Pakistani SMEs are at a specific disadvantage as the lack of an R&D culture reduces firms’ innovation performance. Policy instruments such as R&D grants are more beneficial than financing.

It is difficult for SMEs to obtain research financing due to its risky nature.

The results imply that specific policy measures might be provided through such institutions as the Small Industries Development Bank of India and the Small and Medium Enterprise Development Authority of Pakistan beside banks.

In addition, instruments as the availability of external finance and university - industry linkages may encourage innovation. The complementary relationship between internal and external R&D implies that business managers can utilise a balanced combination.

Despite tense diplomatic relations between the two countries, the flow of informal trade between the two countries is nearly $3 billion. SMEs in India contribute 17 per cent to total GDP while the figure for Pakistan is around 40pc.

Indian SMEs employ nearly 15pc of the national workforce of about 60 million people, account for 26 million enterprises, and contribute 45pc of manufacturing output.

In comparison, SMEs in Pakistan employ 75pc of the non-agriculture workforce, account for 3.2 million enterprises, and contribute 30pc of manufacturing output. Concerning R&D investment, India has the edge over Pakistan related to overall R&D expenditure, which is equal to 1pc of GDP compared with 0.3pc for Pakistan.

India has higher research investment than Pakistan in plastics and rubber, machinery, chemicals, electronics, basic metals, and other sectors. Alternatively, Pakistani firms had higher research than India in food, textiles, chemicals, vehicles, retail trade, and others. In both countries the R&D intensity is higher in manufacturing than in service.

Published in Dawn, June 26th, 2016