Unit-2

Small Business- Vital component of the economy

Small business:
According to Small Business Administration, a small business is one that does not
dominate its industry has less than $10 million in annual sales, and has fewer than 1000
employees. In the USA, the manufacturing firm is officially a small business for
government procurement purposes, if it is not dominant in its field of operations and if it
has fewer than 500 employees, or if it is certified as small by the Small Business
Administration for purposes fewer than 250 employees, depending on the size and the
standard set for different industries.
The definition of small enterprises varies from one country to another. In most of
the countries of the world, the criterion for defining a small enterprise is related to the
size of employment. For instance, in USA, small business is one which has employment
of less than 500 people. In U.K, it is less than 20 skilled workers, in Germany less than
300 workers, in Sweden less than 50 and Italy less than 500.
Scope of small industry in select countries

Country Terminology Scope

Japan Small enterprise Manufacturing, mining, services, trading
(wholesale and retail)
India Small scale industry Manufacturing, repair and maintenance
Korea Small enterprise Manufacturing, mining, construction, commerce.
USA/Canada Small business Manufacturing, services, trading (limited)
U.K Small firms Manufacturing, commerce (both retail and
wholesale) construction, mining, transport
Indonesia Small industry Manufacturing services

The definitions of small scale industries prevalent in some countries are;

China: In China, the definition of small industry is less quantified and varies with the
product. These industries are designed to mobilize local raw materials, local skills, local
finance and local markets.
Egypt, Israel and Turkey: The United Nations Report (1958) on the development of the
manufacturing industry in Egypt, Israel and Turkey refers to all manufacturing
establishments employing less than 10 persons as small scale industries.
Germany, Sweden, Norway, and Denmark: Units employing up to 300 workers are
considered to be small. In Scandinavian countries units employ 10 to 100 workers are
taken to be small scale units.
Sudan: Small industries are defined as those industries which have a capital investment
of less than $142,000 or which employs less than 30 full time workers. Most industries in
this category are workshops, small oil mills, perfumeries, ice factories, tanneries etc.
Japan: The government applies the term to those industries which employ less than
$133000; and in the commercial and professional services sector, with a capital of less
than $26,000 employing less than 50 persons. The small enterprise includes retail shops,
shopping districts, beauty saloons, hair dressing establishments and laundry shops.
Vietnam: A small industry is defined as one employing less than 300 persons and having
not more than $250,000 in capital investment.
Ethiopia: Small enterprises are defined with an investment capital of $2350 to $ 5880
(Birr 20,000 –Birr 50,000). Micro enterprises are those with an investment paid up capital
not exceeding $ 2350 (Birr 20,000).

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 Why are small businesses important to the economy?
Most small scale industries have a low capital intensity and high potential for
employment generation. They possess location flexibility which serves as an effective
instrument for achieving a wide dispersal of industries. Small scale units serve as a means
of bringing forth indigenous entrepreneurship and saving lying dormant, particularly in
semi-urban and rural areas. The small scale sector has a high potential for employment,
dispersal of industries, promoting entrepreneurship and earning foreign exchange to the
country. The following points demonstrate the importance of small scale industries;
1. Small is beautiful:
“Small is beautiful”, said E.F.Schumacher. He maintains that man’s current
pursuit of profit and progress, which promotes giant organizations and increased
specialization, has resulted in gross inefficiency, environment pollution, and inhuman
working conditions. Schumacher emphasizes on small working units, communal
ownership and regional work places utilizing local labour and resources.
2. Innovative and productive:
It is the small units which are highly innovative though they do not maintain their
own research and development.
3. Individual tastes, fashions, and personalized services:
Small firms seem to have an edge in industries that call for personalized service,
attention in detail and the flexibility to adapt quickly to changes in the business or
technological environment.
4. Symbols of national identity:
Small enterprises are almost always locally owned and controlled, and they can
strengthen family and other social systems and cultural traditions that are perceived as
valuable in their own right as well as symbols of national identity.
5. Happier in work:
People who work in small enterprises are happier in their work than those who
work in large ones in spite of lower wages and poor standards of safety, comfort and
welfare facilities.
6. Winners of the game:
Small enterprises and new entrepreneurs were at the forefront of every business
boom of the last decade, whether it was computers, television sets, consumer electronics,
garments, diamond exports or advertising.
7. Dispersal over wide areas:
It is only small scale units which have a tendency to disperse over wider areas.
Small scale industries play a key role in the industrialization of a developing country.
This is because they provide immediate large scale employment and has a comparatively
higher labour- capital ratio; they need a shorter gestation period and relatively smaller
markets to be economic; they need lower investments; offer a method of ensuring a more
equitable distribution of national income and facilitate an effective mobilization of
resources of capital and skill which might otherwise remain unutilized; and they stimulate
the growth of industrial entrepreneurship and promote a more diffused pattern of
ownership and location.
Advantages of small scale enterprises
Small enterprises have distinct advantages both economic and social. Some of these are;
1. Some small scale industries do not require a high level of technology.
2. Small scales industries are generally labour intensive and do not require a large
amount of capital. The energy of unemployed or underemployed people may be use
for productive purposes in an economy in which capital is scarce.
3. Small scale industries projects can be undertaken in a short period and hence can
increase production both in the short run and long run.
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4. Most developing countries are rich in certain agricultural, forest and mineral
resources; small scale enterprises can be based on the processing of locally produced
raw materials.
5. It is possible both to save and to earn foreign exchange by producing and exporting
goods processed from local resources.
6. Small scale industrial enterprises are the training ground for local entrepreneurs on
decision making. From small scale industrial enterprises knowledge and skill can be
transferred to other enterprises; small enterprises may grow into medium sized
enterprises.
7. By creating opportunities for the small business, small industrial enterprises can bring
about a more equitable distribution of income which is socially necessary and
desirable.
8. Small scale enterprises in developing countries help to create economic stability in
society by diffusing prosperity and by checking the expansion of monopolies.
9. The development of small scale enterprise will create jobs in the rural areas of the
developing countries where unemployment and underemployment are high.
10. Small scale enterprises will make possible a transfer of manufacturing activities from
the metropolitan and rural areas. This will also help in bringing about a geographical
diffusion of skill and technology in a country.
11. Apart from the linkages between agricultural of rural development and small scale
industrial enterprises, there is an essential linkage between large scale enterprises and
small scale enterprises in the sense that large scale enterprises create opportunities or
facilitates for the growth of the small scale enterprises.
12. Small scale enterprises have their own place in a country’s economy. Imperfect
competition protects the small firm’s markets and enables them to exist where they are
not efficient in terms of cost.
13. The development of small scale enterprises can be apart of integrated rural
development programs. Due attention needs to be given to the industrial and non-
agricultural components or activities in the context of rural development programs.
Economic, social and political aspects of small business enterprise
Small businesses (enterprises) have to play a vital role in Ethiopian economy.
They need a strong support on socio-economic and political grounds.
Socialistic idea
Our goal is to establish a socialistic pattern of society. The main objectives are
equitable distribution of wealth and decentralization of economic power. The benefits of
industrial growth should be shared by as many people as possible and should improve
thee general standard of living. Proliferation of small enterprises will go a long way in
achieving these objectives.
Less capital and more labour
We have vast manpower but inadequate capital which has resulted in increasing
unemployment. Planners have realized the necessity of encouraging small industries
because they require less capital but generate more employment. The small scale sector
has the capacity to generate a much higher degree of employment than the large scale
sector. The small industries will stand in good position because they are less capital
intense and more employment oriented.

Removing regional imbalances

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 There is continuous shifting of people from rural to urban which causes over-
crowding in cities with slum conditions due to lack of social and medical amenities which
require heavy investments. This problem can be solved by inducing people to set up
small industries in rural areas. The prolific setting up of agro-based industries will go a
long way in creating a balance in the economy.
Creating self employment opportunities
Self employment can be generated in adequate avenues by setting up small
industries with the help and expertise provided by the government and other agencies.
Bank and several industrial corporations have arranged special training programs for
young entrepreneurs who can easily set up their own units with package assistance from
the government.
Ancillary function
Many small-scale industrial units supply parts and accessories to bigger
industries. This ancillary function involves specialization in specific areas and results in
greater profitability. The government has relaxed the ceiling of investment in plant and
machinery for ancillary unit.
Export promotion
Small-scale industries are opening up fresh avenues in the export market.
Realizing the importance of small-scale sector in the economy, the Ethiopian government
has adopted several measures to speed up the growth for small industries.
Supply of critical raw materials
The government has also liberalized the import policy to ensure regular supply of raw
materials to small industrial units, and devised a more efficient and consistent system of
distribution of critical raw material.
Problems in Ethiopian small business
Small-scale industries have not been able to contribute substantially as needed to
the economic development particularly because of financial, production and marketing
problems. These problems are still major handicaps to development. Lack of adequate
finance and credit has always been a major problem of Ethiopian small business. Small
scale units do not have easy access to the capital market because they mostly organized
on proprietary partnership basis and are of very small size. They do not have access to
industrial sources of finance partly because of their size and partly because of the fact
that their surpluses which can be utilized to repay loans are negligible. Because of their
size and partly because of their limited profit, they search funds for investment purposes.
Consequently, they approach money-lenders who charge high rate of interest. Hence
small enterprises continue to be financially weak.

Small scale enterprises find it difficult to get raw materials of good quality and at
cheaper rates in the field of production. Very often they do not get raw material in time.
As a result, these enterprises fail to produce goods in requisite quantities and of good
quality at a low cost. Furthermore, the techniques of production, which these enterprises
have adopted, are usually outdated. Because of their poor financial position they are not
able to buy new equipment, consequently their productivity suffers. Many small business
enterprises are suffering with the problem of marketing their products. It is only by
overcoming all these constraints that small entrepreneurs can hope to make their
enterprises successful.

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