Small is Beautiful: Micro Units as Venture Capitalists

There is enough evidence to support the hypothesis that a good number of medium or large firms within the informal sector have achieved their current market position through an expansion of previously tiny/micro and small business development centre firms. Such expansion implies that the units have grown qualitatively in terms of horizontal growth, vertical growth, diversification, and modernization. These are all mutually complementary, and their optimal mix makes a firm expand and grow. It also indicates that they have the qualities of innovation, entrepreneurship, and wealth-creation.

It is true that quite a number of micro, and even small units, fail to survive because of many factors essentially, their built-in risk aversion and the lack of sufficient demand for their products, and also because of government apathy and lack of support. But this should not be misconstrued to conclude that there are no units that get expanded to larger units, despite a variety of exogenous inhibiting factors. There are many examples to substantiate this. Many case studies of indigenous medium and large firms prove that a number of them have grown overtime in terms of qualitative growth. There are a few unique illustrations:

(1) One of the famous brand names in footwear in India, called Woodland, launched formally in 1993, and living up to international quality, and leading the market all over, has been the outcome of a small-little shoe shop in Ambala (Punjab, India) way back in 1954. Presently, it is one of the most famous large industries in shoe making in India;

(2) A small stationery shop in Delhi, opened in 1960s, started manufacturing a pen with a brand name of Luxor, and got converted to Luxor Writing Instruments Ltd. The dream of a small stationery shop, thus, became a reality in 1996;

(3) The largest selling Asian Paints in India had its origins in the 1940s, when during the Second World War, four young men had started manufacturing paint in a garage in Bombay. It is now known as the Asian Paints (India) Pvt. Ltd. Right now, their brand folio contains many products, and they are the market leaders with over 26 per cent share of the total paint market in India. Their sales in recent years have tremendously increased.

(4) The story of Omega begins in 1848 with a clock assembly workshop in La Chaux-de-Fonds (Switzerland). In 1979, it switched to manufacturing watches, and by 1889, it became the largest Swiss watch company with 600 employees and a production of 100,000 pieces. It went on expanding with time, and the Omega collection became one of the best in the world. Omega came to India in 1997.

(5) The company producing the Teachers brand of Scotch whisky started from a small cottage industry in Scotland, and has now become the largest selling whisky in the world;

(6) The history of the Goodyear tyres is also interesting in the sense that the patent of the vulcanized rubber was sold by Charles Goodyear to Charles and Frank Seilberling who founded the Goodyear Tyre and Rubber Company in Akron, USA. Today, this is the Worlds largest tyre company.

There are plenty of such examples. For instance, in the case of Sub Saharan Africa, where several entrepreneurs, assisted by the Africa Project Development Facility (APDF), began their small business development centre on an informal basis, gradually expanded to larger units. Some of the examples are:

(a) In Ghana an egg producer started with less than US$200, three chicken pens, and 900 day old chicks. He now employs more than 300 workers and has an annual turnover of more than US$1.5 million;

(b) A garment maker in Botswana started his business only with US$100 out of personal savings, a rented shed, and sewing machines, and just two apprentices. She now employs 65 workers and her annual sales are US$300,000;

(c) A Malawian left school at the age of 18 to work as a self-employed tobacco grader. Now he is the owner and managing director of four companies engaged in tobacco growing and curing, commodity processing and exporting, property investment, and importation of machinery. Annual turnover exceeds US$1 million; and

(d) A family-owned conglomerate in Ghana, which manufactures clothing, spirits, furniture, textbooks, and other educational materials and imports vehicles and equipment, grew out of a small dry-cleaning shop. A recent World Bank study on Ghana reports that from 1983 onwards, when policy reforms had stimulated economic recovery, the average employment level in the informal sector almost doubled to 6.6 workers, and the average micro-enterprise operating before 1975 was able to grow into a modern enterprise.

As we know, most of the tiny/micro units within the framework of informal sector in any given economy emerge on their own without the support of public authorities, and quite often with their disapproval. They are, in fact, characterized by ease of entry, reliance on indigenous resources, family ownership of enterprises, small business development centre scale operations, labour-intensive and adapted technology, skills acquired outside the formal school system, and unregulated and competitive markets. Relative to large-scale formal sector enterprises, they absorb smaller shares of total investment, and account for an appreciably larger share of recorded industrial employment. Despite debilitating restrictions frequently imposed by authorities, tiny/micro enterprises provide employment that can deem to be both efficient and profitable. These units are more labour intensive and more geographically dispersed and hence are more accessible to indigenous entrepreneurs and to the final consumers. Compared to large-scale formal sector, they have, on the one hand, higher output-capital ratio (capital productivity i.e., output per unit of capital) and, on the other, they have higher labour-capital ratio (capital intensity i.e., absorption of labour per unit of capital).

But unfortunately because of the government apathy, many of these units fail to survive for a long time, and their closing rate is high. They are invariably inhibited by a number of constraints relating small business development centre essentially to infrastructure, accommodation, marketing, availability of basic inputs like, labour, capital, and raw materials, finance, and also with risk aversion, and lack of additional demand. There are also difficulties imposed by government policies in terms of reforms, liberalization, on the one hand, and bureaucratic control and intervention.

Yet there are only a few exceptions where these units get out of their shackles, and expand themselves into larger units. The reasons for such expansion are both push and pull factors like: Entrepreneurship (shedding off risk aversion); Demand-based quality of products; Innovation; Wealth creation; Financial and other management skills; Effective organization capability; Optimal technique(s) of production; Perfect co-ordination of the factors of production; Input-output synchronization and competitive attitude.

In this context, Government support is very crucial. It strengthens both the push and pull factors. Consequently, the units take off to greater heights and that too in a shorter period.