The Nature, Scope and Purpose of Small Business in Developing Countries


By: Site Engineer, Staff

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In many parts of the world, the importance of small-scale business in the process of socio-economic development has been well documented.

In developing countries, in particular, it is now realized that large-scale enterprises have not played and cannot alone be expected to play the dynamic role that they are supposed to play in the rapid growth and development of the economies.

These roles include the substantial contribution of the sector to the gross domestic, employment generation, increasing local value added and the technological development It is thus becoming evident that small-scale enterprises that had hitherto generally been neglected could play the aforementioned roles as well if not better than the large-scale establishments.

The advocates of small-scale enterprises development have advanced many other reasons.

These reasons include the following:

  1. General enhancement of the tempo of industrial development is visible among small-scale enterprises.
  2. Inventions adaptations and general technology development are common in these industries.
  3. The low level of capital required in the establishment of the industries.
  4. A large number of establishments and their labor-intensive mode of operation guarantee employment for a large number of individuals.
  5. More equitable redistribution of income is usually achieved in this sub-sector.
  6. The evolution of indigenous enterprises is common amongst these establishments.
  7. Industrial diversification and a relatively more balanced regional development are assured.

In developing countries, the emphasis is at present laid on small-scale enterprises in all sectors of the economy. With the supportive role of the government, small-scale enterprises are capable of pulling countries out of their present economic predicaments, especially if the raw materials are locally sourced.

Characteristics of Small Business Firms in Developing Countries

These include:

  • The bulk of the start-up capital is provided by promoters since access to the organized capital market is limited and this category of businesses are not easily favored by institutions in the money market due to the risk complexion of their operations.
  • Low level of education of the promoters.
  • The high incidence of suspicion prevalent among many of them gives birth to the preponderance of sole-proprietorship with its attendant shortcomings.
  • Inexperience and their high propensity for ‘get-rich-quick’ business which in turn mirrors the impatience in the business philosophy of most business people.
  • They are an urban as well as rural phenomenon though they tend to be more concentrated in the later if rural artisans and home-based economic activities are included.
  • Small business firms exert little or no influence on the market that is dominated by larger businesses. As a result, they are not usually at an advantageous position to attract scale economies in buying or selling or even in production.

Definition of Small-Scale Enterprise

The word business means a lot to many people, and so individuals view it in different ways. To some, it means only buying and selling, whereas in an actual sense business is an all-inclusive term.

It embraces all profit-oriented economic or commercial activities carried out by individual or group of professions, employment, and other related areas.

Size’ is relative depending on the individual’s point of view. A company may be big when taken by itself and yet small when compared with the other companies in the same industry. Such a company should, therefore, be categorized as a small business.

An industry may be big or small depending on the capital or the worth of such an industry. Various schools of thought have proffered varied definitions of the small-scale enterprise using parameters as:

  1. Total investment cost
  2. Size of the workforce if labor leaders would decide
  3. Level of turnover
  4. Even operational environments as judged by the government

Despite the possibility of sustaining the development of viable small-scale business projects in the country, a major problem observed as militating against adequate development of small-scale business in developing country is the absence of a uniform internationally accepted definition of small-scale business.

The varieties of the criteria used in defining this sort of business depend in part on the general conditions in a particular country. In Japan where this sector has received special attention, small-scale business is defined “as one employing fewer than 300 persons and having a capital of less than $28,000”.

By contrast, in Trinidad and Tobago, a country with a much smaller population and industry employing 25 or more persons is considered large. To resolve the problem imposed by definition, many countries are now using enterprise capital.

This, however, has further compounded problems associated with assignation of a suitable definition for the sector in Nigeria because of the instability of the value of the naira and absence of accurate statistics on the assets. Profit and loss accounts of most indigenous enterprises made a definition on the basis of capital difficult.

However for operational purposes, taking into consideration the devaluation of the naira instance of Structural Adjustment Programme (SAP) and within the context of present Nigeria industrial situation, the Federal Ministry of Industries defines a small-scale enterprise “as any business with a total investment of less than one million with a number of employees not more than twenty.”

It is pertinent to state that sometimes in 1998, the Central Bank of Nigeria came up with a definition of small-scale enterprise that addressed two financial areas the merchant banks and commercial banks.

It states “for lending purpose of merchant banks, a small scale enterprise of one with a maximum annual turnover of N500,000 or with a capital investment of not more than N200,000 (excluding the cost of land). And for commercial banks, a small-scale enterprise is one with an annual turnover not exceeding N500,000 (excluding the cost of land).

It will be observed that small businesses dominate the overall business activities in Nigeria. Individuals, groups, companies or cooperatives can establish them. But whatever the nature of a small business, such businesses share the same general characteristics as big ones.

It is, however, crucial that a standard definition of small business enterprises be involved to act as a guide to both financiers and operators of such ventures.

Importance of Small Scale Business in Developing Countries

From various research works, which has been carried out it is discovered that small businesses predominate in all private sectors of the economy all over the world.

Independent small-scale business plays an important role in the nation’s economy. Small-scale businesses are fast growing in developing countries.

It is useful in creating improvement in the economy in the following areas.

  • Local Development: It is also important in regional development and in promoting a more decentralized pattern of industrial growth. Compared with large-scale industrial enterprises, small-scale industries are more regional economic imbalance and further help in achieving a decentralization of industrial structure and to distribute ownership of real wealth and economic power more widely in the country, it is also assumed that small enterprise constitute the chief means of industrialization in rural areas.
  • Creation of Employment: Employment opportunities are created with little capital investment with the increased yearly output from schools and the increasing inability of the public sector to expand fast to absorb the school leavers.
  • Manpower Training: Fifty percent of our apprentices are attached to one form of small-scale business or the other for training.
  • Waste Utilization: Small-scale enterprise helps in waste reduction in the economy e.g. many craft men use scrap materials from a large firm not only as their raw materials but also for the manufacturing of serviceable improvised tools and machinery for themselves and others. Moreover, small businessmen tap talent, services, and skills which otherwise might have remained unused.
  • Introduction to Big Business: Small business serves as a nursery for entrepreneurial talent and they grow in some cases into a large industry. Many large organizations all over the world today started as a small business.
  • Promotion of Competition: It acts as a check against a monopoly. They also improve prices and services to consumers. The small entrepreneur has close contact with market needs.
  • Aid to Industrialization: By producing components required by large factories small firms enhance the industrialization process. Large firms may require components and supplies but sometimes management sees an advantage in having these components made not within its premises but by a number of independent artisans.
  • Self-Reliance: Small business can be an aid to personal and national self-reliance. This is because they utilize their resources; skills experience knowledge and capital for the benefit of themselves and the nation as a whole. They ensure a supply of goods and services within the reach of a great majority of the population. They employ labor-intensive technology for production purposes. Many use tools and machinery manufactured from scrap material. Such improvised tools are often very serviceable and specialized copies of expensive items.

Problems Faced by Small-Scale Business in Developing Countries

There are many problems that militate against small-scale enterprises in developing countries.

These are:

Capital: Gaining access to credit facilities is the greatest barrier of small-scale entrepreneurs as there are seldom institutional credit agencies to take care of their needs. Where such institutions exist, the small businessmen are not likely to satisfy the strict criteria for legibility generally used. The initial capital for the establishment a small industry may be small but many entrepreneurs do not get it easily. Too little money at a start means that the basic tools and equipment are not good and there are not enough funds for the day-to-day running of the business. These may constitute a major hurdle for the survival and growth of the firm. However, the shortage of capital may be over-emphasized as many businessmen will not employ their money wisely. Experience has shown that money is needed not so much for the running or expansion of the firm but for the fulfillment of extended family obligations, marriages, luxury and diversification of investment.

Management Problem: The success or failure of a small business depends solely on the business acumen of the proprietor since management and control authorities are vested on the managers. Most often the proprietor is lacking in technological and managerial knowledge as he has to combine in himself all the responsibilities and functions of management, production, sales, finance, and research. Furthermore, he may be uninformed about the right choice of industry or product the amount of capital needed, the economic size of the plant, the best equipment and material and the most efficient and effective production of the advantages new tools, raw materials, and production techniques. The large industrialist can afford to engage technical and management consultants to be able to adapt and make innovations to suit the changing requirements of the industry. Proprietor’s inability to supervise workers in order to make the best use of labor and materials and thereby increase productivity and improve upon quality products, their coercive attitude and the tendency to disperse efforts and attention, are some other major management problems found amongst small businesses in developing countries. The proprietors see his workers as his inferiors. His official reaction to workers protestor vent criticism is generally to interpret it as sabotage and calculated to wreck the organization most of the time.

Manpower: Closely associated with the management problem is the shortage of adequate trained manpower. While this is a common problem confronting the various sectors of the Nigerian economy, it presents special difficulties for small enterprises that have to compete with large firms for the services of skilled workers at the wag and terms of services they can’t afford to offer. The few small entrepreneurs that can afford better condition often do not see the rationale behind paying so much to employees. They hardly realize how much is lost due to the poor motivation of workers and poor management strategy. Under such a situation, they end up recruiting unskilled workers who they train on the job. A small firm has limited training facilities the entrepreneur must work with the control of less skilled, less talented workers with little or no education whose poor input account for the light unit cost of output and poor quality product.

Marketing Problems: As the entrepreneur has to combine a variety of functions, it is, therefore, apparent that he lacks the resources and qualification for efficient marketing. He cannot afford the cost of showrooms and display windows. He can neither keep in contact with distant market nor distribution agencies. At times he may have to sell his product to middlemen who advance him some credit at exorbitant interest rates. Scarcely does he knows of changing market trend to be able to make an appropriate adaptation in his product and may suddenly be caught up by a change in demand as a result. This leads to heavy losses because he is unable to make a timely and appropriate adaptation. For a product requiring after sale services, a small-scale industry faces a particular disadvantage. There are problems arising from the competitive nature of the market fluctuation in both prices and demand, and failure by the client to pay for and collect items they had ordered. Many small firms have the capacity to produce more if the market situation improves. The problems lie in finding sufficient market for their product or services.

Quality and Standard: Small entrepreneur is confronted with technical problems. Small entrepreneurs are generally unaware of the importance of standard and quality. They may not have facilities for the firsthand knowledge about standards. They lack the equipment for quality control and testing. They have neither the resources nor training to present their workers with proper consumer appeal.

Danger Signals in Managing Small Enterprises

The danger signs in business help the business owner to recognize the management problems in the early stage so that assistance should be sought early enough.

Such dangers can manifest in one or more of the following areas.

1. Customers

  • There is a danger if many customers visit the shop and eventually walk out of it without purchasing any good or service.
  • When old and regular customers stop visiting the shop.
  • If customers return more goods than they should because of complaints.
  • If sales are much below what it was the same month the previous year.

2. Goods

  • There is a danger if the shop has on display only old products.
  • If the display shelves and counters are dusty and unkept.
  • If the shop is crowded with goods that are not often requested for.

3. Buying and selling

  • There a danger if there is a scarcity of raw materials for production.
  • If there is a considerable decline in the demand for the manufactured products and the warehouse is full of slow-moving items.

4. Employees

  • This is a warning alarm if the employees appear indifferent and make customers wait unnecessarily.
  • If the employees look untidy and miserable.
  • If the salesperson has no knowledge of the product or service being offered.
  • If the customers complain and the employees are rude or show no interest
  • If the good employees of the business leave the enterprise to be employed by the competitors.
  • If there are too many mistakes by the employees.

5. Money/Finance

  • The business has a problem meeting the payment on loans.
  • If the business cannot breakeven as expected.
  • If the bank is reluctant to lend money to the enterprises.

6. Record Keeping

  • There is a danger if the business has no good books of records.
  • If the owner of the business uses the same bank account for business his personal expenses.
  • If the credit customers do not pay their bills on time.
  • If the gross profit is less than those of others in a similar business.
  • If the net worth of the business is decreasing.

Failures of small businesses can be caused by several factors which include fraud, neglect disaster, management incompetence plus other external impacts. A small business person operating in a certain locality is in a good position to adapt his or her business to the local circumstances.

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