Small Enterprises and Economic Development: The Dynamics of Micro and Small Enterprises

Citation

Aftab, K. (2001), "Small Enterprises and Economic Development: The Dynamics of Micro and Small Enterprises", Journal of Economic Studies, Vol. 28 No. 1, pp. 65-68. https://doi.org/10.1108/jes.2001.28.1.65.1

This book brings into focus the debate on the dynamics of micro and small enterprises (MSEs) in the process of economic development. Making use of survey‐based data on MSEs (firms with 1‐50 workers) of African countries, the authors attempt to analyse the enterprise “dynamics” viz., entry, survival and growth prospects of such units across sectors. The detailed analysis ends on positive findings regarding entry, survival and growth prospects of MSEs, though with uneven chances of success depending on their access to policy and institutional support in each country. In a nutshell, the study identifies the key determinants of the enterprise dynamics including age, initial size, location and gender.

The debate about the role of the informal sector (where micro and small abound) in developing countries gained momentum in the 1980s when it was taken by some economists as a new theory about the economic realities of the Third World. The importance of informal economic activity in growth notwithstanding, the evidence does not show the same dynamism of MSEs in similar economic conditions across countries. At the same time, the success stories of African MSEs included in this study indicate their resilience even in difficult economic conditions.

Hence the basic question which this debate raises is: what should be the criteria of “success” for judging the performance of informal enterprises? Obviously, the performance of informal sector enterprises cannot be assessed on the efficiency criteria set for the formal businesses. The two exist in distinctly different worlds. Like their goals, the strengths and weaknesses of the formal and informal firms often differ. No wonder that the authors found evidence that within the MSEs, the smaller firms are more likely to survive. This observation corroborates evidence from other studies and underlines the general ability of very small firms to survive on the basis of technical and managerial flexibility wherever possible.

The issue of growth of MSE firms assumes special importance in this debate as it is linked with increased income, productivity and employment. The study suggests that informal enterprises’ growth potential depends on access to inputs and knowledge of product qualities and market requirements. Furthermore, a cost‐effective support system is believed to be extremely beneficial for the growing MSEs. The results of this study highlight the central issue viz., it is not just the presence of a certain number of MSEs but the rate at which such enterprises manage to grow in a given environment that really matters for economic development. Though not every MSE can grow even under most favourable conditions, yet the study suggests that at economy‐wide level, the macroeconomic context is particularly crucial to the expansion of productive micro enterprises. This observation is crucial as the same has been noted in other studies in Asia (e.g. Pakistan) where agriculture‐industry linkages stimulated rapid growth of informal small enterprises, though the industrial policy was designed to support large‐scale firms.

Another important observation of the study on African enterprises is the negative impact of economic stagnation on MSEs. Market contraction is observed to have not only a dampening effect on growth of enterprises, but also promote “survivalist activities” as very small enterprises desperately attempt to keep afloat in difficult economic conditions. This may include product diversification in related activities, even production of technically inferior products.

The authors also attempt to relate the growth of firms to sectors, gender of entrepreneur and location of units. It is interesting to note that enterprises owned and managed by females were generally found to be smaller and less likely to grow, not for business but for personal reasons (e.g. general risk aversion). It would be interesting to see if similar trends exist even in non‐traditional western societies.

Similarly, overall higher growth of urban SMEs probably is attributable to better access of these units to provision of capital, product market, inputs, technology and skills. On the one hand, this confirms the often voiced demand by MSEs for these inputs; but on the other hand it does not guarantee successful transition of any small enterprise to large‐scale business. Access to various inputs may be a necessary but not sufficient condition of growth of MSE firms. To sum up, what needs to be recognized is the complexity of the MSE universe. Provision of policy and institutional support to such a diversified group of enterprises are likely to hit many snags. Therefore, detailed information on their working conditions reported in this study may serve as a good basis for initiating policy support programmes for MSEs. The real contribution of this study is the disaggregated information on the requirements of entry, survival and growth phases of MSEs across industries, sectors and countries. This work deserves serious attention of researchers for further investigation and analysis of micro and small enterprise dynamics.