Networks of small enterprises, architecture of governance and incentive alignment: some cases from India

Abstract

Networks formed by small enterprises among themselves or with larger ones are common features in many agricultural, manufacturing and service activities in India and probably in many other countries. Through the network, a group of entrepreneurs pool their limited resources including capital, skills and expertise, knowledge and information in order to gain access to various product/input markets and services or to take advantages of some favourable situations or to overcome certain constraints. These networks have a very different governance architecture compared to that of a corporate or a supply chain network. The corporate governance involves command and control down the vertical line. The suppliers in the supply chain are often merely the agents of the large retailer with little autonomy as entrepreneurs, and when they can retain their autonomy, there emerge problems of aligning incentives of the various stakeholders in the supply chain. In the network, the governance architecture is primarily based on self-interests of the equity participants forming the networks. Functioning of the network requires active participation of all the stakeholders, and shirking by any member reduces the return on resources of every member which provides the basis of equity participation and reciprocal cooperation. “Complementarity” and “essentiality” of the assets of various entrepreneurs largely determine the nature of network cooperation and surplus distribution. In general, the network enables the small producers to retain their independent entrepreneurships and at the same time help overcome the incentive alignment problems to a large extent. However, there exist wide varieties of networks across industries and within an industry in different locations with varied levels of cooperation and alignment of incentives. Some networks are operating at suboptimal levels and some others are potentially unstable.