Small Manufacturing Enterprises (SMEs) in an overpopulated developing economy serve the dual role of job-creation and shifting the occupational structure. However, their contribution to the overall health of the economy are being questioned on grounds of low productivity and economic viability. Sustainability of SMEs is argued to depend on improving labour productivity (LP) through technological upgradation. In a developing economy this may be a costly proposition due to capital scarcity. So, the effect of technological changes on productivity levels has to be estimated before taking such policies. This effect is generally measured by Total Factor Productivity Growth (TFPG) which is also a measure of Technological Progress (TP). A positive TFPG implies outward expansion of the production frontier leading to more than proportionate output growth compared to input growth whereby it may be concluded that TP is leading to productivity rise. However, TFPG in the growth accounting approach is a residual measure and encompasses the effect of not only TP, but is a combination of improved technology and the skill with which known technology is applied, i.e. Technological Diffusion or Technological Efficiency (TE). The SMEs rely on indigenous resources, adaptive technology, 'on-job' skill acquisition, and, go on experimenting till they achieve the optimum mix of technology, resource, skill and organisation. Consequently, technological diffusion is more important to them rather than the 'modernity' of the technology itself. This paper seeks to disassociate the effects of pure TP from those of TEC in few selected industries within the SMEs to examine the relative importance of them in improving the health of the SMEs. We use the NSSO database on Unorganised Manufacturing sector. The reference periods are 1994-95 and 2000-01, as defined by the two latest NSSO surveys and concentrate on Food product, Textiles, Leather product, and Non-electrical & electrical equipment sectors. Mean contribution of input growth is found to be 3.17 percent p.a. while that of TFPG has been only 1.10 percent p.a. Contribution of input growth is higher than TFPG in majority of cases, indicating that major part of VAG has been possible because of increased input use and technological upgradation has had only a moderate effect. It is observed that Efficiency levels have improved in 65 percent of cases while TP has been positive in just 35 percent cases. The quantum of TEC has been higher than TP in more number of cases. In about 70 per cent of the situations where indeed there has been some technological improvement, technological diffusion has by far outstripped the role of pure technical progress. For Food product and Equipment sectors, both TP and TEC are observed to be equally important in determining TFPG. While TP plays a dominant role in the Textiles sector, TEC plays a more vital role in the Leather products sector.This underlines the importance of diffusion for improving the conditions of the SMEs and as a policy choice, Efficiency Upgradation appears more viable, effective and lucrative compared to Technological Upgradation
