Industry, Small

BIBLIOGRAPHY

“Small industry” means manufacturing carried on in relatively small establishments. Several quite different forms of organization come within this definition (see Table 1), and few generalizations

are valid for all. In traditional economies that have not experienced the industrial revolution, small industry (indeed, all manufacturing) is predominantly of the nonfactory type. In modern industrialized economies, the predominant form of small industry is the small factory. In transitional economies—that is, economies in the process of development from traditional to modern—all forms of small industry usually exist, some on the way down, some, particularly the small but modern factory, on the way up.

Functional and statistical classification. Non-factory forms of manufacture are nearly always carried on in quite small establishments; therefore, the problem of defining an upper boundary to small industry hardly arises for them. But it does arise when we talk about the small factory. Beyond what point is a factory no longer small? Any such specification must be more or less arbitrary. It is like defining hot water. Just as the concept of hot water depends on whether one is thinking of shaving or of running a steam turbine, so the boundary of small industry can reasonably be set differently for different purposes and for countries at different stages of development. The main reason for distinguishing small industry from large is that the two have characteristics and problems sufficiently diverse that different developmental approaches and methods are necessary. Therefore, before suggesting any quantitative line of demarcation, let us first note some of these functional differences.

The following are characteristics of small industry that justify separate analysis of its role in development and require special developmental techniques.

(1) Relatively little specialization in management. With some overstatement, we may say that small industry is characterized by “one-man management.” The small firm cannot afford, as can large firms, vice presidents or staff specialists for production, sales, finance, or research. Therefore, the needs of small industry for advice, aid, and management training are rather different from the needs of large industry.

(2)Close personal contacts. The manager is personally in touch with production workers, customers, suppliers, and owners (ownership is often identical with management). If the manager is a good one, this characteristic of small industry gives a quality of human concern and a flexibility in daily operations—for example, in meeting a customer’s special requirements—that may in properly chosen lines mean a competitive advantage over large industry.

(3)Handicaps in obtaining capital and credit. The small industrial firm cannot raise capital in the organized securities market, and—owing to greater unit costs of small transactions, greater risks, the habits and social connections of people with wealth, and other factors—it often finds difficulty in getting loans and credits from banks or other financing institutions. This characteristic, of course, also suggests needs for special types of developmental aids.

(4)Sheer numbers of small industry units. It is often impractical, or at any rate uneconomic, to apply to thousands of small units the same developmental techniques (e.g., individual feasibility studies) that can be applied to tens of large units. Group techniques must be devised for small industry development that are analogous to the extension methods used in agriculture to reach small farmers.

It is known that no statistical classification can coincide perfectly with these important functional distinctions and that different classifications (both administrative and statistical) are appropriate in differing environments; nevertheless, it is desirable to achieve a greater degree of consistency in use of terms than exists today, at least for international comparisons. For example, a United Nations report (The Development of Manufacturing Industry in Egypt, Israel, and Turkey 1958) referred to manufacturing establishments employing 10 or more persons as “medium-scale and large-scale,” whereas, at the other extreme, small business in the United States is officially defined to include manufacturing establishments with 250, 500, or even as many as 1,000 employees, depending on the industry. Another difficulty is that no single measure of the size of an industrial establishment is satisfactory by itself. Possible measures include the number of persons employed, capital investment, various measures of output, amount of energy used, and relative position in the industry. All are relevant in any complete characterization. The number of persons employed is, however, the most widely available, the most convenient, and the most readily comparable internationally, because it is unaffected by vagaries of prices and exchange rates. On the whole, it is probably the least objectionable for general purposes.

It is suggested, therefore, that the term “small industry” normally be understood to mean, especially in international comparisons, manufacturing establishments employing up to 100 persons. Nearly all industrial censuses break at 100; otherwise a somewhat lower figure, say 75, might be better. But somewhere in this size range, according to observations in many countries, specialization within management and the other functional differences that distinguish large from small industry usually become fairly significant, although it must be emphasized that this varies with the industry and with factors in the economic environment.

It is also desirable to differentiate in industrial censuses between factory and nonfactory producers. This is done now in some countries, especially the industrially advanced ones. But in the newly industrializing countries it is often not possible to obtain separate data on artisan and household units for special study of their developmental trends. Nor is it possible to study small factories without finding the data confused by the inclusion of an unknown number of nonfactory units.

Developmental prospects. As a country moves through the transitional stage from a predominantly traditional to a more and more modernized economy, the character of its small industry changes. Somewhat oversimplified, the outlook is for traditional artisan industry to be transformed, for household cottage industry to be largely replaced, and for small but modern factories to be developed.

In newly industrializing countries, the competition of factory-made goods, both imported and locally produced, makes obsolete large segments of traditional artisan activity, often with devastating effect on such old-line craftsmen as weavers, potters, blacksmiths, and shoemakers. At the same time, many new, distinctly modern artisan activities arise. These are not so much in manufacturing as in services: automobile repairing, radio and television servicing, installation and repair of electrical appliances and plumbing fixtures, and photographic work. Some old-line crafts continue and even expand in modernized form. Rural blacksmiths, for instance, instead of making farm tools by hand become repairmen and dealers in agricultural implements and machinery, while carpenters turn to new products and methods. The rise of new crafts and the modernization of old ones have belied predictions that were common in the late nineteenth century in the then industrializing countries of Europe that factory competition would lead to the disappearance of the artisan. The highly industrialized, modern economies of today seem, on the contrary, to be using increasing numbers of new types of artisans whose functions have undergone a transformation from the making of manufactured goods to their installation, servicing, and repair. The modern artisan, instead of competing with the factory, supplements it.

Household industry, on the other hand, seems destined to be gradually replaced as countries modernize. Household industry is almost always technologically unprogressive and subject to grave social abuses. However, in the poorer and more densely populated countries the process of replacement may be a very long and gradual one. In certain special situations, there is a good economic and social case for preserving and even promoting household industry—for example, as a part-time supplement to the incomes of farmers and mountain dwellers—but experience suggests that this had better be done under careful regulation and preferably with the help of an organization that will function as a benevolent intermediary between the homeworkers and the pressures of the market.

The role of the small modern factory. The small but modern factory is the segment of small industry with greatest developmental potential in newly industrializing countries. It has too often been overlooked and neglected by development planners and the makers of industrialization programs.

Historically, small factories preceded large ones. But today, in countries that are importing the industrial revolution, the sequence is often reversed. Nowadays newly industrializing countries do not have to evolve their factories gradually, inventing each new device as they go along. Instead, they take over many industrial ideas and techniques from more developed countries. While traditional industry continues in most of the economy, modern industry is built up in port cities or other key centers. This modern industry is likely to appear in large units—oil refineries, textile mills, sugar mills, cement plants. Later come other fairly large-scale units that produce or assemble products for which the market has been prepared by the import trade.

Thus, modern large factories develop ahead of modern small factories. For some time the middle range of small but modern-type manufacturing is likely to be less well represented in a newly industrializing country than in the highly industrialized countries. There tends to be a hollow area in the industrial size structure, an “excluded middle,” until local enterprise turns to modern-type manufacturing and fills in the relatively neglected sector of the small but modern factory. Until this happens, the efficiency of the whole industrial complex suffers.

At the middle stages of industrial development, if local entrepreneurs become proficient in modern factory-type industry, the role of the small factory is likely to increase rapidly. In many countries at this middle stage, small factories can be expected to gain a larger relative role than in the highly industrialized countries. This follows from the smaller total demands associated with lower income levels, from markets segmented more by inadequate transport and communications, from less experience and expertise in the kinds of organization and management required to make large enterprises efficient, and from other factors. Thus, the relative role of small factories in newly industrializing countries may now start very low, subsequently rise quite high, then gradually decline and level off as the country moves toward industrial maturity.

Even at a high level of industrial maturity, small factories will by no means disappear. This is the experience of the most industrialized countries. The available statistical evidence appears to refute the belief that, in a given country, the relative role of small manufacturing establishments must continue to fall indefinitely. In fact, the relative share of small factories in manufacturing employment has shown a surprising stability in industrialized countries since World War I. In the United States, 91 per cent of all manufacturing establishments as of 1958 had fewer than 100 employees. These establishments employed 27 per cent of all manufacturing employees and produced 23 per cent of the total value added by manufacture. The relative importance of small manufacturers in other industrialized countries is as great or greater (Staley & Morse 1965, chapter 1).

Competitive ability. In view of the well-known economies of scale, why is it that small factories manage to compete as well as they do? Some of the reasons follow.

(1) Economies of scale are less important in some lines of production than in others. In the case of blast furnaces and cement kilns there are great engineering advantages and cost advantages from the use of big pieces of equipment to handle large amounts of materials; these are not undertakings suitable for small units. But in the manufacture of garments or certain kinds of machine tools the advantages of scale are much less significant, and a moderate-sized plant may be just as efficient as, or even more efficient than, a large one.

(2)Small units have an advantage where shipping costs are high or the product is perishable. Thus, bricks and tiles and freshly baked goods can be produced more economically by relatively small, local establishments than by great central factories.

(3)Small manufacturing establishments have an advantage in meeting highly specialized or individualized demands or in catering to a small-volume market or one requiring frequent quick readjustments because of style changes or for other reasons. They compete very well in certain kinds of precision instruments, some types of specialized machinery, some types of surgical equipment, women’s wear, and so on. Here the flexibility of the small firm stands it in good stead. Large enterprises are handicapped by their bureaucratic procedures and their relatively large overhead expenses. It does not pay for them to produce short “runs” of a nonstandard item, but the small factory can often do so at a profit. It can “fill the cracks” between the large-volume, standardized outputs of large factories. For example, a successful small cycle manufacturer near Madras, India, produces junior-sized bicycles, also tricycles and tricycle-mounted delivery carts, thus supplementing rather than competing with a major bicycle factory in his immediate vicinity.

(4)Where labor and social laws are applied more stringently to large than to small plants, as is often the case in newly industrializing countries, this may be a factor (whether or not a desirable one) in the competitive ability of small plants.

(5)The small factory can produce components and supplies for large factories. Much of Japanese small industry works on contract for large industry. One of the reasons for the efficiency of industry in the United States and Europe is that large plants characteristically buy many specialized parts from hundreds or even thousands of other plants, both large and small. A small enterprise supplying a specialized item to several large firms may have greater economies of scale on that item than any of the large firms could obtain. Also, small industry often performs job shop operations for large industry.

(6)The small factory often serves to initiate new products and sometimes grows large with growth of the market for the product. Henry Ford and other pioneer automobile manufacturers started on a very small scale. The electronics industry today is bursting with small firms, as well as large ones, hopefully exploiting new ideas. In countries where industrial diversification is at an early stage, small-scale manufacturers often discover opportunities to introduce products that are new to the country though not necessary new in the world.

Small factories in development strategy. There are several kinds of benefits that a newly industrializing country may gain by intelligent promotion of its small factory sector. Progressive small firms serve as a nursery for entrepreneurial talent, and they grow in some cases into large industry. Small manufacturers are usually local entrepreneurs; thus, healthy growth of their firms helps to balance the importation of foreign capital and to prevent domination by foreign-owned enterprises. Small factories can be important in local and regional development and in promoting a more decentralized pattern of industrial growth. Vigorous small industry helps to create a tradition of independent initiative by alert individuals and a strong middle class, which in turn is an important underpinning of political democracy.

Also, vigorous small factories help to check monopoly, improving prices and services to consumers. Alert small entrepreneurs in intimate contact with market needs and possessing practical technical competence may be important sources of product innovation and adaptation. Also, they tap sources of capital (especially from family savings and, if the enterprise is successful, from plowed-back profits) that would not otherwise contribute to capital formation. The limited size of the home market in many newly industrializing countries makes production unfeasible on the scale that is usual in the major industrialized countries; smaller plants may be able to produce the smaller quantities required at reasonable cost if provided with appropriate kinds of information, encouragement, and services.

Implications for development policy. For those concerned with development programs in newly industrializing countries, the following policy implications of the preceding analysis may be stressed:

First, development planners will do well to give attention to the constructive possibilities in modernization and growth of the small industry sector.

Second, in the development of a modern small industry sector there will be, over the long run, a declining place for household industry. Traditional artisan industry will give way to modern service trades, which supplement rather than compete directly with factories. The small factory will rise in importance, taking its place as a complement of the large factory in a diversified industrial structure.

Third, in encouraging development of small factories, careful selection of suitable product lines is essential. The suitability of a given product for small-scale manufacture varies from country to country, from one part to another of the same country, and from time to time as a country develops. Because so many technical and economic factors are involved, provision for continuing analysis of specific situations is advisable in development programs for small industry.

Specific methods that have been found useful in newly industrializing countries for practical development of modern small industry include industrial advisory or counseling services, industrial training services, industrial research services, measures to improve small industry financing, industrial estates or industrial parks, marketing aids, aids in the procurement of materials and equipment, and the fostering of interfirm assistance and self-help by industrial associations.

Eugene Staley

BIBLIOGRAPHY

International Labor Office 1961 Services for Small-scale Industry. Studies and Reports, New Series, No. 61. Geneva: The Office.

Nanjundan, S.; Robison, H. E.; and staley, Eugene 1962 Economic Research for Small Industry Development, Illustrated by India’s Experience. Bombay: Asia Publishing House.

Staley, eugene; and morse, Richard M. 1965 Modern Small Industry for Newly Developing Countries. New York: McGraw-Hill.

Stanford Research Institute, International Development Center 1960a Small Industry: An International Annotated Bibliography. Compiled by Marian C. Alexander-Frutschi. Glencoe, Ill.: Free Press.

Stanford Research Institute, International Development Center 1960b Small Industry Advisory Services: An International Study, by Joseph E. Stepanek. Glencoe, Ill.: Free Press.

United Nations, Department of Economic and Social Affairs 1958 The Development of Manufacturing Industry in Egypt, Israel, and Turkey. New York: United Nations.