Small Company

Small business may be defined in various ways e.g. in terms of investment, number of persons employed, volume of output and sales, technique of production etc.

However, in India, small business is defined by Government, as consisting of the following four types of businesses:

(i) Small Scale Industries

The investment in plant and machinery is up to Rs. 1 crore.

(ii) Ancillary Industrial Undertakings

The investment in plant and machinery not to exceed Rs.1crore; and the undertaking must sell not less than 50% of the its output to other industrial undertakings.

(iii) Export-Oriented Units

The investment in plant and machinery is up to Rs. 5 crores; and the unit must export at least 30% of its output by the end of three years from the commencement of production.

(iv) Tiny Units

The investment in plant and machinery is up-to Rs.25 lakhs.

Features of Small Business

It is not correct to say that the days of small industries are gone. Eugene Staley has mentioned five distinct ways in which small industries successfully coexist with large industry.

1. Competition

Small industry can out-compete large industry in certain circumstances and in selected products. Some of these industries are bricks and tiles, fresh baked goods, condiments and preserved fruits, goods requiring small engineering skill, items requiring artistry and craftsmanship.

2. Supplementary

Small industry can “fill the cracks” between the big volume and standardised outputs of large factory. Staley mentions a Madras case where a small tricycle factory flourished along side a large cycle factory.

3. Components

A small industry can produce components for a large industry. This is the most common example of the small manufacturing sec­tor and many of them function under the protection of big industries. Very often they also derive the advantage of a protected market with assured supply of their output to one or more selected large manufactories.

4. Initiation

Small industry can initiate new products and subsequently grow large with the growth of the product. Staley mentions that many of the automobile factories started this way in USA. In India, the electronics industry looks like taking to this pattern of development.

5. Servicing

Small industry can install service, and repair the products of large industry. In India these industries are growing in respect of major industries like refrigerators, radio and TV sets, watches, and clocks, cycles and motor cycles and motor vehicles in respect of repair, servicing and maintenance.

It is thus obvious that growth of large scale industries does not necessarily bring about the end of cottage or small scale industries. Electricity has revolutionised large scale industry; at the same time small units based on electricity can also be cheaply and conveniently started with limited infrastructure.

Besides, many artistic goods, products of craftsmanship, and luxury goods do not lend themselves to standardization of large scale manufacturing and are largely reserved to the cottage, rural and small industrial sectors.

Finally new ventures, so long as they are in an experimental or formative stage are first tried on a small scale and it is only when their success is demonstrated and their profitability and capital base established that they are organized on a large scale.

Small business always plays an important role in the development of any country. As already mentioned, most of the industrial and business activities starts small. With market opportunities and vision of the entrepreneur, it grows into a large industry.

Types of Small Business

Small business includes a variety of companies.

They may operate in any of the following areas:

(a) Manufacturing,

(b) Trading,

(c) Services and

(d) Others

The definition of small business is given in relation to the investment made in plant and machinery not exceeding Rs. 60 lakhs and Rs. 75 lakhs in case of ancillary industry and Rs. 5 lakhs for tiny industry.

Roles of Small Business

In selecting industries for development in a new country attention should be given to those industries which create conditions favourable for the growth of other industries since this method will lead to the simulta­neous development of many industries. Rosenstein Rodan advocates this line of development. India followed this path by constructing multipurpose river-valley projects and by developing small scale industries.

An underdeveloped economy should produce and export commodities that use relatively less capital per unit of output and to import items requiring more capital. Prof. Amartya Sen has come to the conclusion that the case for choosing relatively labour-intensive techniques in the under developed economies is not bad in many sectors of production.

Small industries are capital-light, skilllight, labour-intensive and dispersed. They are of quick investment type, and by carrying the job to the worker they can overcome the difficulties of geographical immobility. In the conditions prevailing in many underdeveloped countries the development of small industry may be the most economic form of industrialization; it may be more economic than either large scale organized industry or cottage industry.

Moreover small industry represents much less of a break with previously established modes of living and therefore represents less of strain than industrialization in the form of large units.

In relation to cottage and small scale industries the Industrial Policy Resolution, 1956, states that they provide immediate large scale employment; they offer a method of ensuring a more equi­table distribution of the national income and they facilitate an effective mobilization of resources, of capital and skill which might otherwise remain unutilized.

Some of the problems that unplanned urbanization tends to create will be avoided by the establishment of small centres of industrial production all over the country. The Industrial Policy Resolution puts forth four main roles of small industries in the Indian economy.

1. Employment Argument

The most important economic task before the country is the solution of unemployment problem. The scope for creation of “wage employment” is limited as it depends on industrial growth. But there is a large scope for the creation of “self-employment” and here the small scale industries can play a significant role.

The development of the Indian economy over the last four decades has been characterized by a high incidence of unemployment and under-employment, resulting in 30 p.c. of the population living below the poverty line. Another feature is that the growth of the non-agricultural sector during the last 40 years has failed to make any impact on the work force, 62% people continue to depend on agriculture.

These aspects of the economy have prompted the policy makers to turn to small industry for absorption of the additions to the labour force primarily because these are labour intensive in character. The small businesses are labour intensive and create more employment per unit of capital employed.

A more sophisticated form of this argument is that small industries should be developed because the capital output ratio for such enterprises is lower vis-a-vis large scale industries. Prof. P. C. Mahalanabis supports small scale industries on the ground that capital output ratio for such enterprises is lower than that for large scale enterprises.

2. Equality Argument

Large-scale industries generally lead to inequalities of income and concentration of economic power. On the other hand, an SSI leads to a more equitable distribution of produce of industry. In other words, the income generated in a large number of small enterprises is dispersed more widely in a community than income generated in a few large enterprises.

The income benefit of small enterprises is derived by a large population while large enterprises encourage more concentration of economic power. In this way, small enterprises bring about greater equality of income distribution.

However, it is a fact that there is a com­mon tendency in all countries wages to be lower in small factories than in large factories; but it is also equally true that in underdeveloped economy workers have a choice not between a high paid job and a low paid job but between a low paid job and no job at all.

So the low paid job is accepted by the force of circumstances. In the absence of small enterprises, the workers have to lose even small wage which they hope to get. A policy of supporting cottage and small industries is really a policy of social insurance for a group which would otherwise be threatened by unemployment.

3. Latent Resources Argument

Small scale industries are capable of mopping up latent and unutilized resources. This argument justifies the cause of SSIs on three grounds: First, it presup­poses that there are a large number of small and potential entrepreneurs who are capable of running industrial units efficiently if proper help is extended to them.

Second, there are a large number of potential enterprises whose full capacities have not been used so far. Third, SSIs will be helpful in putting idle savings in productive use.

4. Decentralization Argument

Decentralization of industrial activity has also been advanced as another reason for promoting SSIs.

There are two aspects of this argument; first, there is the need to prevent congestion in large cities through prevention of growth of industries there; second, this negative measure has to be reinforced by promoting industrial growth in semiurban and rural areas so that the local people can stay on their areas without emigrating to the nearby cities.

The primary objective of developing small industries in rural areas is to extend work opportunities, raise incomes and standard of living and to bring about a more balanced and integrated rural economy. In India, the method adopted for developing cottage and small scale industry is the construction of industrial estates, usually in towns.

These estates provide factory space, electricity, sheds and common facilities. At present there are 346 such industrial estates in India.

Large industries are mostly concentrated in metropolitan cities. The smaller towns and the countryside in order to benefit from modern industrialization must encourage small enterprises. Industrialization of the country can become complete only if it penetrated into the remote corners of the country. Small industries by carrying the job to the workers overcome the difficulties of territorial immobility.

An important reason for developing small industries lies in the prevention of a lopsided industrial growth. A pyramid like structure of industrial development with a few large scale industries at the top and a mass of small enterprises at the base would obviously make the industrial economy ill balanced.

There should be layers of industrial enterprises in between the largest and the smallest categories. An integrated development of large scale and small scale industries complementing each other is the most important aspect of economic planning which should not be lost sight of.

The larger units should be a source of most of the critical raw materials which the smaller units need for processing them into finished goods.

The smaller units in their turn should be acting as auxiliaries engaged in the manufacture of components, parts and accessories required by the bigger units which should have sub contracted with the former. The economic and technical possibility of such complementary relationship should be explored and realised.