problems and obstacles facing industry in the gaza...

Chapter 3 Small and Micro-Scale

Industry

Literature on Small and Micro-Scale Industry

3.1 Introduction

Developing countries consider industrialisation as an important objective of

economic development. It may enable countries to achieve high rates of economic

growth, provide the basic needs of the population, create more employment

opportunities, and lead to diversified economies (see Tambunan, 1991-1 & Harper,

1984).

The past two decades of economic development have shown that the agricultural

sector has a very limited capacity to expand employment, and so it has become

necessary to create jobs outside the agricultural sector (Tambunan, 1991-1 & Geertz,

1981). But large industry is generally capital-intensive, and needs imported

technology, highly skilled labour and management, and over all it needs a good

infrastructure, and large markets.

Employment generation is perceived as one of the main goals of poor countries, and

small enterprises are believed to be a fruitful source of jobs (Harper, 1984). For all

71

Chapter (3)


Industry

these reasons and particularly because small-scale industries (SSI) are believed to be

labour-intensive, many argue that developing countries should pay particular

attention to SSIs as an alternative to overcome the handicaps of large-scale

industries.

The vast majority of industries in the NPE are small and micro-scale industries; most

are traditional, craft and informal workshops in homes. The local market is small due

to the low income, small area and difficulties in importing raw-materials or

exporting the final product. Other reason for the small market in the NPE is the

difficulties on movement of persons and goods within the NPE between the GS and

the WB1. It is not easy to start a large-scale capital-intensive industry as a strategy in

the NPE due to the lack of capital, infrastructure, managerial skills and investment

environment. In this chapter, we shall try to provide a general idea on the role of

small and micro-scale industries in the literature.

3.2 The definition of small-scale industries

There are no agreed definitions of SSIs. Bansal (1991) considers six factors as the

basis of the definition. These are; number of persons employed, energy input, amount

of investment, physical measure of production, nature of activities engaged in and

size of the enterprise (Bansal, 1991), but it is not clear what Bansal means by “size of

the enterprise” as a basis for the definition.

The number of employees, or the assets employed, or both together, are the most

common basis for the definition. Both criteria have been used in developed and

developing countries, now and in the past. In a survey covering 75 countries

1. There is an extreme limitation on the movement of Palestinians between the West Bank and the Gaza Strip. Only after obtaining a permit and within a very strict and limited guidelines, can Palestinians travel between the two regions, which at best is usually a permit for one day only (see PNA, 1998).

72


Industry

undertaken in 1975, it is obvious that the majority of these countries (54 out of 75)

use quantitative measures and especially employment and assets used, to distinguish

between small and large-scale industries (Harper, 1984).

However, the concept of SSIs could have various definitions; many writers define it

in different ways. Staley and Morse (1965) define SSIs as “all manufacturing carried

on in relatively small establishments”. Then they consider that every establishment

employing less than hundred persons is relatively small. After that Staley and Morse

use a wider definition for SSIs. They state; “The term thus covers both small

factories and non-factory producers of manufactured goods (homework, artisan

shops). It includes traditional and modern enterprises, hand and machine types of

production, urban and rural establishments” (Staley and Morse, 1965).

From a managerial point of view a small enterprise can be described in qualitative

terms as “one in which operational and administrative management lies in the hands

of one or two people who are also responsible for the major decisions” (Neck, 1979

& Harper, 1984). For India, Rao (1967) identifies SSIs as “those organised units in

terms of the Factories Act which do not ordinarily employ more than 100 persons

without power, or 50 persons with power, and working capital of less than Rupees 5

lakhs2”. The working group of Economic Commission for Asia and the Far East

(ECAFE) in 1952 suggested that Small industry can be defined for statistical

purposes as “establishments employing not more than 20 persons when using power

or 50 without using power” (Staley and Morse, 1965).

It is obvious that there is no clear-cut definition for SSIs, so it can be defined in

different ways depending on the country, the stage of development and the type of

industry, using arbitrary parameters and different criteria.

2. Lakh is a large number in India equal 100000.

73


Industry

Weiss (1998) states that most definitions of SSIs focus on number of workers

employed in an enterprise, then he gives a common set of distinction as in Table 3.1.

Table (3.1) Definition of scale

Enterprise category Number of workers

Household/ Cottage 0 – 4

Micro 0 – 9

Small 10 – 49

Medium 50 – 99

Large Above 100 Source: Weiss, 1998

However, we might agree that, SSIs are manufactures carried on in relatively small

establishments, including all kinds of manufactures even rural, cottage or household

industry and we shall consider the higher limit 50 workers for the SSI in the GS.

Neck (1979) did not consider any lower limit to the size of small enterprises but we

agree with Weiss (1998) that firms employing less than 10 are considered as micro

enterprises to distinguish between small and micro enterprises.

3.2.1 Examples of the definition in selected

countries

Different countries use different upper limit and do not use the same criteria to

measure the size of SSI. Table 3.2 brings together different definitions. The small

business administration in the US classifies a business as small if it has fewer than

250 employees as shown in the Table 3.2, and between 250-1000 may be small or

large depending on the industry. For purposes of financial and other assistance, it is

classified as small if it employs fewer than 250 employees, depending on the size

and the standard set for different industries (Nelson, 1969).

74


Industry

For policy and operational purposes in Singapore, the Economic Development Board

(EDB) has defined a SME as “a manufacturing enterprises having at least 30% local

equity and not more than $8 million in net fixed asset investment” (Yue, 1992). A

UN, (1958) report on development in manufacturing industry in Egypt, Israel, and

Turkey refers to manufacturing establishment employing 10 persons or more as

medium and large scale, limiting the term small scale to establishments with less

than 10 persons (Staley and Morse, 1965:13).

Table (3.2) Definition of SSIs in different countries

Country The size Capital assets Employment ceiling

Ceylon SSIs Less than Rs. 200 000

China SMIs That have fixed asset at value less than 30 million Yuans

ECAFE * SSIs 50 workers without using power or 20 with power

75


Industry

India SSIs units having investment in plant and machinery not exceeding Rs. 35 Lakhs.

Indonesia

Cottage industry

SSIs

-

CJC less than US$ 100

Up to 4 employees

5-19 employees*Iran SSIs Whose employees at shift do not exceed 50 workers

Japan very small

SSIs

-

100 million Yen

20 employees

300 employees

Germany, Sweden, Norway and Denmark

Up to 300 workers considered as SSIs

Korea SSIs 500 million Eon 300 but more than 5 persons

Malaysia SSIs Up to $ (M) 250,000 1-50 employees

Nepal SSIs Up to Rs. 2 millions

Philippines SSIs + Assets P 100,000 to P 1.0 million

Between 5 and 99 workers

Taiwan SSIs Less than NT$ 5 millions Less than 100 workers

Thailand SSIs - Employs less than 50 workers.

UK SSIs - Less than 200 persons

USA SSIs - Less than 250 persons

* The definition for SSI in Indonesia and many other countries depend on different criteria. + The definition in Philippines is not official one.Source: Collected by the researcher from: Bansal (1991), Veba, R. K. (1988), UN (1992) and Nelson (1969).

3.3 Types and characteristics of SSIs

Within the wide sector of small-scale industries there are a number of sub-

classifications. The various types and subtypes have different potentialities and

different needs, therefore they require a different treatment by development

authorities. The concept of SSI as shown before refers to manufacturing industries

carried on in relatively small establishments. Staley and Morse (1965) and Sutcliffe

76


Industry

(1971) divided SSIs into traditional, partly modern, and modern small industry. They

use partly modern as an intermediate term to designate small industry units, which

have broken away from the traditional, but still only moderately (Staley and Morse,

1965). In the division of Staley and Morse the second type is transitional.

According to the World Bank (1980) there are different types of small enterprises,

some SSIs are modern, others traditional, some are handicraft-shops, others are small

factories, some are located in rural areas, others in cities, some are operated

informally with production inter-mingling with household activities, others are

organised formally as business enterprises, and some have a permanent location,

while others do not. However, the Word Bank implies the key division is between

traditional and modern, and between formal and informal sector. The other different

types that are mentioned by the World Bank lie under traditional or informal on one

side, or under modern or formal on the other.

Staley and Morse (1965) give another distinction within small-scale industry; that is

between non-factory and factory form. They classify the non-factory into five types,

these types are, own-use manufactures, artisan homework, artisan workshop,

industrial homework (wage-paid), and dependent and quasi-independent small shops.

Abdelrahim (1995) used the same idea, and classified SSIs into, factory SSIs, and

non-factory SSIs. The second includes traditional, household, or cottage industry,

and artisan and handicraft establishment. The factory SSIs are distinguished from

non-factory SSIs by the degree of specialisation of labour and from large industry by

its small capital and absence of middle management. Very small or micro industries

are defined by UNIDO (1987) as firms with less than 5 employees.

Taking the literature into consideration, we suggest that small-scale industry can be

divided into traditional and modern small industry on one side or formal and

77


Industry

informal sector on the other. Each type also can be sub-divided into many categories

as shown above.

3.3.1 Traditional and modern industry

Many terms can be used for traditional industry. Chakravarti (1965) mentioned some

of these such as rural industry; household industry; cottage industry; village industry

and handicrafts or crafts industry. He defined rural industry as “An activity in which

predominate manpower resides in the farm and when modern technique and

technology is applied to fabricate process or otherwise transform products into a

more finished state” (Chakravarti, 1965).

Traditional small industries can be defined as “those forms that prevail in and cater

to the needs of traditional sector” (Staley & Morse, 1965). Household enterprises can

be defined also as “those units not using hired labour ” (Uribe-Echevarria, 1991).

Rao (1967) defined cottage industry as “one which is carried on in a place which is

not a factory, or it is an industry which is carried on wholly or primarily with the

help of the members of the family for the whole or part time occupation” (Rao,

1967).

Traditional small industry is characterised by; relatively little specialisation in

management; close personal contacts; handicaps in obtaining capital and large

numbers of small industry units. Modern small industry in contrast is “the industry

which caters to the needs of the emerging modern economy, is progressive in

outlook and adaptable to changing conditions, uses the results of modern science and

invention in its production processes, and applies reasonably up to date ideas of

organisation and management in its business operation” (Staley and Morse 1965).

78


Industry

Staley and Morse mention four major points where modern small industry differs

from traditional: - First, there is a continual search for improved ways of production

and ready adaptability. Second, products are suited for modern needs or for the

emerging needs of the economy in transition from traditional to modern. Third,

appropriate use is made of efficient machines, good plant layout and price control of

chemical processes. Fourth, appropriate use is made of business planning and

budgeting, market analysis, cost accounting and enlightened ideas of personnel

management (Staley and Morse 1965).

In the mission of UNIDO (1970) to six Arab countries, the mission found it more

complicated to distinguish between small-scale manufacturing and handicrafts there.

The mission used modern technology, including mechanisation, as a criterion for

distinguishing small scale manufacturing industry from handicrafts. The definition of

small scale manufacturing industry in the six countries is “a group of manufacturing

establishments division 20 to 39 of the international standard classification- that

employ from 5 to 49 persons each” (UNIDO, 1970).

3.3.2 Formal and informal sector concept

The concept of the informal sector provided an alternative methodology for

approaching small-scale activities (Thomas, 1991). Tokman (1989) views the

informal sector as illegal enterprises having legal objectives. Many informal entities

operate outside the legal and institutional framework. Tokman (1978) stated that the

informal sector is characterised by activities providing employment and goods and

services for the lower income groups of the urban population.

The very large numbers of one or two person enterprises, usually mobile or

operating from temporary premises and often outside the law, clearly have rather

79


Industry

different problems from other small industry. It was argued that their main problem

was not finance, raw material or shortage of demand, but the regulatory system

which made it difficult for the enterprise to exist (Harper, 1984).

The informal sector activities are characterised by; ease of entry, reliance on

indigenous resources, family ownership, small scale operation, labour intensity,

indigenous technology, skills acquired outside the formal school system, and an

unregulated and competitive market (Bromley, 1978 & Kirkpatrick et al, 1984). The

informal sector also does not pay taxes, some argue that the main reason for

informality is this reason.

Neshamba (1997) argues that most formal enterprises are started as informal

enterprises. He studied the case of Zimbabwe and observed that most of the formal

businesses in the sample had graduated from informality. Neshamba argue that the

alteration to the formal sector depends on the characteristics and the ability of

owners. Based on the finding of Neshamba, informal sector businesses are not only a

temporary holding ground for the urban unemployed, as asserted by some authors.

The finding of Neshamba might be correct for Zimbabwe or some other countries,

but this does not mean that it is a rule. Many big firms in many countries started big

and did not convert from the informal sector.

The formal sector in contrast is characterised by: difficult entry; frequent reliance on

overseas resources; corporate ownership; large scale of operation; capital intensity;

and often imported technology; formally acquired skills, often expatriate and until

recently protected markets, though tariffs, quotas, and trade licenses (Bromley,

1978).

80


Industry

3.3.3 General characteristics of SSIs

We discussed before the characteristics of different types of SSIs and especially the

traditional and informal sector. In this section we are going to conclude the

characteristics of SSIs in general as shown in the literature.

Nelson (1969) identified some characteristics of SSIs in the developing countries;

very little specialisation or none in management functions, shortage of capital, and

only very limited access to institutional finance, weak bargaining position in its

markets, close personal contact between management and workers and often between

the firm and its customers.

The UNIDO mission for some Arab Countries in (1970) consider that Small-scale

industry characterised by: shortage of capital; inadequate level of technological and

managerial skills; frequent use of inefficient machinery, difficulties in marketing and

distribution and other factors associated with size. This explain the low level of

productivity of its workers (UNIDO, 1970).

In a joint study, UNIDO (1988) mentions some characteristics of rural small

industrial enterprises (RSIE); First, the overwhelming majority are in the enterprises

size range (1-4) persons employed per enterprise. Second, the structure of RSIE as a

sector changes over time. Third, the great majority of RSIE are privately owned.

Fourth, owners and family-workers are the largest component of the labour force.

Fifth, in most cases the average persons employed do not work full time over the

entire year.

Barrow (1979) considers some other characteristics, these are; small business have

flexibility in production; they offer close personal contact more likely to occur

naturally in one man type management; they represent a quest by new entrepreneurs

81


Industry

seeking industrial opportunities, but with little access to capital; they produce to

individual customers, and so they are best produced on a small scale; the finished

products of some large plants depend on a high degree of sub-contracting

arrangements with small labour-intensive businesses.

Shinohara (1968) mentioned the attributes of household industry -as a part of small

industry- as follows; Strong characteristics of an individual enterprises; pre-modern

labour management relationships; inferior labour conditions; subordination in some

measure to big enterprises; old-fashioned equipment and techniques; pre-modern

management of business; inseparability of household and business; high dependence

on family-labour. He considers that the first six attributes are common to the small

factory industry also, but the last two are purely of a “petty business” nature. Table

(3.3) summarizes some of the key characteristics of SSIs found in the literature.

82


Industry

Table (3.3) Characteristics of SSIs

Characteristics ReferencesLittle specialisation in management, or one-man management, or none.

Staley and Morse (1965), Shinohara (1968), Nelson (1969), UNIDO (1970), Barrow (1979), Neck, (1979).

Labour-intensive technique and use less capital per job created.

Bromley (1978), Neck (1979), Kirkpatrick et al (1984), Harper (1984), Bruch and Hiemenz (1984), Little et al (1987), Uribe-Echevarria (1991).

Shortage of capital and limited access to finance.

Staley and Morse (1965), Nelson (1969), UNIDO (1970), Neck (1979), Barrow (1979) Veba (1988) and Boswell (1972).

The majority of SSIs are privately owned.

Bromley (1978), Kirkpatrick et al (1984), Harper, (1984), UNIDO (1988), Shinohara (1968).

The majority of SSIs are Micro enterprises (1-4) persons, and work in SS operations

Barrow (1979), Bromley (1978), Kirkpatrick et al (1984), UNIDO (1988).

Close personal contact with workers and inferior labour condition.

Staley and Morse (1965), Nelson (1969), Barrow (1979), Shinohara (1968).

Weak bargaining position in markets and depending on unregulated markets.

Nelson (1969), UNIDO (1970), Bromley (1978), Kirkpatrick et al (1984), Tambunan (1991).

In adequate level of technology. Shinohara (1968), UNIDO (1970), Bromley (1978), Kirkpatrick et al (1984) and Boswell (1972).

Ease of entry. Bromley (1978), Kirkpatrick et al (1984).Skills acquired out side the formal school system.

Bromley (1978), Kirkpatrick et al (1984).

Reliance on indigenous resources. Bromley (1978), Kirkpatrick et al (1984).High degree of subcontracting arrangement

Barrow (1979), Shinohara (1968), Veba (1988).

In most cases the average persons employed do not work full-time over the entire year

UNIDO (1988).

The structure of SSIs, change over time

UNIDO (1988).

Flexibility in the products they produce

ILO (1987), Barrow (1979).

The majority of the labour force is family workers

UNIDO (1988), Shinohara (1968).

Source; collected by the researcher from different sources. ; SS = small-scale ; SSI = small-scale industry

83


Industry

3.4 The role of SSI; special focusing on LDCs

Small-scale industry of many different types has an important role to play in both

industrialised and less developed countries (LDCs). They are a powerful generator of

income and employment, often with less capital-invested per job created than larger

enterprises (ILO, 1987). Comparative studies of large and small business, carried out

in some developing countries showed that SSIs employ more labour per unit of

output than large ones. To absorb redundant agricultural workers, industries must be

established. It is less costly in social overheads if these industries can be set up in the

areas where the unemployed normally reside. As these areas are rural and perhaps

remote from the centres of high populations density, small undertakings are likely to

be the only possible type (Harper, 1984). See also Young (1993, Tambunan (1991-2)

& Geertz (1981).

According to Tambunan’s study in (1991) on the Indonesian economy, most of the

industrial units, and employment were concentrated in CHIs3. In 1974, CHIs

accounted for 80% of total industrial employment, and in 1986 CHIs accounted for

53% in total manufacturing employment. SSIs still provide the bulk of employment

and income opportunities for a large part of the population in Indonesia. There has

been decline in the share of employment and number of units in the manufacturing

sector (Tambunan, 1991:2).

The employment mission to Colombia found that 56% of the workers in the four

largest cites worked in establishments having fewer than ten employees in 1984

(Pardo, 1991).

3 CHIs contain ( cottage and household industries)

84


Industry

The role of handicrafts as small industries is important, as their structure, capital, and

skilled labour requirements are particularly suited to conditions generally prevailing

in the Caribbean area. Because of the problem of employment and the need to create

employment opportunities, the need to establish SSIs as widely as possible is

obvious (Saraf, 1973).

SSIs can also play other important roles. They can provide a training ground for

those with proper entrepreneurial spirit. The experience gained there can be

translated into a wider field (UNIDO 1969 & Neck, 1979). Cortes (1987) suggested

that SSIs often serve as training grounds for entrepreneur-ship, thereby creating a

business-oriented middle class, spreading modern attitudes through the population,

and providing future managers for large firms and public sector entities4.

SSIs can have the effect of creating a new class of small capitalists leading to the

formation of middle class and to wider distribution of income (UNIDO, 1969).

Being labour-intensive SMIs can make an important contribution to the equitable

distribution of income both in functional terms (wages/profits) and in regional terms

(U N, 1992).

In Bangladesh, Small-scale and cottage industry play a vital role in the industrial

sector of Bangladesh, they employ almost 80% of the industrial labor force. Small and

cottage industries occupy a dominant place in its industrial structure. Although in

terms of value added their contribution is smaller than large industries, in terms of

employment their contribution is much larger (Siddiqi, 1992).

The number of employees in the SSIs represented 77% of the total employment in

China in 1985. Small-scale industries can play a very important role in employment,

labour restructuring and rural industrialisation in China (Yang, 1992).4 . Although the process can work the other way with workers from large firms leaving to set up their own SSI.

85


Industry

In 1983, 90% of the industrial establishments in the Philippines had less than 10

workers, this sub-group accounted for 21% of total employment, but only 2% of

manufacturing census value added. Although there was a decline in the ranking of

SMIs in terms of share of industry value added in certain industries, they remain

important in the ranking in many others. SSIs by this definition are firms employing

(1-99) workers, while medium firms are those employing (100-199) workers

(Tecson et al, 1989).

Although SSIs have a significant share of value added it is still much less significant

when compared to their dominance in employment and number of units, reflecting

their relatively low productivity (Tambunan, 1991-1).

In the 1960’s, even in the developed countries, the share of SSIs in terms of output

and employment was significant (Staley & Morse 1965). The contribution of small

and medium scale industries (SMEs) is still high even in this decade. Regnier, (1994)

discussed the contribution of SMEs in some Newly Industrialised Economies (NIEs)

and found that this sector contribute a high ratio in Hong Kong and Korea and a

considerable ratio in Taiwan and Singapore.

3.4.1 The role of subcontracting

Due to the importance of subcontracting in the SSIs in general and in the NPE in

particular, we discuss it separately focusing on the relation particularly in the

clothing sector. This is due to the heavy dependence of the clothing sector in the

NPE on subcontracting.

The UNCTAD definition for a subcontracting relationship is “an arrangement

between two manufacturing units under which one of the units -the contractor-

86


Industry

provides the other -the principal- on agreed terms and conditions, with products that

are used or marketed by the principal under his sole responsibility” (UNCTAD,

1975).

A subcontracting relationship might be domestic, when both units work in the same

country, otherwise it is international (UNCTAD, 1975). There are two types of

subcontracting relationship between small and large factories; First, independent

subcontractors, who serve more than one buyer; Second, subordinated or captive

subcontractors who serve only one (Staley & Morse, 1965).

The literature identifies some characteristics of the subcontracting relationships.

Sriyani, (1992) considers the volume of subcontracting relationships between small

and large-scale firms is usually increased through voluntary linkages in which each

party finds it to its advantage to enter into a contractual arrangement. Tecson, (1989)

wrote that subcontracting firms in Philippines show more efficiency in the use of

labour and also provide the necessary training to workers and Mead (1984) and

Heemst (1982) consider subcontracting firms to be more labour intensive. Regarding

the size of subcontracting firms Halbach, (1989) argues that many of the

subcontracting firms are usually small or medium size, and this gives an additional

advantage in terms of development policy.

Grunwald and Flamm (1985) found that subcontracting via international trade has

been practised more in garments and electronics. On a survey of a subcontracting

sector in Tunisia, 13 out of 19 firms were involved in textile and ready-made clothes

(Falise, 1980). Schmitz (1982) considers subcontracting to be dominant in the

clothing and construction industry, and agrees with Scott (1979) that, subcontracting

firms mostly work as self-employed.

87


Industry

Watanabe, (1971) argue that although subcontracting firms face some problems,

many firms are able in the process to accumulate more capital than they would,

which helps them in expanding their business. He states that “subcontracting can

lessen the obstacles to small enterprises setting up in business and can help them,

once they are established, to survive and flourish”. Staley and Morse (1965) argue

that subcontracting firms’ face a strong tendency for each manufacturer to want his

own integrated production facilities5.

The literature supports the importance of subcontracting in the clothing sector.

Subcontracting firms can overcome different problems and obstacles, they can be

more efficient in creating jobs, because they are mainly labour intensive. For the

previous reasons and after the field study, we found subcontracting firms in the NPE

to be important in the industrial sector and especially in clothing.

3.4.2 The structural changes and importance of

SSIs

SSIs are a necessary inputs to development in developing countries in general and in

the NPE as a special case because the structural transformation of the economy at

this stage may require labour-intensive plants of simple technology capable of using

raw-materials in scattered locations and not requiring highly developed

infrastructure. Small enterprises have been widely assumed to offer significant

development potential. The small-scale sector played an important role in classic

development success stories, such as Japan, Taiwan and Hong Kong.

5 ?. For more details return to Staley and Morse (1965:263), for example, the case of India, France, and Japan

88


Industry

The relative importance of SSIs is partly related to a country’s level of per capita

income. Such industries have been found to be particularly prominent in lower-

income countries; but they are less important in term of employment and number of

establishments, in countries of higher incomes (Tambunan, 1991:2).

Small industry by no means disappears even in the most highly industrialised

countries, put it takes more modern forms. Both cross-sectional and time-series data

indicate that the industrialisation process normally begins with rapid growth of SSI,

some of which expand into medium and large firms or survive in a market niche,

where they remain competitive as large scale industries come to dominate the size

distribution (Anderson, 1982).

In the early stage of development, cottage level production, employing mainly

family labour, is expected to predominate, producing goods and services for

immediate markets and using local resources. As income and demand expand SMEs

attain prominence before yielding to large industries as the economy undergoes

structural change towards industries characterised by economies of scale and

industrial products (U.N, 1992).

This means that SSIs can exist side by side with the large industries, the SSIs would

grow and substitute handicrafts and artisan activities gradually. Anderson shows in

Graph 3.1 the changes in the size structure of industry over time.

Graph (3.1) Percentage share of total manufacturing employment

Phase I II III

Handicrafts and

artisans activities

89


Industry

Small workshops

and factories

Large factory

Time or level of industrialisation

Source: (Anderson, 1982: 981)

3.4.3 Problems facing SSIs

It is not easy to make generalisations on problems facing SSIs. The problems will

differ depending on type of industry and the level of technology. Here we identify

some of the major problems mentioned in the literature.

Schmitz (1982) argues that the main problems facing SSIs are the lack of

entrepreneur-ship and managerial skills, and puts the blame for the failure of SSIs on

people who run them rather than on the environment in which they operate.

A second problem might be considered, the lack of adequate finance. In the studies

of Harper (1984) and Veba (1988) most of the firms consider that the financial

90


Industry

problems and the shortage of capital are the main problems that face small

enterprises. Even though, Harper (1984) said that in most poor countries, the

shortage of viable investment opportunities is far more serious than any shortage of

funds to finance them. The reason for this problem in Harper's point of view is that

SSIs are unable to offer security in the event of loss. Also the lack of financial

management and advice affects negatively the use of the existing capital (Harper,

1976).

ESCAP (1994) agrees that the financial problem is the most critical problem that

faces SSIs, especially the modern and the better-established segment of SSIs, but

informal financial markets might offer an alternative source of finance to the formal

banking institutions.

Agrawal and Chandra (1994) found that 80% or more of the initial investment by

SSIs in some African countries came from an entrepreneur's own savings, friends

and relatives. Even in countries like Korea, in enterprises employing up to 49

workers start-up finance from institutional sources was only 8% of total capital.

ESCAP (1994) determines two main financial problems facing small-scale

industries; obstacles in obtaining access to finance from formal financial institutions

and the implementation of guarantee and insurance schemes.

Harper (1984) found that a smaller number of firms complained about shortage of

demand, while others mentioned the difficulty in obtaining raw materials or shortage

of skilled and honest workers. Cortes et al (1987) argue that small firms do pay more

for raw materials than larger ones, but this has little effect on the total cost.

The informal financial sector plays a critical role in solving the financial problem of

SSIs in LDCs. Steel (1997) concluded that informal financial institutions defined as

financial activities that are not regulated by central bank supervisory authorities are

91


Industry

an important vehicle for mobilising household savings and financing small

businesses. He recommended that informal finance be better-integrated into financial

development strategies.

Chandavarkar (1989) noticed that the share of informal credit markets (ICMs) in the

total finance of micro businesses is still large. He define the (ICMs) as all legal but

officially unrecorded and unregulated financial activities and transactions, which are

outside the orbit of officially regulated institutional finance.

3.5 Factors determining performance

There are many factors that affect the performance of the small firm. In this section

we shall discuss those factors and their effect on performance.

3.5.1 Efficiency of SSIs

Size of the firm is mentioned as the first factor that determines efficiency. This is

supported by the theory of economies of scale, that suggests that large-scale industry

will perform better than smaller in some markets. But demand and the size of the

market must be sufficiently large to allow the economies of scale happen. A country

can be doubly handicapped if it finds that it has limited access to international

markets and faces a limited domestic market. In a situation like this it may become

impossible for a large industry to become profitable and efficient, and hence in that

case the appropriate industrialisation strategy open to this type of economy would be

to develop its SMIs particularly modern ones, (U N, 1992).

However, Little et al (1987), find the absence of a relationship between firm size and

relative efficiency, they found this association in one industry only of the sample.

Cortes et al (1987) argue that SSIs could be efficient in all industries, or at the other

extreme in none. This gives an indicator of no association between efficiency and

92


Industry

size. Boswell (1972) agrees with this result, and found that firm size did not appear

to have a significant impact on growth and profitability of the firm, even though, he

found that SSIs had slightly better profitability. Ho (1980) noted mixed evidence in

Korea regarding the relation between size and capital productivity. Heemst (1982)

after analysing footwear industry in Ghana suggested that some methods of small-

scale footwear production were relatively efficient and profitable.

After discussing the contradictory relation between size and performance, Weiss

(1998) concludes that, the expectation must be that there will be clear variation in

the size-performance relation between different branches of industry. Using the

Mexican census data (1993) Weiss found that SSIs (11-50 employees) have slightly

higher returns6 than micro firms (0-10) workers. However, he found that the pattern

varies between and within sectors and sub-sectors. For the food industry micro firms

have the highest returns followed by large firms with 100 or more employees. In

machinery, in the aggregate micro firms have higher return than large firms, whilst

in the Air-conditioning equipment branch the reverse holds. Every where it is the

medium size (51-100) that has the lowest return (Weiss, 1998).

There are other factors that affect the performance and efficiency of the firm. Cortes

et al (1987) conclude that the factors that affect economic performance are; firm

size, cost of labour, cost of raw-materials, education, aim of the entrepreneur, the

cost of investment, access to funds, access to information and market intermediaries,

lack of modern bookkeeping and production technique and type of technology. They

found that second-hand technology had a positive impact on profitability.

6 . Economic return per unit of capital = (VA –L * W/K) whereK and L are units of capital and labour per unit of output.VA is value added per unit of output.W is the economic value of each unit of labour.

93


Industry

Cortes et al (1987) argue that firms working as complementary to larger ones are

more successful, and said that, such complementary can lead to subcontracting.

Boswell (1972) also found that subsidiary firms are slightly better in terms of

productivity, since those firms had less overhead cost, lower wages, and more tax

avoidance. Heemst (1982), on Ghana for a particular type of industry, found that

subcontracting may be considered an important determinant of relative cost

advantage.

Little et al (1987) mention other factors that affect performance; literacy and

education, father’s occupation, total employment, experience of entrepreneur,

employees’ experience, age of the firm, and capacity utilisation ratio. Experience of

workers was positively related with profitability, while age of the firm was not

significant. The availability of raw materials showed a positive relation with

efficiency. Boswell (1972) found that the youngest firms perform slightly better in

terms of profitability

Ideally, efficiency comparisons by size of establishment should be restricted to firms

that produce the same product, face the same markets, and are integrated to the same

degree. So, there are likely to be distortions in efficiency measures, so that the

comparison across firms must be made with some caution.

3.5.2 Factors determining technology and growth

indicators

Ho (1980) found that in many cases it is economically efficient for the small plants

to select labour-intensive techniques and for large firms to choose capital-intensive

techniques. He noted that capital-intensity in large industries was 1.5 times that of

small industries. But in other cases, in contrast, he found that the capital labour ratio

94


Industry

in industries dominated by large enterprises was lower, if compared to the whole

sector or even to small enterprises. He refers the contradictory differences between

the capital labour ratio of SSIs and that of large-scale industries to the differences in

capacity utilisation or type of product and other measurement problems.

Cortes, et al (1987) noted that capital intensity tends to fall with size initially then

rise with the rise of level of technology and age of enterprise.

When size is measured by number of employees, Little et al (1987) found no

systematic relationship between employment size and capital intensity. When size is

measured by capital stock rather than number of employees, they note that very

small industries are less capital intensive than larger firms. Even though, SSIs and

subcontracting firms are believed to be more labour intensive, see (Heemst, 1987).

We might conclude that size affects capital intensity positively after properly

adjusted the differences in utilisation rates. Liedholm and Mead (1987) find that

SSIs are more labour intensive than their larger counterparts and they use less fixed

capital per worker. Heemst (1982) found that one of the attractive features of SSI,

was its ability to create new jobs at minimal costs.

Cortes et al (1987) argue that SSIs represent the natural starting point for countries

embarking on industrialisation. On the other hand, Boswell (1972) found that firm

size did not appear to have a significant impact on growth. While there might be

other factors that affect growth, Boswell (1972) found that firms broadly grew better

under young bosses and worse under older ones. Also he found that young firm’s

performance was above the average in terms of growth. Cortes et al (1987) found

that entrepreneur’s age and the age of the firm are negatively related to the growth

rate.

95


Industry

3.6 Conclusion

In this chapter we try to discuss the term SSIs, and to provide a general idea on SSIs.

At the beginning of the chapter, we discussed the basic definition. In general, we

found that the main criteria used are employment, assets employed, or both together.

Many authors consider that SSIs employ less than 50 workers, micro firms employ

less than 10 workers, and that medium-scale firms employ 51-100, while large firms

employ more than 100 employees.

In the context of types of SSIs, most of the writers divide SSIs into two types,

modern small industry and traditional industry. While the traditional firms might be

defined as those firms that prevail in and cater to the need of traditional sector,

modern firms might be defined as the industry, which caters to the need of the

emerging modern economy and uses the result of modern science and invention in

production.

Then we surveyed the characteristics of SSIs in general, and the special

characteristics of traditional, cottage and informal industry. The main characteristics

of SSIs are; use of labour-intensive techniques, little specialisation in management,

limited access to capital, private ownership, and close personal contact between

management and workers.

96


Industry

SSIs play an important role in developing countries. Their importance can be shown

on the side of income and employment generation, the share in value added, training

for unskilled labour, income distribution, utilisation of local resources, and provision

of forward and backward linkages.

97

problems and obstacles facing industry in the gaza...

Documents