Small and Medium Entrepreneurs in Southeast Asia 9789814376020

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I5EA5 Institute of Southeast Asian Studies The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The responsibility for facts and opinions expressed in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

I5EA5

INSTITUTE OF SOUTHEAST ASIAN STUDIES HENG MUI KENG TERRACE, PASIR PANJANG SINGAPORE 0511 REPUBLIC OF SINGAPORE

CABLE: ISEAS TEL: 7780955 TELEX: R 5 37068 I ISEAS

SMALL AND MEDIUM ENTREPRENEURS IN SOUTHEAST ASIA

by

Ronald Clapham in co-operation with Reiner Strunk, Heinz G.H. Schaldach, and Gisela Clapham

Translated by Horst E. Schneider and Linda Mayes

Research Notes and Discussions Paper No. 49 INSTITUTE OF SOUTHEAST ASIAN STUDIES 1985

Report commissioned by the Konrad Adenauer Foundation e.V. Bonn October 1982

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace P asir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. ©1985 Institute of Southeast Asian Studies ISSN 0129-8828 ISBN 9971-902-99-0

CONTENTS

Page INTRODUCTION

1

THE CONTRIBUTION OF SMALL AND MEDIUM ENTREPRENEURS TO SOCIAL AND ECONOMIC DEVELOPMENT Towards a Definition of Desired Development Contributions

6

Identification of the Entrepreneurial Contribution to Individual Objectives

7

Economic Efficiency Supplementing the Industrial Sector Supplementing Consumer Supply Use of Local Raw Materials Development of National Entrepreneurial and Managerial Manpower Resources Additional Capital Formation Economical Use of Capital Employment Effects Changes in Labour and Social Relations Regional Distribution of Development Effects Socio-political Development II

6

FACTORS WHICH PROMOTE AND INHIBIT THE DEVELOPMENT CONTRIBUTIONS OF SMALL AND MEDIUM ENTREPRENEURS: THE EXPERIENCE IN INDONESIA AND MALAYSIA Factors External to the Enterprise iii

8 14 21 23 24 27 30 34 42 52 59

69 70

Page General Economic Conditions and Specific Industrial Promotion Experiences in Indonesia Experiences in Malaysia Location Conditions Conditions on Markets Institutional Representation of Small and Medium Enterprises Internal Factors

III

70

72 80

95 97 101 104

Conditions of Management Personnel Situation Problems of Financial Control Technical Production Conditions Factors Having an Influence on Marketing

104 112 113 115 116

RECOMMENDATIONS FOR IMPROVING THE CONTRIBUTION MADE BY SMALL AND MEDIUM ENTERPRISES TO THE DEVELOPMENT PROCESS

119

Opportunities for Increasing Incentives and Reducing Obstacles in the Economic Environment of Small and Medium Enterprises The Basic Idea: A Minimum of Regulations with a Maximum of Freedom Improvement of the Information System in Economic Matters Integration of Small and Medium Enterprises in Self-governing Organizations in the Economy Removal of Obstacles to Obtaining Credit Improved Technical Advisory Services Promotion of Access to Sales Markets Removing Obstacles caused by Location Influencing Entrepreneurial Attitudes and Conduct through Training Provision Trainers Teaching Materials Initial and Continuing Training Programmes and their Sponsoring Institutions Efficiency Control BIBLIOGRAPHY iv

120 121 121 122 123 124 126 128

129 129 129 131 136 138

LIST OF TABLES

Page 1

2 3 4

5

6

7 8 9

10

Breakdown of Enterprises by Number of Employees, Indonesia and Malaysia

3

Delimitation of Small Enterprises in Selected Countries of South and Southeast Asia

4

Structural Differences between Indonesia and Malaysia

9

Enterprise Structure in the Manufacturing Industry in Indonesia (1974/75) and Malaysia (1978), excluding Cottage Industry

11

Indicators showing the Importance of the Manufacturing Industry in Selected Countries of Asia, 1978

13

Net Product Per Employee in the Manufacturing Sector, by Unit Size in Indonesia (1974) and Malaysia (1973)

15

Malaysia: Structure of the Manufacturing Sector, 1976 and 1978

18

Occuptional Background of Small and Medium Entrepreneurs in South Korea, 1973

26

Malaysia: Source of Initial Capital by Paid Full-Time Employment Size Group

29

Malaysia:

Assets Per Employee in the v

Page

11 12 13 14 15 16 17

18

19 20

Manufacturing Sector as a Function of Unit Size, 1976 and 1978

33

Breakdown of Employees in the Manufacturing Sector by Unit Size

36

Indonesia: Wage and Salary Structure in US$ (monthly data), Mid-1978

46

Wage Costs (average wages) in Indonesia, in Regional Comparison, as of Mid-1978

47

Malaysia: Wage and Salary Structure in Various Industries

48

Indonesia: Regional Breakdown of Industrial Enterprises and Population, 1974/75

55

Indonesia: Changes in the Regional Distribution of Industrial Enterprises, 1973-77

56

Indonesia: Regional Breakdown of Employment in the Manufacturing Industry, by Enterprise Unit Size, 1974

57

Malaysia: Regional Breakdown of Enterprises in the Manufacturing Sector, of Employees, of the Population, and Deviation from Per Capita GDP

58

Breakdown of Enterprises by Industrial Branch in Indonesia (1980), and Malaysia (1978)

61

Indonesia: 1974/75

63

Enterprise Age Profile by Unit Size,

21

Malaysia;

Type of Previous Job

65

22

Malaysia:

Highest Educational Level Achieved

66

23

Malaysia: Major Problems Facing Small Bumiputra Enterprises

71

Indonesia: Small Investment Credits (KIK), and Permanent Working Capital Credit (KMKP), 1977-81

76

Breakdown of EDP I, by States

91

24 25

vi

Page 26

The Most Important Reason for Entering Business, by Race

105

27

The Three Most Important Reasons for Entering Business, by Ranking

106

28

Analysis showing Level of Business Aspiration, by Race

107

29

Psychological Test Scores

109

vii

LIST OF FIGURES

Page 1

2 3 4

Malaysia: Breakdown of Work-force in the Manufacturing Industry, by Unit Size

38

Taiwan: Breakdown of Employment in the Manufacturing Industry, by Unit Size

39

Korea: Breakdown of Employment in the Manufacturing Industry, by Unit Size

39

A Schematic Diagram of MARA's Efforts to Create New Entrepreneurs

86

viii

INTRODUCTION

What is the actual and potential contribution of small and medium entrepreneurs in South and Southeast Asia to social and economic development in their countries? Which influences encourage or hinder their contributions to development? These two central questions will be investigated in the light of the activities of small and medium enterprises; in this investigation, observations relating to Asian developing countries (DCs) in general will be supplemented by an examination of the experiences gained in Indonesia and Malaysia in particular. The study is divided into three main sections: Identification of the contribution towards development Assuming that the aims of the development to which the small and medium enterprises could contribute are known, the extent to which they participate in the achievement of those aims can be empirically established and described in detail. Determination of the factors restricting and promoting entrepreneurial contributions to development Areas of influence will be circumscribed, particularly those which hinder or promote the activities of ente~prises in realizing the stated aims of development. - Recommendations for improving the contribution towards development Suggestions will be put forwdrd on how the contribution to development made by small and medium entrepreneurs can be rendered more effective, with. special emphasis being placed on the possibilities of promotion by nongovernmental institutions.

1

The investigation is confined to the manufacturing sector in view of the outstanding importance of this sector in the economic policy of developing countries. The two central questions raised will be answered with regard to this sector by way of example. The numerous and important contributions to development made by small and medium enterprises operating in the service sector (particularly in commerce and repairs enterprises), in the construction industry, and in the transport sector are not included within the scope of this study. It is possible to define the small and medium enterprise sector within the manufacturing industry in both quantitative and qualitative terms. A large number of enterprises in the manufacturing industry of a given country fall within the category of small and medium enterprises, if this is defined, for example, according to size of the work-force, amount of fixed assets, net value of the enterprise, or level of turnover. The developing countries vary in the features which they have adopted for the purpose of statistical differentiation of enterprise size and the selection of specific promotion measures. For our part, under "small and medium enterprises" we have grouped together enterprises which, in quantitative terms, conform with the system of differentiation used by the Biro Pusat Statistik for the 1974/75 industry census in Indonesia, and that of the Industrial Co-ordination Act 1975 in Malaysia (cf. Table 1). An overall view of other conventional distinctions used for special purposes (such as for small credits) in selected countries of South and Southeast Asia is provided in Table 2. In qualitative terms, the distinction lies in the fact that, in the small enterprise, there is no or only a relatively small amount of operational and administrative division of labour at management level -- the borderline case is the one-man management of the owner-entrepreneur -- and that close personal relationships exist between the entrepreneur and his work-force, clients, and suppliers. Conversely, in medium enterprises there is some internal division of labour; from a functional and institutional viewpoint, however, this is neither distinctly formal (as with job descriptions) nor informal. The method of investigation adopted here provides, firstly, for an analysis of national and international specialized literature, published and still unpublished, and also of statistical material. Secondly, it provides for some empirical enquiries which were conducted in July and August 1982 in Indonesia and Malaysia within the framework of numerous discussions with experts from international, governmental, and private institutions and universities; instructors from management institutes; participants in management courses, and forty small or 2

TABLE 1 Breakdown of Enterprises by Number of Employees, Indonesia and Malaysia

No. of employees 8 Enterprise Category Malaysiab

Indonesia

Cottage industry

1-4

1-4

Small industry

5-19

to 25 (5-19)

Medium industry

20-99

25 and over (20-99)

Large-scale industry

100 and over

(100 and over)

a In full-time employment. b The values in parentheses are those used for industrial surveys.

TABLE 2 Delimitation of Small Enterprises in Selected Countries of South and Southeast Asia Delimitation Criterion Country

domestic currency Bangladesh, 1950 early 1960 mid- 1970 1981

Indonesia Malaysia, 1975 1977 Philippines

Singapore early 1950 1981

Sri Lanka

Full-time work-force

Capital Assets in US$

max. 2,500 16,500 5,000 33,000 1 mio 66,000 165,000 2.5 mio (plant and machinery only) under 70 mio

112,000

under 250,000 under 500,000

100,000 200,000

under 50 under 50

between 100,000 and 1 mio

12,740 127,400

5-99

under 250,000 120,500 max. 2 mio 963, 855 (only industrial premises, machinery, plant and tools)

under 50

·max. 2 mio 110,000 (land, premises, machinery and plant) max. 1 mio 55,000 (only machinery and plant)

Thailand Southeast Asia"

under 2 mio

99,500

(mechanical capacity inferior to 50 hp)

max. 50 max. 50

* The delimitation for small and medium enterprises, according to the United Nations Economic and Social Commission for Asia and the Pacific.

4

medium entrepreneurs (predominantly in Indonesia). Unless otherwise stated, the data on Malaysia contained in the text refer to West (Peninsular) Malaysia.

5

THE CONTRIBUTION OF SMALL AND MEDIUM ENTREPRENEURS TO SOCIAL AND ECONOMIC DEVELOPMENT

Towards a Definition of Desired Development Contributions In an empirical investigation to establish and describe the actual contribution made by small and medium entrepreneurs to development, it must be known from the outset which section of the complexities of reality is to observed. Similarly, considerations about possible contributions to development presuppose the specification of what could or should be reached. It must therefore be established which values and contexts are being referred to when talking about development within a society. On analytical grounds, we propose a distinction between societal, social, and economic components. The societal objective in many South and Southeast Asian countries -- as indeed in Indonesia and Malaysia -- has been determined by a fundamental political decision to strive for a par 1i amentary-democrat i c sys tern with a mixed economy of the free enterprise type. This calls for efficient political and economic institutions as well as responsible individuals who are capable of actively organizing and operating them. Small and medium entrepreneurs can support societal development in this sense by their independent and autonomous action and activity. What is sought is a strong; dynamic, entrepreneurial middle class which is economically efficient, acts in a socially responsible manner and lends political support to the concepts of human rights and freedoms, liberal-democratic- social and governmental structures, and government by the rule of law. The social objective -- to set at least a minimum standard -is to ensure satisfaction of the basic material needs of the entire national population (that is, nourishment, clothing, accommodation, health care, and education). Entrepreneurs and managers in the private sector bear a social duty to contribute towards ensuring employment and income opportunities, a sufficient 6

supply of goods, better living conditions for the work-force, their families and those otherwise concerned with the enterprise. The economic objective is to deploy the national resources according to the principles of economics. If, politically, a decision has been made in favour of economic growth -- which is the case in Indonesia and Malaysia -- then the dictates of reason imply that efforts must be made to achieve the greatest possible accomplishments with the available means. Therefore, the general mandate of the entrepreneur (and the state) is to draw on all production factors (labour, capital, land) to ensure a maximum level of economic growth of the type which corresponds to the needs of the population.

Identification of the Entrepreneurial Contribution to Individual Objectives The following statements draw on the experience of entrepreneurial contributions to development: a small proportion of the experience drawn on here stems from industrial countries, while by far the greater part refers to developing countries, in particular Indonesia and Malaysia. Observations relating to modern economies can justifiably be included for two reasons (Staley and Morse 1965, p. 97): firstly, the factors which influence the viability of small enterprises in modern economies serve as an indication of the future possibilities of such enterprises in the developing countries; secondly, it is often only in extreme situations that the efficiency of an institution can be tested, that is, if small enterprises are found to be able to thrive amongst large enterprises in industrialized societies, then these small enterprises must obviously have specific qualities, and there must also be specific economic and technological factors which permit their continued existence. In spite of the significance which small enterprises bear in many respects in the social and economic development in the DCs, this sector of the economy and the possibilities of promoting it have not yet been intensively examined (Harper and Tan 1979, Introduction). The information presently available deals mostly with individual aspects such as financial or technical questions; very little has so far been published on the overall problem and integrated promotion measures. There follows a description of eleven outstanding contributions made to the development process by small and medium entrepreneurs; the sequence of their presentation does not represent any order of merit. Attention is drawn to the principal 7

impact of the contribution and also to the secondary effects provoked in other areas. The intention of the report is not to develop a one-sided, idealized, or indeed, negative, overall picture of the contribution of small and medium entrepreneurs. Rather, it is to shed light on the societal, social and economic effects which a society can expect if it opts, by authorizing and promoting private economic activities, to open up development opportunities for small and medium entrepreneurs. Two reservations must be made: firstly, DCs have dichotomized economies in the sense that in addition to the official (first) economy there is also a hidden (second) economy, the activities of which are concealed from the state for a variety of reasons (such as no business licence, avoidance of taxation, and social welfare contributions). This hidden economy is an especially prevalent feature of the small enterprise field; for the reasons stated above and also because of the well-known problems of data collection, the activities of this economy do not feature in statistics. Secondly, it must be borne in mind that each country is distinguished by a unique combination of conditions which precludes any generalized statements about the possibilities and limitations of entrepreneurial contributions to development. Five factors exert a particularly strong influence on the environment in which small and medium entrepreneurs operate (Staley and Morse 1965, p. 228): resource endowment, size of domestic market, level of income on the domestic market, industrial basis, and politico-social organization. These factors as they concern Indonesia and Malaysia are described in Table 3.

Economic efficiency Economic efficiency means the better utilization of available resources (labour, capital, raw materials), which results in an increase in production, real income, and the standard of living. One of the procedures best suited to this purpose is the establishment of a manufacturing industry, where production is organized in small, medium and large enterprise units. The enterprise structure of the manufacturing sector is shown in Table 4, broken down in accordance with the national distinction into small, medium and large units. The level of industrialization of a country can conveniently be expressed by the percentage of the gross domestic product (GOP) accounted for by the manufacturing sector. Admittedly, this sector constitutes only part of the total industrial sector, but it is generally the most dynamic sphere of that sector. In the 8

TABLE 3

Structural Differences between Indonesia and Malaysia

Structural features

1. Resources

Indonesia

population in millions (mid-1980) average annual population growth as 9~ (1970-78) civilian work-force (15-64 years) as % (1980) growth of labour potential as % (1970-80)

2.

Malaysia

146.6

13.9

2.3

2.4

57

2.1

56

3.0

4

adult literacy rate as % (1977)

62

60

gross domestic savings as % of the GDP (1980)

30

32

gross domestic investment as % of the GDP (1980)

22

29

average annual growth rate of gross domestic investment as % (1970-80)

14.4

10.3

Domestic market: geographical size in thousand km2

1,919

330

TABLE 3 (continued) Structural Differences between Indonesia and Malaysia

Indonesia

Structural features

3.

Domestic market: GOP per capita in U.S. dollars (1980) income level GOP per capita, average annual increase as % (1960-80)

4.

Industrial basis

430

4.0

GOP in millions of U.S. dollars (1980) 69,800 breakdown of GOP as % according to sector (1980): - agriculture - industry (total) finished products only

type of government

type of economy

*

1,620

4.3

23,600

26

24

42

37

(9)

(23)

32

39

- services

5. Politicosocial organization

Malaysia

republic

federal constitutional monarchy

guided market economy with a relatively high level of government activity

guided market economy with a medium level of government activity

figure relates to 1976

SOURCE: World Bank, World Development Report, 1981 and 1982.

TABLE 4 Enterprise Structure in the Manufacturing Industry in Indonesia (1974/75) and Malaysia (1978), excluding Cottage Industry

Malaysia

Indonesia Enterprise Structure

absolute

absolute

%

Small enterprises

48,186

87.2

1,437

31.9

Medium enterprises

5, 790

10.5

2,280

50.7

Large enterprises

1,301

2.3

782

17.4

55,277

100.0

4,499

100.0

Total

SOURCE:

%

World Bank, Indonesia, Vol. II (1979), p. 59; Department of Statistics (Malaysia), Industrial Survey 1978 (Peninsular Malaysia, Kuala Lumpur, 1981), p. 28.

countries of South and Southeast Asia, the indicators representing the significance of the manufacturing industries point to a considerable discrepancy in terms of industrialization level (cf. Table 5). In 1978, the manufacturing industry in Indonesia was developed to a much lesser extent than in the other countries, while Malaysia had already reached an intermediate position. From the point of view of the absolute size of the manufacturing sector, expressed by the net product (that is, gross production value minus outlays, depreciation, and indirect taxes, plus subsidies), Indonesia was ahead of Malaysia; however, in Indonesia the net product per capita was very low and in 1978 stood at only US$12.4 (1970 value), considerably lower than the figure for Malaysia (US$86.9) and the figures for the neighbouring countries. On the whole, the figures show a difference in the industrialization level prevailing in Indonesia and Malaysia, and this is a factor which must be considered when analysing the contribution of the small and medium enterprise sector. At this juncture it must be expressly pointed out that the industry statistics for Indonesia and Malaysia can only be considered to be of limited informational value. Most of the figures for Indonesia date back to the industry census of 1974/75; the results of the more recent 1g80/81 census have not yet been pub 1i shed. Ma 1ays i a has more up- to-date figures, but a recent World Bank report has established considerable deficiencies in the industry statistics (World Bank, Malaysia's Manufacturing Sector, Vol. III, 1981). The structure of the manufacturing sector in Indonesia is still characterized quite strongly by traditional agricultural and forestry-linked pursuits, particularly food-processing and handling, the manufacture of beverages, tobacco processing, and leather and rubber goods; in 1970, together with textile production, this category of goods accounted for 84 per cent of the total output of the manufacturing sector. At the end of the 1970s their share was sti 11 greater than 66 per cent (World Bank 1979, Vol. I, p. 5). The structure of the manufacturing sector in Malaysia (West Malaysia), on the other hand, has changed greatly since the late 1960s. In 1970, the four largest industries in the economy -measured in terms of net product -- were timber processing, beverages, tobacco, and rubber goods; these industries accounted at that time for 46.5 per cent of the net product of the manufacturing sector. In 1980 the four largest industrial sectors were: oil and fats, timber and timber products, drinks and tobacco, and foodstuffs; their share of the total net product of the manufacturing sector amounted to 45.3 per cent (fourth Malaysia Plan, 1981-85, p. 294). 12

TABLE 5 Indicators Showing the Importance of the Manufacturing Industry in Selected Countries of Asia, 1978

Net Product in Manufacturing Industry* Contribution of Manufacturing Industry to GDP (%)

Country

Indonesia Malaysia India Korea, Rep. Pakistan Philippines Singapore Sri Lanka Thailand

*

9 l7

17 24 16 25 26 23 18

Total in 1970 (US$ billion)

Per Capita in 1970 (US$)

1,671 1,103 8,973 3,934 1,757 2,334 707 346 2,101

12.4 86.9 14.5 109.3 24.6 53.9 307.4 25.1 48.9

Real Average Growth Rate in Net Product as (%) (1960-76)

7.6 12.0 4.4 18.8 6.9 7.0 14.1 5.0 10.8

These figures relate to 1976, not 1978.

SOURCE:

World Bank, Indonesia (1981), Annex I, p. 28, Table l, and p. 21, Table B.

The efficiency of the various enterprise unit sizes can be seen from the figures presented in Table 6, which shows the productivity per man-hour worked. In Indonesia and Malaysia, net productivity per employee in the manufacturing industry rises sharply as the size of the enterprise increases. It is noteworthy that, in Malaysia, even the small enterprises show a relatively high productivity rate per employee, this being in total contrast to the situation in Indonesia. fn the category of medium enterprises, (up to 99 employees) too, productivity is higher in Malaysia; this fact, on the whole, is a consequence of the level of industrialization, which was already higher when the data were compiled in 1973. Endeavours to determine the contribution made by small and medium enterprises to increasing economic efficiency tend to overlook the fact that these also provide the irreplaceable contribution of discovery: it is well known that in any society knowledge and skills of an economic and technical nature are widely scattered. Particularly in the DCs, very little information is available (for example, in the Ministry of Industry or a large enterprise) on the knowledge and skills potential within the country. Therefore, methods must be used which help to utilize the development potential as fully as possible. Thus, all potential for technical, industrial/entrepreneurial and commercial experiments .nust be activated: as many people as possible must be involved in making optimal use of local know-how, skills, ideas, raw materials, and other factors of production. By these methods it can be "discovered" which products and production processes are possible in any given society. Using traditional, local know-how can also contribute greatly to improving employment possibilities in export-oriented industries if such know-how is used to introduce new technology among the national producers. In South Korea, for example, traditional experience with the basic production technology for non-synthetic yarns and materials served as the basis for the swift development of a modern textile industry processing synthetic raw materials; a further example is the production of plywood (Westphal, Rhee and Pursell 1981, pp. 45-52).

Supplementing the Industrial Sector An increasingly efficient industrial sector of an economy requires small, medium and large enterprises in the manufacturing industry. The principle derived from experience is that of complementarity according to which speci~ic functions in the field of supply: production, sales, techn1cal development, and maintenance and repair can best be fulfilled by enterprises of differing sizes. 14

TABLE 6 Net Product Per Employee in the Manufacturing Sector, by Unit Size in Indonesia (1974) and Malaysia (1973)

Malaysia

Indonesia

Rupiah ( '000)

in relation to average

M$

in relation to average

5-9

135

0.29

4,385

0.60

10-19

191

0.41

4, 781

0.65

5,656

0.77

312

0.67 6,460

0.88

9.138

1.25

9,501

1.30

9,942

1.36

Work-force

20-29

J

30-49

508

50-99

J

100-199

680

200-499

1.09

1.47

500 and aver

956

2.06

8,677

1.19

Average

464

1.00

7,318

1.00

SOURCE:

World Bank, Indonesia, Vol. II (1979), p. 116, Table lOA; World Bank, Malaysia, Val. I (1976), p. 33, Annex Table 2.6.

Large enterprises in the DCs have a strong tendency to incorporate as many primary and intermediate products as possible into their production programmes. This partly explains their relatively higher fixed overhead costs and unit costs and, by extension, their lower efficiency in comparison with the industrial countries. However, situations can arise in which, as a result of import restrictions or inadequate domestic supply, a shortage of specific primary and intermediate products on the domestic market could endanger the operation of a large enterprise and render necessary domestic production. However, far more frequently this tendency is governed by the fact that those responsible for decision-making in the field of development pol icy underestimate the macro-economic significance of the complementary contributions of small and medium enterprises. Accordingly, it must be stressed that large enterprises need small enterprises on economic grounds as suppliers (for example, on the basis of subcontracts) and purchasers of products and in many service capacities (such as maintenance, repair, cleaning). Thus, an efficient small and medium enterprise sector can contribute to the economic efficiency of large enterprises. The presence of well developed supply industries for semi-manufactures and tools, and of maintenance and repair enterprises can -- as experience in Singapore shows also serve to stimulate additional foreign investment (Tan Thian Soon 1977). An impression of the significance of the small and medium enterprise sector can be obtained from an analysis of the industrial structure according to unit size, and an analysis of the concentration of small and medium enterprises within the various industrial subsectors. In the case of Indonesia, detailed data exist on the structure of enterprises in the manufacturing sector in 1974. These report a total of 1,289,788 business units, of which by far the greater fraction belongs to the category of cottage industries (1-4 employees) -- namely 1,234,511 units, or 95.7 per cent of the total. The remaining 55,277 units can be divided among different enterprise sizes, as illustrated in Table 4. It must be emphasized at this point that the figures in the official statistics present an incomplete picture of the actual number of enterprises in existence. The record is very fragmentary, especially in the sphere of small enterprises since a large number of these are not registered with any official authority. Thus, at a symposium in 1978 the chairman of the Indonesian association of enterprises (KADIN) was able to report that there were approximately eleven million small enterprises. In the province of Central Java alone, a survey conducted in 1976 16

reported the existence of more than 280,000 craft and other small enterprises with approximately 400,000 employees. More recent data exist on Malaysia concerning the structure of the manufacturing sector in 1978. They record a total of 4,499 enterprises in this sector of the economy, 30.1 per cent of them being small enterprises; 50.7 per cent medium enterprises; and 17.4 per cent large enterprises (cf. Table 7). If, in the case of Malaysia, one defines small and medium enterprises as being those employing between 5 and 99 employees, then this group would comprise 3,717 enterprises (accounting for 80.8 per cent of all enterprises in the manufacturing sector, 26.2 per cent of the gross turnover, and 30.8 per cent of the work-force in this sector). The traditionally one-sided concentration of small enterprises on a few areas of industry is a further feature which warrants attention. Of the total of 48,186 small enterprises in Indonesia in 1974, more than 70 per cent were concentrated in only four industries: foodstuffs, 46.8 per cent; textiles, 9.6 per cent; brick and clay products, 8.6 per cent; and timber and timber products, 6.7 per cent. The medium enterprises, too, are concentrated heavily in a few, albeit different, branches of industry. Of the total of 5,790 medium enterprises in Indonesia in 1974, more than 70 per cent belonoed to five industries: textiles, 28.8 per cent; foodstuffs,- 22.6 per cent; tobacco processing, 9.5 per cent; rubber goods, 5.7 per cent; and timber products, 4.8 per cent. This small and underlines industrial

breakdown is a clear indication of the efficiency of medium enterprises in certain areas of production and the complementary nature of their contribution to the sector in general.

This contribution can be even more precisely delimited if the fraction of the net product of the manufacturing sector accounted for by these areas is established. In 1974, small enterprises in Indonesia generated 10.2 per cent of the net product of the manufacturing sector, wh i 1e the medium enterprises accounted for 18.7 per cent, and large enterprises, 71.0 per cent. However, if one analyses the fraction of the net product accounted for by the various branches of industry, it appears that it is the small and medium enterprises which have the highest fractions, amounting together to more than 50 per cent. Examples of net product by industry are shown below. If one looks to empirical research from the United States, one finds that among 109 industries in the modern industrial

17

TABLE 7 Structure of the Manufacturing Sector, 1976 and 1978

Malaysia:

Unit Sizea by number of employees

No. of Enterprises

Gross Turnover

Work-force

as %

as %

as %

Composition of Work-force, as % of Family Members

Full- Time Staff

Part-Time Staff

1976

1978

1976

1978

1976

1978

1976

1978

1976

1978

1976

1978

Small enterprises (5-19)

29.6

30.1

3.1

3.1

4.7

4.6

41.7

45.9

4.2

4.2

8.5

6.6

Medium enterprises (20-99)

50.9

50.7

22.5

23.1

26.8

26.2

53.2

50.3

26.3

25.6

49.6

49.1

Large enterprises ( 100 and over)

17.4

17.4

74.3

73.8

68.4

69.1

2.2

1.3

69.5

70.2

41.7

43.9

Totalb

97.9

98.2

99.9 100

97.1

97.5

99.8

99.6

99.9

100

100

100

a It is not possible to distinguish between small and medium enterprises using the 24-employees criterion, given the size categories used in industrial statistics. b Deviations from 100 per cent are the result of the non-inclusion of cottage industry. SOURCE:

Department of Statistics, Industrial Surveys 1976 and 1978, Vol. II (Kuala Lumpur, 1981).

Small enterprise fraction

Industry

Medium enterprise fraction

Clothing

59.5%

33.4%

Leather and leather goods

19.4%

40.9%

Timber and timber products

28.9%

22.9%

Furniture

66.8%

19.0%

Printed materials

21.5%

39.6%

Plastic articles

15.2%

44.7%

Pottery

28.6%

60.7%

Tiles

61.4%

33.4%

SOURCE:

World Bank, Indonesia (1979), p. 122, Table 16A.

sector of the economy small enterprises (those with less than 100 employees) have generated at least 50 per cent of the net product of these industries (Staley and Morse 1965, p. 107); those warranting particular emphasis are food production and garments and, of less importance, printing, timber and timber products, stone and clay products, and machinery. Obviously, economic and technical circumstances exist which favour the operation of small and medium enterprises. They can be classified into three groups (Staley and Morse 1965, p. 112): 1.

Influences of location a) b)

2.

businesses which use raw materials which are spread over the region products with local markets and relatively high transfer costs

Influences of the production process a)

separable processing stages 19

b) c) 3.

craft or precision handling simply assembly, blending or finishing work

Market influences a) b)

product differentiation with low, cost-effective production volumes production for small, undifferentiated markets.

The complementary nature of the contribution made by small and medium enterprises to overall industrial development changes in the course of time. There are sharp fl uctu at ions within the group of small enterprises. According to international reports, the failure rate of newly-formed enterprises in the first three years of existence stands at 50-75 per cent. Only 10-20 per cent of enterprises are still in existence in the fifth year after establishment. On the one hand, such fluctuation effects a macro-economic loss in terms of fixed assets which are no longer used, and of lost work-places, but on the other hand, it is reasonable from the overall economic viewpoint since, assuming fair competition, such fluctuation leads to better deployment of capital, labour and innovation capacity to the effect that the performance capacity of the economy slowly increases. The overall result is that of a change in the relationship between small and medium enterprises on the one hand and large-scale enterprises on the other. There is a shift in the relative share accounted for by the individual unit sizes in the various branches of industry; small and medium enterprises are now also actively engaged in "modern" sectors of industry. Thus, in the past ten years small enterprises in Malaysia have become more active in economic areas such as metal casting, welding, printing, equipping rubber plantations, vehicle repair, and so forth (Fourth Malaysia Plan 1981-85, p. 297). These are indications that in the course of economic development the inter-industrial division of labour is increasingly being replaced by intra-industrial specialization. The small and medium sector contributes towards improving economic relationships between and within industries, both upstream and downstream in the various sectors. Industrial integration also increases through the award of commission work, and specialization becomes more marked; for example, specialized enterprises take over the product finishing process. Industrial sector studies can define these correlations in detail. A study on the metal-working industry, for example, shows that in Malaysia, where a higher standard has already been achieved in the manufacturing sector, more small and medium enterprises are involved in subcontract work than in Indonesia (Technonet 1981, p. 13). 20

Supplementing Consumer Supply Consumer goods markets in the DCs are limited by two factors. Firstly, low average incomes restrict the market for both traditional and new products. Secondly, the already restricted domestic market is segmented by inadequate transport possibilities and high transport costs. A further factor 1imiting the markets in both industrial and developing countries is the very specific type of demand, as can be observed particularly in the case of foodstuffs and garments. Here, there are many small submarkets, very limited in volume, and frequently existing only at the local level, that is, in one village or in one urban district. The implication of this fact at the manufacturing level is that often only low production capacities are required to cover the entire consumer demand. Small enterprises are particularly suitable for providing these production capacities. They have easy access to and high possibilities of survival on the markets concerned, where the cost advantages of mass production are not, or only scarcely, relevant. This is the case with a very broad range of products which express differences in consumer taste; this type of product needs to be manufactured in only small quantities. If these products can be produced using relatively simple manufacturing processes (such as using little machinery), the cost disadvantages entailed by small production val umes are scarcely or not at all noticeable. A further contribution made by small enterprises to the consumer market concerns product quality. Owing to the low average incomes, it is usually the consumer goods of very simple quality which are in demand (such as shoes, clothing, furniture). These basic requirements can be satisfied by small enterprises in particular, which usually produce products of simple quality although their products can indeed cover a wide range. For low-income consumers it is important to have a low-cost supply of the desired low-quality goods. Consequently, it can be stated that small enterprises make a very important contribution towards keeping down the cost of living for the lower-income groups. Furthermore, small and medium entrepreneurs have a very precise knowledge of local and regional markets. They produce not so much for an anonymous market as for a clientele with whom they are connected on a personal 1eve 1 and by virtue of a network of social integration. Usually they know the income position and requirements of the families in their neighbourhood so well that they are able to adjust their supply to suit the wishes of their consumers. Generally speaking, thus, small and medium enterprises contribute greatly to ensuring consumer sovereignty. Local and regional markets can absorb products of varying 21

qualities and prices, and therefore, they offer many opportunities for enterprises of all levels of efficiency. The smaller producers in Indonesia operate predominantly in very localized markets and sell their products directly to the consumer. For the producer, this implies a "forward-integration" process in trading and transport activities which makes economic sense when small production volumes and fragmented markets are involved. For the consumer, the advantages lie in reduced transport costs and profit margins (World Bank, Indonesia, val. I, 1979, p. 23). One of the often emphasized advantages of small and medium enterprises is their adaptability in response to changes in the procurement and sales markets. The experiences gained in Indonesia and Malaysia are contradictory. On the one hand, there are small and medium enterprises which are indeed in a position, as far as product material, processing and design are concerned, to respond to new consumer wishes or to modify products on their own initiative. Impressive examples are found in both Indonesia and Ma 1ays i a in the meta 1-work i ng industry (as a modern sector), in which, on the basis of photographs, brochure specifications, or simple hand drawings, small enterprises can produce quite new products. The same observations can be made concerning small furniture manufacturers who nowadays, in the same way, a 1so work with synthetic materials. On the other hand, there are also many cases of small enterprises c 1i ngi ng to unaltered products, manufactured on the basis of old, traditional techniques, and no longer being able to sell these because they have been ousted, for reasons of both price and quality, by new producers-- even medium and large enterprises. Here, there are evidently obstacles to the necessary adaptation process; these will be examined in detail in Chapter 3. Generally speaking, however, the many positive examples of successful adaptation to changes on the procurement and sales markets can support the conclusion that there exists among small and medium producers a widespread ability and willingness to adapt. Small and medium entrepreneurs have so far only made a small contribution to upgrading the level of consumer protection. The negative factors at play here are: a lack of consideration of and action regarding product safety, a lack of operating instructions for using equipment, inadequacies in maintaining quality standards and proper product labelling. 22

The numerous street traders play a very important role in supplementing the supply of consumer goods. They constitute a closely-woven distribution network for foodstuffs and other consumer goods, especially in urban regions. The advantage for the consumer of these distribution paths lies in possible savings on transfer costs and in the convenience of being able to purchase goods at almost any time and in very small quantities. The importance of the street traders' turnover for the producers is often underestimated. An example from Indonesia can illustrate this importance. A study on street traders operatinq in Jakarta in 1979 estimated their number to lie between 30/40,000 and 60,000; the traders' daily turnover at the time lay between RplOO and RplO,OOO, with an average figure of Rpl.742 (Atma Jaya If the average daily turnover is Research Centre 1979). multiplied by the figure of 50,000 traders and this is converted to U.S. dollars (US$1 = Rp625), the volume of turnover would amount to approximately US$140,000 daily, and US$4.2 million monthly. This simple example of the market in Jakarta clearly shows the magnitude of turnover via small traders. Thus, for producers of consumer goods, it is not only direct sales and sales through retail shops, but also sales via many small traders which constitute very important market outlets. Production enterprises, therefore, need small commercial enterprises in order to secure a better market for their products. Use of Local Raw Materials One advantage of small and medium enterprises in the manufacturing sector which is often claimed is the fact that they use relatively few imported raw materials, but procure the necessary inputs from the domestic market. Referring to local influences we have already pointed out that small and medium industries are to be found operating in fields of production which handle and process raw materials available locally or regionally. The processing lessens the weight and volume of the original raw material and makes it easier, hence cheaper, to transport. Examples in this connection include condensed milk, milk powder, animal and vegetable fats, and sawn and pre-processed wood. The processing activities take place in the neighbourhood of the raw material sources. Another activity in which locally available raw materials is used is the recycling of industrial and other waste products. In the DCs, it can generally be observed that used paper, cardboard, textiles, glass, iron, and other materials, are gathered for recycling purposes. The activity of small and medium enterprises in the collection and re-utilization of such raw materials makes a contribution towards ensuring that these materials are not lost to the economy. 23

In this context it is expedient to point to the important economic linkage between small enterprises and activities in the informal sector. Many of the preliminary activities and also the repair and maintenance services needed by small enterprises, usually in small quantities and simple quality, are provided by the very small businesses in the informal sector. Typical examples are the collection and screening of industrial, commercial, and household waste and its preparation for recycled use. Further services include the repair of vehicles in backstreet workshops, and building and masonry work carried out by "one-man businesses". There is, therefore, evidence to support the theory that economic advances in the small and medium enterprise sector imply parallel advantages for the informal sector. Nevertheless, some raw materials required by small and medium enterprises have to be imported. A study on South Korea (1969) shows that the manufacturing sector as a whole obtained a total of 23.5 per cent of its raw materials from abroad, with the percentage of raw materials imported by small enterprises lying between 8 and 15 per cent, that by medium enterprises between 33 and 41 per cent, and that by large enterprises at 43 per cent (Ho 1980, p. 20). In the case of South Korea, the relatively high amount of imported raw materials is largely conditioned by the export production in the small and medium enterprise sector. Since the individual small producer consumes only very small quantities of raw materials, and has no direct access to the wholesale trade in industrial waste, raw materials or imported products, he is often dependent on a string of middlemen for his supplies. His average purchasing price is, therefore, considerably higher than that paid by the bulk purchaser, a fact which results in an increase in his production costs. Development of National Entrepreneurial and Managerial Manpower Resources Generally speaking, the small and medium enterprise sector is a macro-economically irreplaceable institution for promoting the formation of human capital. We shall now proceed to examine this contribution as it concerns the managerial sphere; its significance concerning the work-force at skilled worker level, will be addressed in due course in connection with the employment effects. Economic growth in the DCs requires an increasingly large number of persons who display the qualities of personal initiative and a talent for leadership, coupled with an ability for organization and management. A very important contribution made by the small and medium enterprise sector as a whole consists in 24

opening up ways for suitably motivated and competent individuals to advance as independent entrepreneurs and managers. The issue at stake here is to direct nationals towards new and expanded economic activities. Empirical investigations into the occupational history of small and medium entrepreneurs show again that a high percentage of them first gathered specialized knowledge and experience in the same or a similar branch of the economy. In South Korea, for example, 32 per cent of all new entrepreneurs had previously been employed in the same branch of the economy (cf. Table 8). This also corresponds to the information compiled in Malaysia where, of a total of 821 bumiputra entrepreneurs, 41.6 per cent had acquired their knowledge from former work in the same branch of the economy (Ghani et al. 1980, p. 27). These numerous small enterprises can be regarded as training places for acquiring practical experience in making economically sound decisions on technological and commercial matters. The modern economic sector differs from the traditional sector in that it requires four skills in particular, which the new entrepreneurs must learn: 1) planning, 2) product and product design, 3) production technology, and 4) techniques of corporate organization and management. One important contribution made by small enterprises is that, compared with med i urn or 1arge enterprises, they open up training possibilities for more individuals from all social strata throughout the entire country. This initiates a process whereby human capital is developed on a broad basis. At the same time, small enterprises also provide a practical test situation which ultimately shows up which individuals would make good entrepreneurs or managers. Small enterprises, therefore, constitute an important societal institution for the training and selection of executive personnel, not only for activities within the economy (for example, in large private and public enterprises), but also for social and political positions. Small enterprises already fulfil these functions in all the DCs; their contribution could be strengthened, however, if the barriers to access to entrepreneurial activities were lowered (for example, adequate access to capital, technical counselling, improvement of business know-how), and the selection process were governed by the pr inc i p 1es of fair competition. From the macro-economic viewpoint, this process of selecting 25

fABL£ 8

Occupational Background of Small and Medium Entrepreneurs in South Korea, 1973 (In per cent)

Formerly occupied in/as

Breakdown by unit size (No. of employees) Total

5-9

10-19

20-49

32

33

35

25

0-5 years

( 5)

( 5)

( 6)

( 5)

5-10 years

(13)

(13)

(13)

( 9)

10 years and over

(14)

(15)

(16)

(11)

Enterprise in a different line of business

16

16

15

22

Family business

20

18

Merchant

20

18

22

24

Civil service, police, and military service

12

12

11

10

4

4

7

Same line of business

Others

SOURCE:

Sam P.S. Ho (1980), p. 82.

26

11

and training managerial personnel is a sound one insofar as the costs are borne predominantly by the private sector and are also widely distributed over a long period of time and a large number of people. The national budget is burdened only insofar as public funds are used to finance loans for the establishment of enterprises and for training and technical consultancy services. Only scant research has so far been conducted to determine which type of enterprise is best suited for the training of entrepreneurs and managers. It cannot be assumed that all products, production technologies and corporate management techniques p1ace equ a1 demands on the 1earner and can thus serve as comparable test cases. Staley and Morse refer to an empirical study according to which the metal-working industries fulfil a key function in providing high quality training (Staley and Morse 1965, pp. 232-34). Here, there is a relatively strong need for specialization and for fostering complementary business relationships. Accordingly, if an enterprise of this type is to be successfully managed, broad-based technical ancr commercial knowledge and skills are required. Repair and maintenance enterprises (such as for engines and electrical appliances) could have a similar significance, since here, too, relatively high demands are made with regard to division of labour, technical knowledge, and customer services.

Additional Capital Formation One of the most important contributions made by the small and medium enterprise sector is the additional formation of capital which it introduces into the national economy. After having examined the formation of human capital in the foregoing, we shall now address the subject of the formation of real capital. This effect results from the trend manifest among small, and also to some extent medium enterprises, to finance their corporate investments less from loans from finance institutions than from their own savings, the reinvestment of profits and from loans taken out in the informal finance market. A further advantage of this behaviour trend lies in the fact that a formation of capital process takes place within the national economy even when its financing institutions are only slightly developed. By these means, sources of finance can be tapped which are not normally reached by banks, savings banks, credit co-operatives and other finance institutions, nor by large enterprises or the tax collectors. In addition, with the intention of safeguarding their continued existence, small and medium entrepreneurs have a strong tendency to invest any savings directly, that is, funds are deployed productively which in other 27

circumstances might be used for consumption purposes. Here too, therefore, there arises an additional capital formation process used for productive purposes. Although it can be expected that a well organized banking system, represented throughout the entire country by suitable institutions, can similarly open up new sources of capital by guaranteeing attractive real interest and security, in many DCs finance institutions are not yet in a position to do so for various reasons. Accordingly, there are grounds to support the central statement that, irrespective of the efficiency of the formal financial sector, small and medium enterprises can open up additional sources of capital. When establishing an enterprise and during the initial stages of development, it is typical for the small entrepreneur to use his own savings and loans from his family and friends to finance the necessary fixed assets and operating expenses. Thus, the money is derived primarily from commercial and agricultural incomes. Very often, the establishement of an enterprise is supported by loans of goods and equipment from suppliers. Recourse is had to professional money-lenders, less for the initial financing than for bridging financial gaps after commencing ooerations. In Indonesia, a large number of small producers choose to proceed in this manner, because despite very high monthly interest rates of between 10 and 30 per cent, they value the great flexibility and simplicity (for example, no securities, no documents) of this informal credit market (Ropke, 1981, pp. 269-71). If the entrepreneur manages his business successfully for a lengthy period of time and thereby proves his credit worthiness, the circle of individuals, firms and credit institutions who are prepared to finance equipment and operating expenditures increases. Empirical results from Malaysia support this statement: of a total of 871 bumiputra enterprises, the establishment capital for 41 per cent of them came exclusively from personal means, while 16.5 per cent of them raised capital from the family, but only 3 per cent borrowed from credit institutions. The expansion of an existing enterprise presents an entirely different picture: the capital needed for this comes, in 36 per cent of the cases, exclusively from credit institutions; for 6 per cent of the cases from personal and family means, and for the remaining 58 per cent from various sources (Ghani et al. 1980, pp. 54-55). If the source of the establishment capital is broken down according to the size of the enterprise then, as an analysis of 399 enterprises in the manufacturing sector in Malaysia in 1974 shows, it is clear that small enterprises are virtually completely dependent on personal and family capital (cf. Table 9). At the time of establishment and during the first years of operation, the 28

Malaysia:

TABLE 9 Source of Initial Capital by Paid Full-time Employment Size Group (In per cent)

Paid Full-time Employment Size Group

SOURCE:

Own

Family/ Relative

Friend

Commercial Bank

Other

Total

0-4

81.7

11.2

4.9

0,3

1.9

100.0

5-9

74.0

17.2

6.1

0,1

2.6

100.0

10-19

77.9

11.7

10.4

-

-

100.0

20-29

86.5

3.3

1.4

-

8.8

100.0

30-49

71.5

16.6

7.6

0.6

3.7

100.0

50 and over

55.8

9.5

4.8

6.0

23.9

100.0

Average

74.5

11.6

5.9

1.2

6.8

100.0

Chee Peng Lim (1977), p. 22.

closeness of the business partners (family connections, friendships, direct and indirect business relationships) seems to be a factor which, for the borrower, scales down the assessment of risk and reduces the administrative costs of the loan. Close relationships of this type do not exist between a new enterprise and the institutions in the formal financing sector. In addition, despite its relatively high interest rates, the informal credit market obviously offers a number of advantages for the small entrepreneur. These include speed and simplicity of financial transactions, very flexible security requirements, and confidentiality. The institutions of the formal financing sector cannot compete in these respects. Few indicative reports and estimates exist concerning the volume of the informal finance market in the DCs. In Indonesia, its volume is estimated to approximately equal 50 per cent of that of the formal national financial market, that is, an amount of US$1,750 million (World Bank, Indonesia, Annex 4, Financial Policies for Industrial Development, 1981, p. 23). Indonesia was able to bring about a marked expansion in its gross domestic savings (expressed as a percentage of the gross domestic product) from 8 per cent in 1960 to 30 per cent in 1980. In Malaysia, gross domestic savings for the same years were 27 and 32 per cent- (World Bank, World Development Report 1982, pp. 124-27).

Economical Use of Capital One macro-economic advantage of small enterprises, and to some extent of medium enterprises, too, is often perceived in the fact that they deploy their capital relatively economically. Small enterprises are reported to need, on average, only 25 per cent of the capital required per work-place, compared to larger enterprises. Assuming that there is a scare i ty of cap it a l in a given economy, it is always an advantage to produce the maximum amount of goods and create the maximum number of jobs per unit of capital invested. Nevertheless, controversy still prevails concerning whether this advantage exists at all, and if so, whether or not it is of significant effect. This critical pas it ion is supported by a large number of arguments based on empirical evidence obtained in the DCs. For instance, it may be that the relatively small amount of machinery available is used irregularly and uneconomically (for example, low capacity utilization through working only one shift, a shortage of spare parts, and so forth), thus implying that the capital costs per production unit are higher than in capital-intensive, 30

well-organized enterprises. Or, the operating capital, reported as being relatively low, is still too high because of the cost of storing raw materials and finished products -- excessively high in relation to production costs -- so that once again the capital costs are not necessarily lower than in large enterprises. For purposes of assessing capital savings or capital intensity, therefore, it is advisable not to link the capital with the enterprise size but instead to consider the product or the production technology concerned (Staley and Morse 1965, p. 240). Deploying capital economically in production and in the creation of new work-places is a duty incumbent on enterprises of all sizes throughout the entire economy. The claim that small enterprises, and sometimes medium enterprises too, are particularly successful in this respect evidently presupposes numerous opportunities for economical capital management. These include: investment requirements with a brief maturation period, allowing for a briefer lead-up time to production; the use of second-hand machinery and tools; and avoidance of large-scale capital misplacement and wastage which can arise from ill-advised decisions on major projects. The need for small enterprises to economize on capital is imposed not only from the viewpoint of costs (interest and administrative costs on loans), but also from the viewpoint of returns. Most small enterprises have to depress their overheads (cost of production site and premises), in order to arrive at costs with which they can compete on the market. An analysis of factor intensities in the manufacturing sector in Indonesia (1976), according to the two major categories, capital intensity and labour intensity, revealed a number of industries which could quite clearly be assigned to these categories (World Bank, Indonesia, Annex 1, The Structure of the Manufacturing Sector, 1981, p. 16, Table 30). Capital-intensive Industries

Labour-intensive Industries

beverages

textiles

industrial chemicals

clothing

rubber

timber 31

Capital-intensive Industries

Labour-intensive Industries

cement

furniture

steel

printed goods

electric appliances

building and roofing tiles other non-metallic products capital goods (excluding electrical machinery and transport equipment).

In the following, two indicators will be taken to illustrate relative capital economies in small and medium enterprises. The figures referring to capital costs per work-place in the countries of South and Southeast Asia vary very greatly, both between the various unit sizes and within these size categories. According to World Bank studies, small businesses (defined here as having fixed assets of a maximum of US$250,000) are less capital-intensive. For India (1965-73), the value obtained was US$278 per work-place, while for the Philippines it was US$1,020 (1970). The figures obtained for medium enterprises in these two countries were US$557 and US$2,850, and for large enterprises US$2,450 and US$8,000 respectively (International Labour Organization 1979, p. 64). For Malaysia, Table 10 presents a breakdown of fixed assets per full-time employee according to unit size. A comparison between the 1976 and 1978 figures reveals a general increase in average fixed assets; that is, there exists a general trend towards higher capital-intensity. In overall terms, small and medium enterprises clearly have a lower capital outlay per employee. Sector studies, too, reveal considerable discrepancies. The average relation between capital and labour units in small and medium metal-working enterprises is US$1,845 in Indonesia, and US$7,028 in Malaysia (Technonet Asia 1981, p. 10). In Indonesia, the ratio increases as the number of jobs increases from 5 to 99 -- that is, during the transition from a small to a medium enterprise -- and it decreases as the number of employees increases from 100 to 199 -- that is, during the transition to a large enterprise. In Malaysia, the same line of development could be identified, though for different sizes of employee groups. Here, the capital/labour ratio was found to increase as the number of employees increases from 5 to 50, and to decrease as the number of employees increases from 51 to 199. Another indicator is capital productivity. Here, the figures show more favourable results for the l ar9e enterprises. In the metal-working industries in both Indonesia and Malaysia, capital productivity was highest in enterprises with a work-force of between 100 and 199. 32

Malaysia:

TABLE 10 Assets per Employee 8 in the Manufacturing Sector as a function of Unit Size, 1976 and 1978 Assets per employee 197Bb

l976b

No. of Employees M$

US$

M$

US$

5-9

6,475

2,549

10,119

3,984

10-19

6,627

2,609

7,456

2,935

20-29

7,409

2, 917

8,293

3,265

30-49

8,991

3,540

9, 746

3,837

50-99

ll, 490

4,524

13,121

5,166

100-199

15, 515

6,108

15,928

6, 271

200-499

16,839

6,630

18,110

7,130

500-999

20,355 8, 845

8,014 3,482

16,565 11,748

6,522 4,625

8

In full-time employment.

b

Exchange rate:

SOURCE:

US$ = M$2.54 (Ringgit).

Department of Statistics, Malaysia (1976), P• 30, Table 1.5; ibid., (1978), p. 28, Table 1.5.

Employment Effects More than 75 per cent of all employment outside the agricultural sector in the DCs is provided by small enterprises in the manufacturing sector, commerce, and the remainder of the services sector. Small and even medium enterprises are being given particular support because they are believed to represent a rapid and direct means of creating numerous jobs (full-time and part-time) with a relatively low capital investment requirement. The quantitative and structural employment effect involved will be examined below, and the influence of the regional distribution of effects on 1 iving conditions will be examined in the following section. In countries with a high population growth rate and where the manpower resources increase annually by several hundred thousand persons, undoubtedly every opportunity should be grasped to create new, productive and permanent jobs. However, the potentia 1 ro 1e of the small and medium enterprise sector in creating employment should not be overrated. Three considerations argue in favour of a somewhat reserved judgment (Staley and Morse lg65, p. 242). The first is that in economies with a very generous supply of manpower, the employment problem forms part of that of shaping the development process in all sectors of the economy. Small and medium enterprises can play an important role in this connection, just as they make substantial contributions towards capital formation, the development of entrepreneurial and managerial personnel, the upgrading of regional 1iving conditions, and so forth. The creation of new jobs is, thus, neither the only nor the most important contribution made by the small and medium enterprise sector. Secondly, the greater uti 1i zat ion of 1abour does not primarily serve as an argument in favour of small and medium unit sizes; more important is the selection of suitable products and production techniques throughout the entire industrial sector, and indeed the entire economy. Thirdly and finally, there exist situations in which direct employment effects can be achieved more rapidly by other means, such as by labour-intensive infrastructure, and construction programmes. It wou 1d be erroneous to p1ace the burden of job creation exclusively or even predominantly on the small and medium industrial sector as this sector could spawn enterprises with a low level of macro-economic efficiency which could only be kept in operation by means of large-scale and long-term subsidies. From the macro-economic viewpoint, there is no virtue in approaching employment policy mainly from this angle. 34

The direct employment effects which could be generated by labour-intensive products or production technologies within the small and medium industrial sector can be classified into those which are of a quantitative and those which are of a qualitative nature. In the DCs, employment in small and medium enterprises in the manufacturing sector can account for more than one-third of total employment in this sector. The figures vary markedly from country to country, however, to some extent as a function of the level of industrialization achieved. In the developing countries of South and Southeast Asia, the majority of those employed in the manufacturing industries are not in small and medium firms (cf. Table 11.) In South Korea 17.4 per cent of all employees in the manufacturing sector are employed in small enterprises, and 8.7 per cent in medium enterprises; in Taiwan, the corresponding figures are 24.4 per cent and 9.5 per cent. In Indonesia, the small enterprise sector accounts for 32.3 per cent and medium firms for 22.1 per cent of all those employed in the manufacturing sector; the figures for Malaysia are 4.6 per cent and 26.2 per cent respectively. These figures include a relatively high proportion of unpaid 1abour from members of the entrepreneur's family. This group covers all persons belonging to the entrepreneur's household who fulfil a specific function on a full or part-time basis for at least one-third of the customary working hours but who receive no monetary recompense or other recompense in lieu. Small firms cannot usually be established and remain economically viable in the longer term unless family members contribute their labour free of charge. How great are the direct employment effects of developing the small and medium enterprise sector of the manufacturing industry? Is there any clear difference in this respect between small and medium units? These questions are important insofar as they elicit information on where, in countries with a rapidly increasing labour potential, a large proportion of the manpower flowing into the labour market each year is ultimately absorbed. According to the World Development Report, 1981 and 1982, Indonesia had an average annual population growth rate of 2.3 per cent between 1970 and 1978, and an average annual increase in the potential labour force of 2.1 per cent (1970-80). The significance of the small and medium enterprise sector for the labour market becomes evident from the following figures: in the first four years of Indonesia's Second Development Plan (Repelita II, 1974/75 to 1978/79), only 120,000 jobs were created each year in the manufacturing sector -- half of the target figure set out in the plan -- though only a few of these were 1ocated in large enterprises (World Bank, Indonesia, Vol. I, 1979, p.3). In Malaysia, the corresponding population growth rate was 2.4 per 35

TABLE 11 Breakdown of Employees in the Manufacturing Sector by Unit Size (In per cent)

Unit Size by No. of Employees Absolute No. of Employees

Country

Indonesia (1974) Malaysia (1978)

5-19

20-49

50-99

100+

32.3

13.2

8.7

45.8

1,021,326

69.1

377' 718

4.6

26.2

South Korea (1975)

17.4

8.7

73.9

1,420,144

Taiwan (1971)

24.4

9.5

66.1

1,170,179

SOURCE:

For data on South Korea and Taiwan, see Sam P.S. Ho (1980), p. 5 (calculated); for data on Malaysia, see Department of Statistics, Vol. 4 (1978); for data on Indonesia, see World Bank, Indonesia, Vol. II (1979), p. lOB, Table 2A.

cent ( 1970-78), while the increase in the potential labour force reached 3.0 per cent (1970-80). The available statistics indicate that as the level of industrialization increases, there is an increase in the absolute number of persons employed in small and medium enterprises but a marked decrease in the fraction accounted for by this sector in total employment in the manufacturing sector. Data on industry and employment in Malaysia show that between 1968 and 1978 the number of employees in the manufacturing industry increased from 119,860 to 374,129, that is, an increase of 312 per cent. For sma 11 enterprises, however, they show an absolute decline from 19,180 to 15,803 (-17.6 per cent). Since this decline is particularly marked in the case of units employing between five and nine persons (-76.6 per cent), it can be assumed that the external factors are exerting an influence here, in particular the new regulation stating that employers employing five or more full-time staff are required to contribute towards various social insurance schemes (cf. Chapter 2). By contrast, an absolute increase from 42,731 to 97,305, that is, 228 per cent, can be found in the case of medium enterprises. As can be seen from Figure 1, the fraction of those employed in small enterprises declined from 16 per cent (6 per cent plus 10 per cent) to about 4.5 per cent (0.5 per cent plus 4 per cent). Most severely affected were the small firms with between five and nine employees. The medium enterprises likewise showed a decline in their relative share in total employment in the sector, falling From 36 per cent (20 + 16 per cent) to 25.5 per cent (12 + 13.5 per cent). The mast marked decline here was found in the group having between 20 and 49 employees. If one takes the development process in Taiwan and South Korea as an example -- countries which have undergone rapid industrialization since the 1950s similar trends can be discerned (cf. Figures 2 and 3). In Taiwan, the share of employment accounted for by small enterprises (4-19 employees) decreased in the eleven years from 1961 to 1971 from 28 to 15 per cent, with the corresponding figures for medium enterprises showing a decline from 22 to 20 per cent. In South Korea, the years 1963-75 brought a decline from 29 to 9 per cent for small enterprises, and from 28 to 17 per cent for medium enterprises. The conclusions to be drawn from the similarity evident in qu ant it at i ve developments in these three countries are that the direct contribution to employment forthcoming from small firms is in fact very limited, that medium enterprises make a considerably greater contribution, but that the large enterprises absorb the greatest fraction of the labour force in both absolute and 37

FIGURE 1 Breakdown of the Work-force in the Manufacturing Industry, by Unit Size (measured in terms of the number of full-time and part-time employees), 196B, 1972, 1976 and 1978. ( In per cent)

Malaysia:

Unit size

500

100-499

50-99

20-49

lQ-19

0--9

80

SOURCE:

82

Department of Statistics, Malaysia, Industrial Surveys, Vol. II, 196B, 1972, 1976, l97B.

38

FIGURE 2

Taiwan: Breakdown of Employment in the Manufact uring Industry, by Unit Size (measured in terms of the number of employee s), 1954, 1961 and 1971 (In per cent)

1964

SOURCE:

196!

1971

!975

1980

Sam P.S. Ho (1980), p. 27.

FIGURE 3

Korea: Breakdown of Employment in the Manufact uring Industry, by Unit Size (measured in terms of the number of employee s), 1958, 1963, 1975 (In per cent)

...

,

1958

1963

1975

SOURCE: Ibid.

39

industrial work processes and the upgrading of vocational qualifications -- virtually exclusively on a learning-by-doing basis -- indicates that the small and medium enterprise sector generates a large number of skilled personnel. They represent the manpower reservoir for future industrial development. Thus, the small and medium enterprise sector is an irreplaceable institution from the macro-economic viewpoint, contributing as it does not only to the formation of human capital in the form of entrepreneurial and managerial personnel but also in the provision of specialized training for the labour force. Another qualitative aspect is work-place stability. The employment contribution of the small and medium enterprise sector must also be examined with regard to the question whether or not the newly created jobs are secure in the medium and longer term. A distinction should be made here between full-time and part-time jobs. Full-time jobs are defined as those covering at least six hours per day, and at least twenty days per month; part-time jobs are those which fail to fulfil one or both of the above criteria (Department of Statistics, Malaysia, Industrial Survey 1978, p. 9). The statistics on employment in Indonesia and Malaysia show that the proportion of family members working as unpaid or low-paid labour and also the proportion of part-time staff vary as a function of unit size. In Malaysia, the percentage of family members working in their own small enterprises in 1978 was relatively high at 45.9 per cent, while it was higher in medium enterprises, at 50.3 per cent, but at a very low level in large enterprises, at 1.3 per cent. Part-time employment varies very distinctly as a function of unit size. In Malaysia, it accounts for a relatively small proportion of all employees in small enterprises (6.6 per cent), increasing very substantially in the case of medium enterprises (49.1 per cent), and remaining relatively high even in large firms (43.9 per cent). For further information on these figures and comparative values for 1976, see Table 7. Medium and large enterprises, therefore, show a very much greater level of flexibility with regard to the number of persons employed. The insecure nature of jobs in small and med i urn enterprises is attributable to two circumstances. Firstly, the lifetime of small firms is often very brief because of the high failure rates within the first five years of existence. Secondly, a small or medium entrepreneur can react very rapidly -- unencumbered by labour or social legislation to seasonal, cyclical and structural changes by adjusting the employment factor. Because of the small number of part-time staff in small enterprises, this rapid reaction is largely directed towards family members. By 41

relative terms. Even if one proceeds from the assumption that small and medium enterprises have not received sufficient support hitherto, this still cannot account for the full extent to which they have fallen behind in terms of employment development. For this reason, justification exists for contending that small and medium enterprises in the manufacturing sector cannot contribute much towards solving the employment problem. Of particular importance too, is the qualitative aspect of the employment effect. It has been shown that small enterprises largely absorb unskilled or semi-ski 11 ed labour; the proportion accounted for by these categories is considerably higher here than in large enterprises. Thus, for a large fraction of the poorer population, the small enterprises open up their only prospects of finding employment within the near future. A typical feature of the employment structure in small enterprises in Indonesia and Malaysia is that the very few skilled workers available -- or even just the entrepreneur himself -- are assigned very young, unskilled workers known as "apprentices". The apprentices receive very low wages (some even have to pay the entrepreneur for the privilege of receiving training), usually in conjunction with material benefits such as sleeping room and board. They are not trained systematically to become skilled in all aspects of the occupation in question but are given some measure of instruction and otherwise learn their trade from their day-to-day contact with materials, simple tools, and sometimes even machinery and other equipment. Generally speaking, the training provision is narrow in scope and incomplete. Semi-skilled workers are in demand in the medium and, more particularly, large enterprises; they are very often siphoned off from the smaller firms to the effect that a sectoral brain drain occurs. Some skilled workers decide to become self-employed after several years of home-based employment or work in a small firm. In the small and medium metal-working sector in Indonesia and Malaysia, the data from the 631 firms surveyed showed that the workers had been employed for between two and five years; upon recruitment their educational standard had been extended primary level or below (Technonet Asia, 1981, p. 2). If a cost-benefit analysis is applied, it implies that the costs of specialized training are borne by very many small firms, whereas the benefit (that is, the increased labour productivity) accrues to a smaller number of subsequent employers who had made no contribution towards the training costs. The existence of small enterprises, therefore, implies more favourable prospects of employment for workers who have received no, or only limited, formal training. Their introduction to 40

contrast, in medium enterprises the variations affect both family members and part-time workers.

Changes in Labour and Social Relations Industrialization in a DC implies a change in the traditional forms of work organization and personal work relations in an increasingly large part of the economy. The introduction of machinery brings about new forms of work design; at the same time, changes take place in the relations between the employees of any given enterprises as a result of factors such as managerial hierarchy, marked skill differentials, technologically conditioned timing of the work process, shift work, and so forth. Because of these changes, it is often claimed that small and medium enterprises are suitable institutions for facilitating the transition from the traditional world of rural crafts to industrial employment. These changes taking place within a DC are part of a cultural change initiated from without. This cultural change takes place on three levels: technical, economic, and social (Behrendt 1965, p. 90 ff.) An exogenously initiated cultural change, industrialization operates first at the technical and economic levels because the institutions and behaviour patterns prevailing at these levels offer relatively little resistance. The change in social norms and values, by contrast, is a much slower process, with the result that there develops a time lag in the change levels reached at the various cultural levels. Because of this hiatus in interdependencies, the ensuing cultural change is a disharmonious one. This characterizes the basic conflict situation facing the new industrial worker who enters a modern industrial enterprise: his behaviour patterns, conditioned by his cultural background, are not in line with those required in working life in an industrial context bearing the stamp of alien cultural traditions. Small and medium enterprises can do much to mitigate this conflict. Accordingly, they can be regarded as institutions favouring a flexible transition from traditional to industrial labour and social relations. The following examines the various important contributions made towards this adaptation process, as shown up by broad-based empirical research in the countries of South and Southeast Asia. The first contribution in this respect can be discerned in the fact that workers are familiarized with working life in the industrial context. It was pointed out above, in connection with the issue of employment effects, that small and to some extent medium

42

enterprises recruit predominantly unskilled or semi-skilled manpower, train them on an on-the-job basis, and then in many cases lose them to larger enterprises within a few years. The small entrepreneur, thus, is normally handling one of four categories of workers (Kerr 1960, p. 351 ff.): the semi-adapted industrial worker. Such a worker wants to move on to the industrial sector. He has already freed himself to a large extent from traditional patterns of behaviour and reasoning, but is still closely linked with his extended family and his home village. In many instances, such a worker already lives with his close family in the neighbourhood of the industrial centre. The characteristic features of this category of workers, found in large numbers in Indonesia and Malaysia, are: motivation to learn, ability to learn, and a willingness to adapt himself to new production technologies and forms of work organization. The adaptation process is generally more straightforward in small and medium enterprises, where the tools, machinery and other equipment is normally easy to handle. Furthermore, where the number of employees per enterprise is small, the social contact and links among the work-force on the one hand and between the work-force and the entrepreneur on the other are closer than in larger firms. Generally speaking, employment in a small enterprise does not necessarily have to differ substantially from that in a craft enterprise or from work at home. The workers in this category usually belong to one ethnic, religious and/or linguistic population group. This cultural familiarity within the work-force is instrumental in reducing the danger of conflict within the enterprise. In the small enterprise sector in Indonesia and Malaysia, for example, the work-force belongs to the same ethnic grouping as the entrepreneur himself, that is, Chinese, Indian, Malay, or Indonesian. This differentiation is also a marked feature in the medium enterprise sector, although the more advanced the technical skills required (engineering, bilingual secretarial work), the greater is the readiness to tolerate individuals belonging to different ethnic groupings. There is reason to doubt the validity of the common assumption that job satisfaction is greater in small and medium enterprises than in large ones. It is probably not true of the majority of small enterprises. Here, the work is normally carried out in cramped conditions, with poor ventilation and lighting, excessive heat and dampness, inadequate supplies of tools, dirty work-places and sanitary facilities, and so forth. There is a clearly discernible qualitative difference with respect to all these points between the small enterprise and its medium and, more particularly, large counterpart. The economic explanation for the conditions prevailing in small enterprises (and also in some 43

medium enterprisesr is the employer's endeavour to keep overheads as low as possible. The social explanation to be reconciled with this -- and in many instances the only explanation for the working conditions -- is that small entrepreneurs show no interest in humanizing working conditions or they fail to display any understanding of such social considerations. When examining these statements it should be borne in mind that the overwhelming majority of the new industrial workers do not come from a perfectly harmonious work situation -- if such a world should even exist within the craft or home-based employment context but from poor rural and urban families looking for a secure job offering an appropriate cash income. In the search for work, factors such as humanized working conditions play a very minor role. Even though small and medium enterprises may facilitate the adjustment to industrial work in many respects, for the new industrial worker this transition still implies high "costs". Indicators of this are the high levels of unexcused absenteeism, frequent absence because of illness, high personnel fluctuation rates, unpunctuality, lack of discipline, and non-observance of instructions. By way of example, between 5 and 6 per cent of all metal-working firms in Indonesia and Malaysia report an average rate of employee absence of over 20 per cent (T echnonet Asia, 1981' p. 2). Some

behaviour patterns found among tend to prevent any upgrading of conditions. These negative contributions can autocratic attitudes and a reaction to changes and social legislation. entre~reneurs

small and medium working and social be traced back to in national labour

The degree to which entrepreneurial behaviour is autocratic can be measured on the basis of four criteria: perception of the potential managerial skills and initiative among subordinates; view of the need to share information and data on targets with others; view of worker participation; and perception of in-firm monitoring needs (Redding and Casey, 1976). This study, based on a survey of 108 managers in eight countries in Southeast Asia, arrives at the conclusion that entrepreneurial behaviour in Malaysia, Indonesia, the Philippines, and Thailand is autocratic. If one applies this finding to small and medium enterpreneurs, it can be assumed that the autocratic trait is further reinforced by factors typical of the structure of their enterprises: these latter are established very largely on the basis of personal savings and family capital, and operations are managed by the owner/entrepreneur himself.

44

These conditions exist within a context of interpersonal relations in which the attitude of the worker towards the entrepreneur is sti 11 1 argely feudalistic. The measure of power held by the entrepreneur is simply accepted and no delegation of tasks is expected. The entrepreneur himself perceives no reason for pursuing considerations of co-responsibility or introducing the emp 1oyees to the concept of co-determination of corporate affairs. In Indonesia, the entrepreneurs are called upon by the government to assume a paternalistic role in the light of the inadequacies of the social security system; they are responsible, it is claimed, for the health and well-being of their employees and their families (Investment Coordination Board 1981, p. 13). There is no evidence, however, that this has led to any increase in the social provision offered in small and medium enterprises. The reaction of small and medium entrepreneurs to new labour and social legislation is often questionable from the social viewpoint. This can be illustrated by a number of examples concerning labour protection regulations, m1n1mum wages, and social insurance. An investigation conducted in small and medium metal-working enterprises showed that more than 40 per cent of the firms in Indonesia and 90 per cent of those in Malaysia failed to appoint a person to be responsible for accident prevention measures within the enterprise. More than 55 per cent of enterprises in both countries carry out no pre-recruitment medical examination, although free medical care is available for those emp 1oyed on a permanent basis. More than 32 per cent of the enterprises in Indonesia, and 22 per cent in Malaysia offer paid leave for their permanent staff (Technonet Asia 1981, p. 4). In the majority of the DCs, wages and salaries differ greatly as a function of unit size. This phenomenon is the result of differences in labour productivity. The wage and salary structure for various occupational groups in Indonesia in mid-1978 is given in Table 12. Taking the Indonesian figures as the point of departure, Table 13 shows how the average wage situation differs in other Asian developing countries and Japan. The differences in the wage and salary structures applied in various industries in Malaysia are set out in Table 14. A statutory minimum wage has been introduced in many DCs as a means of affording social protection to unskilled labour. In Indonesia, the minimum wage payable in Jakarta was increased with effect from January 1982 from 600 rupiahs to 750 rupiahs per day (about DM 2.88); this figure is supposed to be applicable to all -- men, women and young people -- for a seven-hour work day irrespective of the type of work and duration of employment. Malaysia has no minimum wage provision for the manufacturing sector as such but does have a number of i nd i vi du a1 regu 1at ions 45

TABLE 12

Indonesia: Wage and Salary Structure in US$ (monthly data)*, Mid-1978

Occupational Group

Minimum Wage

Average Wage

Maximum Wage

Industrial Engineer

~3~

7~2

947

Mechanical Engineer

366

786

1,393

Electrical Engineer

205

299

636

Accountant

198

733

1,~45

General Manager

964

1, 513

1,952

Production Manager

325

8~1

1,405

84

439

940

198

496

1,012

Typist

60

214

573

Junior Clerk

82

173

504

Foreman

84

241

706

Skilled Worker

60

137

467

Semi-skilled Worker

46

96

210

Unskilled Worker

31

65

1~7

369

482

590

29

53

104

Section Chief Executive Secretary

Tool-Maker Cleaning Worker

Including bonuses in the form of additional month's wages; excluding extraordinary payments. SOURCE:

International Business Review (Hong Kong), cited in: Rationalizierungs-Kuratorium der Deutschen Wirtschaft, ed., Landerstudie lndonesien (Eschborn 1980), p. 96.

46

TABLE 13 Wage Costs (average wages) in Indonesia in Regional Comparison, as of mid-1976 (Index: Indonesia = 100) Occupational Groups Industrial Engineer Mechanical Engineer Electrical Engineer Accountant General Manager Production Manager Section Chief Executive Secretary Typist Junior Clerk foreman Skilled Worker Semi-skilled Worker Unskilled Worker Tool-Maker Cleaning Worker

SOURCE:

Indonesia

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Hong Kong

62 80 197 123 158 141 231

147 114 149 176 186 197 243 63 321

Japan

South Korea

211 158 343 208 ZZ6 292 362 274 353 454 622 847 981 107 138 104

85 75 170 127 79 123 203 119 149 199 204 232 324 225 68 392

Malaysia

Philippines

Singapore

Taiwan

73 86 255 129 177 123

25 24 68 26 53 59 50 35 34 66 61 59 73 80

109 90 269 126 139 143 118 101 99 114 171 150 139 157

13 111

204

48 52 lOB 66 69 86 105 88 86 87 153 122 120 143 51 226

179

81 62 104 162 132 134 129 63 154

44

International Business Review, Hong Kong, cited in Rationa1isierungs-Kuratorium der Duetschen Wirtschaft, ed., Landeratudie Indonesian (Eschborn 1980), p. 99.

Thailand

58 59 165 68 118 79 89 86 71

78 84 63 79 78 28 145

Malaysia:

TABLE 14 Wage and Salary Structure in Various Industries

Monthly wage rates for selected occupations in the Metal Products Industry Wage rates (Malaysian dollars)

Occupations

Male Female

180-420

Typist Production Supervisor Welder Fitters Lathe Operators Pat ten Makers

Female Male Male Male Male Male

400-780 250-380 300-480 330-480 400-640

General Workers

Male Female

200-350 160-250

Office Clerk

200-4~0

180-3~0

Monthly wage rates for selected occupations in the Plywood and Veneer Products Industry Wage rates (Malaysian dollars)

Occupations

Office clerk

Male Female

200-500 180-450

Typist Production Supervisor General Fitters Lathe Operators Electrician Carpenters Boilerman Machine Setters

Female Male Male Male Male Male Male Male

180-350 400-800 300-520 300-480 330-600 260-450 380-670 360-450

Production Operators

Male Female

200-380 160-340

48

Malaysia:

TABLE 14 (continued) Wage and Salary Structure in Various Industries

Monthly wage rates for selected occupations in the Plastic Products Industry Wage rates (Malaysian dollars)

Occupations

0 ffice clerk, general

Male Female

200-350 180-250

Typist Production Supervisor Extruding Machine Operator Quality Controller General Fitter

Female Male Male Male Male

130-250 400-750 230-450 350-450 240-350

Production Operator

Male Female

180-310 160-280

Monthly wage rates for selected occupations in the Rubber Products Industry Wage rates (Malaysian dollars)

Occupations

Office clerk

Male Female

200-450 180-400

Typist

Female

180-350

Production Supervisor

Male Female

450-850 350-650

Rubber Extruding Machiner Operator

Male Female

150-300 130-250

Rubber Moulding Press Operator Mechanical Fitter Electrical Fitter Sewing Machine Mechanic

Male Male Male Male

150-300 250-560 250-560 200-460

Sewing Machine Operators

Female

150-250

Production Operators

Male Female

180-330 170-290

SOURCE:

Occupational wage survey, December 1980, Central Unit MIDA; cited in MIDA, ed., labour and Wage Rates (Kuala Lumpur, 1981), pp. 7-9.

governing specific fields, for example, the retail trade, and the hotel and restaurant trade (MIDA 1981, p. 14). Many small entrepreneurs and a considerable number of medium entrepreneurs in Indonesia and Malaysia pay very low wages, well below the specified minimum. In Indonesia, for example, unskilled workers seldom earn as much as US$40 to US$64 per month; in Malaysia, unskilled workers are paid about M$4 per day (about US$1.80). Failure to pay the m1n1mum wage constitutes a violation of labour legislation, but as long as it is not pursued to excess it is generally ignored by the authorities. Apart from the administrative difficulties involved in trying to monitor the wages paid in the many thousands of small and medium firms registered in the official or first economy, in many instances payment of the minimum wage would exceed the economic capacities of the firm. In Indonesia, the owner of a medium enterprise pays wages and salaries which are only 30 per cent higher (on average) than those payable in small enterprises, but labour productivity in the medium enterprise is some 80 per cent higher, largely because the manpower has access to better tools and equipment A socio-political conflict (World Bank 1979, val. I, p. 9). exists here between maintaining a maximum number of jobs offering wages below the statutory minimum and reducing the number of jobs in the event that payment of the minimum wage were to be enforced. Similarly, many employers fail to comply with the statutorily prescribed social insurance provisions. It should, however, be added that in the DCs, newly introduced social legislation normally applies only to larger firms for an initial period. In Indonesia, for example, the social insurance contribution (accident insurance, retirement and surv1v1ng dependents' pensions) which has been payable since 1977 applies only to enterprises having more than 100 employees or a total monthly payroll of more than 5 million rupiahs. Smaller firms are entitled to subscribe to the scheme on a voluntary basis. By the end of March 1979, only 3,737 enterprises accounting for a total of 913,248 employees had become affiliated to the social insurance institution, Perum ASTEK (Department of Information, Republic of Indonesia, 1981, p. 154). The employers keep some of their jobs in the "shadow economy" and fail to disclose to the government authorities the true level of their net product and employment figures. For this part of the hidden economy, they are able to exclude themselves from their obligations in terms of taxation and social security contributions. In concrete terms, this means that no or only very small social security contributions are paid on behalf of their emp 1oyees. The Indonesian entrepreneur, who is under obligation 50

to pay, in full, accident insurance premiums to an amount equivalent to between 0.24 and 3.6 per cent of the payroll depending on the firm's risk classification; to pay, in full, insurance premiums for the care of dependent survivors to the amount of 0. 5 per cent of the payroll; to pay part of the contributions towards a retirement pension to the amount of 1.5 per cent of the payroll (employee contribution= 1 per cent); can evidently effect a marked reduction in his wage costs by evading these payments (Investment Co-ordination Board 1981, p. 14).

In Malaysia, it has been found that the number of employees working on a full-time basis is often not more than five because in this case neither accident insurance (only the employer's contribution of 1.25 per cent of the monthly wage) nor invalidity insurance (employer's and employee's contributions, each equivalent to 0.5 per cent of the monthly wage) is payable as long as the number of the work-force does not exceed five. Similarly, many employers in Malaysia try to keep their work-force to less than five full-time employees because they would otherwise have to subscribe to the retirement pension scheme (in which an employer's contribution would be equal to 11 per cent of the monthly wage and an employee's contribution, about 9 per cent). This rate, totalling 20 per cent, has been applicable since December 1980, before which time it was only 13 per cent (Ministry of Finance, Malaysia 1981, p. 70). Small and medium entrepreneurs in Malaysia can, therefore, economize on wage costs if they keep the number of their full-time work-force under five. Although the sma 11 entrepreneur often pays 1ower wages and makes less social provisions for his work-force, industrial conflicts se 1dam occur in this sector of the economy. One contributory factor may be the close personal contacts prevailing within a sma 11 enterprise; and the entrepreneur, too, often sets his small work-force an example by virtue of his personal dedication and work-time invested. Any worker who is dissatisfied simply looks for another job and leaves the enterprise. The trade unions in Indonesia and Malaysia are not involved in determining working conditions in small enterprises, and the same applies, to a large extent, to medium enterprises too. They focus their activities on large enterprises in the private and public sectors. In Indonesia, membership of a trade union --which must be state-recognized is a voluntary matter; a nominal figure of some 40 per cent of the work-force are unionized, though 51

probably only between 5 and 10 per cent are active members (Investment Co-ordination Board 1981, p. 46). Strikes and lock-outs are prohibited by the government as they cannot be reconciled with the harmony in labour relations set out in the official Pancasila philosophy. Collective wage bargaining, the outcome of which has to be sanctioned by the government and which is valid for a maximum duration of three years, is undertaken only in the large enterprise context. These enterprises play virtually no practical role in setting guidelines for the wages and salaries payable in the medium enterprises. In Malaysia, too, trade union existence and action are governed by special legislation and governmental stipulations. Labour conflicts have to be resolved within the framework of precisely specified procedures; new collective bargaining agreements have to be approved by the Industrial Court. In 1980, Malaysia had 290 trade unions with a total membership of 504,400 {that is, 10 per cent of the work-force of 5,094 million); 46 of these trade unions, incorporating 87,100 workers, represented the interests of the manufacturing sector (that is, 10.8 per cent of the total of 803,000 workers engaged in this sector) (Ministry of Finance, Malaysia, Economic Report 1981/82, Table 6.1).

Regional Distribution of Development Effects A prominent objective of all development policy programmes is to approximate the level of economic and social development throughout all the regions in a given country. In order to achieve a balanced improvement of general living conditions throughout these regions, great importance is attached to the decentralization of industrialization. This is based on the expectation that in many ways small and medium industrial enterprises are particularly suitable for contributing towards greater social equilibrium both within one region and among several regions. Thus, the small and medium enterprise sector is seen as a suitable institution for overcoming economic and social dualism. This definition of objectives is frequently featured in programmes for the industrialization of rural areas. One should ask critically, first of all, precisely what these objectives will entail, and whether they will present small enterprises with a task which, in the typical conditions prevailing in a DC, they are unable or barely able to fulfil. It is necessary to clarify this preliminary issue in order to avoid diagnosing later an inadequate or even negative contribution because of a set of objectives which was, from the outset, based on a false impression of the actual position of small entrepreneurs. The substance of these objectives is, from the economic 52

point of view, to increase the regional income per capita, and from the social point of view, to raise the general standard of living in order to mitigate the tendency of the population to migrate to other regions or to the towns. On the one hand, it must be stated that the promotion of small and medium enterprises can only be one element in a strategy of regional development planning. It is essential that this is complemented by the development of agriculture, the material infrastructure (transport network, energy supply), training provision, and so forth. On the other hand, even small and medium enterprises can become established and flourish outside the towns and urban catchment areas, provided that there exists a minimum of economic and technical facilities and an infrastructure. These basic facts are sometimes overlooked, and sometimes it is claimed that small enterprises in the most severely underdeveloped regions should be given special promotion. Such regions would have typical characteristics: low income per capita, low consumption per capita, a high level of population in relation to the amount of cultivable land, a scarcity of natural resources, and a poor communications network (Staley and Morse 1965, p. 309). These are the characteristic features of an economic and social environment in which small and medium enterprises would not be viable. If entrepreneurs were encouraged to invest in these areas, one would have to expect a higher than average rate of failure, because the industrial growth potential of such a region is too small. A relatively favourable environment for small and medium enterprises is provided by regions and districts where the standard of conditions and facilities lies somewhere between that of the cities and the villages. The subsidiary objectives of decentralizing industrialization are normally very numerous; they include in particular: 1.

The creation of new work-places for the underemployed and the unemployed, particularly making use of local technologies and skills;

2.

The creation of centres for innovation and economic and social change with a view to using the available local resources to greater advantage;

3.

To provide the population in relatively underdeveloped areas with the goods to cover their basic needs, and consumer goods of a higher quality for local needs.

Due to the considerable gaps in the empirical research carried out to date, one cannot fully ascertain whether, and to what extent, small and medium enterprises actually contribute towards the regional distribution of development in the various 53

countries of South and Southeast Asia. Data exist for Indonesia and Malaysia relating to the regional location of enterprises, newly established enterprises, and the regional effects on employment; these are presented below. For Indonesia, there exists detailed information on the regional distribution of enterprises (classified as small, medium, and large enterprises) and also of the work-force. Table 15 indicates the regional distribution of industrial enterprises in the manufacturing sector and the population figures for the year 1974/75. In order to determine the regional distribution of development for one indicator (that is, the number of small , medium, and large enterprises), a breakdown has been undertaken by province. It emerges that the majority of large enterprises (83.4 per cent), medium enterprises (85.7 per cent), and small enterprises (70.2 per cent) in Indonesia are concentrated in Java. This concentration of industry matches the high concentration of population in Java. In Sumatra, the distribution of industry also corresponds with the level of population, although not, however, with the population density, The same can be said of the other provinces, especially with respect to small enterprises. This is confirmed by their contribution to supplying the local market. Table 16 presents the change in the regional distribution of industrial enterprises in the manufacturing sector between 1973 and 1977. The rates of change for each province show that the number of small enterprises in the poorer provinces (East Nusatenggara and Central Sulawesi) increased very markedly, but expressed in absolute figures, the increase was greatest in East Java. There is a recogn i zab 1e trend among med i urn and 1 arge enterprises towards a more balanced regional distribution, even if by far the largest number of these enterprises are still concentrated in Java. Table 17 presents the regional distribution of employment in the manufacturing industry in 1974, classed according to enterprise size. This shows that the employment effects of industrialization were very much concentrated in Java (81.2 per cent, of which 56.9 per cent represented employment in medium and 1 arge enterprises, and 24.3 per cent in small enterprises). On the other hand, employment in small enterprises was predominant in Sulawesi, Nusatenggara and Irian Jaya. On the whole, it can be stated that in 1974, industrialization did not lead to a particularly evenly distributed regional pattern of employment. For Malaysia, the regional distribution of enterprises in the manufacturing industry, of full-time workers, the population and the GOP per capita are shown in Table 18 in relation to the average figures for West Malaysia. In contrast to Indonesia, Malaysia showed a more balanced regional pattern of

54

TABLE 15 Indonesia: Regional Breakdown of Industrial Enterprises and Population, 1974/75 ( In per cent)

Province

Sumatra Java Bali Nusatenggara Kalimantan Sulawesi Maluku Irian Jay a

Total (absolute)

SOURCE:

Medium Firms

Small Firms

Fraction of Population (1971)

Population Density p/km2 (1971)

10.7 83.4 1.1 0.6 2.4 1.3 0.2 0.1

7.2 85.7 0.8 1.2 2.1 2.6 0.1 0.2

15.8 70.2 1.5 1.7 2.8 7.6 0.2 0.3

17.5 63.8 1.9 3.8 4.3 7.2 0.9 0.8

44 576 381 157 10 45 15 2

1.306

5.746

48.221

Large Firms

119.233.000

Data on industrial enterprises (manufacturing industry) from: Statistical Yearbook of Indonesia 1976, p. 49D. Data on population from: World Bank Indonesia, Development Prospects and Policy Options, 1981, Statistical Annex, p. 83.

Indonesia:

TABLE 16 Changes in the Regional Distribution of Industrial Enterprises, 1973-77 (absolute and percentage figures) Small

Medium

Industry

and

Large-scale

Industry

--Province

Aceh Sumatra, Nord Riau * Jambi* Jogjakarta Java, Ost Kalimantan, West Sulawesi, Central* Nusatenggara, West Nusatenggara, Ost

1973

1974

1975

1976

1977

Variation 1973/77

-

-

4.032

4.765

5.588

38.6

2.527 768 1.086 6.218 1.163 178 1.182 629

2.448 1.220 968 7.483 1.162 565 1.289 903

2.483 1.264

12.9 19.6 -14.4 113.1 7.0 707.3 42.8 797.0

2.199 1.057

4.469 973 96

171

2.452 1.154 1.131 5.730 1.187 96 973 209

* Small industry includes the craft sector. SOURCE:

World Bank, Indonesia, Vol. II (1979), p. 91.

9.522 1.041 775 1.390 .1538

1973

104 171 4.107 185 31

11

1974

117 186 155 4.295 191 31 75 18

1975

1976

1977

Variation 1973/77

166

153

160

-3.6

115 297 179 4.458 148 37 105 31

122 296 175 4.432 133 42 139 35

130 320

25.0 87.1 12.9 6.5 -31.4 45.2 78.7 218.2

4.376 127 45 134 35

TABLE 17 Indonesia: Regional Breakdown of Employment in the Manufacturing Industry by Enterprise Unit Size, 1974

Small Enterprises

Medium and Large Enterprises

Absolute

Absolute

%

54,871 572,208 5,811 4,073 14,638 B, 318 1,023 762

5.5 56.9 0.6 0.4 1.5 0.8 0.1 0.1

All Sizes (%)

Province Sumatra Java Bali Nusatenggara Kalimantan Sulawesi Maluku Irian Jaya

Total absolute %

SOURCE:

52,752 244,451 5,630 s, 377 9,573 23,581 855 1,021

%

5.2 24.3 0.6 0,5 1.0 2.3 0.1 0.1

10.7 81.2 1.2 0.9 2.5 3.1 0.2 0.2

343,240

661,704

1,004,944

34.1

65.9

100

World Bank, Indonesia, Cottage and Small Industry in the National Economy, Vol. II, Annexes and Statistical Tables (1979), p. 65, Table 3.2.

TABLE 18 Malaysia: Regional Breakdown of Enterprises in the Manufacturing Sector, of emp1oyeesa, of the Population, and Deviation from Per Capita GDPb

Enterprise

Employees Population

State Johore Kedah Kelantan Melaka Negeri Sembilan Pahang Penang Perak Per lis Selangor Trengganu Wilayah Persekutuan (Federal Territory) Total a b c

Absolute

,,,,

645 212 152 1Z7 157 191 565 704 16 796 80 854

14.34 4. 71 3.38 2.82 3.49 4.24 12.56 15.65 0.36 17.69 l. 78 18.98

4,499

100.0

Absolute

%

50,564

13.73 3.25 l. 70 4.42 3.16 4.83 18.45

11,961

6,255 16,265 11,633

17,788 67,957 41,670 1,214 94,419 5,033 43,531

368,290

11.31

0.33 25.64 1.36 ll. 82

100.0

,,,,

14.38 9.90 7.88 4.07 5.06 6.92 8.18 15.82 1.33 13.17 4.87 8.42

Per capita GOP in relation to Malaysian averagec 0. 94 0.60 0.46 0.80 0.99 0.81 1.28 0. 86 0.60 1.45 D. 72 2.17

100.0

In full-time employment. Firms and employees relate to 1978; population, and GOP to 1980. The average per capita GOP in Malaysia (including West Malaysia1 Sabah and Sarawak) is M$1,886 (:1.03).

SOURCE:

Department of Statistics, Industrial Surveys 1978, Vol. II, p. 25, Table 1.2; Fourth Malaysia Plan, 1981-85 (Kuala Lumpur, 1981), p. 101, Table 5.2.

industrialization in 1978, although there was a marked concentration in Kuala Lumpur, Selangor, Perak, Johore, and Penang. This corresponded with the distribution of employed workers, although in a different order. By and large, the distribution of employment is compatible with the distribution of population. According to official classifications, those states judged to be poor in terms of income per capita are Kedah/Perlis, Kelantan and Trengganu, while the Federal Territory (Kuala Lumpur) and Selangor are defined as rich (Fourth Malaysia Plan 1981, p. 102). The poor states are endowed with only a low proportion of industrial enterprises and employment. The attempt of the Malaysian Government to attach more importance to regional interests when authorizing the setting up of new industrial firms was succes sfu 1 in the years 1971-80 on 1y in the poor state of Kedah, where anticipated projects and investments rose by 4.6 and 5.2 per cent respectively, that is, more rapidly than in four of the states with an average income level (Fourth Malaysia Plan 1981' p. 113). One instrument of regional industrial development policy is the designation of industrial estates. If these are set up in regions which have hitherto remained relatively underdeveloped, they can provide a new focus for local development. In Indonesia, there are two completed industrial estates in Pulogadnang (East Jakarta) and Rungkat (Surabaya, East Java), and another in Cilicap which is not yet fully operational. Other industrial estates either being planned or under construction are in Medan (North Sumatra), Semarang (Central Java), Ujung Pandang (South Sulawesi), Samarinda (East Kalimantan) (Investment Coordination Board 1981, p. 50). The governmental planning authorities responsible are strongly inclined to move medium enterprises in the higher employment categories and large enterprises into these new industrial estates. Thus, medium enterprises are being directly attracted as instruments for regionalizing development. In Malaysia, there are 61 industrial estates, 55 of which are in West Malaysia, and 6 in Sabah and Sarawak; in 1980, 19 of these industrial estates were completely occupied by firms. Here too, small and medium enterprises are only represented in small numbers; their effect on regional employment and their contribution towards nationwide inter-industrial integration is being viewed with increasing criticism (Chee Peng Lim and Lim Chui Chao 1980, pp. 29-32).

Socio-political Development Small and medium enterprises can contribute in many ways to development in the social as well as the economic sphere 59

(Staley and Morse 1965, pp. 243-45). formula ted as: distribution power;

and

Their objectives can be

monitoring of

economic

and

political

creation of development opportunities for the individual in all spheres of life; promotion of individual and collective initiative; realization of basic social justice and solidarity.

values,

such

as

freedom,

In order to appreciate the contribution made by sma l1 and medium enterprises towards achieving these goals, one must bear in mind the fact that there is no sound basis for making any general statements about "good" or "bad" contributions in comparison to those made by large enterprises. This is because there is too much diversity in the points of departure for large and smal1 industries on the one hand, and in the values of the observer on the other. An individual entrepreneur can help to achieve the above aims in his business, or he can prevent them from being realized. We must point out yet again that the presentation of these considerations is a question of showing what opportunities a society offers itself for achieving its socio-political aims if it sanctions and promotes smal1 and medium enterprises as an institution within its framework. The first contribution of the small entrepreneur sector is in supporting the division and monitoring power in the economy. With a large number of small and medium producers operating in different markets, there is a greater probability that competition will prevail. This means in general that prices will be lower; new, improved products will be more frequently introduced; and there will be better services for consumers. If there are a large number of independent enterprises, this will hinder or prevent the concentration of economic power (in the form of market shares and access to resources) in the hands of a few firms and families, or the state itself. A very important side-effect of this is that in a decentralized, competitive structure, the state does not need to impose so many regulations on the economy. In order to assess the competitive structure of a national economy, one could, as an initial approach, refer to the number of enterprises in each industrial group (divided into sub-groups) and the contribution of each to the gross turnover of the group. For Indonesia and Malaysia, only incomple~e data could be compiled. Table 19 shows t~e numbe_r ~f enterpnses per industrial group. These figures, wh1ch rema1n 1ncomplete, support nothing more than

60

TABLE 19 Breakdown of Enterprises by Industrial Branch in Indonesia (1980) and Malaysia (1978) No. of Enterprises Industrial Branch

Indonesia

Food Beverages Tobacco Textiles Garments Leather and leather goods Footwear Timber and timber products Furniture Paper and paper products Printing Industrial chemicals Other chemical products Rubber products Plastic products Pottery Glass and glassware Cement Clay products Non-metallic mineral products I ron and stee 1 Mineral products Machinery Electrical machinery equipment Transport equipment Precision and optical equipment Other products

1,674 100 715 1,957 134 40 57 483 137 84 279 97 297 222 221 21 49 330 203 37 23 363 132 113 178 25 83

Total

8,054

SOURCE:

Malaysia 846 41 68 229 172 18 26 684 189 85 270 80 137 234 157 16 10

199 111 249 304 169 128 13

44 4,479

Biro Pusat Statistik (Indonesia), Industrial Statistics 1980, Vol. I (Jakarta 1982), p. 6 ff.; Department of Statistics (Malaysia), Industrial Surveys, 1978, Vol. II, p. 11 ff.

61

a general statement on the concentration of enterprises in a few industries (for example, in textiles, food, tobacco, timber and timber products in Indonesia). The second contribution of small and medium enterprises is that they are important in providing a direction for social mobility. The establishment of small enterprises, and successful entrepreneurs in part i cu 1ar, provoke numerous attempts at imitation by those who, as craftsmen, traders and skilled workers, are full of ideas and are prepared to take a gamble. Admittedly, a great number of these new entrepreneurs wi 11 fail in the first few years, but their behaviour is very significant for the developing society itself, in that it becomes apparent to everyone from the many thousands of attempts to set up an independent existence that an open society is developing, in which those who are talented and prepared to take a risk can become active irrespective of their social background. Moreover, it shows another way-- apart from careers in politics, government, and the military-- whereby social recognition can be achieved. For a society that has been developing over a period of several decades, this is all of paramount importance if it is to free itself from the dependence of the individual on those who traditionally held a monopoly of economic and political power. A clear indicator of the level of social mobility would be the background of entrepreneurs according to their previous occupation, school education, and ethnic origins, and so forth. No quantitative data to indicate the extent of social mobility in Asian countries have yet been systematically compiled; the few investigations carried out provide the following information on social mobility.

1.

Age profile according to enterprise size. Experience has shown that the setting up of small enterprises (measured in terms of the number of their work-force) is easier, but the rate of failure is correspondingly high; large enterprises usually grow from small ones, and have, therefore, usually been going on for some time. Thus, it would follow that in a particular country at any given time, small and medium enterprises must be relatively new, and larger firms relatively old. A study of the age profile of Indonesian enterprises in 1974/75 (see Table 20) does not contradict this idea. Smaller enterprises in particular have mostly been set up in the last few years. This is an indicator of the opportunities for upward mobility that exist in society. Malaysia shows the same pattern. The following figures relate to 603 bumiputra enterprises surveyed in 1979:

62

Indonesia:

Unit Size (No. of employees)

TABLE 20 Enterprise Age Profile, by Unit Size, 1974/75 (In per cent) Year of Establishment

Total No. of Enterprises

1970-74

1960-69

1960

20-24

43.0

31.2

25.8

1,319

25-29

39.2

33.8

27.0

1,060

30-49

36.8

31.5

31.7

1,928

50-99

32.7

29.9

37.4

1,346

100-399

34.3

23.7

42.0

999

400 and over

30.8

19.5

49.7

302

36.9

29.8

33.3

6,954

SOURCE:

World Bank, Indonesia, Selected Issues of Industrial Development and Trade Strategy, Annex 1, The Structure of the Manufacturing Sector, 15 July 1982, p. 48, Table 21 (excerpt).

Year of establishment

1975 - 1979 1970 - 1974 1960 - 1969 before 1960 (no figures

55.6% 35.0% 6.6% 1.7% 1.2%)

(Ghani et al. 1980, p. 18) 2.

Occupational background of small and medium entrepreneurs. In South Korea (1973), 68 per cent of new entrepreneurs came from other branches of the economy (see Table 8 and pp. 23). A relatively high number of them were originally active in the commercial sector; the figures recorded are: for Sri Lanka, 48 per cent; Pakistan 45 per cent; and the Philippines, 43 per cent (Clapham 1973, p. 104). In Malaysia, of the 871 bumi putra entrepreneurs, the largest group came from the skilled worker category (21.1 per cent). (For the full range of the former occupations of these new entrepreneurs, see Table 21). The figures also give an indication of the opportunities for advancement in society.

3.

Educational background of new entrepreneurs. A survey of 603 bumi putra entrepreneurs in Malaysia showed that the majority (56.8 per cent) had only completed the first cycle of education or had had only a brief education or no formal school education at all (see Table 22).

Thirdly, small and medium enterprises contribute towards the development of a middle class in society. New owner-entrepreneurs and manager-entrepreneurs form a group of people who have learnt to develop initiative, organize, and find solutions to problems. These new aptitudes are not only applied in the economic and technical sphere, but are also extended sooner or later to political and social spheres. Through its particularly active participation in decisions in the economic and social sphere, this group also creates favourable conditions for shared decision-making in the socio-political sphere. These abilities strengthen the foundations for political democracy in society. Small and medium enterprises are involved in many ways in structuring the organizations which promote social pluralism. As members of professional associations, guilds, entrepreneurial organizations, and chambers of commerce and industry, they lay the foundations for the existence of private institutions and the influence that these have. They thus create part of the structure of a free, market economy and a democratic society. The new theory of economic order, which is concerned with the 64

Malaysia:

Type of Previous Job

TABLE 21 Type of Previous Job

Kuala Lumpur Respondents No.

Farmer/Fisherman/Rubber Tapper

r,

Johore Bahru Respondents No.

r,

Total

No.

%

4

0.6

20

7.9

24

2.8

Unskilled Labourer/Gardener

59

9.5

40

15.8

99

11.4

Skilled/Semi-skilled Worker

143

23.1

41

16.2

184

21.1

69

11.2

40

15.8

109

12.5

5

O.B

3

1.2

8

0.9

Clerk/Salesman/Technician

69

ll. 2

18

7.1

87

10.0

Policeman/Soldier

45

7.3

19

7. 5

64

7.3

Senior Civil Servant/Teacher

28

4.5

8

3. 2

26

4.1

Senior Politician/Supervisor

33

5.3

14

5. 5

47

5.4

Others

10

1.6

-

10

l.l

2

0.3

-

2

0.2

618

100.0

871

100.00

Businessman/Shopkeeper

Junior Civil Servant

No Response

--Total

SOURCE:

A. Ghani et al. (1980), p. 12.

253

100.00

Malaysia:

Highest Educational Level Achieved

TABLE 22 Highest Educational Level Achieved Kuala Lumpur Respondents No.

,, ~

Johore Bahru Respondents No.

,,

Total No.

~

~

"

No formal education

21

6.0

20

8.0

41

6.8

Primary 1-3

20

5.7

22

8.8

42

7.0

Primary 4-6

138

39.2

121

48.3

259

43.0

Secondary 1-3

63

17.9

55

21.9

118

19.6

Secondary 4-5

77

21.9

25

10.0

102

16.9

Secondary 6

11

3.2

5

2.0

16

2.6

University

17

4.8

0

-

17

2.8

5

1.4

3

1.2

8

1.3

352

100.0

251

100.0

603

100.0

Diploma

Total

SOURCE:

A. Ghani et a1. (1980), p. 15.

formation of regulations for organizing a national economy (institutional choice), has shown yet again the political importance of the large or small sector of private enterprise (Schenk 1981, p. 222). According to this theory, under the conditions of competition between the programmes presented by the various political parties, the strength of small and medium enterprises helps to determine the way in which the responsibility for economic decision-making in a national economy is shared out between the private and the public sector. When political competition is slight, and the small enterprise sector is small and politically weak, the private sector can generally be expected This situation to have only limited decision-making powers. currently prevails in some Asian developing countries (for example, Indonesia and Thai 1and), and explains, among other things, the high level of state intervention in growth planning, that is, state investment control. In order to appreciate the contribution of small and medium enterprises to the establishment of an indigenous middle class, one would have to refer to the number of newly formed organizations for the promotion of free enterprise (in particular, self-help organizations), the number of their members, and the scope of their activities. Small and medium entrepreneurs can be expected to contribute to the realization of basic social values such as freedom, justice, and solidarity, primarily within the field of responsibility of the enterprise itself, and secondly, for the benefit of local society, and, to a much lesser degree, the developing society as a whole. It has been shown, however, that these expectations have not been met in the closest social arena. Since no empirical research could be found on this subject, a survey of senior managerial personnel from 100 firms in Malaysia is taken by way of substitute (Thong and Yap 1981). Their previous entrepreneurial activities were assessed (high/medium/ low) according to four areas of social responsibility and divided according to the number of firms. The activities involved: high

medium

human resources (that is, well-being of the work-force)

70

28

2

product supply and provision of services (that is, satisfaction of consumers)

70

16

14

social responsibility (that is, measures for the benefit of society)

34

37

39

67

low

physical environment (that is, protection of the environment)

32

37

31

The results clearly show that even in the larger firms in Malaysia, considerable difficulties still exist in recognizing and acknowledging social responsibility.

68

II

FACTORS WHICH PROMOTE AND INHIBIT THE DEVELOPMENT CONTRIBUTIONS OF SMALL AND MEDIUM ENTREPRENEURS: THE EXPERIENCE IN INDONESIA AND MALAYSIA

The concrete contribution towards development made by a small or medium enterprise is the product of an intricate combination of a) behaviour patterns and the associated attitude and knowledge of the entrepreneur; and b) incentives or obstacles which give rise to a particular behaviour pattern. Attitude and behaviour are generally not changeable in the short term. They are formed by upbringing and education and the cultural system in the broadest sense (and are also conditioned by personal disposition), and become ingrained over a period of many months or years. Economic incentives and restraints, on the other hand, can frequently be changed in the short term (for example, in a few days or weeks), according to their scope and intensity. However, positive incentives or the removal of restraints can only lead to a particular change in behaviour pattern if this change is in any case consistent with the general attitude of the entrepreneur. In trying to explain why the actual contribution made by small and medium enterprises to social and economic development and social welfare sometimes meets and sometimes falls below expectations, it is practical to divide these promotional and inhibitive factors into two broad cateoories: environmental factors (external to the enterprise); and~ corporate, or internal factors. From the environmental viewpoint, one can see the kind of climate in which the small and medium enterprise operates. We are not exam1n1ng the cultural and social environment, but are particularly concerned with influences exerted by the area of decision-making controlled by the state, since general economic conditions and the development policy adopted exert a very strong impact on the behaviour of the small and medium enterprise. Moreover, we sha 11 address ourselves to the influence of factors 69

of location, commodity market conditions, and the contribution of self-help organizations to economic life. Examination from the internal, corporate point of view is intended to shed light on the factors within the enterprise which affect the extent and quality of its development contributions. This will concern the management as a whole, the personnel situation, financial control, technical production conditions, and factors affecting marketing. Environmental and internal factors together form the conditions which determine the firm's activities. As an illustration of this, from the point of view of 590 bumiputra entrepreneurs in Ma 1ays i a, the rna in problems fall into the areas shown in Table 23. The greatest difficulties, according to the personal estimate of those questioned (confirming experiences in other South and Southeast Asian countries), arise in the areas of financing, marketing, and administration or management.

Factors External to the Enterprise General Economic Conditions and Specific Industrial Promotion As far as the market-economy-oriented countries of South and Southeast Asia are concerned, it would appear from development plans and other important policy manifestos that their governments are allocating an important role to the private sector -- includinCJ small and medium enterprises -- within the economic and socfal development process. However, state development planning frequently departs from this principle in many details, and in particular in development practice. Small and medium enterprises often have only second-rate importance in industrial development plans. In many cases, this sector receives only a minimum of legal, financial, technical or other assistance. In order to examine the influence of government decisions on the behaviour of entrepreneurs, therefore, it is necessary to start by looking at the real state of affairs where the promotion of development is concerned. The following aims to show, through the examples of Indonesia and Malaysia, how the actual economic framework conditions and special promotional measures influence the activities of small and medium entrepreneurs. Thus, for each country respectively, a short description of the most important measures is linked with an assessment of their effects on the behaviour of entrepreneurs. To qualify this, it must be added that national, regional and sectoral data are frequently unavailable. "In many, if not most,

70

Malaysia:

TABLE 23 Major Problems Facing Small Bumiputra Enterprises No. of Enterprises

Problem

%

Lack of capital/finance Marketing Administration/Management Land/building Raw materials Labour Competition Other No problem

357 91 48 11 4 4

57

8.1 1.9 0.7 0.7 0.3 2.7 9.7

Total

590

100.0

SOURCE:

A. Ghani, et al. (1980), p. 82.

2 16

60.5 15.4

cases governments are neither organized to collect information nor to report on the performance of the sector" (ILO 1979, p. 18).

Experiences in Indonesia. The Suharto government (since 1966), as a starting point for its new industrialization policy, stressed from the outset the need for more liberal economic relations with other countries, the need to encourage the private economic sector and the need for nationalized enterprise in the industrial sector. In the 1970s, however, the influence of state interventionist policies on the life of the economy as a whole increased. The objectives and policy of industrialization have been laid down since 1969 in the Five Year Plans of the government, establishing major changes in priority with respect to objectives and economic methods (World Bank, Indonesia, Main Report, 1981, p. 17ft). Repe 1 ita I (1969/70-1973/7 4) gave a speci a 1 boost to some sectors of industry with substantial state investments (such as in fertilizer, cement, chemicals, textiles, cellulose, and paper), but relatively low priority to the promotion of small industries and the creation of new jobs. Repel ita I I (1974/75-1978/79) embraced the same industrial aims, but gave top priority to the creation of jobs. Accordingly, greater importance was given to the role of labour-intensive small and medium enterprises, and this was matched by protectionist measures in the form of import restrictions and special promotion programmes to provide loans, training, and advice. Repelita III (1979/80-1983/84) comprised broader aims for industrial policy based on three key notions in development: equality, growth and stability. These are given concrete expression in at least ten individual objectives of current Indonesian industrial pol icy: 1.

expansion of opportunities for employment;

2.

production of low-cost mass-produced consumer goods;

3.

reduction of dependence on imports and the guaranteed supply of goods on the domestic market;

4.

export promotion;

5.

regional distribution of industries;

6.

protection of the weaker economic sector ekonomi lemah) and promotion of enterprise;

7.

economic growth; 72

(golongan

8.

restriction of luxury goods consumption;

9.

support for other sectors of the economy through production of necessary inputs (for example, for agriculture), and promotion of manufacturing activities (for example, timber);

10.

conservation of the environment and non-renewable natural raw materials (energy resources in particular).

An analysis of the industrial pol icy measures which were in the foreground in 1978 leads to the conclusion that of the ten individual objectives cited, five have clearly taken top priority:

protection of financially weak enterprises; creation of jobs (during the course of the Third Plan, about 434,000 new jobs are said to have been created in cottage and small industries, with a capital outlay of about US$332 per job (World Bank, Indonesia, Cottage and Small Industry in the National Economy, Vol. II, 1979, p. 9); promotion of "planned" industrial development; promotion of basic national industries (with a very high proportion of state enterprises); and promotion of labour-intensive industrial exports. These objectives are given substance in the form of a 1arge number of industrial policy measures applied at national and regional levels. The measures mainly include industrial licences, control of loan allocation, protection against import competition, a national pol icy on goods procurement, and state investment in many sectors of industry. What effects does this industrial strategy have for small and medium entrepreneurs? Any judgment must be based on the factual finding that the small and medium enterprise sector is very elastic with regard to the economic order (that is, changes in the terms of regulatory policy for this sector lead to relatively strong reactions in the behaviour of small and medium entrepreneurs). Typical changes concern the timing and volume of investments, as we 11 as the 1ocat ion and nature of the investment (for example, labour-saving production processes). On the whole, one can conclude that this industrial policy is more likely to unsettle than to reassure and encourage small and medium entrepreneurs. When weighing up the effects on this 73

private sector of conflicts emerge.

the

economy,

numerous

contradictions

and

On the one hand, the political emphasis on the importance of the private industrial sector and the principle of protecting financially weak entrepreneurs leads one to expect that small and medium industrial enterprises could, with preferential support in dealing with all adverse factors, follow a course of unhindered development. On the other hand, the principle of "planned" industrial development is a sign that presumably the government also wants to control the future structure of the small and med i urn entrepreneur i a 1 sector. If one adopts the principle of promoting a basic national industry with a high level of state backing, then small and medium enterprises are threatened with becoming highly dependent on the state, as a consequence of increasing interventionist promotion and the growing state industrial sector. Whereas accelerated industrialization is intended to create many new jobs, preference is given by the government to those large industries which are capital-intensive. The large-scale investments already planned have presumably only the direct effect of creating about 20,000 jobs; the capital intensity is about US$0.8-1.0 million per job (World Bank, Indonesia, Development Prospects and Policy Options, 1981, p. 40). Thus, the social responsibility of creating sufficient new jobs falls one-s idedly on small and medium entrepreneurs. This entails the danger of making them seem the "culprits" in the growing problems of unemployment. Whereas dependence on imports must be reduced, as indeed the authorities are trying to do by subsidizing national industries, exports need to be increased, particularly by labour-intensive industries, and this is not possible without raising the quality and quantity of machinery and plant, and without unhindered access to low-cost raw materials. Entrepreneurs currently have no way of knowing whether the prices of domestically manufactured machinery, plant and intermediate goods make entry into competitive export markets easier or more difficult. One objective is to protect the weaker business group and to promote free enterprise, although there exists no precise definition of the role of small and medium enterprises in the present and future stages of development.

74

The specific policy of promoting small and medium enterprises can be classified according to its financial and technical components (World Bank, Indonesia, Vol. I, 1979, ch. 4 and 5). Financial promotion consists mainly of a programme of small loans for capital investment -- namely, KIK (Kredit Investasi Kecil) -and a similar programme for operating capital -- namely, KMKP (Kredit Modal Kerja Permanen). These credit programmes are financed by the state and are backed by foreiqn aid. The central bank (Bank of Indonesia) is in charge of their, administration, and repayment is made through numerous national banks. In order to ensure that only the smaller enterprises obtain these loans, limits were imposed, which were raised in 1979, and are handled very flexibly by the banks concerned. These limits s t i pu 1 ate that the fixed assets of a borrower must not exceed Rp.20 million (US$32,000), and operating assets must not exceed Rp.10 million (US$16,000). The maximum loans for KIK and KMPK are Rp.10 million and Rp.l5 million respectively; in exceptional cases these figures may be doubled. The terms for KIK are 10.5 per cent interest per annum, with four (formerly two) years free from payments, and with repayment spread over ten (formerly five) years. For KMKP the interest is at 12 per cent per annum and, as before, three years are given to pay off the debt, after a one-year period of grace. Repayments of these loans can be made through 600 branches of the banking network, with the Bank Rakyat Indonesia (BRI) serving as the main creditor for the smaller industrial enterprises. It has been possible to increase the number and size of loans considerably since the promotion project began. The progress of the KIK and KMKP loan schemes can be seen from Table 24. The tech i cal promotion measures for small and med i urn industries include numerous programmes to motivate and train entrepreneurs, and skilled labour, and to provide counselling on production and marketing. The best known nationwide programme for promoting the financially weak part of the commercia 1 sector is the BIPIK Project (Bimbingan dan Pengembangan Industrie Kecil or Guidance and Development of Small-Scale Industries), which has been supported by the Ministry of Industry since 1974/75. A most valuable study by Lempelius and Thoma (1977, p. 159ff.) gives a detailed analysis of the theory and practice of this project. This latter comprises four stages of comprehensive technical counselling and promotion specially tailored to the problems facing small industrial enterprises. The programme provides for the allocation of raw materials, machinery, and equipment, together with technical aid for the special needs of small enterprises. It aims to provide training for entrepreneurs in the form of short seminars and evening classes in principles of management, marketing, technology, and finance. The programme is organized by regional development centres (which are planned for 75

TABLE 24 Indonesia: Small Investment Credits (KIK) and Permanent Working Capital Credit (KMKP), 1977-81 (In million rupiahs)

Small Investment Credits Approved Number of Applications

Permanent Working Capital Credits Approved

Value

Outstanding

Number of Applications

Value

Outstanding

1977

39,737

74,186

50,463

322,391

114,990

61,839

1978 March June September December

42,163 47,180 50, 895 54,970

79,249 86,375 97,701 105,801

52,704 56,435 61,923 64,711

335,366 365,776 406,518 420,495

124,496 135,547 158,369 177' 239

65,415 70,703 81,204 83, 748

1979* March June September December

57,378 60,716 65,801 72,097

112,809 122,302 139,705 163,110

67,951 73,979 85, 568 99,380

438,027 511' 684 610,881 644,003

188,289 214,094 262,522 304,501

93,157 108,656 129,570 !54,317

1980 March June September December

79,359 87,553 101,224 114,504

190,175 223,915 266,538 313,973

118,265 142,334 175,587 209,747

664,363 782,344 847' 392 889,761

348,901 415,397 493,686 569,150

!81, 096 228,543 277' 762 320,583

1981 March June September November

125,255 138,712 153,014 161,973

366,259 421,396 476,847 509,888

249,004 288,385 321,767 343,601

952,992 l, 077' 871 1,186,224 1,226,066

655,631 799,299 975,822 1,028,638

383,746 474,347 542,530 614,957

*

The maximum amount of KIK and KMKP was increased from Rp 5 million to Rp lO million in February 1979.

SOURCE:

International Monetary Fund, Indonesia: Recent Economic Development, and data provided by the Indonesian authorities.

76

all the capitals of the provinces), and subregional service and demonstration centres (most of which deal with a particular industry), and centres for the initial and continuing training of entrepreneurs. The year 1980 brought provision for the establishment of seven "development zones" for small industry. These zones are distributed according to towns, regions or provinces, and include (NfA, 27 October 1980): Jakarta, West Java, Lampung; Central Java, Jogjakarta, East Java; Aceh, Northwest Bengkulu;

Sumatra,

Riau,

Jambi,

South

Sumatra,

Sulawesi; Kalimantan; Bali, West and East Nusatenggara, East Timor; Maluku and Irian Jaya. Another special promotional measure is the introduction of a "reservation'' scheme, which exclusively reserves the production of certain specified goods for small enterprises. The Ministry of Industry already has a list of 60 products, which is to be increased to about 300 products (Indonesian Times, 19 February 1980). The weak domestic industrial sector is also to be promoted by government commissions. The government makes detailed regulations to determine which enterprises are to be authorized to accept such commissions. An enterprise qualifies as Indonesian (Pribumi) if its shares are owned entirely by Indonesian nationals, or at least 75 per cent of the shares are owned by Indonesian nationals, or at least 50 per cent of the shares are owned by Indonesian nationals, and the majority of the management are Indonesians (World Bank, Indonesia, Annex 3, Industrial Licensing, 1981, p. 106). Recently, the network of "foster father firms" has been strengthened. This is a system whereby the Ministry of Industry promotes co-operation in the widest sense between large and small 77

or medium enterprises; its function is comparable with the role played by the large trading firms in the development of the Japanese economy. What is the significance of these special financial and technical promotion programmes for the development contribution of small enterprises in Indonesia? A positive aspect is that considerable amounts of money are being made available in the form of loans with favourable conditions, and the scope of technical promotion offered is also increasing. Furthermore, efforts are being made to facilitate access for small and medium enterprises into markets for their products. However, it should be noted that through these numerous promotional programmes, the state instrumentation for regulating certain sectors has increased. An increase in the process possibilities means a change in the status of the economic system in Indonesia towards a more state contra ll ed economic structure of the market economy type. Negative factors are those which obstruct or render more difficult a greater development contribution on the part of small and medium entrepreneurs. These would include the following in particular: 1.

High information costs

Indonesia lacks a well organized system for the public dissemination of information on the numerous laws, regulations and government measures relevant to business (World Bank, Indonesia, Main Report, 1981, p. 111). There is no standard official publication available throughout the country in which all laws, regulations, and decrees made at national and provincial level are promulgated. In the business world, further insecurity arises from the fact that laws frequently enter into force before being officially made public. As a result, the individual entrepreneur incurs high costs in the form of lost working time, travel expenses, information fees, and telephone and postal expenses, simply in order to obtain information on general and specific governmental measures affecting industry. Empirical surveys have shown that small and medium entrepreneurs obtain most of their information by chance, through contact with business partners and through the press. Until now, even chambers of commerce and industry, associations and guilds have failed to serve as a useful source of information, and they have not been systematically used as such, because they have not sufficiently realized their potential role as distributors of information. Information costs are particularly high for enterprises in rural regions, a fact which increases the disadvantages suffered in such locations.

78

2.

Regional imbalance in promotion effects

Economic promotion programmes which do not provide for general measures (such as low interest rates, tax concessions, subsidies for energy costs and other essentials) but for special measures for a 1 imited group of addressees presuppose special institutions with appropriately trained personnel. In Indonesia, the addressees who qualify for financial and technical support -that is, the small enterprises -- are spread throughout the country, although their concentration varies. The institutions responsible for these measures, on the other hand, are heavily concentrated in certain regions, with the development centres, for example, being situated only in the provincial capitals, and the service centres in the proximity of a few of the many regional clusters of homogeneous industries. This distribution of promotional institutions has the effect that only a small proportion of the small enterprises have access to their services. The number of local "clusters" of similar industries is estimated to be 312 in East Java, and 1,500 in Central Java, while at the end of 1978, there were altogether only 19 service and demonstration centres in Indonesia (World Bank, Vol. I, pp. 45 and 47). Small enterprises in regions with only a low level of industrialization are, therefore, additionally disadvantaged. Given these conditions, it is difficult for them to make their most important contribution to overall economic progress, that is, the creation of new jobs and the mitigation of the regional discrepancy in the average standard of living. 3.

Technical imbalance in promotion effects

Promotion programmes for small and medium enterprises are organized by a large number of governmental and para-governmental institutions. Individually, they are each responsible for a particular area of promotion or set of measures, with the result that they cannot produce a complementary policy jointly with other institutions. In Indonesia, the Ministry of Industry cannot co-ordinate or call for the technical or financial assistance of other ministries (for example, Ministry of Employment), or the banks. For the enterprises themselves, this often has the consequence that they cannot obtain assistance in the critical areas that are holding them back (for example, machinery, technical know-how, or marketing). This naturally reduces both the micro-economic and the macro-economic benefits of large-scale promotion in other areas (such as loans). 4.

Shortcomings in promotion programmes

The quality of promotion programmes is dependent on various

79

factors, with the financial volume concerned and regional distribution being undoubtedly very important. Empirical findings show that the quality of the material content of the counselling programme and the quality of the expert personnel involved are factors of paramount importance. In both areas, however, there exist considerable shortcomings (World Bank, Indonesia, Vol. I, 1979, pp. 47-49). The content of the courses is too general, and does not provide sufficient instruction on the vital subjects of simple bookkeeping, cost-price analysis and marketing. In the demonstration centres, there is a lack of suitable teaching material and machinery of the appropriate technology. In most cases, the staff is not very highly qualified. Because of the low pay and poor career prospects prevailing in the counselling field, it is rare to find specialists with practical experience in management, finance, marketing, and technology. Therefore, recourse is often had to graduates from technical colleges who take on the post because they have failed to find work in other professions which they would have preferred. Their motivation for achievement is, therefore, correspondingly low. Moreover, there is a lack of suitable institutions to provide them with further training. These qualitative shortcomings have led to a sharp decline in interest on the part of the small entrepreneurs in the courses and seminars, as the anticipated benefits are outweighed by the cost incurred in terms of time and money. According to investigations conducted by the World Bank, the level of participation in these training programmes has declined from about 15,000 in 1975 to about 1,000 in 1979 (World Bank, Indonesia, Vol. I, 1979, p. 48). There are also considerable shortcomings in financial promotion programmes (World Bank, Indonesia, Vol. I, 1979, p. 35-36). The development banks have so far been very cautious about giving loans to new entrepreneurs who are unable to produce any evidence of their capability. Thus, 86 per cent of all industrial KIK loans and as much as 99 per cent of KMKP loans have been allocated to already existing enterprises. Only 975 loans amounting to US$3.7 million have been allocated to newly established enterprises. Most banks have a considerable shortage of personnel sufficiently qualified and experienced in financing small enterprises. This leads to both a casual attitude in handling loan applications and the exclusion of complex cases, as well as failure to give consideration to new enterprises. Experiences in Malaysia. Malaysia's development programme is based on the New Economic Policy (NEP), which was drawn up after the racial riots of May 1969 and laid down for the two decades from 1971 to 1990. The main political task of the NEP is to

80

achieve national unity through the following twofold development strategy: to overcome poverty by increasing job opportunities and the level of income for all Malays, and to restructure society in such a way that economic inequality between the various ethnic groups (53.9 per cent Malay, 34.9 per cent Chinese, 10.5 per cent Indian, and 0.7 per cent other origins) is lessened, and the identification of individual racial groups with particular economic functions is finally eliminated. The strategy aims at striking a balance in economic activities which is more or less in line with the ethnic composition of the population in all areas where until now Malaysians of Chinese and Indian origin or foreigners have predominated. The general socio-economic framework within which the individual quantitative aims of the NEP are pursued is laid down in the Outline Perspective Plan (OPP, 1971-90). A series of five-year development plans has been developed on the basis of this OPP: Second Malaysia Plan (1971-75); Third Malaysia Plan (1976-80); and Fourth Malaysia Plan (1981-85). The objectives are itemized as follows: to achieve a GOP growth rate of more than 8 per cent per annum; -

to achieve growth rates of 13 per cent per annum for the industrial sector (as the leading sector); 8.4 per cent for the service sector, and 5 per cent for the agricultural sector (it is planned that 90 per cent of the 2.4 million jobs created between 1975 and 1990 will be in the industrial and service sectors); to reduce poverty (according to an unofficial definition, the poverty line lies at M$300 per average family of about five persons) from 49 per cent (1970) to 17 per cent of households by 1990. to increase employment of Malays (bumiputra) in the secondary sector from 31 per cent (1970) to 52 per cent (1990); and at the same time, to reduce employment of Chinese from 60 per cent (1970) to 38 per cent (1990). to increase employment of Malays (bumiputra)in administration and management from 22 per cent (1970) to 49 per cent (1990). 81

to increase participation stock companies to 70 per which is to be held by Bussink and Hasan 1980, pp.

of domestic capital in joint cent by 1990, 30 per cent of Malays (bumiputra). (Young, 61ff.)

The economic concept of the Malaysian Government, as expressed in the development plans, on the one hand supports private ownership of the means of production, private investment and private initiative. Thus, the level of investment in the private sector is high in proportion to total investment. In the Fourth Malaysia Plan, M$74,110 million out of a total economic investment of M$102,640 million are to be invested in the private sector, that is, 72 per cent. On the other hand, the state is vested with the power to impose numerous regulations and interventionist measures. The most wide-reaching and at the same time the most controversial means through which the state can influence industry is the Industrial Coordination Act of 1975 (in force since 1976). Through a licensing system which is applied to all enterprises with more than 25 full-time employees and more than M$250,000 in paid-up capital, the development of enterprises and their market access opportunities are monitored from fifteen viewpoints, such as production capacity, product range, location, employment, management structure, export plan, and use of domestic inputs (Young, Bussink and Hasan 1980, pp. 184-85). However, the role of the state in the economy is hardly perceived as being ideological, but is based for the most part on pragmatic principles. The general economic pol icy pursued since the beginning of the 1970s has been primarily growth oriented. It has been and is characterized by state planning of the conditions which govern economic growth. On the whole, the policy of economic growth, which particularly favours private investment, has been consistently geared since 1975 towards preserving price stability. The monetary and fiscal policy, which has been oriented towards stability since the mid-1970s, is largely responsible for the substantial growth in private domestic demand, which has led to a notable improvement in the overall business and investment activity (Bank Negara Malaysia 1979, p. 5). The result of this economic policy is a high real growth rate of GOP of an average of 8 per cent per year between 1970 and 1980, and a rate of i nfl at ion lying between 2. 6 and 6.7 per cent from 1975 to 1980. Malaysia's general industrial policy is on the whole not a result of any rational economic decision between several alternatives, nor is it a consistent policy (Kanapathy 1981, Decisions on industrial policy have been based on p. 5). generally formulated aims, and tended to exploit favourable economic situations. The industrial policy in the initial phase 82

(during the 1960s) was directed principally towards a strategy of import substitution. Then, in the early seventies came the second phase of active promotion of national and foreign private industries which were labour-intensive, export-oriented, and related to the production of raw materials (for example, timber and rubber production). This industrial policy was to provide a basis for rapid industrial growth with increasing employment and higher incomes. The success of this policy manifested itself in the high average annual growth rate of industrial production (9.7 per cent from 1970 to 1980) especially in the finished goods industry (11.8 per cent). The contribution of industry to the GOP increased between 1960 and 1980 from 18 to 37 per cent, and that of the finished goods industry from 9 to 23 per cent (World Bank, World Deve 1opment Report 1982, pp. 121 and 123). Moreover, there was a sharp increase in employment in the manufacturing industry from 623,000 (1976) to 803,000 (1980) persons, that is, by approximately 29 per cent (Ministry of Finance, Malaysia, 1981, Statistical Annex, Table 6.1). Furthermore, this industrialization policy led to an increase in domestic demand for durable consumer goods, services, and housing, thus giving rise to a new and additional area of emphasis for industrial production. On the one hand, economic policy in general and industrial pol icy have created favourable conditions for the establishment and development of small and medium enterprises. The Third Malaysia Plan, 1976-80, specifically laid down that the promotion of smaller enterprises is an integral part of development. On the other hand, the industrial policy applied so far has only made a slight contribution towards developing upstream and downstream industries (Kanapathy 1981, p. 7-9). Thus, in the import substitution phase, mainly production sites for assembly and packing were set up, while in the export orientation phase, the two main exporting industries (electronic goods and textiles) made no efforts to strengthen the domestic production of upstream products. Thus, the third phase of the industrial policy, addressing the 1980s, provides for the promotion of raw material production and the capital goods industry. In heavy industry, it is perceived as being in the national interest that supervision and Since there is management should be in the hands of Malays. allegedly no interest in this direction from the private sector because of the high capital requirement and the long period before the industry becomes profitable, the state carries out the planning, production, and management of these enterprises. The Fourth Malaysia Plan has allocated M$125 million for the Heavy Industries Corporation of Malaysia (HICOM). This policy aims to consolidate the industrial base and achieve a better regional distribution of industries throughout the country. HICOM intends to concentrate on the following industrial categories: 83

iron and metal industry; machinery and equipment manufacture; general mechanical engineering industries; transport equipment; building materials; paper and paper products; the petrochemical industry. What effects do overall economic conditions have on the small and medium enterprise sector? Positive incentives arise from the political emphasis placed on the role of the private sector in development: the monetary and fiscal policies pursued in recent years, which have been geared towards price stability, and the high average growth rate of the economy as a whole, as well as the entire industrial sector. At the same time, however, there are serious obstacles to development: Small and medium entrepreneurs find that the government is applying a comprehensive promotion and protection system for large enterprises. It acts pragmatically according to the merits of each case, its action specially tailored to suit the needs of firms in a certain subsector of the economy in order to correspond with the objectives of the NEP. Measures to which recourse is frequently had include tariff protection, import licensing, exemption from import duties and special taxes, and reimbursement of import duties (World Bank, Malaysia's Manufacturing Sector, 1981, Vol. I, p.8). Small and medium enterprises as a whole are increasingly faced with state intervention in the industrial sector. Economic conditions (import opportunities, loans, subsidies) are estimated to be more favourable for state-owned industries. The small and medium enterprise sector is dominated by uncertainty as to how far the government will try to achieve -- recently with far-reaching regulations -- the main objective of its social policy, that is, to match the extent of economic participation of ethnic groups with the proportion of the population that they represent. The Chinese population is currently the main contributor to overall economic development; a cautious attitude on the part of this group to economic decisions taken would 84

reduce economic growth, and hence the prospects financing the promotion programmes for the bumiputra.

of

In Malaysia, the specific promotion po 1icy for sma 11 and medium enterprises in the manufacturing industry is dominated primarily by the intention to increase substantially the proportion of bumi putra entrepreneurs. The mast important state institutions with these objectives are: Malaysian Industrial Development Authority (MIDA), Majlis Amanah Rakyat (MARA), National Productivity Centre (NPC), Standards and Industrial Research Institute of Malaysia (SIRIM), MIDF Industrial Consultants (MIDFIC), Credit Guarantee Corporation (CGC), and Bank Pembangunan Malaysia (BPM). 1979, pp. 155ff.)

(Chee Peng Lim et al.

The following gives a summary of the main activities of MARA, NPC, CGC and MIDA, as these institutions are the most important in the promotion of small enterprises. MARA (Council of Trust for the Indigenous People) The objectives of this institution, which was created as early as 1966, are to motivate, guide, train and give support to Malays and other bumiputra, so that they can take a more active part in both commerce and industry. Since 1973, the programme has been clearly directed at recruiting new bumiputra entrepreneurs, at the same time promoting already existing industries as a secondary activity. The following measures are applied: Motivation of potential entrepreneurs among Malays and other bumiputra; management training and technical Provision of counselling; for some time MARA has been implementing an ambitious five-phase programme of motivation and training (see Figure 4) (MARA 1981); Award of loans for establishing and expanding commercial and industrial enterprises: loans are granted for various 85

FIGURE 4

A Schematic Oiagra11 of MARA 1 s Efforts to Create New Entrepreneurs

(l)

TARGET GROUPS:

1. IKM Graduands 2. Ex-Police & Military Personnel 3. Youth

4. Graduates of H1gher Institutions of Learning 5. Those Who Are

Interested

(3)

(Z)

IDENTIFYING PROSPECTIVE ENTREPRENEURS

CREATING AWARENESS (PRE-BIPC)

~

OBJECTIVES:

1. Reinforcing Interest

GUIDING PROSPECTIVE ENTREPRENEURS (BIPC)

~

to would-be entrepreneurs 2, Creating Awareness about available business opportunities 3. Providing information on aids and assistance available in MARA and other government agencies

INPUTS:

1. Achievement Motivation

Training Z. Business

Motivation Training

____J~

_

PROSPECTIVE ENTREPRENEURS WITH THEIR PROJECTS

(5)

DEVELOPING AND UPGRADING ENTREPRENEURS

(4)

~

ENTREPRENEURS SUCCEED

~

ASSISTING PROSPECTIVE ENTREPRENEURS (POST -BIPC)

SERVICES:

INPUTS:

1. Advisory Service and Guidance

1. Practical Business

2. Panel of Consultants 3. Special and Regular Courses

2, Loan Scheme

0!9

-

New Enterpreneurs Project Evaluation Credit Assistance Technical Services Marketing etc.

purposes with various conditions attached. For loans of less than M$5,000, the annual interest rate is 5.5 per cent, and for larger loans the rate is 7 per cent. Loans for operating capital are limited to M$20,000 and are repayable within five years; Loans for capital investment (factory sites, machinery and equipment) are limited to M$50,000 and are also repayable within five years; Loans for the purchase of vehicles; Loans for wholesalers and construction industry (maximum M$60,000). In practice, the average size of loans is small: according to figures from 1976, 93 per cent of loans were below M$5,000, 3.5 per cent below M$10,000 and only 3.6 per cent were more than M$10,000 (Chee Peng Lim et al. 1979, p. 44). The majority of loans (60 per cent) were unsecured. Establishment of commercial and transport enterprises and other enterprises in order to increase the participation of Malays and other bumiputra in these sectors; Provision of other services which are needed in general or in particular, in order to promote these groups. NPC (National Productivity Centre) This institution was founded in 1962 and has the following specific functions in the field of management promotion: to raise the degree of management skill at all levels; to increase the efficiency of industrial activities, particularly by measures to raise productivity, improve quality, lower costs and develop constructive relations between management and labour. Since 1976, the NPC has also operated a special training scheme for bumiputra (called the Entrepreneurship Development Programme) which provides for a three-stage programme involving 180 hours of training. The original aim was to train about 17,500 bumiputra entrepreneurs in the first stage of the course by 1980, in order to eventually create 2,187 successful entrepreneurs (that is, participants in the third stage of the course). The government authorities even specified from which categories the participants were to be drawn, namely: 87

technically skilled and private sector (2,000);

semi-skilled workers from the

participants of MARA courses, vocational training schools, etc. (3,000); small entrepreneurs who want (6,000);

to expand and diversify

former members of the armed forces (2,000); other persons wishing to take up a business activity ( 4 '500). In addition there is a technical counselling service which counsels former course participants free of charge, for example, on the application of new production processes with which they were familiarized in the NPC courses. A more formal counselling service is available for a fee, but even this is still much less costly than private consultancy. CGC (Credit Guarantee Corporation) This government institution has the function of encouraging commercial banks to extend credit facilities to small enterprises. A guarantee is given for loans which serve to finance fixed and operating assets. Since 1973, the size of a loan thus guaranteed has been M$200,000 for bumiputra enterprises, and M$100,000 for other enterprises; the maximum interest rate is 8.5 per cent. In addition to this, a Special Loan Scheme was introduced in 1981 which provides credits of up to M$50,000 without security at 7.5 per cent interest for bumiputra enterprises. MIDA (Malaysian Industrial Development Authority) MIDA provides another form of support for bumiputra entrepreneurs by finding products which are particularly suitable for manufacturing in small and medium enterprises. The most recent 1 ist from 1982, which serves as a guide for all applications for loans and advice, includes the following products: 1.

Low density polyethylene bags (LDPB)

2.

Fibre-glass tanks

3.

Polystyrene packing material

4.

Multi-wall paper bags

5.

Vacuum flasks 88

6.

Cement hollow blocks

7.

Pottery decorative items

8.

Wooden door and window frames

9.

Bee honey

10.

Bee honey production

11.

Instant noodles

12.

Wooden picture frames

13.

Rattan furniture

14.

Bamboo sticks

15.

Wooden toys

16.

Wood briquettes

17.

Iron gates, grilles and windows

18.

Battery chargers

19.

Shoe eyelets

20.

Metal spectacle frames

21.

Plastic torchlights

22.

Spring balances

23.

Link chains

24.

Cast aluminium gates

What is the significance of these special programmes for small and medium entrepreneurs in Malaysia? Just as in the case of Indonesia, a positive factor is that the government is making efforts in many directions to expand and strengthen this sector. Access to entrepreneurial training, loans. technology, and market outlets is heavily promoted. Nevertheless, it can be asserted that all these measures are at best a means of compensating for the numerous cases of direct and indirect discrimination which arise from the promotion of 1arge enterprises. Furthermore. so far there has been very little co-operation and co-ordination between the institutions which the government has commissioned to

89

carry out these promotional measures, so that the scarce resources are not used to optimal effect. The special loan programmes have hardly penetrated smaller enterprises. Of the total borrowings from MARA in 1976, about 65 per cent went to commerce, about 13 per cent to the construction industry, 11 per cent to the transport sector, more than 9 per cent to other service industries, and only about 2 per cent to the manufacturing sector (Chee Peng Lim et al. 1979, p. 44). The Credit Guarantee Corporation (CGC) has clearly not played any essential part in financing small firms. In 1979, CGC-secured loans amounted to only M$142.5 million or less than 5 per cent of all loans granted by commercial banks. Since 1973, this programme has assisted only 73,000 small enterprises; this is in contrast to the more than 300,000 small firms existing outside the agricultural sector (Chee Peng Lim 1980, p. 22). The empirical investigation into the sources of the capital needed for establishment cited in the section on capital formation shows the very low contribution which credit institutions make towards the accumulation of financial means. Although some of the special loan programmes have been in existence for many years, there is a 1 ack of information among small enterprises about sources of finance and opportunities for obtaining loans from banks, finance institutions, and government agencies. The camp 1i cated process of app 1yi ng for loans forces many entrepreneurs to have recourse to intermediaries. The special motivation and training schemes for bumiputra entrepreneurs have so far had only 1imited success. Table 25 relating to the first stage of the NPC's Entrepreneur Development Programme (1976-79) shows: that measured on a nationwide basis, participants per year is very low;

the

number

of

that the success ratio ("new entrepreneurs") measured against the original number of course participants for each year lies between 26.6 per cent (1976) and 4.6 per cent (1979), and is thus relatively small. On the whole, it can be stated from the example of Indonesia and Malaysia that the general economic conditions and the special promotion policies have not sufficiently mobilized the potential contribution which small and medium entrepreneurs could make towards the development process. The measures of industrial policy often -- albeit unintentionally -- lead to a virtual discrimination against the small and medium sector. Because industrial policy places too much emphasis on capital, large enterprises are more strongly favoured. This is also the 90

TABLE 25a Breakdown of EDP I By States * 1976

-1976 State

Per lis Kedah P Pinang Perak Selangor Federal Territory Negeri Sembilan Malacca Johore Pahang Trengganu Kelantan Sarawak Sabah

Total

*

Total No. of Courses

Total No. of Participants

1 2 1 1 5 9 1 1 3 1 l l

20 51 27 26 122 223 29 23 66 22 29 23

27

661

Participants in Business 11

22 12

Participants not yet in Business 9 29 15

13

13

18 39 17 9 25 14 9 17

104 184 12 14 41 8 20 6

206

Entrepreneurs Created

445

5 12 9 8 28 18 6 4

16 1 8

6

121

,, " 55.6 41.4 60.0 61.5 26.9 9.8 50.0 28.6 39.0 12.5 40.0 100.0

26.6

EDP I : Entrepreneur Development Programme, Stage I

SOURCE:

National Productivity Centre (NPC), ed., Yearly Report 1979 (Kuala Lumpur

198~),

Appendix E 4.

Total No. of Participants 5 11 7 12 11

12 7 8 11

9 10 11 2 4

120

TABLE 25b Breakdown of EDP I By States * 1977 1977 State

Total No. of Participants

Per lis Kedah P Pinang Perak Selangor Federal Territory Negeri Sembilan Mal ace a Johore Pahang Trengganu Kelantan Sarawak Sabah

Total

*

Participants in Business

117 304 184 291 263 308 155 203 289 229 240 284 57 112

34 123

3036

1174

79

115 87 116 62 74 126 99 93 122 lZ 32

Participants not yet in Business

Entrepreneurs

80

7 49 30 39 27 37 25 14 43 18 31 49 2 12

1862

398

83 181 105 176 176 192 93 129 163 130 147 162 45

EDP I = Entrepreneur Development Programme, Stage I

SOURCE:

National Productivity Centre (NPC), ed., Yearly Report 1979 (Kuala Lumpur 1980), Appendix E 4.

TABLE 25c Breakdown of EDP I By States* 1978 1978 State %

Perlis Kedah P Pinang Perak Se1angor Federal Territory Negeri Sembilan Malacca Johore Pahang Trengganu Kelantan Sarawak Sabah Total

Total No. of Courses

Total No. of Participants

13.8

11 11

21.1 30.2 4.4 15.0

9 12 3 6

97 280 186 198 260 241 138 158 262 275 223 322 88 162

21.4

116

2890

26.5 27.1 28.6 22.2 15.3 19.3 26.9 10.9 26.4

4 11

7 9 10 10 6 7

Participants in Business 33 89 57 86 78 71 55 34 105 88 74

Participants not yet in Business

Entrepreneurs Created

36 62

64 191 129 112 182 170 83 124 157 187 149 234 52 100

4 25 15 12 30 22 8 8 24 23 13 17 4 11

956

1934

216

88

* EDP I = Entrepreneur Development Programme, Stage I SOURCE:

National Productivity Centre (NPC), ed., Yearly Report 1979 (Kuala Lumpur 1980), Appendix E 4.

TABLE 25d Breakdown of EDP I By States" 1979

1979 State

"''"

Total No. of Courses

Total No. of Participants

Participants in Business

Per lis Kedah P Pinang Perak Selangor Federal Territory Neger i Semb ilan Ma1acca Johore Pahang Trengganu Kelantan Sarawak Sabah

6.3 13.1 11.6 10.7 16.5 12.9 9.6 6.5 15.3 12.3 8.7 7.3 7.7 11.0

4 9 5 17 7 5 6 6 9 13 7 6 4 10

110 231 138 174 199 142 171 145 237 319 179 167 110 275

26 76 54 60 73 25 35 43 96 140 43 39 33 114

Total

11.2

98

2597

857

Participants not yet in Business

Entrepreneurs Created

77

2 3 2 6 14 3 2 4 10 5 4 7 4

161

4

2.4 8.4 2.4 5.3 11.1 2.6 1.5 3.9 7.1 2.8 2.9 5.5 5.2 2.5

1740

80

4.6

B4

155 84 114 126 117 136 102 141 179 136 128

* EDP I = Entrepreneur Development Programme, Stage I SOURCE:

,, ""

National Productivity Centre (NPC), ed., Yearly Report 1979 (Kuala Lumpur 1980), Appendix E 4.

Total No. Created

Total %

Created

33 99 56 65 99 80 41 30 93 47 56 79 10 27

13.8 17.8 16.8 15.7 16.8 12.1 12.7 8.1 18.5 9.3 12.4 14.9 5.7 7.0

815

13.6

provisional conclusion of a study by the World Bank, which is still in progress, on the promotion of small enterprises in India, Their the Philippines, South Korea and Taiwan, among others. activities (and the income of the work-force employed there) clearly depend much more heavily on complex sectoral development policies than on special promotion measures, such as loan programmes and technical assistance (World Bank, Research News, January 1980, p. 13.

Location Conditions The location chosen for an enterprise exerts a strong influence on The most vital factors for the its expenditure and profits. choice of location within an economy and a particular region availability of raw materials; labour supply; taxes; include: energy supply; transport facilities; and market outlets (Wohe 1973, pp. 165-70). For small and medium enterprises in the DCs, the availability of raw materials and a market are the most important factors. However, in the majority of cases, when setting up or expanding a firm, an entrepreneur does not have a choice of various possible locations with suitable sites and premises (for example, in a The choice is considerably narrowed down by the town). availability of capital, the shortage of suitable sites and imposed by local the planning restrictions and premises, Very often, the small entrepreneur authorities, and so forth. begins production in smallish buildings annexed to his house (such as in the manufacture of shoes, handbags, fabrics, clothing, and household equipment) or on the same residential site (such as in the manufacture of furniture, metalwork, motor-cycle and vehicle repairs). Most small and medium enterprises today have locations which are not -- or at least not permanently-- intended for industrial purposes. Small enterprises in urban areas are mainly situated in residential areas (about 40 per cent), commercial districts (about 47 per cent), and other areas not suitable for industrial purposes. In Malaysia, it is estimated that about 70-80 per cent of all small industrial firms operating in urban areas have an illegal status because they are working without a licence from the This situation raises some grave state or local authority. socio-economic and infrastructure to relating problems considerations, both for the enterprise itself and for its environment (Federation of Malaysian Manufacturers, 1982). All this implies considerable nuisance factors for the environment in residential areas (noise, dirt, refuse, fire risks) 95

and also for traffic (transport to and fro of goods, storage and processing of goods on the street). For example, 40 per cent of 499 enterprises surveyed in Butterworth, Malaysia, had no waste containers, 64 per cent out of 191 enterprises burned their waste, and a further 8 per cent just dumped their waste (Goh Ban Lee 1976, pp. 11 ff.). Illegal tapping of electricity supply cables frequently leads to blown fuses and power cuts, large fluctuations in voltages, and fires due to overheated electric cables. Water supplies and sewerage in residential and commercial centres are not capable of meeting industrial requirements, and problems often arise here. For successful small industries, the expansion of the production plant is often difficult or even impossible in the original location. Increasing environmental awareness, at least in the conurbations of the DCs, has caused the authorities to adopt more stringent legislation on waste disposal, an innovation which raises production costs. Unlicensed industrial activity leads to various forms of corruption. Owners of small firms are well aware that the local authorities tolerate the present situation in order to keep the enterprises and the jobs that they provide going; nonetheless, they remain heavily dependent on the goodwill of the authorities and those who work there. On the other hand, the present locations preferred by small and to some extent medium enterprises also offer considerable advantages. Family business and accommodation are often in the same building, which commands a relatively low rent. Local market outlets are to a certain extent just on the doorstep, and products can be marketed there without an intermediary. The labour force (permanent and temporary employees) live in the immediate neighbourhood. Thus, a potential labour force can be utilized which would otherwise remain unused. The particularly important informal information channels via which information on prices, products, marketing outlets, and technology can be obtained, are well developed and reliable. A new location would present the enterprise with considerable difficulties in all these respects. The study conducted in Butterworth, Malaysia, shows that of a total of 482 enterprises surveyed, 55 per cent wanted to keep the same location and only 21 per cent were prepared to move to nearby industrial estates (Goh Ban Lee 1976, p. 37). Small enterprises usually remain in their initial location for many years; when business expands they try to procure additional buildings, preferably in the immediate vicinity, which they purchase or rent on a long lease. However, empirical inquiries show time and again that the shortage of industrial sites and premises is one of the main location problems for 96

enterprises. Chee Peng Lim established in 1974 that of 227 entrepreneurs questioned in Malaysia, 24.7 per cent considered this to be their greatest operational problem; more than 20 per cent of the enterprises had their production and service areas in residential buildings and sheds, and even those that operated in factories and shops were mostly in cramped conditions and poorly accommodated (Chee Peng Lim et al. 1979, pp. 123-24). Hitherto, relocation of a business to another part of town or another region is a rare exception. One reason for the small degree of mobility is that under the terms of the national industrialization policy, established industrial estates are mainly reserved for medium and large enterprises. There is no evidence that small supply enterprises or service industries are accepted on industria 1 estates. The State Economic Deve 1opment Corporation (SEDC) of Malaysia has so far completely excluded from its planning (for example, in plot delimitation and rents) the possibility of allocating industrial premises to small industries on a rental basis or for purchase by instalments. Although smaller firms were officially given priority for moving into the first two industrial zones opened in Indonesia at the beginning of the seventies (Jakarta, Surabaya), it is the large and medium firms that have made much greater use of this opportunity (RKW 1980 ' p. 72) . On the whole, from an inspection of small and medium firms

one gains the impression that many of them have assumed industrial

production processes and dimensions which, in their present location, are contributing quite considerably to environmental nuisance. Small entrepreneurs in Indonesia and Malaysia do not have a very developed awareness of their own production methods as sources of environmental nuisance. They do not understand the necessity to make a voluntary contribution to environmental conservation out of a sense of social responsibility.

Conditions on Markets In both the procurement and sales markets there exist a set of factors which create difficulties for the small and medium enterprises. A very strong influence on both markets is the obstacle posed by the market power of the middlemen. Since in Indonesia and Malaysia these are mostly Chinese, the economic problem of market power also assumes a very special social dimension. For small entrepreneurs in ·particular, but also for medium entrepreneurs to a large extent, the power of middlemen puts them, the producers, in the position of being and remaining dependent, in that they have no way of knowing or finding out what business alternatives there are either in the procurement or the

97

sales market. It is common practice for the retailer, who buys the products at a fixed price, to pay the producer a few weeks in advance, as the 1 atter does not have the necessary operating capital to finance the production process. This is the experience reported by roof-tile manufacturers in Madura, Indonesia (Harper and Tan 1979, pp. 57-59). The practice in other sectors (such as in the textile and leather industries) is that the middleman provides the raw materials and buys back the end product of the manufacturer at a price that is agreed beforehand. Sma 11 producers are thus dependent on the middleman, who combines the functions of creditor and purchaser in order to ensure his monopoly as a buyer. Frequently, machinery and tools are also procured through the middleman. The producer does not normally know from which suppliers and at what prices and quality he could otherwise obtain these inputs; nor does he know of any other sales outlets, especially when the market is not in the vicinity of his business. He cannot build up independent market channels with other suppliers and purchasers. It is likewise impossible for him to compare the prices and the conditions attached to machinery and tools. And in addition to this lack of knowledge about different suppliers, there is also the practice of financing new acquisitions with a loan obtained from the supplier, in which case the purchase price and the interest on the loan are often not specified separately. The market power held by middlemen can thus lead to the "exploitation and abuse" of small and medium enterprises, so that they can hardly increase their capital, and hence productivity, to the desired extent. Moreover, this market power prevents entrepreneurs from taking their own direction in searching for new procurement and sales markets. They have no opportunity to learn from experiments with these markets (such as trying out different technologies and marketing strategies). In spite of all the negative effects that the market power of middlemen may have, it should not be overlooked that in certain phases of development they do have positive effects for small and medium entrepreneurs which would not be easy to substitute. Frequently, for example, middlemen are the actual business pioneers who combine new ideas with capital and stimulate the manufacturers into production. It is often the middlemen who develop new sources of inputs and market outlets, suggest new products and partially finance the new production. For these reasons, government promotion of the Indonesian and Malaysian economic sectors has not been directed towards destroying the predominantly Chinese retailing sector, but towards controlling and reducing its power. Another

prob 1em

is

the

change

98

in the structure of demand

brought about by government contract work such as those awarded in Indonesia and Malaysia to support the domestic enterprise. In this case, the state is acting as a monopolistic, partly ol igopolistic consumer of products for the public administration and public-sector enterprise. As this contract work is not awarded primarily on the basis of productivity criteria in the small and medium enterprise sector, but rather on the criterion of development worthiness, there is a great danger that scarce entrepreneurial resources will be misdirected: the domestic entrepreneur will spend a lot of time, energy and financial means on directly or indirectly (that is, through private intermediaries or co-operatives) acquiring these government contracts. These can affect the structure of his production in such a way that products manufactured hitherto are abandoned, and the existence of the enterprise thereby becomes dependent on government contracts. In order to obtain the official status of an enterprise worthy of development, financial interests and the composition of the management are frequently man i pu 1ated (increasing the proportion of bumiputra or pribumi) in a way which has 1ittl e to do with medium or long-term business planning. Serious difficulties for small and medium enterprises arise from the low level of market transparency on their sales and procurement markets. Unlike in industrial countries where an overall view of the market may be deliberately obscured as a feature of corporate policy (for example, by a high level of product differentiation), in the DCs in Asia the problem arises from a whole series of institutional factors and behaviour patterns. In general, it can be stated that there is a shortage of suitable distributors of information to small and medium enterprises. For this group, there is no institutionalized, reliable and systematic source of information on markets (such as scope, quality, prices, competition situation). Neither the private sector (for the contribution of chambers of commerce and industry, see below), nor the public or parapubl ic sector has so far produced efficient means of informing this category of entrepreneurs on general and specific economic issues. Enterprises find it difficult to gain access to government markets because they are not familiar with the pertinent government regulations or the requirements (as in the case of tenders). With regard to the private markets, there is a lack of information on short and long-term market development trends to which an entrepreneur should adjust his production. There is too little information on market niches in which firms with a small output could compete successfully on the markets for mass-produced goods. The level of transparency on the consumer market because enterprises have insufficient access to the 99

iS

lOW

pub 1i c

(advertising is too expensive for this sector of enterprise) and so far only few special trade fairs, permanent exhibitions or sales campaigns (such as those in shopping centres and international hotels) have been organized. Domestic consumers, particularly in the urban areas, often are not familiar with the products of small and medium domestic enterprises or are extremely distrustful of and prejudiced against these products when measured against international standards of quality. Another marketing obstacle is represented by unfair competition. Due to inaccurate cost calculation and planning, many sma 11 entrepreneurs are inc 1 i ned to offer prices that are very low in order to obtain urgently needed cash through quick sales. This amounts to "price dumping", or selling below the cost price, and creates unfair competition. The same applies if large firms deliberately undercut prices in order to oust other firms from the market under the terms of a ruinous competition policy. Another instance of unfair competition is product imitation by other suppliers. In countries where it is difficult to maintain laws protecting new products and production processes and even more difficult to enforce them, illicit imitation can cause serious financial loss to the first inventor or user. However, even if there were such 1ega 1 channe 1s that one cou 1d resort to, not all the so-called innovations could be protected, and imitations would therefore still be possible. This is also wrongly defined by small and medium entrepreneurs as unfair competition, although it is really a macro-economically desirable case of innovations being disseminated by imitating entrepreneurs. If, for example, former staff members of a firm start their own business by imitating the product, the first entrepreneur frequently does not react by exploiting his comparative advantages (such as lower production costs and better knowledge of the market), but changes instead to another product. Even market competition is perceived by small enterprises as preventing their expansion. In Malaysia, many bumiputra enterprises set up in the past ten years are faced with intensive competition from domestic and foreign suppliers who are already well established in the market. Given the limited managerial and commercial experience of the new entrepreneurs, these enterprises experience difficulty in competing with other suppliers (Ghani et al. 1980, pp. 84-85). One particular problem for small entrepreneurs in Indonesia with regard to procurement is the stringent import restrictions imposed on second-hand machinery and plant. Admittedly, this regulation is primarily intended to promote domestic manufacture of capital goods, but it does make it difficult for smaller firms with limited financial means to replace their old machinery or

100

increase their capacity. Machinery that is five years old is about 60 per cent cheaper than new machinery, and, given the conditions prevailing in the DCs in Asia, can still be used on an economically viable basis. The government occasionally allows exceptions to these import restrictions; an ex amp 1e here are the proposals offered to the Indonesian textile industry in May 1982. However, this kind of selective policy leads to a considerable misdirection of capital in the economy, insofar as other branches of industry, which can only avail themselves of new machinery, incur higher capital costs per unit of production. Another procurement problem is the question of upstream inputs and services and intermediate goods. The Indonesian consumer goods industry, according to a study by the Ministry of Industry and KADIN, protests at the quality of the inputs supplied. Not infrequently, these are already eight or ten months out of date; often, imported input materials are of a higher quality. The keen competition felt by small and medium enterprises on the consumer goods market demands a higher quality of raw materials and other inputs.

Institutional Representation of Small and Medium Enterprises Negative effects on the development contribution of small and medium enterprises derive from the fact that they and their interests are not, or at least not sufficiently, represented by institutions in society. Without doubt, the economic and social prob 1ems encountered in sma 11 and med i urn enterprises are of a quite different kind from those encountered in large enterprises. It would, therefore, be practical to be able to bring these specific difficulties to the attention of government departments, banks, training centres, technology centres, and others. For this reason, the difficulties which these enterprises typically encounter have not yet been given sufficient attention in institutes of management, productivity centres, technical institutes, universities, vocational training institutes, and schools (ILO 1979, p. 15). It can be observed time and again that industrial promotion programmes are introduced without taking adequate account of the interests of the small industrial sector. Examples in this connection are the national education system and occupational guidance provision; these often jeopardize the supply of qualified manpower for small and medium enterprises by placing emphasis on training a labour force for large enterprises and the public administration (ILO 1979, p. 18). In

the mixed

economies

of 101

the

countries

of

South

and

Southeast Asia, it is very important that private entrepreneurs should be able to counsel and influence the government on economic and social issues via influential organizations which represent their interests. When structuring national legislation on employment and social affairs in particular, special care has to be taken that the intent of these laws is not solely directed towards politico-social objectives, but also bears a relation to actual economic possibilities. Employers' organizations, therefore, have an important advisory function to discharge concerning the social effect of economic planning and the economic effects of social and labour legislation (ILO 1979, p. 32-33). The more governments shift the emphasis of their economic policies from general to special, selective measures, the more urgently individual branches of industry need to have their interests effectively represented. Large enterprises can usually speak directly to the responsible government department, whilst sma 11 and med i urn entrepreneurs need an organization to conduct a dialogue on their behalf and secure influence for their interests. An industry must also be able to protect itself against an over-powerful state, and this is easier if it has at its disposal a suitable organization with qualified experts. In Malaysia, for example, under the terms of the Industrial Coordination Act (in force since 1976), the number of state regulations and controls applied to enterprises with more than 25 employees has increased; large enterprises, on the other hand, can influence such developments because of their closer contact with the decision-making authorities. The interviews conducted with small entrepreneurs showed that they were aware of the existence of national entrepreneurial organizations and some other organizations of private enterprises, but did not consider membership to be of any use. They were not sure what they could expect from these organizations. Most had no idea what important advisory and information services or training opportunities these organizations could offer in many fields; and this at a reasonable cost. The same was found to be true concerning the organizations which were especially created to promote indigenous entrepreneurs in Indonesia or Malaysia. In Indonesia, six special organizations have been set up in collaboration with the national employers' association, KADIN, for the promotion of the weak Indonesian sector of the economy: 1.

HIPPI

Himpunan Pengusaha Pribumi (Indigeneous Entrepreneurs' Organization)

2.

HIPMI

Himpunan Pengusaha Muda Indonesia (Young Indonesian Entrepreneurs' Association age limit for membership: 40 years) 102

3.

KUKMI

Kerukunan Usahawan Kecil & Menengah Indonesia (Small and Medium Business Society of Indonesia)

4.

H IPLI

Himpunan Pengusaha Lemah (Weak Entrepreneurs' Organization [Pribumi])

5.

HIKSI

Himpunan Industry Kecil Seluruh Indonesia (Small Industrial Organizations of Indonesia)

6.

GENSI

Gabungan Pengecer Seluruh Indonesia (Retailers' Association of Indonesia)

So far, KADIN and these organizations have had only limited success in appealing to small and medium entrepreneurs and recruiting them as active members. For example in Bali, of a total of 12,557 businessmen registered in February 1982, only about 1,000 were members of KADIN. Even for small entrepreneurs, the membership subscriptions should not have represented a drawback, as these are relatively low: Ro 100,000

for 3 years for firms with an operating capital over Rp. 75 million

Rp 75,000

for 3 years for firms with an operating capital of Rp. 25- 75 million

Rp 30,000

for 3 years for firms with an operating capital of Rp. 25 million

The membership structure of HIPMI in 1981 was as follows: 15 per cent large enterprises, 40 per cent medium enterprises, and 45 per cent small enterprises. As bee ame c 1ear from the ex amp 1e of HIPMI's activities in Palembang, South Sumatra, this organization functions, inter alia, as an intermediary between the government and private enterprise. Government construction and transport contracts are made known to this organization and are communicated thereby to its members. In Indonesia, the employers' association, KADIN, has recently been publicly criticized by political circles. It had allegedly failed to act in partnership with the government in helping to formulate and improve economic policy by submitting proposals or comments on economic policy. Furthermore, it had paid too little attention to the small industrial sector. Even if this official critique assigns the association for private enterprise a dependent role (Indonesian Times, 27 April 1982) -- which is not acceptable for a self-help organization representing free enterprise-- it quite rightly sheds light on weakness in the functioning of this institution. 103

Small and medium entrepreneurs themselves are often very apprehensive about these special institutions because they were not established by individual initiative as real self-help organizations, but rather as quasi-state institutions in Indonesia, forming an integral part of official industrialization policy. This was emphasized and confirmed in a contract of co-operation drawn up in May 1982 between the Investment Coordination Board (BKPM) and KADIN, under the terms of which joint studies are to be carried out on investments and key projects.

Internal Factors of the Enterprise Conditions of Management A few factors are sufficient to understand the conditions which are characteristic of business conduct in small and medium enterprises in the manufacturing sector and which therefore bring any influence to bear on their contribution towards development. Surveys among small and medium enterpreneurs as to their motives for establishing an enterprise in their own right in different sectors of the economy generally reveal two main reasons for doing so: the desire for independence and the aim of increasing one's own personal income. This is shown very clearly, for example, from the answers given by 239 entrepreneurs in Malaysia. The most important reasons for establishing an enterprise are given in Table 26, broken down according to the replies given by representatives of the three main ethnic groups. Table 27 shows the three main reasons for establishing a business activity. Similar results were obtained from a survey conducted in 1977 among 144 entrepreneurs (73 Malay and 71 Chinese) working in the manufacturing sector, the construction industry and the retail trade (Abdul Aziz Mahmud 1980). To the question as to business expectations, 93 per cent of those questioned expressed the desire for an improved material and financial position, though the Chinese were considerably less ambitious than the bumiputra (cf. Table 28). The way in which these objectives are pursued is generally limited by two conditions: 1.

The level of training among new entrepreneurs has predominantly been reached on the basis of a low level of formal school education and in conjunction with practical work experience (cf. Table 22 on the highest level of formal education attained by entrepreneurs in Malaysia); 104

TABLE 26 The Most Important Reason for Entering Business, by Race

Malays

Chinese

Desire to be independent More money in business Inherited business Encouraged by government assistance More challenging Nothing else to do Side income Other reasons No response

15 10 6 2 3 2 1

25 48 36

2

Total

54

Reason

SOURCE:

13

Chee, Puthucheary and Lee (1979), p. 104.

Indians & Others

Total

-

2 6 1 1 1 1 1 4 1

42 64 43 3 16 15 6 47 3

167

18

239

12 12 4 30

TABLE 27 The Three Most Important Reasons for Entering Business, by Ranking

First Reason No. %

Reason

Desire to be independent More money in business Inherited business Encouraged by government assistance More challenging Nothing else to do Side income Other reasons No response

Total

SOURCE:

43 64

43 3 16 15 6 47 3

239

Ibid., p. 104.

17.0 26.5 18.0 1.3 7.2 7.6 2.6 19.0 1.3

Second Reason % No.

61 74 10 3 27 9 12 24 19

239

25.6 31.0 4.2 1.3 11.3 3.8 5.1 10.5 7.7

Third Reason No. %

51 27 10 14 36 21 12 18 60

239

21.4 11.3 4.2 1.7 15.1 8.8 5.1 7.6 25.2

Total No.

154 164 63 20 69 44 30 89 82

717

%

21.4 22.9 8.8 1.5 9.6 6.1 4.1 12.0 11.0

TABLE 28 Analysis showing Level of Business Aspiration, By Race Race Whether or Not Entrepreneur wants to be Better Off No.

,,

~

Malay No. "

~

Chinese Noa

%

Yes, moderately better off

29

(20.1)

7

( 9.6)

22

(31.0)

Yes, much better off

72

(50.1)

39

(53.4)

33

(46.5)

Yes, make a fortune

33

(22.9)

23

(31.5)

10

(14.0)

No, currently content

10

( 6.9)

4

( 5.5)

6

( 8.5)

144

(100)

Total

SOURCE:

Abdul Aziz Mahmud (1980).

73

(100)

7l

(100)

2.

The starting capital is derived from personal savings and

informal loans from family and friends. It can be argued that these four factors -- the desire for independence, the aim of increasing personal income, a limited formal education, and a small amount of personal and family capital -- are the conditions which determine the conduct of the sole owner in the first few years of being an independent entrepreneur in his own right. This has positive and negative effects on the contribution of entrepreneurs to development.

The new entrepreneur's positive characteristics are generally referred to as: initiative and imaginativeness, enthusiasm, -

drive and persistence, the ability to instill confidence and to convince, courage and readiness to take risks, readiness to be productive -- (the new entrepreneur is ready to work hard and under conditions which he would not accept if working for anyone else).

However, empirical studies show that on account of socio-cultural values and behaviour patterns, the entrepreneurial characteristics referred to above are not all positively pronounced among new entrepreneurs. An insight is given from the results of a psychological test involving 144 entrepreneurs in Malaysia, in which personal evaluations of socio-cultural values and behaviour patterns were to be recorded on a scale of +44 to -44. The results (in total and on average for both ethnic groups) are presented in Table 29. They show that characteristics important for entrepreneurs, such as personal independence and willingness to accept risks, are very poorly developed, or at most developed to a very limited extent. On the other hand, there is a distinctly marked readiness to engage actively in trade. The following negative characteristics can be identified: l.

The basic attitude of entrepreneurs in small and medium enterprises is characterized by an autocratic approach. If one takes the results of surveys of managers in Indonesia, Malaysia, the Philippines and Thailand, then the evaluations of the need to share information with others, as well as the evaluations of leadership quality 108

TABLE 29 Psychological Test Scores N = 144 Mean Score

Socio-cultural Value/Attitude

Total Malay

Chinese

I ndi vidu alism

-19

-15

-22

Risk-taking

5

17

- 7

Trust

1

- 1

2

Activism

31

32

30

Conservatism

19

34

4

Maximum score Minimum score Source:

+44 -44

Abdul Aziz Mahmud (1980).

and initiative of colleagues, and the need to let them take part in the decision-making process (participation), are all very low. They indicate a distinctly paternalistic attitude (Redding and Casey 1976, pp. 8-9). 2.

There is a shortage of the basic skills needed to manage an enterprise successfully. In the case of small enterprises it can be said to be a lack of business know-how, as this expression describes the difficulties more accurately than the widely used phrase "management problems". The gap in knowledge appears in all areas of business with the exception of small sectors of production, because often it is a good knowledge of the product, or its method of manufacture, which originally led the entrepreneur to take the step towards independence. A total lack of, or only limited knowledge, can be identified in areas such as book-keeping, costing, financing, procurement, warehousing and stock-control, production scheduling, quality control, sales and marketing, and personnel management. The entrepreneur does not understand financial statements; he is unable to interpret and use them. He is unable to fulfil the socially important task of the entrepreneur of controlling and as far as possible reducing his production costs. To a lesser extent, all these failings are also to be found in many medium enterprises. In Indonesia, there are very many small entrepreneurs who keep no written records at all of expenditure and receipts, do not differentiate between personal and business expenditure, and have no accurate conception of their production costs (for example, unit costs). In many cases, the value of physical assets (machinery, plant and tools) is unknown, because no inventory has ever been made. In the same way, the stock is recorded neither by type and quantity nor by value. In all, these entrepreneurs contribute only modestly to development in the sense defined in Chapter 1. This lack of fundamental business know-how is in many cases so serious that even the many positive characteristics of the new entrepreneurs are not sufficient to compensate. These enterprises stand as marginal enterprises on the threshold of economic collapse not just in their first year of activity, but for several years thereafter. This lack of business know-how causes the banks (and also the suppliers) to refuse any credit, even if a security could be arranged in the form of real estate. Here, even the credits which

110

have been created in special credit programmes for small enterprises without the need for securities are only granted with hesitation. In the same way that basic principles of good management learned and applied as a substitute for real securities have favourable effects on business relations with suppliers and credit institutions, too little know-how has negative repercussions. 3.

The small and even the medium entrepreneur is predominantly a sole proprietor (although informal family credits may have been given). As proprietor-entrepreneur he tries to remain responsible for every decision. The consequence is that his activities are fragmented over many areas and none can be performed to maximum possible effect. A concentration of the entrepreneur's ability-a scarce commodity in any company -- on central tasks, such as cost reduction and product improvement, cannot take place.

4.

Very frequently, the small entrepreneur does not feel himself to be adequately equipped, in terms of education, social status and technical ability, to make contact on his own initiative with those institutions which could assist him. It is known that these are the reasons why visits are not made to credit institutions nor enquiries made of them. The same can be observed with respect to the strong sense of reserve shown in becoming a member of producers' associations and other independently administered associations of the economy, or in simply asking them for advice. For the same reasons, fewer members of this group of entrepreneurs attend state or private institutions for the purpose of commercial or technical training than should be the case in view of the difficulties they experience in business. However, these observations must be qualified in that it is not the intention of the banks, independently administered organizations, and institutions of initial training and continuing training to embrace all the country's small and medium entrepreneurs. From the macro-economic point of view, they should look merely to those among them who have, or can show, promising potential for development. A meaningful promotion policy therefore needs criteria and procedures by which those entrepreneurs who are capable of development can be identified and supported.

111

Personnel Situation For small enterprises the greatest problem, as far as personnel is concerned, is that, on the whole, employees have few occupational skills. Normally, workers who are employed have no, or only 1imited, practical training; then they are trained at the work-place by the entrepreneur himself and/or by one of the few qualified employees already available. However, as the new employees become more qualified, their ability and indeed their personal inclination to join medium or larger firms increases. These firms lure away better trained workers as neither the training facilities within the firm, nor the government-run training establishments are adequate to satisfy the growing demand for skilled workers and trained employees. For example, in Malaysia in 1981, the National Industrial Training and Trade Certification Board could only examine a total of 6,600 candidates for a total of 23 occupational fields (Bank Negara Malaysia 1982, p. 110). Provided that industrial zones or free trade areas with domestic and foreign medium and large businesses are located in close proximity to each other (such as in Penang), their ability to attract labour is remarkably strong. These businesses are in a position to collect the necessary qualified personnel every day using their own transport, even from quite distant villages. For small enterprises, this means that private investment has been made in the area of training, with the investor himself often deriving very little benefit. Thus, the dilemma arises: improved training increases productivity in the enterprise but at the same time encourages the employees to move to other jobs. The problem hardly exists in medium enterprises, or at least it is not as severe. These enterprises have their employees trained, sometimes for several months, in external institutions. For example, a medium enterprise in the metal-working industry in Butterworth, Malaysia, sent two employees for further training to There they the Prai technical training centre for six months. acquired additional specialized skills in welding, drilling, turning, grinding, milling and planing. They had to give an undertaking to the entrepreneur that they wouid remain with the enterprise for at least five years. For small enterprises, a second problem where personnel is concerned is that it is scarcely possible to keep secret information about products and production processes once experienced employees leave to join competitors or start their own business. In the history of the industrialization of Europe too, this movement of skilled manpower was one of the most significant ways in which technological information was communicated. In the absence of patent rights, laws of protection

112

or appropriate regulations concerning industrial law, or if such are not enforced, the entrepreneur himself must seek to protect his rights to technical innovations (property rights), frequently at high cost to himself. This often takes the form that only the entrepreneur himself or employed relatives know the precise details of the innovation and that any skilled employees who are informed are bound to the enterprise by high wages and additional financial rewards.

Problems of Financial Control Almost without exception, entrepreneurs in small and medium enterprises cite financial problems as being one of the greatest difficulties. They complain of the inadequacy of their capital assets and operating capital. Many believe that they only need easier access to capital in order to be more successful in business (Harper and Tan 1979, pp. 33 and 93). These statements cannot be supported by the accounts figures, espec i a 11 y in the small enterprises. In the study of the small bumiputra entrepreneurs in Malaysia, it was found that most of the firms surveyed kept no detailed accounts, prepared no regular financial statements to inform the entrepreneur as to business development, and were unable to present a profit and loss account or a balance sheet. There were no clear ideas of the various costs involved in the business, and no financial budgets were prepared for the different business activities (Ghani et al. 1980, pp. 65-66). In the case of small enterprises, the capital assets consist entirely of material assets, such as land, machinery, plant, tools, furniture, and fixtures. There are hardly any fixed intangible assets or invested capital. Certainly, in most cases the material assets are very low in terms of value, but of vital importance is how they are used appropriately and to economical effect. At this point, it must be said by way of criticism that on the one hand many small entrepreneurs -- as well as many medium entrepreneurs -- have no accurate idea of the current value of the material assets available, as no, or no regular, inventory has been carried out which records the assets by type, quantity, and value. On the other hand, time and again when visiting smaller or medium enterprises it can be seen that some of the assets quite clearly remain unused. Typical of this are small and large machines, tools and equipment covered with dust and standing or lying around on the premises and which have not been used for a long time. In cases such as this, what little capital there is, is tied up in the wrong place. The situation is similar with regard to operating capital. It can usually be found that there is no economically sound

113

relationship between the volume of stocks and the end products held on the one hand, and the normal production requirements and turnover on the other. Too many of the smaller and medium entrepreneurs tend to react to genuine, or only apparently favourable, price offers for primary materials by buying in excessive quantitites. They hope to be able to process these materials shortly but seldom have an appropriate production and Even if the excessively high stocks market policy (see below). are financed by suppliers' credits, the interest costs which are involved mean that operating capital is tied up unnecessarily. Another area which also causes problems is that of financial receivables from customers. Frequently, customer credit is given in order to keep customers or win new ones. If the market position of the small and medium offerer is weak, then he must grant a long grace period and a relatively low rate of interest. Consequently, more of what little operating capital he has, is tied up. In addition, it is difficult (for example, due to the limited powers of the legal system) to collect debts from customers who are unwilling to pay. On the whole, it can therefore be said of the problem of financing that each individual case must be analysed in detail in order to determine whether the rea 1 prob 1em is the incorrect use of capital, or -- as is usually maintained -- the lack of capital. This distinction is of the greatest importance in answering the question why the contributions to development on the part of entrepreneurs are being fulfi 11 ed successfully or less successfully. Poor use of capital assets and operating capital means that the concentration of capital in small and medium enterprises is greater than is necessary from an economic point of view. It explains why the failure rate is so high in the first few years of a business's existence. Furthermore, it affects the productivity of labour as unused, surplus fixed capital is not converted into serviceable new or used machines. The distinction between the incorrect use of capital and a shortage of capital is just as relevant in respect of promotion policy. In the past in Indonesia and Malaysia, as in other DCs in Asia, measures have been taken to promote exclusively the expansion of financing capabilities for the small and medium enterprise sector (for example, easier access to credit, and subsidized interest charges), without taking into account the fact that this does not solve the problem of the misuse of capital, but rather tends to exacerbate it. The use of credits from state and private banks and special financing institutions is frequently prevented by difficulties within the enterprise, apart from the problems which exist with these institutions themselves (cf. the observations above). The

114

lack of securities for collateral and the lack of organized book-keeping are both typical problems affecting the terms of issue to smaller businesses. For example, in Indonesia in 1978, short-term credits were often only granted for a security of up to 150 per cent of the sum of the credit, and rarely just for 25 per cent. The higher rate was demanded of first-time customers and had a severe effect, particularly on small and medium enterprises (RKW 1980, p. 60). The problem of a lack of securities requires that a decision be taken by the government, within the framework of development policy, to create legal conditions to enable bank credits to be granted even when securities are limited or non-existent. On the other hand, the second problem-- book-keeping-- is beyond any central government regulation, and its solution requires decentralized explanatory and training measures which are costly in terms of personnel. In Indonesia and Malaysia, this has not yet been started to any great extent for this group of small and medium entrepreneurs, either by the government or by private institutions. The limitations within the enterprise -- lack of or inadequate book-keeping -- thus hinder the financial provision which is necessary for the business to operate in the present and in the future.

Technical Production Conditions Sma11 or medium entrepreneurs consider their technical production problems to be serious. The fact that technica1 difficulties are rated very highly among their problems is partly to be explained by the fact that defective products, machine failure, failure to keep to delivery dates, and so forth, are immediately recognizable. In addition, many entrepreneurs have production or technical training. It is, therefore, often not realized that the entrepreneur's real problems are not so much of a technical nature but rather are due to mismanagement. That is, production processes require planning to ensure the supply of personnel, raw materials, machines and finance in the right quantitites and at the right time. Each case must therefore be examined to ascertain whether in instances of difficulties claimed to be due to production, the problem is more one of organization or one of technology. For example, out of twenty case studies from different DCs involving different sectors of the economy, only in five cases was technology the main problem (Harper and Tan 1979, Preface). In the past, the prob1ems had not been analysed, the consequence being that a disproportionate amount of attention had been devoted to dealing with technical issues. 115

If the technical problem does represent the real difficulty in an enterprise (for example, a high percentage of products has defects), then the greatest likelihood is that the existing production process is not being used to its greatest potential. In Indonesia for example, in the manufacture of roof tiles in Madura, a relatively high reject rate was reached during drying and firing; in Bandung, castings were produced with fairly extensive pitting, which meant that they had to be smelted again. In these instances the problems are probably due less to the technical shortcomings of the traditional method of manufacture as such, than to the inadequate quality of the work-force and/or the starting material, as well as inadequate organization of the work procedure. In a report on the mechanical engineering industry under Indonesian management, the World Bank observed that: in the workshops only low standards prevailed with respect to the work procedures; virtually no quality control or inspections were carried out; planning was left to each individual foreman; machine operators carried out maintenance work as the need arose, rather than to prevent damage (War l d Bank, Indonesia, Development Prospects for the Engineering Industries, p. 38). From the long-term viewpoint, it is more appropriate in such cases to first train the work-force and introduce quality controls, than to immediately change to another -- usually more capital-intensive -- method. This consideration also shows that the concept and application of "applied technology" can only bring about a partial solution to the existing complex technological problem. One consequence of the problems which have been pointed out is that they represent an obstacle to the enterprises' contributions to development in terms of increasing economic efficiency (productivity), supplementing the industrial sector (qualified suppliers), and improving supplies to the consumer (high product quality at low prices). Moreover, it is clear how the technical difficulties could be reduced without any great capital expenditure.

Factors Having an Influence on Marketing By selling the goods realized by virtue of the enterprises' 116

operating efficiency -- the final phase of the process -- the enterprise seeks to win back the money it has invested and thus ensure the continuation of production (Wohe 1973, p. 265). Hitherto, there has been relatively little investigation into the marketing problems of small and medium enterprises in the DCs, as in the total debate on development policy an input-orientation has been pursued above all else (labour, capital, and technology). The marketing function can be divided into sales preparation, corporate price policy, advertising, product design and, finally, selling methods. Insofar as enterprises sell their products exclusively through a retailer, they do not develop their own activities in the marketing areas referred to, with the exception of product and product range design. There are many examples of how small entrepreneurs have on their own account deve 1oped and further deve 1oped products by seizing ide as from other sources (such as photographs of furniture and metal grilles and doors) and/or from customers. Increased competition among the traditional products also leads to innovations. For example, a small entrepreneur in Palembang (South Sumatra) changed his production from aluminium spoons -- made from melted scrap -- to aluminium bowls and dishes, as former workers from his enterprise were copying the original product. Those entrepreneurs who sell their products themselves (such as furniture, shoes, textiles) experience difficulties in all areas of marketing. As a rule, the owner-entrepreneur has no special skills in these matters and does not know where he can obtain reliable information about market developments, advertising opportunities, or better marketing channels. The few institutionalized sources of information from which the necessary information may perhaps be obtained on payment are too expensive for small entrepreneurs and generally the information does not concern their markets. Any sales information which the entrepreneur may obtain is therefore usually by chance and fragmentary; it is derived from discussions with suppliers, customers and other manufacturers, from personal observations of markets in the immediate vicinity, and occasional visits to local exhibitions (such as the annual Jakarta Fair). Altogether however, this information does not form a sufficiently strong basis even to plan medium-term investment and production levels. The marketing problem as a whole is, therefore, an important reason for the widespread inability of enterprises to plan for the medium or longer term. The impression was gained from discussions with entrepreneurs that they are aware of the 1arge gaps in the information about private and public sector markets. Many, therefore, even take their dependence on a retailer as a safeguard against market risks which they themselves feel unable to overcome. 117

It can be foreseen that the marketing problems of many small and medium entrepreneurs will increase. Admittedly, the purchasing power of the general public is slowly increasing in the OCs (the gross national product per capita is useful as an indicator here, reaching US$430 in Indonesia in 1980 after an aver age annual increase of 4 per cent from 1960-80, while the corresponding figures for Malaysia were US$1,620 and 4.3 per cent), so that the private markets are expanding. But at the same time, the people's ability to choose between products is also growing. It is, therefore, vital for the producers not to remain complacent with products which have been tried and tested. Small entrepreneurs, as well as many medium entrepreneurs, lack the skills, qualified personnel and financial resources needed to make the necessary adjustments in terms of product quality and design, starting materials and production techniques. Smaller enterprises in particular have hitherto taken little part in supp 1yi ng the pub 1i c sector markets (that is, through government contracts), as they are frequently unable to meet the special requirements of these markets. Difficulties arise due to: standardized product or manufacturing requirements which often presuppose familiarity with technical drawings and plans; the required form for responding to public invitations to tender; the size of the order and delivery in full at a given time; the necessary (guarantee);

servicing

after

supplying

the

goods

the costs i nvo 1ved in making contact with the government (World Bank, departments which award the contracts. Indonesia, Vol. I, Main Report, 1979, p. 71). The overall effect of these marketing problems is that small and medium enterprises encounter difficulty in increasing their contributions to development with regard to supplementing the industrial sector and increasing supplies to the consumer. Consequently, greater importance should be accorded in promotion programmes to the subject of marketing than has hitherto been the case.

118

III

RECOMMENDATIONS FOR IMPROVING THE CONTRIBUTION MADE BY SMALL AND MEDIUM ENTERPRISES TO THE DEVELOPMENT PROCESS

It was stated at the beginning of Chapter I I that every concrete contribution made by enterprises is a result of the interaction of attitudes and behaviour patterns -- generally only capable of being influenced in the long term -- and of incentives or obstacles which are predominantly changeable in the short term. From this structure, there derives a need for development policy to distinguish between those measures which are effective over the long and the short term, but compatible with each other (instrument variables) in promoting business activities. The starting points of promotion pol icy are shown in the following diagram.

Environment: Incentives and removal of obstacles

+

t

Entrepreneur: Change in output, attitudes and skills

t

predominantly long-term

predominantly short-term

Instrument variable

I Promotion policy of state and private institutions

119

+

Output: (= Tarqet variable: contributions to development)

This interrelation allows further conclusions to be drawn: Which short-term instrument variable is suitable to influence a target variable depends decisively on attitudes and behaviour patterns -- to be considered as fixed and constant over the short term. If, for ex amp 1e, the small entrepreneur does not know how to carry out a simple costing, then a reduction of the credit interest (instrument variable) on the part of the national development banks is not an appropriate measure to increase the profitability of the small businesses. Aid remains particularly ineffective if the short-term measure is incompatible with the behaviour pattern or attitude concerned. In the long term, influence exerted on behaviour patterns and attitudes can a1so 1ead to a change of the target variables (that is, contributions to development). One example of this is making the entrepreneurs aware of their social responsibility vis-a-vis the community. On the basis of these considerations, the following recommendations are classified as measures which: offer economic incentives and remove obstacles in the environment of the enterprise, and which are intended to change the behaviour patterns, attitudes and skills of the entrepreneur. National and international institutions have already made many proposals in this respect, both specific to certain countries and also of a general nature. We shall just refer briefly to the most important of these proposals, and discuss in greater detail some points which hitherto have been neglected. Particular emphasis will be given in this respect to possible promotion contributions from non-governmental institutions.

Opportunities for Increasing Incentives and Reducing Obstacles in the Economic Environment of Small and Medium Enterprises Insofar as the government deve 1opment po 1 icy inc 1udes the promotion of small and medium enterprises as a complementary element to its industrialization policy, the measures concerned should predominantly be designed to create correspondingly favourable conditions as quickly as possible in the environment of the enterprise. In view of the factors of influence which were 120

found to be a hindrance to greater contributions towards development, the following measures are to be recommended.

The Basic Idea: A Minimum of Regulations with a Maximum of Freedom The analysis of the experiences gained in the past five years in countries such as Taiwan, South Korea, Sri Lanka, Bangladesh, and Nepal lends further support to the view of experts from the World Bank that f avourab 1e economic conditions for the development of small (and medium) enterprises should consist of a combination of a minimum of government regulations with a maximum of freedom (Marsden 1981, p. 15). The best environment for these enterprises is a relatively free market which offers equal incentives and opportunities for all enterprises. Special promotion programmes can be useful for this sector, provided that they reinforce and supplement the initiatives of the private sector instead of stifling or suppressing them. Certainly, the most important task in most developing countries is to remove obstacles which are mostly concealed in the existing systems of incentives and regulations applied to the economy. In this context, the most important areas in which measures are required include: the removal of subsidies and preferential treatment which favour the large enterprises and discriminate against small and medium enterprises; improved access to and use of input factors which are generally needed by small and medium entrepreneurs; increase in the number of outlets for the products of the small and medium enterprise sector.

Improvement of the Information System in Economic Matters Small and medium entrepreneurs urgently need information concerning changes in the economy, technology and legislation. It is a question of removing, as a considerable market barrier, the quasi-monopolistic access to official and unofficial information channels enjoyed by large domestic and foreign businesses. The existing information system must, therefore, be expanded and modified in such a way that enterprises have free, non-discriminatory and inexpensive access to any information which affects business life, especially changes in: legislation (company, labour, welfare and tax law);

121

government directives and implementing regulations; economic promotion measures; public invitations to tender; economic data (business and economic forecasts); and technical conditions (new products and processes, quality standards). The information sys tern can be improved on the one hand by government measures to ensure that appropriate publications are made available regularly and throughout the whole country. Investigations should be made in the same way as for agriculture -- as to whether information, especially for small businesses, can be broadcast regularly on the radio and television. This would mean that at a relatively low cost a very great number of these enterprises could be trained in basic business skills (for example, the basics of book-keeping and costing) and they would also be informed about important economic data (such as price movements). On the other hand, the private sector, within the framework of the independently administered organizations of the economy (such as chambers of commerce, and associations), could expand the information system by publishing circulars, monthly reports, and economic and technical documentation for entrepreneurs.

Integration of Small and Medium Enterprises in _Self-governing Organizations in the Economy Suitable institutions are needed so that the interests of the small and medium business economy can be appropriately represented vis-a-vis the state, the banks and other economic groupings. As the largest employer in the private economy, the small and medium enterprise sector must make use of its opportunities to participate in the government's economic and social decision-making process on the basis of an effective institutional structure. Only with a strong institutional representation in dealings with the public and private sector can the small and medium enterprise sector contribute to the development of a pluralist society. If the government admits representatives of the private sector to advisory councils for individual ministeries and other government agencies (in Malaysia, for example, there are plans to establish an Industrial Advisory Council to the Ministry of Trade and Industry), the sector of small and medium producers should also be represented.

122

Already existing independently administered organizations of the business community should, therefore, be encouraged to extend their responsibility and their activities to small businesses much more than has hitherto been the case. The integration of small and medium enterprises into general business and industrial associations is preferable to independent representation, owing to the many opportunities for communication which could be expected from them. The government should promote such institutional developments as it cannot reach these thousands of businesses directly, on account of the large number of staff it would require and the high costs incurred. The individual sectors of industry should organize themselves on a local and regional basis in order to exchange information on technical and economic matters. The first few steps towards autonomy which already exist, such as the Medium and Small Enterprises Association of Malaysia (MESEAM), which intends to take over training, advisory and financing functions, should receive an initial complement of financial and technical assistance. Existing institutions, such as the chambers of commerce and other associations, should support such projects. The forming of working parties, with technical as well as economic and social objectives, by medium entrepreneurs, should be promoted. Better results can be expected in the long term from private initiatives taken by management than from the problem clinics proposed by the government in Indonesia and Malaysia for example, in which a fairly small group of entrepreneurs with the same problems is supposed to resolve them together.

Removal of Obstacles to Obtaining Credit In the countries of South and Southeast Asia, such as in Indonesia and Malaysia, resolving the cash flow problem experienced by small and medium enterprises is less a problem of absolute scarcity of finance from government development banks, than a problem of the conditions governing access. Consequently, in accordance with a World Bank report (World Bank, Indonesia, 1979, Vol. I, Main Report, p. 63), it is proposed that the credit programmes which exist especially for the weak domestic sector should be improved as follows: a greater allocation of "group credits" to selected industrial groupings (clusters), supported by detailed subsector analysis and a more intensive advisory service; simplification of the valuation procedures; simplification and standardization of the disbursement procedures in accordance with progress made on the project; 123

an increase in the rate of the credit repayment guarantee to government and private credit institutions; provision of adequately qualified and experienced bank personnel to be responsible in particular for valuation, credit control, and credit repayment; a departure from the insistence on material securities for the allocation of credit and in its place providing greater consideration for the expected cash flow; an increase of the individual's credit limit for financing capital projects; a prolongation of the term of the credit; and reducing the reticence of credit institutions vis-a-vis new entrepreneurs by providing them with improved information regarding their potential for growth. In addition to the direct granting of credit by institutions, selected retailers could be called upon to improve the financing situation, especially of small entrepreneurs (World Bank, Indonesia, 1979, Main Report, p. 64). The banks could increase the credit volume of retailers who place operating capital at the disposal of small enterprises. The advantage of this approach is that the retailer has access even to very small and remote enterprises, and generally can assess their financial situation and development prospects more accurately than bank staff. The original feature of this approach is that it proposes an extremely decentralized promotion process involving the use of "intermediaries", which would also be applied in other areas (cf. below).

Improved Technical Advisory Services To upgrade the productivity and survival prospects of small and medium enterprises, their technological input must be improved. Thus, more effective advisory services are necessary. In view of the experiences in Indonesia, which also apply in other DCs, this can only be achieved if improvements are made in co-ordinating financial and technological programmes, in the qualifications of the work-force and in the implementation of the advisory function. Improvements as far as personnel are concerned require in particular the establishment counsellors;

of

suitable

124

training

facilities

for

wages and benefits qualified personnel period;

which are high enough to attract and retain them over an extended

the concentration of activities involving training, demonstration and dissemination of information within the enterprises themselves; and the possibility of easy recourse to experts in the event of special problems. Private management institutes could be encouraged to hold special courses regularly for the trainers and technical instructors from national training centres to deal with problems relating to regulations, the economy in general, the environment, and so forth. This is because instructors in private institutions generally have better formal education and have more practical experience; moreover, these institutions are far better equipped to respond with greater flexibility to new tasks. Greater motivation among the advisers can be achieved by -in addition to higher wages -- improved prospects of professional advancement. When it is recognized by development banks, chambers of commerce, private and government training centres for small enterprises and other institutions that advisers of the government technical advisory services possess particular experience for tasks in this field, then new opportunities present themselves to former advisers. Ultimately, this can serve as a stimulus to upgrade qualifications. In addition to the need for the adviser groups to include appropriate technical experts, it is advisable that the implementation of the advisory function be limited to growth-oriented businesses so that the scarce promotion resources can be used in a concentrated manner. Technical services provided by governmental and para-governmental agencies could include: development of new products and manufacturing processes which are appropriate to the raw materials and plant available; quality control and standardization measures; support in the application for licences. The facility of recourse to experts is very helpful. A well-trained adviser for small and medium enterprises who can overcome the general problems of management, financing, technology and marketing, must himself be able to call on the required information or specialists in order to solve special problems. 125

Both resources would have to be made available from a special advisory department or facility. Enquiries should be made as to whether the extremely decentralized promotion arrangements could be used in providing technical advice. On the basis of experience in the industria 1i zed countries, the entrepreneur obtains a very 1arge part of his know-how about new technical processes and products from the suppliers' sales representatives. In general, these personnel must provide convincing information on the advantages of a product before selling a tool, machine or item of plant. As the governments of the DCs cannot arrange, due to personnel and finance constraints, for most of the small enterprises to be attended to individually, it would be useful to include the sales representatives as intermediaries. They would be interested in giving advice, from an economic point of view, because only a successful entrepreneur would be a potential buyer. The supplier must be encouraged to send all its representatives to special training courses in which the skills of effectively conveying technical information can be acquired. Greater open-mindedness towards advice could be expected from small entrepreneurs, and partly from medium entrepreneurs as well, if the service is one which will prove worthwhile to them financially. They would be prepared to accept the costs involved if the advice leads -- preferably in the short term -- to recognizable economic benefits. In order to introduce this economic mechanism successfully, it is sufficient to begin with a few entrepreneurs in one part of a town or region. Experience in OCs, in terms of consumer behaviour, has already proven that demonstration is effective even with people who think in terms of business practice.

Promotion of Access to Sales Markets Promotion measures with an input orientation (real and human resources, technology) must be complemented with a promotion policy which concerns the products of the small and medium enterprise. Apart from considerations concerning the free market, the demand for products depends on price and quality. In order to create a free market in Indonesia and Malaysia, the "monopoly" of the Chinese traders must be broken. It is not a question of curtailing the economic activities of this group, as this would reduce their dynamic contribution to the development of the whole economy, which at this time is absolutely essential. Rather, an economic counterforce must be effectively developed. This could come about in such a way that both Indonesian and 126

Malaysian marketing organizations (such as co-operatives, syndicates, etc.) are promoted (for ex amp 1e, through credit facilities) and the producer could become more independent of his former retailer by being provided with more operating capital. In order to facilitate access to the domestic market, the authorities should promote the construction of shops which can be purchased or rented at low cost by smaller businesses. Large state and private (national and international) companies should be encouraged to order more products from smaller enterprises than has been the case hitherto (that is, through subcontractors). This applies particularly to individual components for companies involved in assembling bicycles, mopeds, motor-cycles, cars, radios, telecommunications equipment, and electrical household appliances. Chambers of commerce can assist these co-operatives by, for example, producing registers of potential small and medium producers and by drawing up sample contracts. Small and medium enterprises should receive a larger share of government contracts (goods and services such as cleaning, maintenance and repair work). The main obstacles would be reduced by the promotion strategy set out below (World Bank, Indonesia, 1979, Vol. I, Main Report, pp. 71-72). Intermediaries who take over all the functions which must be fulfilled in carrying out government contracts must become institutionalized. These intermediaries could be private trading companies and co-operative associations of small and medium entrepreneurs. In this way, in Indonesia for example, small enterprises could supply government agencies with the following products at competitive prices: construction materials, school and office furniture, clothing and uniforms, shoes, table-ware, food, irrigation pumps, agricultural implements, drinking water and waste water pipes, fences, and so forth. The domestic market would also expand if, as purchasing power grows, traditional domestic products are not replaced too quickly by "modern" domestic and imported products. However, this depends to a very great extent on non-economic factors, in particular on the attitude of society to traditional culture (as reflected in the mass media for example) and whether the elite seek by their behaviour to relinquish these traditions or maintain them. In Indonesia, the batik dress, rattan furniture and wooden windows and doors in modern administrative buildings are splendid examples for a promotion policy in this sense. Access to export markets must be made easier for sma 11 and medium enterprises which can offer internationally competitive

127

products. One example of a useful promotion measure is the new Directory of Indonesian Exporters (1981), through which for the first time competitive export businesses are made known to the interested public. Of the total of 1,903 businesses included from all sectors of the economy, 534 (or 28.1 per cent) are small enterprises and 538 (or 28.3 per cent) are medium enterprises. One proposal for promoting exports could be to grant small and medium enterprises customs and tax relief for their products and to familiarize them with international quality requirements and technical standards. In this area as well, many functions can be performed by independently administered organizations of the private business community.

Removing Obstacles Caused by Location Competitive small and medium enterprises are frequently hindered by unfavourable local conditions. Accordingly, within the framework of its industrialization policy, the government should support not only the 1arge businesses and 1arger medium-sized companies but also to a greater extent the small and medium businesses by helping to solve problems relating to location. It is essential to remove distortions of competition caused by discriminatory prices set by the government on the markets because of production factors. Larger businesses in industrial zones usual1y pay Jess than the norma1 market price for the use of industrial lots and factory buildings; in addition, they pay preferential prices for their energy and water supply and use of the transport services operated by the national transport companies. Furthermore, additional publicly owned land could be made available for industrial use; even multi-storey buildings for shops, small businesses, and workshops ("flatted factories") could be bui1t. In the past, this infrastructure for improved production and market locations had not been developed in line with increased technica1 needs, with the result that very high compensatory sums (key money) must now be paid in order to arrive at a more favourable location. The private sector shou1d be encouraged to convert land used hitherto for agricultural purposes into industrial lots and to build factory accommodation for lease or sale (FMM 1982, p. 5). The present and new locations for small and medium enterprises should be supp1ied at norma1 market prices with appropriate infrastructural facilities (such as energy, water, communications, and refuse disposal).

128

Influencing Entrepreneurial Attitudes and Conduct through Training Provision Special programmes should be developed for the initial and continuing training of small and medium entrepreneurs, with their progress controlled so that improvements can be made to the programmes when necessary. The demands made in terms of trainers, teaching material, and programme design would differ greatly from those which exist with regard to management seminars for entrepreneurs and managers from large companies.

Trainers In addition to being skilled in the teaching of management, the trainers must have as much practical experience as possible of the business routine and typical problems encountered by small and medium entrepreneurs in various sectors of the economy. They should acquire these skills before or during their special training and later also in order to keep up to date with current business practice. A new training programme for trainers carried out in Indonesia since 1982 by the private Institute for Management, Education and Development, Jakarta, could become a model for this. Those who have participated, approximately 30, have a higher level of formal school education and some already had practical experience with small businesses. They are being trained as advisers and experts in a combined training course consisting of theoretical elements and predominantly practical activities in small enterprises (which account for approximately 85 per cent of the training). Among other things, the practical activities consist of first carrying out an inventory in a small enterprise, drawing up simple accounts, creating the conditions for cost accounting, and giving support in organizing stocks and production. These activities are carried out in groups of five in each small enterprise, with an experienced trainer from the management institute taking part. Problems and solutions are then analysed by the entire group in seminar sessions.

Teaching Materials Hitherto, very 1 ittle instructional material has been compiled specifically for courses for small and medium entrepreneurs. Frequently, management programmes or parts of programmes originally desi_gned for the management and organization of large or larger medium businesses are merely reduced on the basis of 129

common sense entrepreneurs.

to

the

problem

level

of

small

and

medium

It is necessary to compile or develop new, special teaching material and training manuals for this group of entrepreneurs. This task, the accomplishment of which calls for a very good knowledge of practical problems, management theory and modern teaching methods, could be undertaken by a private institution in the DC concerned, for example, a management institute, which has greater chances of success than a department of a national university. Previous experience shows that learning from case studies is of the greatest importance. Two action alternatives are possible for obtaining suitable material: 1.

Recording, comparing, assessing and selecting case studies relating to small and medium enterprises in DCs: There now exist appropriate case studies from many DCs which have been compiled for very different reasons. Only very occasionally have such studies been published as comparative works. One example which can be referred to is the survey, already quoted, carried out by Harper and Tan (1979) of the Marketing Development Centre of the Cranfield School of Management, United Kingdom, which contains 21 short case studies from various DCs with comments and recommendations. Another ex amp 1e is presented by the project studies set up in Indonesia by a group of universities for BIPIK (Guidance and Development of Small-Scale Industry), which include 4,158 domestic and small businesses involved in rattan and timber products, leather, footwear, metal products, oils, and building materials. It could be useful to collect the existing case studies for a country or region and compare these in accordance with criteria established beforehand, part i cu 1ar ly those re 1at i ng to form and content. The object of this is to finally arrive at an evaluation of the available case studies, in terms of content and teaching method, so that for certain courses (beginners/advanced; sectors of the economy; problem areas) cases can be selected as examples which allow conclusions to be drawn about structure, problems and solutions with a wider application than that of each individual case. This approach has the merit that it is straightforward, can be concluded in a relatively short time, and is not very personnel and cost-intensive. But the approach could also be extended as the comparative 130

analysis and assessment could be carried out in the context of seminars in which trainers from small and medium enterprises take part. The compiling of case studies has the disadvantage that it involves the use of example cases which are based on very different circumstances and which were frequently written out of scientific interest or for the purpose of advising on policy, and not for the purposes of a training course. 2.

Drawing up purposes:

of

new

case

studies

for

instructional

New case studies on the basis of specifically national and regional experiences can be drawn up for training and further training courses for entrepreneurs of small and medium businesses. This task would have to be carried out by experts who can combine extensive practical experience with knowledge of teaching methods in the training of entrepreneurs. A case study which can be presented in the form of a text with graphic illustrations can play a key role in training procedures. This has been the experience gained in German schools where in practice the textbook plays a far more important role for the teacher in preparing and carrying out his lessons than do the curriculum and instruction guidelines.

Initial and Continuing Training Programmes and their Sponsoring Institutions There is at present some uncertainty in the public and private training centres in Indonesia and Malaysia as to the most suitable ways of training small and, to some extent, medium entrepreneurs. Firstly, basic structural decisions would have to be made in this respect and then improvements made to the content of the training courses.

~S_t,ru-'-c"""t_,u,r--'a'-'-l--"-p_r-=-o"-po"-s::..:a::_:_l.

into three is formed; enterprise problems.

Business problems can generally be divided groups chronologically: that is, when the enterprise when the enterprise is consolidating; and when the is expanding. Each period has its own particular The typical problems encountered when the enterprise is 131

being formed are presented, for example, in Table 23, which lists the difficulties according to degree, as perceived by 590 bumi putr a entrepreneurs in Malaysia. The transition from one period to another also brings special difficulties. This fact is not given sufficient consideration in training programmes today. Additionally, with the intention of reducing training costs per trainee and increasing the effectiveness of the courses, a consistent division of labour should be established between public, university and private training centres. On the basis of the experiences gained hitherto, private institutions have the following advantages in this area: their sole responsibility is to provide a service for private or public enterprises; they are free of bureaucratic contra 1s which hinder a rapid response to problems -- an important element of their service; the staff are qualified and motivated, a feature which is scarcely possible given the pay structure in the civil service; it is understood that information which arises in the course of training and advisory programmes will be kept confidential. The following structural proposal is made under two peripheral conditions: better selection of participants; and the use of economic incentives. Here, there is deliberate emphasis on an approach to training policy for small and medium entrepreneurs which is oriented not to considerations of social policy but above all to a policy directed towards growth. Preparatory courses as a general introduction to business activities for nationals. In these courses the sole objective should be the teaching of very simple skills of organization (the organization of book-keeping, costing, production, marketing, and so forth). These courses are being conducted by the government for Malays (bumiputra) throughout Malaysia, with the first stage being solely concerned with the subject of motivation, followed by very simple training in fundamental business skills. Similar courses -- though fewer in number -- are being held by the Indonesian Government for Indonesians (pribumi). As considerable expenditure in terms of personnel and finance is required every year for such preparatory 132

courses to train a few thousand potential and actual new entrepreneurs, who in the first course can hardly be expected to train at their own expense, state institutions must take over this task completely. This does not prevent universities and non-governmental institutions from taking part indirectly as they can assist the trainers and develop teaching material. Basic courses for teaching skills to already active entrepreneurs. Entrepreneurs who have already been in business for several years experience a growing need for skills in various areas of management. For this reason, the teaching of skills on general questions of business organization is no longer sufficient; instead, special problems must be dealt with (for example, financing, and marketing). In addition, subjects should be included which demonstrate the role of the entrepreneur in the social and economic development of the country. Although in these basic courses it is not necessary to group the participants according to activity such as manufacturing, commerce, and other services it is expedient to do so in the case of special courses as the main problems frequently vary from one sector of the economy to another. With regard to the basic courses, private training centres should enter into competition with the existing government-run centres which, for example, give priority to Indonesians and Malays. The problem of financing is dealt with below. More advanced courses to assist successful small and medium entrepreneurs. Only a relatively small number of small and medium entrepreneurs are wi 11 i ng and ab 1e to extend their business activities. Their further training can be acquired from private institutions which have considerable experience in this respect on account of the management programmes they have been organizing hitherto. The course should deal in detail with questions of economic order, as well as special economic and socio-political issues, since many of those in attendance would hold posit ions, currently or in the future, in non-governmental institutions, such as chambers of commerce, and business associations. It is neither the intention nor is it financially possible for public and private training centres to cater for the majority of small and medium entrepreneurs of a country. It can only give

133

initial training and continuing training to as many of the promising entrepreneurs as possible. The qualitative selection of the participants has so far not been carried out in a systematic way. Rather, each institution applies its own selection criteria. In government-run institutions (for example, MARA in Malaysia), it appears to be a case of being able to demonstrate that the planned number of course participants is maintained at the end of the year. Even if at the initial trial stage selection criteria are applied in a "trial and error approach", sufficient experience gained over time should help the identification of suitable characteristics. It is therefore suggested that the experiences of public and private training institutions in the DCs using various selection criteria be evaluated and a practicable framework for selection deve 1oped. Two criteria shou 1d be taken into account on the basis of experiences gained hitherto: Age of enterprise: If 50-70 per cent of new enterprises fail in the first three years and only 10-20 per cent survive the fifth year, training should be concentrated on those enterprises which have relatively good prospects for survival, that is, on those enterprises which have already been in business for three years. Age of the entrepreneur: Younger people generally have better formal school education, so that the teaching of business skills can be effected more rapidly and with better results. Economic incentives must be systematically built into the organization of initial and continuing training so as to increase their effectiveness. In Indonesia and Malaysia, it is no'rmal for the government-run training centres to offer the basic course for new and intending entrepreneurs free of charge; in addition, travel costs to and from the training venue (on one occasion or throughout the course) and to some extent also, the cost of accommodation and food, are borne by the state. Arguments in favour of this financing are that the entrepreneur would in any case incur "costs" in the form of loss of working time, that travel costs otherwise operate as a barrier to access, and that it is precisely the poor, small entrepreneurs who should be given an incentive, and so forth. But the question of financing can also be considered from a completely different point of view. A management course is a method of improving human resources; the participant -- that is, the entrepreneur --and the community both benefit from and are involved with the economic benefit generated by this investment. As this also results in personal benefit, a personal contribution to the costs can also be expected (such as in form of a registration fee or a nominal fee for teaching materials).

134

Involving the trainees in the financing aspect would also put pressure on the training institution to conduct its course effectively as the trainees would then examine more closely the service they obtain in return. Whereas effective training on the part of the training centres has hitherto been supported by government requirements, political obligation, and/or the commitment of the trainers, an economic factor would now be added. The financial charge to the course participants could be graded in such a way that the income from more advanced courses would be sufficient to cover the basic courses too, which would not be fully financed by the participants. This financing proposal is supported by the observation that in Indonesia and Malaysia, many small management institutes and private business schools (offering day and evening courses) have recently been set up and organized by the private sector as service companies. This indicates a ready market with affluent customers; at the same time, there is reason to view more critically than before the training courses on offer and the costs of the long-standing management institutes (Syed Adam Aljafri 1982, pp. 24-25).

Recommendation of training programmes. For some years, public and private training institutions in the countries of South and Southeast Asia have been experimenting with programmes for small, and to some extent medium entrepreneurs. The programmes have for the most part been developed independently by individual members of the institutions, and the exchange of information with similar institutions and academic institutions at home and in other DCs have remained very limited. The experiences gained so far with these training programmes should be assessed in order to establish programmes which are both effective and available at a reasonable cost. To this end, the following procedure is proposed: a)

the compilation of a register of national and regional training programmes for small and medium enterprenuers,

b)

an analysis of the programmes in terms of formal criteria (for example, institutions, the trainers, qualifications, duration, average number of participants, costs and costs borne by the participants, · number of participants not completing the course, number of participants who attend further courses, and so forth); in

terms

of

material 135

criteria

(for

example,

objectives, content, teaching methods, demonstrable business successes of former trainees, and so forth); c)

assessment of the programmes and identification of weak points in terms of economic criteria (including costs per participant, degree to which costs are covered by the participant's own financial contribution), and in terms of success rate (determined in course tests and subsequent monitoring of success in the enterprise) (cf. below);

d)

the recommendation of any existing effective, low-cost programmes or parts of programmes and improvements.

Efficiency Control One of the most serious weak points in initial and continuing training programmes for entrepreneurs has hitherto been the inadequate or superficial monitoring of the transfer of knowledge. It is the purpose of progress control to check whether the training has produced the desired results or whether problems have developed. If problems are discerned, then the control should also provide information about the reasons, so that the experience gained in this way can be used to good account in the design of future programmes. It is proposed that procedures be introduced for carrying out a progress control. Two ways are suggested here: a)

Control in the work situation (that is, progress control in the enterprise of the former trainee). This control seeks to establish whether after attending the initial or continuing training programme the entrepreneur has made any changes in his business (for example, in the conduct and organization of book-keeping, costing, stock-keeping, production, and marketing), and how his business has developed in general (for example, success in investment, turnover, number of employees, net product per employee, and so forth). Control procedures of this type pose problems, however, for the following reasons: there is some dispute concerning the business values to which the control should be oriented and at what stage after completion of 136

the course it should usefully be carried out. If the examiner is not the same person as the trainer, then considerable differences in evaluation can arise when comparing the training objective and behaviour within the context of commercial reality. The progress of the enterprise, as determined by questioning or by analysis of corporate documents, is not necessarily attri butab 1e to the training programme. Finally, the procedure is very personnel-intensive and consequently, only a few enterprises can be monitored. This in turn raises the additional problem of selecting the typical enterprise. b)

Control in the learning situation control during the training course).

(that

is,

progress

A survey conducted before and after the course is suitable as a control method in order to examine whether the participant's level of skills and attitude has changed. In order to establish whether the teaching objectives have been reached and whether the participant has understood the contents of the training programmes, provision should be made for examinations to be held at the end of each part of the course. This would avoid the disadvantages of the procedure described above; moreover, an important tool could thus be created for assisting small and med i urn entrepreneurs. In other words, if a certificate attesting participation in the course were to be issued only in the case of success in the examinations, it could be furnished as proof of a qualification when dealing with credit-granting institutions and business partners. This could support efforts being made in DCs to have the creditworthiness of new enterprises assessed not solely or predominantly in terms of their ownership of tangible securities, but also of their business skills (human resources endowment). For new entrepreneurs, this would be a strong incentive to attend courses and complete them successfully; they would then be much more willing to contribute to the financing of initial and continuing training programmes. These observations show that economic incentives and penalty mechanisms can be used to raise performance levels among both initial and continuing training institutions and course participants.

137

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THE AUTHOR Dr RONALD CLAPHAM is Professor of Economics and has held the chair for economics at Siegen University, Federal Republic of Germany, since 1976. His main fields of interest are the theory of economic systems, development economics, and the economic theory of techn i ca 1 progress. Among his numerous pub 1 i cations are books on the market economy in developing countries (1973), the socio-economic responsibility of foreign entrepreneurs in developing countries (1976), and World Economic Order: Liberal Views, co-author H. Kammler (1983).