by
Dr. Enyinna Chuta
Modibbo Adama College
University of Maiduguri, Nigeria
Introduction
Available literature on small-scale industry contains a wealth of empirical information on the static aspects. Most of the information on the extent, composition, characteristics, factor proportions, consumption pattern's, etc. of the sector are based on cross-sectional data (FAO, 1985). Time-series data on the sector are not available for most developing countries. As such, discussions relating to the dynamism and growth of the sector have not yielded particularly fruitful results. Policy formulation, project and programme design have focussed on the problem of short-term employment creation without proper understanding of their long-term implications.
The limited available information on growth rates is not in the form of a continuous time-series. The positive growth rates computed from discrete time-series data mostly for two points in time for Sierra Leone (Chuta and Liedholm, 1982) tend to be contradicted by high attrition rates observed for India (Nag, 1980). There is evidence to show that many Indian handicrafts and cottage enterprises which survived must have done so as a result of substantial government subsidies. Growth figures often quoted for South Korea, Taiwan and Philippines are too scanty to merit credibility. As the ILO clearly observes, “little is yet known about such aspects as mortality rate of rural small enterprises, conditions for their success and expansion, or reasons for their failure” (ILO, 1984).
The purpose of this paper is to focus attention on certain information gaps which have to be filled if questions of growth and dynamism of the sector are to be addressed. We focus on topics such as minimum unit cost, management, labour productivity and demand.
Unit cost of production
Most often, the criteria used in the assessment of economic or financial viability of small-scale enterprises include rates of return to the enterprise/family-labour/proprietor and rate of profit on capital. While the former rate is usually compared with the opportunity cost of labour to assess its efficiency, the rate of return on investment does indicate the extent of profit accrual given the existing rate of interest. Unfortunately, it is not clear whether the abnormally high rates of profitability observed for small enterprises are due to very low capital base or some other reasons.
The observed high profit-rates are not consistent with very low reinvestment practice of the enterprises. Nor are the profit rates reflected in the growth in size of output, outlay or capital base of small enterprises. It would thus seem that other criteria should be utilised for assessing the long-term viability of small enterprises.
Table 14: Shortrun production and cost data for Sierra Leone bakeries in 1974/75
|
Technology |
Value of gross output |
Total cos |
Indicators |
|||
|
Economic rate of profit |
Unit cost |
|||||
|
(Le)1/ |
(Le) |
% |
Rank |
(Le) |
Rank |
|
|
Tuned oven |
150000 |
146000 |
3 |
4 |
.97 |
4 |
|
Red oven (in capital city) |
75000 |
66600 |
19 |
3 |
.88 |
3 |
|
Multiple deck oven (in capital city) |
113500 |
117700 |
-10 |
6 |
1.03 |
6 |
|
Multiple deck oven (in province) |
32500 |
27600 |
.7 |
5 |
.85 |
2 |
|
Rotary peel oven |
28400 |
18200 |
272 |
1 |
.64 |
1 |
|
Traditional |
4200 |
4100 |
24 |
2 |
.98 |
5 |
Source: Adapted from Chuta & Liedholm: Employment and Growth in Small-scale Industry. London, Macmilllan, 1985, Table 7.6, p.125.Note:
1/ Le = Leone (the Sierra Leone currency).
2. Total costs include costs of raw material, annual capital, labour, etc.
A criterion which could be utilised for assessing growth potential is the concept of the optium firm, i.e. a competitive firm operating at that scale at which in existing conditions of technique and organising ability has the lowest average cost of production, when all costs which must be covered in the long-term are included. The criterion of lowest unit cost of production should be used to cross-check the validity of the criterion of profit rate in assessing the viability of different technologies or enterprises. An examination of Table 14 shows that if one were to rank the various Sierra Leone bakery technologies in terms of their rates of profitability, the most labour-intensive technique, the traditional oven, would rank second whereas, in terms of unit cost of production, it is inefficient and may not survive market competition in the long run. An important corollary which emerges is that excessive use of labour could be disadvantageous as the wage bill is unduly increased to the detriment of profitability. Equally, undue capital intensity could lead to excess capacities and economic waste.
Table 15: Normative longrun unit cost and optimal firm selection in the Sierra Leone carpentry industry
|
Location |
Description of representative firm type |
Normative unit cost (Le) |
Number in optimum solution |
|
Town with over 120000 people |
Small tools |
.72 |
- |
|
Large machines |
.27 |
- |
|
|
Towns with 20000-100000 people |
Small tools |
.18 |
432 |
|
Small tools |
.37 |
- |
|
|
Large machines |
.31 |
- |
|
|
Towns with 2000-20000 people |
Small tools |
.41 |
- |
|
Small tools |
.10 |
746 |
|
|
Small machines and tools |
.21 |
- |
|
|
Towns with under 2000 people |
Small tools |
.45 |
- |
|
Small tools |
1.90 |
- |
|
|
Small tools |
1.10 |
- |
Note:-Unit costs are for labour and capital.-Note the considerable range in normative unit cost for firms with similar basic equipment type.
In order to obtain the longrun unit costs of small enterprises in Sierra Leone, 1974/75 input-output data were projected to 1985 using a linear programming (LP) model (Chuta, 1977). Realistic assumptions were made about population growth rate, income elasticity of demand for the various small enterprise products and annual rate of growth in per capital GDP. Table 15 shows the predicted unit costs of production for representative firms in the carpentry industry. As expected, the LP model those the optimum firms in the two intermediate locations to produce for the country.
What is of crucial importance is the need to ascertain why some firms are capable of producing at low unit costs while others cannot. From the point of view of economic theory, there are technical (input-output relationships), financial, managerial and marketing forces which influence the capacity of firms to achieve the optimum size of operation. Firms which seek to achieve a balance between the various optima would tend to be viable.
However, it is apparent that conflicts could exist between the best technical and best managerial scales of operation. For example, within the small enterprise sector of some developing countries, the mismatch whereby technical optimum far exceeds the managerial optimum is quite prominent. Thus, certain firms operate sophisticated equipment without keeping any good records of their business transactions. Some proprietors own several industrial establishments without requisite management capacity to monitor and evaluate performance. The management problem will be referred to again later on.1/ However, for most small enterprises (especially rural ones), the limited size of market or demand gives rise to excess capacities so that there can never be a question of attaining a reasonable level of any of the theoretical forces which determine optimum size.
1/See the paper by Sahlin (in this publication)
Improvement in management capacity
Stewart (1966) uses the Harrod-Domar identity to define growth rate as being equal to the savings rate assuming a constant incremental capital-output ratio. Furthermore, savings rate is said to be determined by four capacities, namely, savings. Investment, absorptive and willingness to invest capacities. At the micro (firm) level the absorptive capacity component is very crucial because it touches on issues of availability of managerial, entrepreneurial, administrative and technical-skill capacity without which rates of return will decline and the willingness to invest would cease to exist. Therefore no assessment of viability will be complete which fails to graple with issues of absorptive capacity of individual enterprises. In recognition of this fact, Stewart and Streeten emphasized the importance of improved managerial performance in their discussion of dynamic trade-offs between output and employment. With improvements in absorptive capacity, not only is there no trade-off but output increases faster than employment thus creating longrun growth potential.
Unfortunately, information on the management side is very deficient. Whatever information is available is rather speculative (Chuta, 1983). Information on years of formal education, record keeping etc. does not throw enough light on capacity of small entrepreneurs to identify profitable lines of activity, raise and invest funds, assess their financial performance, seek and obtain valuable information for effecting improvements. There is a need to have better understanding of the financial management aspects of enterprises with respect to their operational performance, liquidity position and long-term stability. Analytical indices of improved financial management can be designed with a view to assessing the viability and performance of existing firms.
In order to fill the information gap on management, there is a need to systematically study the management activities of small enterprises with a view to rectifying existing anomalies. The scope of such a study should start with how entrepreneurs cope with their problems. If the entrepreneur encounters some operating problems such as technology, inventory controls, management and control of operations and financing, we need to know how the entrepreneur copes with such problems.
The information gathering techniques employed by the entrepreneur will need to be investigated. A successful entrepreneur will be one that has the ability to gather, process and use data. It is expected that the activities of the entrepreneur will be devoted to summarizing and interpreting the information gathered from within and without the organisation and also evaluating the impact of the information and the operations of the enterprise. How the entrepreneur uses information may be partially reflected in the budgetary process.
In addition, assessment of other procedures such as priority setting or ranking and forecasting will be undertaken. The decision-making process of the entrepreneur will be examined. However, the decision process will be examined in the context of the established goals or objectives of the enterprise.
The actual execution of the established goals or objectives involves the determination of the planning horizon of the entrepreneurs and the degree of commitment to the attainment of the stated goals. For instance, important questions that may be asked are: What is the nature of small and medium-size entrepreneurs' planning? How far in the future do they plan? Answers to these questions will reveal whether small and medium-size entrepreneurs have formal or informal plans, operational, intermediate or long-range plans. Important also will be the investigation of the organizational structure and various control and coordinating mechanisms employed by small business entrepreneurs. Finally, methods of evaluating the organizations' performance vis-a-vis the set goals will be explored.
Improvement in labour productivity
Limited information on employment growth rates is not enough to address questions of growth and dynamism in the small-scale industry sector. It is important as well to ascertain what the rates of growth in real output have been. The current state of knowledge on input-output relationship has not gone beyond the state of comparative-static analysis. Thus information is only available with respect to the short-run efficiency of resource use as revealed by the marginal productivity coefficients of major inputs like Capital and Labour. Little or no effort has been made to ascertain the rate of change of output with respect to time taking into account dynamic changes in the amounts of capital and labour. Although mathematical tools are available for such investigations, it is not clear why analysis has always been limited to the comparative-static.
Furthermore, Stewart and Streeten rightly point out the dynamic trade-offs which will involve sacrificing future increased output to achieve less output and more employment now or putting up with less employment but more output now for the attainment of increased employment in the future. It can be established that if the rates of growth in both employment and output are positive for the sector, then dangers of any trade-off, will be eliminated. If low rates of growth in employment are combined with declining rates of growth in real output, prospects for future contribution of the sector to the national economy could be very bleak. If growth rates in employment and real output are taken into account, it will be possible to ascertain the trends in labour productivity. Positive employment growth rates even if quite high but which are not associated with growth in labour productivity are not a healthy sign for the future overall growth of the economy.
A focus on labour productivity gains will draw attention to the pattern of modernisation process required to increase the efficiency of small enterprises thus rendering them more competitive and therefore less reliant on subsidies. Modernisation is hereby defined as creating scope for utilising small power-driven tools and equipment as well as improved management tools. It is important to identify small enterprises and processes which require modernisation and at what stages of production. Criteria for selecting products for modernisation could be based on demand patterns, nature of raw materials, availability of the necessary infrastructure (such as electricity) and efficiency of techniques currently used by small enterprises.
It is also important to proceed cautiously in order not to steer into the direction of undue capital-intensity. The desired objective could be to attain the highest possible level of labour productivity without excessive decrease in employment.
The case of China is interesting. From 1954 to 1984 the contribution of the handicraft sector to GNP increased from .10 to 7.9 percent with improved product quality and reduced costs. These gains have been achieved through an accelerated process of mechanisation but at a cost of temporary unemployment for the displaced workers who normally got retrained for other jobs. It is believed that the modernisation process, especially in rural areas, is generally difficult to implement without the prior or simultaneous improvement in access to electricity to operate small power-driven tools. However, one should realise that providing electricity in remote areas entails large budgetary allocations and infrastructural development.
Table 16: Trends in imports of wooden handicraft products from south-east Asian countries
|
Importing country |
Exporting country |
|||||||
|
China1 |
China2 |
India |
Hong-Kong |
|||||
|
1979 |
1983 |
1979 |
1983 |
1979 |
1983 |
1979 |
1983 |
|
|
Japan (10 Yen) |
4229 |
8079 |
228 |
1102 |
158 |
80 |
- |
- |
|
USA (106 US $) |
26.5 |
37 |
- |
- |
2.8 |
1.5 |
1.1 |
1.4 |
|
Switzerland (106 US$) |
.01 |
.6 |
.1 |
.1 |
.2 |
.2 |
.0 |
.1 |
|
Sweden (106 US$) |
1.1 |
.8 |
.3 |
.1 |
.1 |
.1 |
- |
- |
|
Norway (106 US$) |
1.1 |
.6 |
- |
- |
.0 |
.0 |
.1 |
.0 |
|
Austria (106 US$) |
.3 |
.6 |
.0 |
.0 |
.9 |
.0 |
- |
- |
Source: Kashuria, S., op cit.Notes:
1. China1 = Republic of China (Taiwan).
2. China2 = People's Republic of China.
Thus, the scale of electricity to be provided in rural areas determines the cost of electricity services to be paid by rural artisans.
Besides providing electricity and improved management practices, gains in labour productivity can be achieved by updating labour skills on the job, and reorganising the production process.
Demand prospects
The demand for the products of small enterprises is crucial to their growth aspects. As has been correctly pointed out, the expenditure elasticity coefficients are indicative of which products have market potential given increased purchasing power. However, available empirical data are limited to a few countries which have not had prolonged experience in small industry development. More disaggregated information is needed from countries such as India, China, Taiwan, Singapore which have had such experience.
In these countries, structural changes in demand have taken place, some product lines within specific industries have disappeared while new ones have emerged; product adaptations or improvements have taken place in response to changes in demand; new products have emerged in response to the development of needs in housing, construction, interior decorating, transportation, shipbuilding, automobile assembly and tourism. This catalogue of experience for relevant countries is needed for designing projects for forest-based small industries which have growth potential. For example, while wood carving and traditional carpentry products may be declining, other product lines such as wooden toys, blackboards, sporting goods, photo frames, jewelry boxes, tooth picks, pencils, paper etc. may be experiencing some growth in demand. There is a need to determine the extent of market potential for newly emerging forest-based small industry products.
Some examples of wooden toys - a growing demand
Since available demand elasticity coefficients for products of small enterprises are based on cross-sectional data, there is a need to validate these with time-series data to assess their future growth prospects. It is conceded that such dynamic information may not be available for many countries and on a product basis.
Table 17: Summary of considerations related to growth and dynamism of small enterprises
|
1. What are indicators of potential for growth and
viability? |
- Low unit costs of production |
|
2. What are examples of enterprise types that could display
such indicators? |
- Rural & urban cottage enterprises for producing toys and
instructional aids, pencils, gum, tooth picks, matches etc. |
|
3. What forms of intervention are necessary for achieving
growth & viability? |
- Labour productivity enhancing measures in the following
order of priority: |
Demand projections that are based on realistic assumptions can also throw light on future prospects. For example, scanty information on demand forecasts in Nigeria over the period 1974 to 2000 show that wood consumption for roundwood pole treating plants would increase from 12 000 m3 to 360 000 m3 while wood consumption for match factories would increase from 12 000 m3 to 120 000 m3 assuming 6 percent annual increase in demand (FAO, 1983).
The foreign demand for wood products should also receive attention. Unfortunately, necessary information may not be available for most developing countries. Data on some Asian countries indicate some important trends (Table 16). Kathuria (1985) points out that there was an approximately 300 million dollar market in 1983 for wooden handicrafted products which include mouldings, carving, jewelry boxes, frames, utensils, baskets. Jewelry boxes took the leading share of the wooden handicraft market with Taiwan dominating the entire market. Mexico follows Taiwan as leader in supplying the world wooden handicraft market. On the dynamic side, evidence from south-east Asia indicates that prospects are fairly good. In most cases, value of imports increased for the two points in time under consideration for the four south-east Asian countries. Thus wooden handicraft products not only create employment, they also generate foreign exchange.
Conclusion
Definitive statements about growth aspects of small enterprises must await further research to fill existing information gaps. The minimum that should be aimed at is to undertake comparative static studies and analysis for countries which have bench-mark data. Needed studies will cut across geographical regions, countries and products. Detailed study of management, productivity, production costs and demand aspects deserve special attention.
Prospects for growth can of course be influenced but it is useful to first focus on enterprise types that are “predisposed” by their characteristics towards growth. The chart which follows (Table 17) summarises indicators, examples of growth enterprises, and possible interventions to promote growth and viability.
Bibliography (Chuta - Growth and Dynamism)
Chuta, E. 1977 “A Linear Programming Analysis of small-scale industries in Sierra Leone”, an unpublished Ph.D. thesis, M.S.U. East Lansing.
Chuta, E. and C. Liedholm. 1982 “Employment growth and change in Sierra Leone small-scale industry, 1974-1980.” International Labour Review, Vol. 121.
Chuta, E. 1983 “Upgrading the Managerial process of small entrepreneurs in West Africa” in Public Administration and Development, Vol. 3.
FAO. 1983 “Forest Industries in Nigeria” Project NIR/77/008 Field Document No. 18, Rome.
FAO. 1985 “The contribution of small-scale forest-based processing enterprises to rural non-farm employment and income in selected developing countries”, Rome.
Freeman, D.B. and Glen. B. Norcliffe. 1985 “Rural Enterprise in Kenya” The University of Chicago.
ILO. 1984 “Cottage Industries, Handicrafts and Non-farm Employment”, Progress Report No. 1. World Employment Programme, Geneva, March, 1984.
Kathuria, S. 1985 “Indian Handicrafts: Constraints and Prospects”. Indian Council for Research on International Economic Relations, Working Paper 21, New Delhi.
Nag, A. 1980 “Small industries: Aspects of their mortality” in The Economic Times (New Delhi), 6 October 1980.
Stewart, F. and Paul Streeten. “Conflicts between output and Employment objectives in Developing Countries”, in Oxford Economic Papers, Vol. 23, No. 2.
Stewart, F. 1982 “Technology and Underdevelopment”, London, The Macmillan Press Ltd.
