Since the 1990s, business environment is undergoing a transformation for the SMEs of Ota. The extended recession, changes in the global industrial structure and advances in Information Technology affected SMEs mainly in two ways:

(1) Overseas transfer of customers: a considerable proportion of large enterprises, which earlier had subcontracting relationship with SMEs of Ota, gradually shifted the procurement of parts & components and/or production bases to South East Asian Countries and China;

(2) Overseas transfer of basic technologies made possible by digitalization, which reduced the dependence of precision manufacturing on skilled workers.

This has made it imperative for the SMEs to: (i) specialize in developing new products and new technologies; (ii) implement process innovation that incorporates inventions and intellectual know-how, which SMEs of other countries cannot provide; and (iii) manufacture high-value products as well as develop new products as demanded by the customers (PIO 2004).

Mysore district is one of the 27 districts of Karnataka state in South India. Mysore city is the headquarters of the district. It is about 140 km away from Bangalore, the capital of Karnataka. Proximity and rail & road link to Bangalore, availability of skilled manpower, economic and social infrastructure like education, scientific and research institutions have created an ideal environment for industry and as a result, Mysore has become the 'second choice' for entrepreneurs, next to Bangalore in Karnataka (DIC, Mysore 2002). The industrial structure of Mysore comprised 115 large and medium scale industries and 18051 small scale industries in 2001. Among the industries agarbathi, bamboo works, wooden furniture, readymade garments and machinery are the prominent ones. Mysore accounted for 8168 (45.25%) of the total of 18051 small scale enterprises in Mysore district. Of these, machinery enterprises accounted for 850 enterprises (more than 10%) (DIC, Mysore 2002). An important feature of the industrial structure of Mysore is the existence of informal relationship between large & medium enterprises and small scale enterprises where the latter worked as vendors by catering to the needs of parts & components of the former, particularly in the machinery and related industries.

Thus at the macro-level, there is a considerable difference between the two regions. While Ota is a reputed industrial centre of Japan and is known internationally for its innovations, Mysore is little known as an industrial centre in the country, leave alone outside. Ota has a long industrial history dating back to the period of WWI, which saw the emergence of machinery industries of different kinds (PIO 2004). On the other hand, industrial history of Mysore could be explained more in terms of traditional industries like sandal oil, silk and agarbathi. The first major industry to come up in Mysore was the government owned Sandal Oil Factories in 1915. Thereafter Mysore Tobacco Company and Mysore Chemicals and Fertilizers Ltd. came up in 1937 (Department of Gazetteer 1996). In the machinery industry, Karnataka Electric Company is a major large scale private enterprise operating in Mysore. While SMEs of Japan have experienced the heat of competition from the rapidly industrializing neighbours since the early 1990s and as a result, have declined in number, Mysore SMEs have not experienced any such explicit threat from outside [though the growth rate of small scale enterprises in India as a whole has come down since 1991 relative to the earlier period (Bala Subrahmanya 2005)]. The product innovations of two SMEs have been comparatively analyzed in this backdrop.

4. TECHNOLOGICAL INNOVATIONS IN SMES: OTA VS MYSORE

To understand the nature and strategy of product innovations in SMEs, one SME each is chosen for a detailed case study in Ota as well as in Mysore. To study each of the two SMEs, the author himself visited these SMEs with a semi-structured schedule and interacted with the entrepreneur concerned for half a day each: in January 2001 in Mysore and in August 2005 in Ota. The information about the Mysore SME was updated through e-mail communication in August 2005.

4.1 Technological innovations in the SME of Ota, Tokyo

Sanei precision manufacturing company is a medium-sized partnership enterprise in Ota with a capital investment of 24 million Yen (about US$ 206,000) and 50 employees. The two partner brothers inherited the enterprise from their father. Their father established the enterprise as a small enterprise with four employees and Yen 600,000 after WWII in 1949. Thus this enterprise has a history of more than five decades in which it graduated from a small into a medium enterprise. The original entrepreneur was a sea cannon technician with the experience of participation in the WWII. After the war, he returned to Japan and joined Hitachi Machine Company. With a couple of years of experience, he quit Hitachi and with four of his former colleagues, he established the present enterprise. The enterprise engaged in the manufacturing of machine tools of different kinds.

The management of the enterprise was taken over by two sons of the entrepreneur (present two partners) in the early 1980s after completing their technical education. The Managing Partner, after his technical education, worked in Hitachi Manufacturing Company in Kawasaki for three years as a machine tool worker. The other partner became a lecturer in a technical institute in Tokyo. However both of them are actively involved in the functioning of the enterprise. An important feature of this enterprise is that it has strong linkages with large enterprises located in Ota, particularly with Canon and Toshiba--two of the internationally reputed Multinational Corporations (MNCs) from Japan. Currently the company has 10 customers. However, about 80% of its production is absorbed by Canon and about 10% by Toshiba. Of course, the company functions independently and it has no direct subcontracting relationship with any large enterprise including Canon. Today the company has acquired reputation for its ability to develop quality products and therefore enjoys the freedom to choose its customers. Primarily its ability to innovate new products has significantly contributed to its reputation and growth.

However, the 'motivation to innovate' did not emerge till the dawn of the 1990s. The onset of globalization prompted the enterprise to think about innovation and product diversification of Canon provided an opportunity to innovate new products. In the early 1990s, when the trend of globalization set in, the present Managing Partner had the foresight to think that mass production would gradually shift from Japan to other Asian countries, particularly China. This caused him to plan moving the company's focus from mass production to the production of multiple products. This necessitated technological innovation. Till then, the company was primarily manufacturing machine tools for the copying machines and cameras of Canon. As anticipated, mass production started steadily shifting towards China. In the meantime, when Canon diversified into the manufacturing of IC machines, they needed specialized parts and components, which they themselves were not keen to manufacture. This provided Sanei an opportunity to approach Canon, offering to develop new parts and components as required by the former. The reputation and trust acquired by Sanei over a period of time made Canon to agree and assist the former in the development of parts and components for IC producing machines. Thereafter both Canon and Toshiba approached Sanei asking, 'can you do this for me?' The latter utilized these opportunities for carrying out further product innovations to meet its customers' demand.

To acquire innovative capability in terms of technology, Sanei has adopted a combination of strategies. The technical education background of the partners and their regular reading of technical journals to keep abreast of developments in the sector met the basic necessity required for innovation. The partner of Sanei, who works as a lecturer, along with his technical institute colleagues, played a major role in the initial technological innovation for the development of components for Canon. Their technical support enabled Sanei to effectively take advantage of the technical information provided by Canon for its component requirements. Subsequently, they hired the services of a retired Senior Engineer of a large company to train their employees. In addition they entered into a technical collaboration with Toyo University in Tokyo. This led to the development of contact with the faculty of Indonesia Institute of Technology, Bandung with whom they subsequently entered into a technology tie-up. The technology tie-up with this Institute continues presently for technological innovations.

Of course, the pro-active role of the Managing Partner played a major role in all these developments. He has a wide information network as well as connections in Japanese industry. He is an active member of Tokyo Chamber of Commerce and Industry (TCCI) and Ota Factories Association (OFA). He is instrumental in regularly arranging lectures from the technical experts of Ministry of Economy, Trade and Industry (METI), Government of Japan, on various technomanagerial issues concerning SMEs. Recognizing his dynamism, Canon gave him useful tips and recommendations for the improvement of production system of Sanei. In 2005, Canon guided Sanei to the acquisition of ISO 14001 Certification for its plating division. In addition, the company's employees interact and collaborate with the employees of Canon and Toshiba for the development of new products for the latter.

On average, Sanei takes about six months for an innovation to move from the stage of conceptualization to that of final product development. Today four employees are exclusively devoted to technological innovations in the company and its product innovation strategy is directed entirely by the needs of its customers such as Canon and Toshiba. As a result, the company has been able to climb-up the ladder of value-chain, engage in the production of high-value items and grow in size over time. The company primarily owes its competitiveness and gradual growth to the foresight and planning of its Managing Partner and subsequent acquisition of technological capability, product innovations, customer focus & support, commitment to quality and deliverability. As a result, it could stave off the threat of competition emerging from its rapidly industrializing neighbours in the era of globalization.

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