Institutional and Operational Barriers in CSR-Driven MSME Development: A Multidimensional Study of Sectoral and Regional Industrial Evolution in India

Abstract

The evolution of Micro, Small and Medium Enterprises (MSMEs) in India reflects a complex interaction of regional industrial transitions, public sector institutional support, cluster-based development, and emerging regulatory frameworks such as Corporate Social Responsibility (CSR). This study examines the historical and structural transformation of Indian MSMEs from the 1960s to the contemporary period, with particular emphasis on the role of Public Sector Undertakings (PSUs), regional industrial ecosystems, and CSR-driven operational dynamics. Using a multidimensional analytical approach, the paper traces the shift of industrial activity from traditional hubs like Calcutta to growth-oriented regions such as Pune, Bangalore, Hyderabad, and Coimbatore, highlighting how political stability, infrastructure provisioning, and visionary leadership fostered MSME growth. Sectoral analyses of heavy engineering, aerospace, electronics, pharmaceuticals, agro-processing, and services reveal both upward value-chain movement and persistent vulnerabilities related to finance, technology, raw material dependency, and employment absorption. The study further investigates institutional and operational barriers to CSR adoption among MSMEs following the Companies Act, 2013, identifying regulatory burden, resource constraints, limited awareness, and inadequate impact measurement capabilities as key challenges. Drawing on cluster experiences and institutional interventions by organizations such as BHEL, HAL, BEL, ECIL, NSIC, CITD, and TiE, the paper argues that CSR can function as a strategic enabler rather than a compliance cost when aligned with core MSME competencies. The findings underscore the need for supportive policy frameworks, revitalized credit access, and sector-specific CSR models to strengthen MSME resilience and enhance their contribution to inclusive and sustainable industrial growth in India.

Introduction

This study examines the institutional, regional, and sectoral evolution of Micro, Small, and Medium Enterprises (MSMEs) in India, with emphasis on the role of Public Sector Undertakings (PSUs), industrial clusters, and Corporate Social Responsibility (CSR) under the Companies Act, 2013.

Key Findings:

1. Regional and Sectoral Evolution:

   • Industrial activity shifted from traditional coastal centers like Calcutta to inland hubs such as Pune, Bangalore, and Hyderabad, driven by political stability, infrastructure, and institutional support.

   • PSUs (BHEL, HAL, BEL, ECIL) acted as industrial anchors, promoting technology transfer, skilled manpower, and demand for ancillary MSMEs.

   • Regional disparities persist: successful clusters like Coimbatore and Salem leveraged local skills and cooperation, while areas like Ratnagiri remain underdeveloped.

   • Sectoral transitions, including pharmaceuticals and electronics, were shaped by regulatory frameworks, global trade (TRIPS), and innovation requirements.

   • Post-1991 service sector growth increased efficiency and market access but provided limited employment, highlighting the continued need for manufacturing-based MSMEs.

2. Institutional and Operational Barriers to CSR:

   • Institutional barriers: complex compliance under the Companies Act, weak government pressure, and lack of supportive policies for MSME CSR engagement.

   • Operational barriers: limited financial, technical, and human resources, low awareness of CSR benefits, and challenges in measuring social impact.

   • ISM analysis identified key constraints: tactical focus over strategic planning, limited knowledge of CSR, financial constraints, and inadequate monitoring skills.

3. Role of Leadership and Institutions:

   • Organizations like CITD Hyderabad and Technocrats Industrial Estate, Balanagar provide technical training, mentorship, and access to networks, bridging MSMEs’ resource and knowledge gaps.

   • NSIC and PSU-led initiatives also support MSMEs through marketing, finance, technology assistance, and social programs (e.g., vocational training, health initiatives).

   • CSR initiatives by PSUs during crises (e.g., COVID-19) demonstrate the potential of corporate-led social responsibility.

4. Synthesis of MSME Progress:

   • MSMEs evolved from ancillary units in the 1960s to key players in a globalized economy.

   • Regional success is linked to institutional quality, infrastructure, and governance, while failure correlates with instability and policy gaps (e.g., Kolkata).

   • CSR adoption remains largely compliance-driven, with strategic integration seen in initiatives like Tata Swach and ITC e-Choupal.

   • Future priorities include formalization through Udyam registration, low-carbon manufacturing, and bridging technical and financial gaps.

5. Research Implications:

   • MSME development depends heavily on regional institutional conditions, not just market forces.

   • PSUs remain critical but overdependence can create vulnerabilities.

   • Policy and institutional interventions must address financial, operational, and CSR adoption challenges to ensure sustainable and socially responsible MSME growth.

This study underscores the dynamic interplay of regional policies, institutional support, sectoral shifts, and emerging sustainability imperatives in shaping India’s MSME landscape.

Conclusion

The study of institutional and operational barriers in MSME development reveals that regional success is fundamentally tied to the synergy between political stability, proactive infrastructure development, and visionary leadership. The stagnation of the Calcutta industrial belt serves as a cautionary tale of how socio-political unrest and policy neutralization (freight equalization) can derail a thriving economic center. Conversely, the rise of Pune and Bangalore demonstrates the \"nursery effect\" of strategic PSUs, where HAL, BEL, and BHEL provided the early demand and technical standards that allowed a sophisticated layer of private MSMEs to emerge. Operational barriers, particularly in the realm of finance and technology, remain persistent. The Trichy BHEL cluster’s decline due to procurement shifts and raw material price disparities highlights the vulnerability of MSMEs to external market forces. In the pharmaceutical sector, the dependency on Chinese APIs represents a strategic risk that can only be mitigated through large-scale domestic investment and regulatory streamlining. Finally, the integration of CSR into MSME operations is currently in a formative stage. While the 2013 mandate has formalized social expenditure for large firms, MSMEs require a more supportive framework that includes: 1) Simplified Impact Measurement Tools: Allowing small units to demonstrate their social value to stakeholders without excessive administrative costs. 2) Demand Aggregation: To help MSMEs negotiate better commercial terms for raw materials and equipment, as seen in the pharma cluster recommendations. 3) Sector-Specific CSR Strategies: Tailoring initiatives to a unit’s core competencies to ensure sustainability and scalability. 4) Revitalized Banking Support: Facilitating credit access for modernization, acknowledging that technically sound MSMEs are the bedrock of India’s export ambitions. Through a combination of collaborative partnerships, innovative solutions, and a transition toward a low-carbon, formalized economy, India’s MSMEs can move from being passive beneficiaries of regional growth to proactive drivers of global industrial and social excellence.

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Copyright

Copyright © 2026 Roshni Sachin Bagwe, Dr. Rahimuddin Syed. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.