û^o I N T E R N A T I O N A L LABOUR O F F I C E SERVICES FOR SMALL-SCALE INDUSTRY GENEVA 1961 s \ STUDIES AND REPORTS New Series, No. 61 PRINTED BY " LA TRIBUNE DE GENÈVE ", GENEVA, SWITZERLAND CONTENTS Page INTRODUCTION 1 CHAPTER I: Small-Scale Industry and Economic Growth 5 What Is Small-Scale Industry ? The Importance of Small-Scale Industry The Impact of Economic Growth on Small-Scale Industry The Role of Small-Scale Industry in Economic Development Types of Assistance to Small-Scale Industry 5 7 10 19 22 CHAPTER II : Some Characteristics and Needs of Small-Scale Industry . . . Finance Raw Materials Marketing Production Labour Management . CHAPTER III: Some Problems of Small-Scale Industrial Extension Services . . Problems of Organisation Co-operation between the State and Voluntary Associations . . . . Co-ordination of Government Agencies Types of Organisation Financing and Staffing The Choice of Extension Methods Some Specific Extension Services Individual Demonstration Plants Demonstration and Training Plants Itinerant Demonstration and Training Teams Marketing Clinics International Technical Assistance CHAPTER IV: Consultancy Services 26 26 27 28 29 31 32 35 36 36 38 40 44 46 49 49 51 51 52 53 57 Subjects and Types of Consultation 58 Qualifications of Consultants 64 IV SERVICES FOR SMALL-SCALE INDUSTRY Page Consultancy Methods Getting the Facts Solving the Problems Reporting the Conclusions Questions of Implementation CHAPTER V: Training and Information Services Training for Management Purposes of Training and Types of Participants Methods of Training Discussion Groups Circuit Schemes Formal Courses Subjects of Training Training for Supervisors Training for Workers Training for Extension Service Officers Information Services Meetings and Broadcasts Exhibitions Films, Filmstrips and Other Visual Aids Printed Matter CHAPTER VI: Research Technological Research and Testing Fields of Technological Research Product Design Manufacture Analysis and Testing of Materials and Products Development of New Materials Fuel and Energy Problems Activities Related to Research Economic and Social Research Choice of Production Methods The Location of Small-Scale Plants Cost and Productivity Studies Market Research Other Economic and Social Problems Co-ordination of Development Policies Management Problems Training Problems Labour Problems Problems of Co-operative Organisation Evaluating Extension Service Activities The Organisation of Research 65 65 66 67 67 71 71 72 74 74 77 77 78 79 81 86 90 91 91 92 93 95 95 96 96 97 98 99 100 100 102 103 104 107 109 110 110 110 110 Ill Ill Ill 112 CONTENTS V Page CHAPTER VII: Financial and Physical Facilities 115 Financial Assistance 115 Owned Capital Long-Term Loans Short-Term Credits Investigating Credit Standing and Supervising the Use of Loans . . Industrial Estates 117 120 123 124 127 CHAPTER VIII: Co-operative Associations 133 Joint Enterprise Co-operatives 135 Common Facility Co-operatives Purchasing and Supply Societies Credit Societies Processing Societies Marketing Societies Other Types The Co-operative as an Association Organisation and Management Co-operation and the State 138 141 143 145 147 149 150 153 155 APPENDICES I. The Organisation of Extension and Similar Services for Small-Scale Industry in Different Countries : Some Examples Belgium Chile Denmark India Italy Japan Netherlands . Pakistan Poland Sweden Turkey United Arab Republic (Egyptian Region) United Kingdom United States II. Help Provided for Small Firms : Some Case Studies Burma: Mechanisation of a Village Pottery Plant Denmark: Inter-Firm Comparisons of Costs India: Market Research for a Small Firm Israel: Production Control in Two Small Firms Malaya: Mechanisation of Coconut Fibre Extraction Sweden: Improvement of Production Methods in Two Small Firms . . 161 161 162 164 165 168 169 170 170 171 172 173 174 174 176 177 177 180 183 186 190 192 VI SERVICES FOR SMALL-SCALE INDUSTRY Page III. Two International Courses on Problems of Small-Scale Industry . . . . Netherlands: Course Given by the Research Institute for Management Science, Delft United States: Course Given by the Stanford Research Institute and the Stanford University Graduate School of Business 194 194 195 IV. Some Examples of Financial Assistance Available to Small-Scale Industry in Different Countries 198 Denmark 198 France 199 Japan 200 Mexico 200 Netherlands 202 Norway 202 Sweden 203 LIST OF TABLES I. Very Small Industrial Establishments and Their Employees . . . . II. Small Industrial Establishments and Their Employees III. Netherlands: Organisation of the Technical Consulting Service (1956) 7 9 43 INTRODUCTION In all countries small-scale industry provides employment for a substantial proportion of the industrial labour force and accounts for a large proportion of all industrial establishments. It has a strategic role to play in the economic development of industrially less advanced countries, and remains important in the economies of the more highly industrialised countries. Growing recognition of these facts has stimulated interest in the problems of promoting and developing prosperous smallscale industry, but these problems have not as yet been studied as systematically as they deserve to be. These problems fall into two broad groups—what can be done by better management within individual small firms to improve their operations and increase their productivity and profitability, and, secondly, what can be done by governments and other agencies to help the managers of small firms in these tasks. The present study is concerned only with the second of these groups of problems.1 The establishment of a thriving small-scale industry nearly always calls for collective measures of various kinds to help the individual small owner-manager overcome the disadvantages associated with the small scale of his operations. " Collective measures ", as the term is used here, include both action by government agencies and action that may be taken by associations of small producers. This volume is addressed primarily to readers who are responsible for, engaged in or otherwise interested in providing advisory, educational or other services or facilities for small-scale industrialists, particularly, though not exclusively, in industrially less advanced countries. It is hoped that the study may be of interest also to individual heads of small firms, for it emphasises the importance of private as well as government initiative, and of joint action by small producers as well as of government action. Chapter I is designed to provide some background and perspective for the problems dealt with in later chapters; it discusses the meaning and importance of small-scale industry and its role in a developing economy. Chapter II discusses very briefly some typical characteristics and needs 1 The I.L.O., in collaboration with the Research Institute for Management Science, Delft, is preparing, as a companion to the present work, a second volume dealing with problems of management in the small factory. 2 SERVICES FOR SMALL-SCALE INDUSTRY of small-scale industry. Chapters III to VI are concerned with what are often called " extension services "—services which communicate knowledge and information to managers and workers in small firms. The main extension services are advisory (or consultancy), training, information and, as a supporting activity, research services.1 Chapter III discusses certain general problems of organising and providing extension services for small-scale industry, with special reference to conditions in the less developed countries. Chapters IV to VI discuss in turn questions relating to the provision of consultancy services, training and information services, and research. Chapter VII is concerned with the provision of financial and physical facilities—matters that would not be regarded as " extension " activities in the sense in which that word is commonly understood, but that may, as will be suggested, be combined with certain extension activities such as advice on problems of management. Chapter VIII is concerned with the possible contribution of co-operative methods to the solution of problems confronting small-scale industry. The performance by a co-operative society of some service (for example, marketing) for a group of small firms would not ordinarily be regarded as an " extension service ", but on the other hand practical advice and assistance by a government agency in the running of a co-operative society would ordinarily be so regarded. The description and analysis in Chapters III to VIII of services and facilities that may be provided for small-scale industry are supplemented by a number of practical examples and case studies in the Appendices, drawn from a number of countries at different levels of development. This illustrative material, both in the Appendices and in the text, has been selected with a view not so much to providing balanced geographical coverage as to providing useful examples of principles, types of organisation and methods that have been used successfully in different circumstances to aid small-scale industries. There is no need to emphasise that the questions discussed in this volume are closely related to the basic objectives of the I.L.O.—the improvement of labour standards and of workers' standards of living throughout the world. Wages tend to be lower and conditions of work worse in small firms than in big ones, largely because small firms are usually poorer than big ones. The legislative approach to the problem 1 The term " extension services " was first applied to agricultural services, and appears to have come into use when agricultural colleges and experimental stations in the United States " extended " their instructional and advisory services into the field by going direct to the farmers. It is used by analogy in the present context, but with the additional connotation of services designed to provide small firms with, in some sense, an " extension " of their own personnel—to give them access to specialists who can perform for them services that in a large firm are often performed by specialist staff members. INTRODUCTION 3 of raising labour standards—the fixing of minimum wages and other minimum standards—though important, encounters great difficulties of inspection and enforcement in small firms. It may prohibit certain undesirable practices, but does nothing in itself to remedy the ignorance and lack of means which, in many small firms, constitute the main obstacles to the improvement of labour standards. It needs to be supplemented by a more positive approach, of the kind discussed in this volume, that does seek to overcome these obstacles. This volume has been prepared by the International Labour Office in collaboration with the Research Institute for Management Science at Delft (Netherlands). Contributors associated with the Research Institute for Management Science include Dr. Yap Kie Han (its Director), Mr. J. F. Maclaine Pont, Professors T. J. Bezemer, H. J. Frietema and J. Tinbergen, and Dr. E. J. Tobi. The study draws in places on a mimeographed report prepared by the International Labour Office on a previous occasion.1 Case studies and other illustrative material have been obtained from persons and sources too numerous to be mentioned individually. The Office wishes, however, to express its gratitude for the trouble taken by the many people in many countries who have supplied information, and to acknowledge in particular the valuable help received from its collaborators at Delft. 1 Labour and Social Problems of Small-Scale and Handicraft Industries in Asian Countries, Report II, Asian Regional Conference, New Delhi, November 1957. CHAPTER I SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH WHAT IS SMALL-SCALE INDUSTRY ? It is not necessary for the purpose of this study to attempt a very exact definition of " small-scale industry ". Broadly speaking, the term has been used here, in accordance with common usage, to cover industries * consisting of smallfirms; in terms of numbers of firms and numbers of employees a small-scale industry may be quite large. Small industrial firms range from household and cottage establishments on the one hand to medium-sized factories on the other. It would be possible to classify undertakings under one or other of different headings by drawing arbitrary dividing fines based on the number of workers employed, the value of output, whether or not power is used, whether or not the head of the firm works at the bench alongside his workers, or other criteria. For certain purposes—e.g., the administration of laws or regulations that apply to some establishments but not to others—it is necessary to have hard and fast definitions. Such definitions, however, are not appropriate for all purposes. Arbitrary dividing Unes make for an artificial grouping of firms. They obscure the continuity that actually exists in the size and characteristics of firms. At or near the dividing lines, wherever they may be drawn, most of the differences will be found to be differences of degree and not of kind, and will often be less important than the common characteristics offirmson either side of the line. 1 An industry is commonly defined as a group of firms producing a certain type of product, and many industries, for example textiles and engineering, have both largescale and small-scale sectors. Generally speaking, there is a good deal of confusion in the terminology and classifications used in talking and writing about small industry. For a good brief discussion of these questions, see E. STALEY: Small Industry Development, Stanford Research Institute, Research Programme on Small Industry Development, Miscellaneous Paper No. 1, Dec. 1958, pp. 3-6. The author suggests the following classification of small industrial establishments : Small industry I I I Factories Non-factory establishments i I I Household or cottage industry Workshop industry 6 SERVICES FOR SMALL-SCALE INDUSTRY Nevertheless, there are important differences as one moves along the spectrum from the smallest to larger undertakings. In the smallest undertakings a homeworker or craftsman works on his own or employs one or two helpers, perhaps members of his family. He can hardly be called a manager; he devotes most of his time to actual production. At some point along the spectrum the head of the firm ceases to be primarily a craftsman. Though he may still do some of the work of actual production (at a still larger size he will drop out of this altogether), he devotes the greater part of his energies to directing, co-ordinating and supervising the work of his staff: he has become primarily a manager. There is still, however, a personal face-to-face relationship between him and the workers. In the smaller firms along this part of the spectrum, the head of the firm will himself perform all or most of the varied range of tasks that management involves—the management of production, of buying and selling, of bookkeeping and costing, hiring, training and supervising workers, and so on. As the firm grows it will become increasingly difficult, and at some point impossible, for him to attend to all these things himself. Though he retains final responsibility for all that is done, he will have to delegate more and more of the details of management to subordinates. After a point this will mean that he deals less personally and less directly with his workers—that his contacts with them are increasingly made through his subordinates. It will also mean that there is now a management team, though perhaps only a small team of two or three people. If the head of the firm is wise he will define clearly the duties and responsibilities of each member of this team so that they do not get in each other's way or countermand each other's orders, and he will delegate to them responsibility for related aspects of the work of the firm, so that each can specialise in a group of related functions. Differences in the degree of specialisation in the performance of managerial functions, and in the degree to which a personal relationship is preserved between the head of the firm and the workers, are among the important differences between small-scale and medium or large-scale undertakings.1 1 STALEY suggests (loc. cit.) that one can usefully regard as a " small " industrial establishment one having several (say two or more) of the following characteristics: (a) relatively little specialisation in management; (b) close personal contact of top management with production workers, customers, suppliers and owners; (c) lack of access to capital through the organised securities market, and often difficulty in obtaining even short-term credit; (d) no special bargaining strength in buying or selling; (e) a relatively close integration with the local community, through local ownership and management and dependence on nearby markets and sources of supply. For statistical purposes, the Stanford Research Institute has tentatively decided to regard manufacturing establishments as " small " if they have less than 100 employees. 7 SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH THE IMPORTANCE OF SMALL-SCALE INDUSTRY How numerous and important are small-scale industrial undertakings ? We may consider first establishments in the smallest size group shown in industrial censuses—usually those employing up to ten wage earners or salaried employees. Table I shows their relative importance in terms of numbers of establishments and numbers of employees in ten countries at three different dates (in some cases only two dates) as near as possible to 1920, 1935 and 1950. It will be seen that in Argentina, Brazil and Switzerland establishments in this size group approximately maintained their relative importance between the census dates shown, that in Japan they appear to have increased in relative importance, and that in the other countries they declined in relative importance—in some cases to a very substantial extent. TABLE I. VERY SMALL INDUSTRIAL ESTABLISHMENTS * AND THEIR EMPLOYEES Country Argentina3 2 . . . Belgium . . . . Brazil Canada54 . . . . France . . . . Japan Sweden8 . . . . Switzerland . . . United Kingdom United States . . Very small establishments as percentage of all establishments Employees in very small establishments as percentage of all employees About 1920 About 1920 87 76 66 91 71 ' 55 34 81 ! About 1935 85 80 74 53 90 62 34 73 73' About 1950 85 79 47 81 7 47 33 58 6 5 2 io 21 13 ' 6 25 14' 7 5 10' About 1935 20 14 15 4 23 18 14 23 7 7 5 5 10 5 9 10 About 1950 ¡ y 2 lo Source : " The Size of Industrial Establishments ", in International Labour Review (Geneva, I.L.O.), Vol. LXXIII, No. 6, June 1956, p. 639. 1 Manufacturing establishments with ten employees or less, except when otherwise stated. ' Wage 3 earners. Up to nine wage earners, excluding members of employer's family. 4 Up to four employees. 6 Including construction. " Employees in establishments having up to nine wage earners.10 * Up 8 to nine employees. Including quarrying and metal mining. " Up to 20 wage earners. Up to 19 employees. It should be noted that this table can be used only for purposes of comparing the position in the same country at different dates.1 The reason why it cannot be used for international comparisons is that there ,¿? 1 Even within individual countries there have been some changes in coverage as between different census dates, which affect comparisons but probably do not invalidate the broad conclusions to be drawn from the figures. 8 SERVICES FOR SMALL-SCALE INDUSTRY is no standard practice as to what constitutes an " industrial establishment " at the lower limit—in other words, there is no agreement as to how small repair shops, handicraft and domestic or semi-domestic establishments should be treated in industrial censuses. In Sweden, for example, establishments with less than ten wage earners are excluded unless they have an annual production of at least 15,000 crowns. In other countries the Une is drawn differently. If one wants worth-while international comparisons, therefore, it is necessary to exclude establishments in the smallest size group shown in industrial censuses. This is done in table II, which provides a better basis for comparison by showing for a number of countries (a) the number of industrial establishments employing (in most cases) from 11 to 50 persons, expressed as a percentage of all industrial establishments employing more than ten persons, and (b) the number of employees in establishments with 11 to 50 employees, expressed as a percentage of all employees in industrial establishments employing more than ten persons. Figures have again been given for three census years (in some cases only two years) as near as possible to 1920, 1935 and 1950. One might suppose that the percentages shown in this table, like those shown in table I, would vary enormously from country to country. In fact, however, they vary much less than might have been expected. A glance at the left-hand part of the table will show that, in eight countries at different levels of economic development in Europe, Asia and North and South America, from 69 to 81 per cent. (87 per cent, in Japan in 1951) of all industrial establishments employing more than (in most cases) ten people employed from 11 to 50. Only the United States displays what appears to be a markedly different pattern, but the United States figures (47 to 48 per cent.) are not comparable because the size groups are different: establishments employing from ten to 20 people being excluded, one would expect the figures to be lower.1 If the figures show relatively little variation from country to country, they show even less variation over time. There has been no tendency for the proportion of small undertakings (those in the 11 to 50 size group) to decline. In Japan, indeed, there appears to have been a sharp increase between 1935 and 1951. It may be concluded that undertakings in this size group com1 This is not the only thing that makes the figures in the table not strictly comparable. Their coverage is not identical. For most countries the figures relate only to manufacturing industry, but for some (see footnotes to the table) it has not been possible to exclude other sectors, e.g. construction, or mining and quarrying. Most of the figures relate to all employees, but some relate to wage earners only. The size groups in Canada as well as in the United States are significantly different from those in other countries. But, when all necessary qualifications have been made, the uniformity displayed by the figures remains remarkable. 9 SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH monly constitute about three-quarters of all industrial undertakings employing more than ten people. TABLE II. SMALL INDUSTRIAL ESTABLISHMENTS ' AND THEIR EMPLOYEES Country Argentina 2 . . Belgium 3 . . . Brazil 4 . . . . Canada 5 . . . France 6 . . . Japan ' . . . . Sweden8 . . . Switzerland . . United States • Establishments employing 11-50 persons as percentage of all establishments with a staff of 11 or more About 1920 About 1935 About 1950 76 74 75 77 81 69 71 47 76 74 77 78 77 81 74 72 47 78 76 79 87 73 73 48 Employees in establishments employing 11-50 persons as percentage of all employees in establishments with a staff of 11 or more About 1920 About 1935 About 1950 27 20 23 28 30 22 26 10 27 24 24 23 27 29 24 26 10 29 26 21 38 23 27 9 For sources, exact dates and details of statistical coverage, see " The Size of Industrial Establishments ", in International Labour Review (Geneva, I.L.O.), Vol. LXXIII, No. 6, June 1956, pp. 540 ff. 1 8 Manufacturing industry, except where otherwise stated. * Number of wage earners. Ten or more wage earners, excluding members of the employer's family. * Wage earners in 1920. 5 Establishments with 5-50 employees (5-49 in 7 1949), as percentages of establishments with five or more employees. • Including construction. Wage earners in 1921 and 1935. ' Including quarrying and metal mining. " Establishments with 21-50 wage earners in 1920 and 1935 (20-49 employees in 1947) as percentage of establishments with 21 or more wage earners (20 or more employees in 1947). Since they are small, their relative importance naturally appears less if one looks, not at the proportion of undertakings, but at the proportion of employees accounted for by this size group. Thesefiguresare given in the right-hand part of the table. Again there is a surprising degree of uniformity both among countries and at different dates. Again (apart from the United States, for which the figures are not comparable) the figure for Japan in 1951 (38 per cent.) is the only one falling outside a rather narrow range. In all the other countries and at all the other dates, from 20 to 30 per cent, of all employees covered by the statistics were at work in undertakings employing (in most cases) from 11 to 50 workers. We may take 25 per cent, as a typical figure. There has been no tendency for this proportion to decline. Indeed, in Japan, and possibly also in Argentina and Brazil, it appears to have increased. What the table does not show is the proportion of total output produced by establishments of different sizes. Some statistics * show that 1 See E. STALEY, op. cit., p. 8. 10 SERVICES FOR SMALL-SCALE INDUSTRY in the United States, Western Germany and Puerto Rico (but not in Japan) the percentage of manufacturing output coming from small establishments (those having less than 100 employees) is not much less than the percentage of manufacturing employment in such establishments—in other words, that in these countries the average productivity per worker is almost as great in small manufacturing establishments as in large ones.1 Another point which these statistics bring out is that the relative importance of small establishments varies greatly from industry to industry. THE IMPACT OF ECONOMIC GROWTH ON SMALL-SCALE INDUSTRY It is sometimes thought that the organisation of industry in smallscale workshops or factories is a transitional phase in a country's industrial development—an intermediate stage between the predominance of cottage industry and that of large-scale industry. If this is so, it must follow that once a certain level of industrial development has been reached the relative importance of small-scale industrial undertakings tends to decline. One would expect tofindevidence of this in the statistics of countries at different levels of development and of the same country at different times. There is some evidence in table I that the smallest industrial establishments are declining in relative importance. But table II (though the number of countries is not very large 2, and the time-span not very long) affords no such evidence as regards slightly larger industrial establishments. It is clear that small-scale industry continues to play a very important role even in the economies of the 1 Other studies that are of interest in showing how the relationship between size and productivity may vary in different circumstances are (a) T. YAMANAKA and K. TAKIZAWA: "Japanese Small-Medium Business and Optimum Size", in Asian Affairs (Tokyo, Asia Kyokai), Vol. II, No. 2, June 1957 (this study covered textile industries in Japan and the United States); and (b) P. N. DHAR: Small-Scale Industries in Delhi (Bombay, Calcutta, New Delhi and Madras, Asia Publishing House, 1958). In the latter study, surveying data for 11 industries in Delhi state having units of different sizes, it was found that in five (flour mills, leather footwear, electric goods, general engineering and electro-plating) productivity was very much higher in the bigger size groups, while in four industries (printing, soap, foundries and drugs) the productivity of labour in the larger units was somewhat lower than in the smaller units (p. 79). For a good general discussion of the advantages and disadvantages of largescale production, taking into account considerations relating to production techniques, management, finance, marketing and the influence of risks and fluctuations, see E. A. G. ROBINSON: The Structure of Competitive Industry (London, James Nisbet & Co., Ltd., 1931). See also " Problems of Size of Plant in Industry in Underdeveloped Countries ", in Industrialisation and Productivity, Bulletin 2 (New York, United Nations, 1959), p. 7. 2 It is unfortunate, in particular, that the only Asian figures available relate to Japan, which is, of course, much more highly industrialised than other Asian countries. SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH 11 most highly industrialised countries.1 It seems likely to go on doing so for as far ahead as one can see. The view that small-scale industry represents a transitional phase has probably been suggested by two facts, namely that a number of small firms grow into big firms and, secondly, that a number of other small firms are driven out of business by competition from the large ones. There is no doubt that both these things happen on a considerable scale. Some, though by no means all, of the industrial giants of today had very small beginnings. Many of the healthiest and most vigorous of the small firms of today are in process of growing into medium or large-sized undertakings. On the other hand, several important types of small industry are losing ground, or have already perished, in the struggle with modern factory production. If, despite these facts, small industrial firms employing from 11 to 50 workers appear not to be losing ground, this can only mean that, as some small firms grow into large ones, or amalgamate with others to become large firms, and as other small firms are driven out of business by the pressure of competition from largescale industry, their places are, by and large, taken by a sufficient number of new small units to maintain the relative importance of small industry in terms of both the number offirmsand the number of employees. This suggests that, while some of the forces making for economic growth place a premium on size and favour large-scale industry, there are other forces simultaneously at work creating new opportunities for small-scale industry. To understand these forces it is necessary to distinguish between different types of small-scale industrial undertakings, for different types of undertakings are differently affected.2 Firstly, there are certain traditional types of small-scale undertakings. According to the markets or customers served by them, three such groups of small-scale undertakings may be distinguished. First, even in a predominantly agricultural community with relatively low levels of income and wants, many of the necessities of daily life (clothing and certain household utensils, as well as agricultural implements and possibly certain processed foodstuffs) are provided by local 1 The average size of industrial establishments, and even of factories considered separately from non-factory establishments, has risen decidedly over the past century in industrialised countries. The relative role of small industrial establishments probably declines with industrial development up to a point, after which the decline is much less significant, or perhaps ceases entirely. For further discussion of this subject, see " The Size of Industrial Establishments ", in International Labour Review (Geneva, I.L.O.), Vol. LXXIII, No. 6, June 1956, pp. 634 ff. and the sources there cited. 2 See I.L.O. : Labour and Social Problems of Small-Scale and Handicraft Industries in Asian Countries, Report II, Asian Regional Conference, New Delhi, November 1957 (mimeographed), pp. 2 ff. 12 SERVICES FOR SMALL-SCALE INDUSTRY craftsmen simply as an application of the principle of division of labour, though some of these activities, varying in number and scope, may be pursued within the family household. Within the village, the carpenter, the blacksmith, the potter, the basket-maker and the cobbler are widely found. Often the craftsman and his family are engaged in agricultural production themselves, and their industrial activities occupy only a part of their time. This is household or cottage industry rather than smallscale factory industry. Particularly where communications are poor, some of these are more or less " place-bound " activities in the sense that the weight, bulk or fragility of the product makes costs of transport exceedingly high in proportion to the value of the article, gives great advantages to local production and virtually confines sales to customers in the immediate neighbourhood of the undertaking. Secondly, with the development of an elementary system of communications and of regional trade, certain types of industrial activities carried on in small rural communities may give birth to centres of rural manufacturing serving a wider geographical area. This will be particularly so in the case of industries producing commodities that are needed by the individual household only occasionally, such as household utensils, agricultural implements and clothing. The products may then be sold on regional markets by itinerant merchants and in urban retail shops. When this happens the craftsman tends to become more fully dependent on his trade; the managerial aspects of his work tend to increase in importance ; he also has to rely to a certain extent on merchants for the supply of raw material and the sale of his product and also, in many cases, for credit. Thirdly, one finds in many communities a certain amount of activity in the production of artistic goods designed for the use of richer people within the country itself or abroad. To this class belong carpet weaving, shell or ivory carving,fineembroidery, lacquerware, most gold and silver working and similar activities. Taken as a whole, traditional small-scale industry is thus seen to fit naturally into a pre-industrial pattern of economy where it usefully performs such elementary industrial functions as are called for in such a system. The forces making for economic growth, and in particular the opening up of communications in the form of good roads or railways, affect the pattern of small-scale industrial activity in a variety of ways. Some of these effects are unfavourable to small industry. In the first place, activities become less " place-bound ". Many small producers are deprived of their assured village or regional markets and exposed to the competition of firms whose superior methods and equipment enable them to produce better articles at a lower price. Small-scale undertakings SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH 13 producing such articles as household utensils, agricultural implements and clothing are especially vulnerable, since these are things that in the first place lend themselves to factory production, and in the second place are bought by individual households only from time to time and for which even a small undertaking therefore needs at least a moderately extensive market. Many small-scale producers of such articles have found themr selves unable to prevent their trade from dwindling even if they cut their profits to a minimum and pay wages at or even below a bare subsistence level. This has been found to be the case in textiles in all countries where large-scale textile industries have been set up. In general, the. more a product embodies work of a type that lends itself to mechanisation, the greater will be the difference in cost between the hand-produced and machine-produced article and the less competitive will be the position of small local producers. Small-scale manufacturers of products embodying a very high content of manual work of a kind that modern technology has not yet succeeded in transferring to machines are less vulnerable than small-scale producers of common consumers' goods. Thisfield,however, is daily growing less and is tending more and more to.be confined to specialised and luxury articles. But if improved communications throw open local markets, formerly the preserve of local small-scale undertakings, to competition from outside, they at the same time open up wider markets for at least certain kinds of small-scale undertakings. One finds new kinds of small-scale undertakings springing up to grasp new opportunities and meet new needs—undertakings for which there would be little scope in an economy of the pre-industrial type. One also finds some of the more traditional types of small undertakings adapting their operations to meet new market opportunities. The opening up of a region, especially if it is accompanied by greater prosperity and the introduction of new economic activities involving the use of such things as motorcars and tractors, may bring new opportunities to small-scale service and repair establishments. Village blacksmiths may learn to install and repair irrigation pumps and other machines. As a country develops an engineering industry there is a growing scope for small firms in the manufacture of special tools, jigs, fixtures and even machines. A rising standard of life of urban populations also leads to demands for canned fruit and fish, while improved housing can give employment to small entrepreneurs in a number of different trades such as furniture, household joinery, plumbing fitments, and so on. Again, for small-scale producers of specialised and luxury articles of a quality superior to that of machine-made substitutes, improved communications may well mean access to markets that were hitherto virtually closed. Very high-class goods such as the best Persian 14 SERVICES FOR SMALL-SCALE INDUSTRY carpets have always found their way to the markets of the world even on camelback or pack mule, but the improvement of communications may expand markets for less distinguished but nevertheless high-quality goods in which some region may specialise. Yet again, one may find small-scale undertakings catering for national or broad regional markets in single " modern " products, for example thermos flasks, that can be produced even within quite a small undertaking on a scale large enough to take advantage of most, if not all, of the economies of large-scale methods. Finally, and most important of all perhaps, are the opportunities for small undertakings to carry out sub-contracting work. In all countries with a modern large-scale industrial sector this type of work appears to account for a substantial proportion of all the work done in small-scale industries. Certain parts are manufactured or certain operations are carried out by small firms for a larger " parent " 1 firm which itself produces other parts and assembles and sells the product. This kind of sub-contracting is especially important in Japan: examples include the production of special types of paper, paper lanterns and paper umbrellas, doll manufacturing, specialised weaving, fountain pens, cutlery, rubber and rubber articles, and engineering products.2 The Indian First FiveYear Plan mentions as examples of processes in which there would be considerable scope for allocating certain stages to small-scale production the manufacture of cycle parts, electrical goods, cutlery, pottery and agricultural implements.3 1 The use of this term in this context does not imply that the firm that gives out work necessarily has any permanent control over the sub-contractor. 2 On these and other examples, see H. G. AUBREY: " Small Industry in Economic Development ", in Social Research (New York, New School for Social Research and Institute of World Affairs), Vol. 18, No. 3, Sep. 1951, pp. 282 ff., and United Nations Economic Commission for Asia and the Far East: Report of the Study Group ofSmallScale Industry Experts on Their Visit to Japan, document E/CN.ll/I and T/108, 1 Feb. 1955 (mimeographed), Chapter II. The latter source includes the following table showing the extent of sub-contracting between large and small firms in the Japanese engineering industries (p. 119): Industries Dependence on smaller enterprises (Percentage of the total cost of the finished product) Rolling stock 70 Shipbuilding 70 Motorcars 62 Textile machinery 34 Telephone switchboards 26 For a more recent study of sub-contracting arrangements in Japan, see T. ANDO: " Inter-relations between Large and Small Industrial Enterprises in Japan ", in Industrialisation and Productivity, op. cit., p. 26. 3 Government of India, Planning Commission: The First Five-Year Plan (New Delhi, 1952), Chapter XXV, para. 18, p. 330. SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH 15 Sub-contracting is so important and interesting that it deserves a rather longer discussion than we have given to other types of small-scale industrial activities. In particular, it is worth while analysing the reasons that lead some firms to give out work to other firms. These include the following: (a) the parent firm may be working at full capacity and be unable to cope with all its orders, either because this is physically impossible or because it would involve unduly high costs (for example, where overtime premium rates are high); this might be called the "capacity" ground for sub-contracting; (b) certain operations may require specialised skill or equipment that cannot easily be obtained at reasonable cost in the area where the parent firm is located or that could not be continuously employed in the firm itself even if it could be bought or recruited; this may be referred to as the " specialisation " ground for sub-contracting; (c) the sub-contractor may enjoy other special advantages that enable him to carry out certain operations at lower cost than the parent firm; in this case one might speak of the " special advantage " ground for sub-contracting. It follows from this analysis that the sub-contractor need not be a small firm.1 In fact, it may very well be larger than the parent firm; however, as will be seen below, in many cases the special advantages that a sub-contractor may have in respect of the operations concerned are found in smaller firms. The " capacity ground " for sub-contracting will be important where shortages of capacity occur occasionally. When they become a permanent feature the parent firm will normally consider an expansion of its own plant and equipment unless there are special reasons which make this impossible. One such reason might be the existence of government policies forbidding the expansion of certain types of plant or making such expansion difficult or costly. Another reason might be the wish of the parent firm to reduce the risk of future fluctuations in demand by shifting it to some extent to the sub-contractor. The latter reason has been mentioned as a general cause of the widespread use of sub-contracting in Japan. 2 One possible explanation of this ground for sub-contracting in Japan may be its heavy dependence on export markets which normally are less stable than domestic markets. A third reason for relying on sub-contracting even if there is a regular shortage of capacity may be 1 Nor indeed need the parent firm be a large firm. Small firms may give out work to other small firms or to large firms. 2 Report of the Study Group of Small-Scale Industry Experts on Their Visit to Japan, op. cit., p. 22; see also p. 33 (specialised weaving). 16 SERVICES FOR SMALL-SCALE INDUSTRY that the shortage is of a seasonal nature, especially if sub-contractors can be found who are suffering from excess capacity during the same seasons. Sub-contracting may in such cases help to relieve seasonal unemployment and underemployment in the countryside, and in some countries the possibilities of developing this kind of sub-contracting may usefully be explored. The " specialisation ground " for sub-contracting may arise when certain operations can be carried out at lower cost if undertaken on a substantially larger scale than is required for the normal output of the individual parent firm, so that it is more economic to have these operations performed by one sub-contractor on behalf of several parent firms. This is a normal cause of differentiation in the organisation of industry and it need not give rise to sub-contracting but may simply lead to the establishment of new independent industries. Sub-contracting may, however, arise when the operation in question relates to occasional orders for small series of special types or varieties of the parent firm's main Unes of production, or if rather special repairs have to be done to equipment for which the firm's own repair shop is not equipped. Another reason may be that the specialised skills required cannot quickly be imparted to factory personnel although they are found in rural areas, and the firm may not take the trouble to have the operation carried out in its own plant if a satisfactory basis for sub-contracting is available. In special cases, when industry is expanding rapidly, it may be that, while there is overpopulation and underemployment in the rural areas, a shortage of skilled labour exists in towns. This seems to have been another reason for the development of sub-contracting in Japan.1 A similar situation arises in cases when labour of the required qualifications can be found in the towns, if at the same time its rate of turnover is very high and it is therefore costly. Management may then prefer to have the work done in rural areas if the labour force thus engaged is more stable. In fact, greater stability of the labour force may constitute one of the " special advantages " of small-scale industry which have been mentioned above as a third ground for sub-contracting. More important advantages of this nature from the point of view of the parent firm may include lower labour and overhead costs. However, from the point of view of social policy, these advantages may be more problematical. For example, wages in small units may be substantially below the standards set for factory production by collective agreements or otherwise. " Prevalence of marginal gains in favour of the small entrepreneur in rural areas arising from lower wages and longer working hours, as compared with 1 H. G. AUBREY, op. cit., p. 286. SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH 17 the higher wages and shorter working hours in the urban large-scale industries " has been mentioned as one of the main factors responsible for the existence of large numbers of small and medium-scale factories in Japan.1 Similar special advantages may result from the exemption of small productive establishments from safety and other regulations applicable to factories, or from the ineffective enforcement of such regulations in the small-scale sector. Moreover, small undertakings, urban as well as rural, may employ quite unskilled workers, including children and other members of the family, to do simple preparatory and finishing tasks and heavy work with hardly any wage payment at all. Thus, the special advantages of small industry, while they may lead to sub-contracting and to the development of small-scale industrial activities more generally, may also be a source of harsh exploitation and give rise to complaints of " unfair " international competition. In such cases, any help or encouragement that may be given to small-scale industries may need to be accompanied by measures to check the exploitation of labour —measures that are, however, difficult to enforce when small firms are numerous and scattered—and, more positively, by action designed to help small managers to acquire the means and the knowledge to provide better labour conditions. Low overhead costs may favour small-scale sub-contractors as compared with factory production, in part because of the use of simpler and cheaper equipment that would involve excessive labour costs in large-scale industry but that is just remunerative in small firms paying lower wages. A further advantage of small industry is probably found in the very low cost of buildings. In the Japanese bicycle industry— . . . one manufacturer has four simple machines in the front room of his house; with his daughter and four employees he manufactures nuts, which he sells to the factory from which he gets the raw material. Next door, another home unit with four machines operated by the owner and one employee finishes hub castings received from a large factory.2 Thirdly, it is in the nature of the small firm that costs of supervision and general administration are very low. We have been discussing thus far chiefly the reasons that may lead some firms to sub-contract work to others. From the point of view of a small firm accepting sub-contracting work the system has great advantages but is subject to abuse if small firms become too heavily dependent on particular large firms that provide them with work. The head of the smallfirmmay be largely, or even wholly, relieved of marketing problems and problems of obtaining raw materials, and thus left free 1 Report of the Study Group, op. cit., p. 22. 2 AUBREY, op. cit., pp. 283-284. 18 SERVICES FOR SMALL-SCALE INDUSTRY to concentrate on production ; and he may receive technical guidance from the firm that gives out work. But such abuses as monopolistic price dictation by parent firms, unduly deferred payments to sub-contracting firms and suspension of orders in retaliation for requests for payment, which existed, for example, in Japan in 1954, led to the adoption of legislation in that country to prohibit deferred payments for subcontracting work. It may be stated, by way of summing up what has been said in this section, that three kinds of relationships prevail between large-scale and small-scale industry. Firstly, there is a competitive relationship between large-scale and small-scale undertakings producing the same kinds of goods for the same markets. If the goods are of a kind that can be produced more cheaply and efficiently by large-scale than by smallscale methods, small industry is likely to fare badly in this competition. Secondly, there is a relationship of " peaceful co-existence " between large and small firms producing different kinds of goods or services, or goods or services for different markets. Examples are (a) markets in which local small industries enjoy a natural protection deriving from their remoteness from big industrial centres, inadequate communications, perishability of the products or other factors ; and (b) markets for high-grade hand-made luxury products produced by traditional skills. Economic growth tends to narrow the scope for the first, and sometimes also for the second, of these kinds of peaceful co-existence, but at the same time to widen the scope for other kinds of peaceful co-existence, for example by creating new opportunities for small-scale service and repair shops. Thirdly, there is a relationship of " mutual aid " when large and small firms co-operate in making the same products, large firms giving out work to small sub-contractors.1 It may be further stated that, if small-scale industry appears, broadly speaking, to maintain its relative importance in national economies as economic growth proceeds, it does so not through sheer inertia, but rather through a process of adaptation—of evolution and natural selection. There is no room for inertia. The scope for many of the more traditional types of small-scale activities is contracting. On the other hand, theflexibilityof small firms gives them advantages in situations in which decisions need to be taken quickly. It is only by grasping new opportunities, expanding into new markets, using new methods and techniques, that small industry can continue to thrive : The survival of small-scale production depends upon continuous enterprise . .., bringing new commodities within the range of the system, for small1 Or small firms buying certain components from large firms. SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH 19 scale industry must contract if it depends only upon age-old products, since most of these will disappear into factories sooner or later.1 To a large extent the process of adaptation that is required would seem to be a process of shifting the centre of gravity of small-scale industry from activities that compete with large-scale industry to activities that are complementary to it. It seems that small industry is often in a relatively stronger position vis-à-vis large-scale industry in the more highly industrialised than in the less highly industrialised countries. If this is so, a large part of the explanation may be found in the fact that the process of adaptation referred to above is more nearly complete in the more highly industrialised countries—that a larger proportion of small firms are complementary to, and a smaller proportion are in direct competition with, large-scale industry. The coming of electricity and the development of a wide range of electrically driven small tools to replace hand operations provide great scope for modernising and increasing the efficiency of small-scale operations. These, however, are not the only opportunities for achieving the adaptation and the increase in productivity that are needed for the development and, in some cases, for the very survival of small-scale industry. No less important are improvements in management and organisation that have in themselves nothing to do with increased mechanisation but that, by increasing the profitability of small-scale undertakings, can help to provide the means to pay for modern tools and equipment. THE ROLE OF SMALL-SCALE INDUSTRY IN ECONOMIC DEVELOPMENT There is general agreement on the imperative need for many underdeveloped countries to devote vigorous efforts, as indeed they are doing, to the development of local manufacturing industries. Economic progress and rising living standards require diversification in the supply of goods. The very content of higher standards of living is an increase in the exchange and consumption of other goods than those meeting the barest necessities of fife; these other goods normally have to be manufactured. True, certain countries might procure these other commodities by expanding agricultural output and exporting part of this in exchange for industrial goods. In several important countries, such as India, this is, however, hardly possible. Food production in these countries is not likely to be capable of expansion at a significantly faster rate than total population. In Japan agricultural production became inadequate for 1 W. A. LEWIS: The Theory of Economic Growth (London, George Allen & Unwin, Ltd., 1955), pp. 139-140. 20 SERVICES FOR SMALL-SCALE INDUSTRY domestic needs long ago and this country has had to build up large exports of manufactured goods in order to pay for agricultural and mineral imports. It seems likely that certain other Asian countries will sooner or later find themselves in a similar situation. Moreover, in the many underdeveloped countries in which there is surplus population on the land, even a large increase in agricultural output may in itself do little or nothing to provide jobs for the unemployed and the underemployed. These countries look largely to the growth of industry to provide the jobs that are so urgently needed. Thus, even among countries which have resources that would permit a large increase in agricultural output, few if any wish to remain purely agricultural countries. Rather, they seek to promote a simultaneous and, in some sense, balanced growth of industry and agriculture, with growth in each sector contributing to growth in the other. Given the need in all or most countries for at least some measure of industrialisation, what part can small-scale industry play in the process ? First, it may make possible economies in the use of capital.1 Capital is very scarce in underdeveloped countries, and it may be used to greater advantage in the early stages of development if it is used to expand transport and other public utilities, irrigation and other agricultural requirements and those forms of manufacturing where the advantages of large-scale production are greatest—especially metals, chemicals, heavy engineering and building materials—and is not used to any great extent in those branches of manufacturing, such as weaving, that can be carried out fairly well by " labour-intensive " methods in small firms or cottage industries. But, while small-scale manufacturing nearly always uses less capital per worker employed, it is not certain that it typically uses less capital than large-scale industry per unit of output. 2 Secondly, besides making possible economies in the use of the existing stock of capital, small-scale industry may call into being capital that would not otherwise have come into existence: . . . The enterprising small manufacturer has to scrape together capital wherever he can find it. But he and his relatives and friends oftentimes do find a surprising amount.... Furthermore, . . . this capital probably would never have come into existence as productive capital had it not been for the small enterprise. The equivalent would not have been invested in government bonds and would not have been put in banks or loaned for the use of others.3 1 2 See W: A. LEWIS, op. cit., p. 141. See, for example, V. V. BHATT: " Capital-Output Ratios in Certain Industries: A Comparative Study of Certain Countries ", in Review of Economics and Statistics (Cambridge, Mass., Harvard University), Vol. XXXVI, No. 3, Aug. 1954, p. 317. See also P. N. DHAR and H. F. LYDALL: The Role of Small Enterprises in Indian Economic Development (Bombay, Calcutta, New Delhi and Madras, Asia Publishing House, 1960). 3 STALEY, op. cit., p. 13. SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH 21 Thirdly, a given amount of capital invested in small-scale industrial undertakings is likely to provide more employment, at least in the short run, than the same amount of capital invested in large-scale undertakings. 1 This is a very important matter for countries with surplus labour for which the shortage of capital makes it difficult to find jobs. Small-scale industry uses labour and capital in proportions corresponding more closely to the proportions in which these two factors of production are available in many undeveloped countries than does largescale industry. Fourthly, large-scale industry calls for a great deal of managerial and supervisory skill—foremen, engineers, accountants and so on. Like capital, these skills are in very short supply in underdeveloped economies and it is important to economise as much as possible in their use. Smallscale industry provides a way of doing this, and at the same time provides industrial experience and serves as a training ground for large numbers of small-scale managers, some at least of whom may develop the capacity for managing large-scale undertakings. Another point is that— . . . the growth of an economy usually requires a large number of small changes, each taking advantage of local opportunities and availability of resources, and each in turn making further growth possible. Dispersal of savings and dispersal of entrepreneurship are important aspects of economic development even in countries in which the State has played an important part as provider of capital and manager of business enterprises.2 Fifthly, it is not only managerial and supervisory skills that are in short supply in underdeveloped countries, but many types of skilled labour as well. Small industry may be better able than large industry to take advantage of existing traditional skills (though even in the smallscale sector new skills will be needed if undertakings are to adjust themselves to changing conditions and take advantage of new opportunities). Finally, many people hope that encouragement of small-scale industry may help to preserve a healthy balance between the rate of economic growth in urban and rural areas. The movement of population from rural to urban areas is a world-wide phenomenon. It is proceeding in a number of countries at a rate that is causing uneasiness for several reasons. 3 In the first place, beyond a certain point additions to urban populations involve heavy costs in the form of investments in social 1 Whether it will also provide more employment in the long run is a more controversial question. See " Some Aspects of Investment Policy in Underdeveloped Countries ", in International Labour Review (Geneva, I.L.O.), Vol. LXXVII, No. 5, May 1958, p. 389. 2 P. T. BAUER and B. S. YAMEY: The Economics of Underdeveloped Countries (London, James Nisbet & Co., Ltd., 1957), p. 201. 8 For a recent detailed study of the problem, see I.L.O.: Why Labour Leaves the Land, Studies and Reports, New Series, No. 59 (Geneva, 1960). 22 SERVICES FOR SMALL-SCALE INDUSTRY capital—expenditure on housing, schools, hospitals, places of worship and improvements and developments in roads, water supplies and drainage. Such investments in " social overheads " (which, important as they are, are not directly productive) make very heavy demands on scarce capital, but failure to make these investments means that the cost takes the form of the creation of slum conditions and the attendant disease, misery and squalor. Again, it is believed by many authorities that a rapid flow of population to the towns not only creates unhealthy urban conditions but is bad for the vitality of village life, the argument being that those who go to the towns include a high proportion of the more able and enterprising of the villagers, who are dissatisfied with the lack of opportunities for progress and advancement in the villages. Large-scale industry is almost inevitably attracted to the large urban centres. The same is likely to be true of many small-scale undertakings too, but there may be considerable scope, if appropriate policies are adopted 1 , for " decentralisation " of small-scale industry and for preserving the predominantly rural character that many small-scale industries have had in the past. It is also argued that the encouragement of smallscale industries in rural areas can serve to counteract seasonal unemployment or underemployment in agriculture, and thus to make use of labour which might otherwise be wasted.2 These are some of the advantages that may be claimed for smallscale industries and some of the ways in which they may contribute to economic growth and development. As has been pointed out— ... It seems probable, for many reasons, that the potential contribution of small industry, provided it can be helped to adopt modern techniques, is even greater in the newly industrialising countries than in the highly industrialised countries. The newly industrialising countries have more abundant labour and less abundant capital, greater difficulties of transport and communication, and less of the special skills and traditions required in large-scale organisations. These are conditions which tend toward a lower optimum size of establishments.3 TYPES OF ASSISTANCE TO SMALL-SCALE INDUSTRY Small-scale industries are not, however, likely to be able to make their full contribution to economic growth unless appropriate measures 1 These may need to include the establishment of certain commercial and other facilities such as banking, insurance, transportation, warehousing and so on. This subject is further discussed in Chapter VI. 2 On this subject see I.L.O. : Labour and Social Problems of Small-Scale and Handicraft Industries in Asian Countries, op. cit., pp. 41 fF. For an account of steps taken to deal with this problem on some collective farms in the U.S.S.R., see L. ZLOMANOV: " The Development of Industrial Production on Kolkhozes ", in Problems of Economics (New York; English translation of the Soviet monthly journal Voprosy Ekonomiki), Vol. I, No. 12, Apr. 1959, pp. 69-71. 3 STALEY, op. cit., pp. 24-25. SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH 23 are taken to help them overcome the disadvantages of smallness. Such measures may be taken both by governments and by small producers themselves in association with each other. A distinction may be drawn, at least in theory—in practice it may be difficult to draw any precise dividing lines—between two kinds of measures : (a) measures designed to help in overcoming the competitive disadvantages that result from smallness, and to place small industry in a position to compete on equal terms with large industry; and (b) measures that go further than this and include an element of subsidy or specially favourable treatment for small firms.1 Measures taken by governments may fall into either category; measures that can be taken by associations of small producers fall only into the first. As regards measures of the first category, it is important to remember that industrial production (including the assembling of the raw material and the sale of the finished product) involves a whole series of processes. In some of these processes economies of scale are important; in others they are much less so, or even non-existent. If it is possible to separate out or " de-integrate " those processes in which economies of scale are important, the remaining processes can be efficiently performed by small producers. There is in fact considerable scope for such " de-integration ". The point has been well explained in the following terms : ... The small firm can survive easily if markets are well organised, so that it can buy cheaply such factors as specialist advice, engineering services, component parts, raw materials and the like, and can dispose easily of its product, whether to final or to intermediate buyers. The better organised the market, the less each firm needs to do for itself, and the smaller is the advantage of large-scale organisation. The corollary of this is that, if it is desired to favour small-scale enterprise, the best way to proceed is to organise around the small firm specialist services and marketing agencies so efficient and cheap that thefirmis not disadvantaged by being small. The large organisation can conduct research, buy in bulk, sell in bulk, raise funds easily, produce a standardised article, advertise, hire the best specialist advice, and so on. The small organisation can succeed just as well if it is surrounded by agencies—private, co-operative or statutory— which will take over all that part of the work which needs to be done on a large scale, so that the small firm can concentrate on those activities which are adequately done on a small scale It is not true that the individual firm must be large in scale if there is to be efficiency or economic growth ; but it is true that the advantages of specialisation cannot be secured unless the economies of scale are available either within the firm or within the framework of well organised markets. All the same, the degree to which the well organised market can substitute for the large firm varies very much from industry to industry. 1 STALEY, for example, draws a distinction between " positive " or " developmental " measures and " negative " or " protective " measures (op. cit., p. 15). 24 SERVICES FOR SMALL-SCALE INDUSTRY It would be very hard to organise railway service, the manufacture of steel or the assembly of motor cars efficiently on a small scale, whereas smallscale enterprise can hold its own very well in road transport, in shopkeeping,1 in some forms of agriculture and in a limited range of manufacturing activities. Much of this book will consist of examples of how particular processes or functions can be " de-integrated " and performed efficiently for a group of small firms by agencies or associations of various kinds, leaving the small firms to handle individually those processes and functions that they can handle efficiently. A word should be said at this point, however, about measures of the second kind distinguished above—measures that go further and involve various kinds of subsidies or specially favourable treatment for small-scale industries. A number of governments have adopted such measures. For example, in Ceylon importers have been obliged to purchase a specified proportion of local goods even when they had to sell them at a loss. In India excisé duties have been levied on mill-made cloth and on the output of largescale firms in the leather footwear industry. In the former case the money is used for financial assistance to the handloom and khadi industries. Furthermore, printing of cloth by large mills has been limited to their best year's output during the 1949-54 period and expansion of large plants in leather footwear, tanning and garment-making has been restricted. In other cases differential excise duties have been imposed or duties reimbursed on a discriminatory basis, or small firms have been given preferential contracts. For several industries it has been decided to reserve further expansion of production for small units. 2 Grave doubts have been expressed regarding the wisdom of measures for regulating competition between large and small-scale industries that go beyond attempts to remove avoidable competitive handicaps to the latter. Attention has been drawn to the danger that this type of protection may make for inefficient production, in the first instance at the expense of the consumer who has to pay high prices for products that may be of inferior quality. More important, it is argued that such policies will tend to hold up economic growth by checking the production of the most efficient productive units. It is not proposed in this volume to discuss the merits of measures of this kind. One argument that is sometimes used in support of such measures may, however, be mentioned briefly. Large-scale and smallscale industry compete on the basis of costs and prices established in the market place. In particular, the prices at which labour and capital can 1 2 LEWIS, op. cit., pp. 77-78. Government of India, Planning Commission: Second Five-Year Plan (New Delhi, 1956), p. 341. SMALL-SCALE INDUSTRY AND ECONOMIC GROWTH 25 be hired determine how much of each it is profitable for private enterprise to employ, given the prices at which the products can be sold. But it is argued that the money costs or private costs of employing labour and capital do not accurately reflect the real costs or social costs involved. Wherever there is heavy unemployment or underemployment, the private cost of employing labour may, it is argued, greatly exceed the social cost of doing so. If we identify the " real " or social cost of employing one more worker in any undertaking with the value of what he would have produced instead if he had made some other use of his labour 1 , the social cost will be nil if the worker was wholly unemployed and may be very low if he was greatly underemployed. But the private cost—his wages together with any other costs to the employer—will have to be at least high enough to feed, clothe and house him and, on account of trade union action or social legislation, may be higher than the bare minimum for subsistence. Given the wage that has to be paid, it is argued that private enterprise will tend to employ less labour and more capital than would be socially desirable, and that governments should use their influence, by subsidising the employment of labour, or in other ways, to counteract this " distortion ".2 Since small-scale industry tends to employ relatively more labour and relatively less capital than largescale industry, measures designed to enlarge the share of small-scale industry in national markets piovide one way of doing this. 1 This may be considered to be the " real " cost to society, because this is what society will lose as a result of his being no longer available for other work. 2 For a fuller analysis of this argument, see " Some Aspects of Investment Policy in Underdeveloped Countries ", op. cit. CHAPTER II SOME CHARACTERISTICS AND NEEDS OF SMALL-SCALE INDUSTRY From Chapter III onwards we shall be concerned with measures of a positive or developmental type designed to help small-scale industry. Such measures need to be based on a thorough understanding of the characteristics and needs of small-scale industrial undertakings. These vary greatly from country to country and from industry to industry, yet many small firms all over the world have a good deal in common. Before discussing what can be done to meet their needs it may be helpful to present, in terms so general as to be necessarily superficial, a brief catalogue of some typical characteristics of small industrial firms and of the needs resulting from these characteristics. In so doing, attention will be given to the advantages or potential advantages as well as to the disadvantages of small firms. The matters discussed may be classified (not necessarily in order of importance) under six main headings, namely (a) problems of finance; (b) supply and quality of raw materials ; (c) marketing problems ; (d) production problems ; (e) labour problems ; and (f) management problems. FINANCE A chronic shortage of finance, both for renewing and expanding equipment and for meeting the running expenses of the business, is one of the most widespread and typical characteristics of small industry in all countries. Even in countries that have well developed financial institutions for channelling savings into productive investment, small firms have difficulty in meeting the security requirements of lending institutions. The cost of handling small loans, including the cost of investigating the credit standing of small applicants for loans, and the risk of default are factors placing smallfirmsat a disadvantage and tending to raise the rate of interest charged to small borrowers. Even more difficult is the position of small borrowers in countries without well developed lending institutions. In such countries they often have to depend upon merchants or middlemen for credit—merchants or middlemen who, partly because their risks are high and partly because of the lack of other sources of CHARACTERISTICS AND NEEDS OF SMALL-SCALE INDUSTRY 27 funds, may charge extremely high rates of interest. Middlemen on whom small businesses are dependent for credit are sometimes in such a strong position that the businesses are obliged to buy their raw materials from them, or sell their products to them, and cannot break away even though they might get better terms elsewhere. Dependence on outside sources of funds often arises because a small man setting up in business underestimates his working capital requirements—i.e., the amount of money he will need for meeting the running expenses of the business. Good management can ease a small firm's financial problems. But this is a field in which governments can do, and in many countries have done, a great deal to help deserving small businesses.1 One way of helping is to provide, for example by establishing industrial estates, well designed premises, supplied with power and other basic requirements, that can be hired by men who wish to set up small firms but lack the capital to purchase their own land and to buy or erect their own buildings. Another way of helping is to make special arrangements or set up special institutions for extending credit to small businesses on terms and conditions that meet their requirements. There are good reasons for combining this kind of financial assistance with advice and assistance in problems of management. Shortage of capital is not the only deficiency of small-scale businessmen. They are often deficient also in the skills of management. One should not, however, overlook the fact, mentioned earlier, that the owners of small firms may be able, and often are able, to scrape together surprisingly large amounts of capital from their own resources and those of their friends and relations, utilising, it may be, funds that would not have been invested in government bonds or the securities of large corporations, 01 even deposited in banks. RAW MATERIALS The purchase of raw materials is another field in which small firms are apt to be at a disadvantage as compared with large ones (although they do sometimes have the advantage of being able to use cheap local raw materials of a quality that would not be suitable for processing by largescale methods). The fact that in underdeveloped countries many small producers may, for financial or other reasons, be virtually tied to a single supplier of materials who is able to profit from his monopoly has already been mentioned. A more general disadvantage is that small firms are seldom able to obtain the discounts that go with buying in bulk. Again, unlike large firms, small firms cannot employ scientists and laboratories 1 See Chapter VII below. 28 SERVICES FOR SMALL-SCALE INDUSTRY to test the quality and suitability of different materials and are poorly placed for taking advantage of new materials that may come on to the market. Sound purchasing policies within the small undertaking will help. But here again outside aid is needed. This is a field in which small producers can do a great deal to help themselves by joint action. Informal buying groups may be set up to strengthen the bargaining position of the individual small firms vis-à-vis suppliers and to obtain discounts for quantity. Formal co-operative supply associations may be established for the joint purchase of materials and other supplies.1 Associations of small-scale producers, financed at least in part by subscriptions or fees from members, may set up laboratories and materials-testing services.2 But it may be difficult for small producers either to organise or to finance such " common facilities " without some help from governments. Particularly where small producers have already taken some initiative, and thus shown an awareness of the need for and potential value of such facilities, and a willingness to meet at least some part of the costs, government help in dealing with the problems of organisation and financing may be extremely valuable. MARKETING For reasons very similar to those just discussed, small firms are often at a disadvantage in the marketing of their products. This, of course, is not always so : sometimes the market or the product is of such a nature that only a small firm can operate profitably—for example, when the size of the market is limited by non-transportability of the product or by high transport costs, or where the demands of buyers are highly specialised and individual. But in many cases small firms tend to be in a weak bargaining position vis-à-vis suppliers; indeed, in underdeveloped countries they are sometimes largely dependent on a single middleman for an outlet for their products. They have difficulty in advertising, or in providing samples, displays or showrooms. They have difficulty in establishing contact with potential customers at a distance, or in building up national or international markets. It they do attempt to do so by maintaining a sales staff, they are unlikely to be able fully to use the capacity of such staff (a salesman can book a large order just as easily and cheaply as a small one) and their overhead costs of selling will be heavy. They are poorly placed for assessing trends in market conditions and changes in 1 See Chapter VIII below. These, it will be observed, are all examples of " de-integration " of particular processes or functions of the kind referred to earlier (see p. 23). 2 CHARACTERISTICS AND NEEDS OF SMALL-SCALE INDUSTRY 29 consumers' tastes and requirements. With the improvement of transport and communications, the maintenance of standards of quality, dimensions or finish becomes increasingly important. Lack of standardisation, both in successive batches of a product turned out by a single small firm and as among a group of small firms producing a similar product, is frequently a great obstacle to an expansion of markets. Here again, sound selling policies within a small undertaking will help, but more than this is needed. " De-integration " of particular processes and functions is, once again, a possible solution. To some extent such de-integration comes about through ordinary market forces without any special action having to be taken. When a small producer sells to a large wholesaler or retailer instead of direct to the final customers he is selling through channels that can take advantage of the economies of large-scale selling and that take certain selling functions off his hands. But co-operative societies or state-aided agencies can provide marketing facilities for small firms that retailers and wholesalers do not provide. They can strengthen the bargaining position of individual small producers. They can pool and grade the products of individual producers and encourage standardisation. They can undertake market surveys and market research that would be too expensive for individual small firms, and that will provide valuable information about market trends and developments and opportunities for expanding into new markets at home or abroad. They can advertise and provide samples, displays and showrooms, and make contacts with and offer procurement services to buyers at home and abroad. They may be helpful in securing government orders.1 PRODUCTION It is characteristic of many small firms that their methods of production are traditional and have not been adapted to take advantage of new tools, new materials and new markets. As indicated earlier, such adaptation seems to be a necessary condition for survival of many branches of small industry. But the heads of small firms often do not know how to make the necessary adaptations. " It appears that the pressure of competition results less often in a change of technology than in a lowered standard of living. The most frequent result of competition appears to be a passive acceptance of what seems inevitable." 2 The heads of very many small undertakings need outside help in responding to the challenge of changing conditions. 1 See Chapter VIII below. 2 See H . G. AUBREY, op. cit., p. 278. 30 SERVICES FOR SMALL-SCALE INDUSTRY Sometimes one or more processes in a sequence of operations need to be performed on a relatively large scale if they are to be performed efficiently. Particularly if these come at the beginning or end of the sequence, " de-integration " may be possible. In Indonesia in the 1930s central finishing plants were established in a variety of small-scale industries to take over half-finished products from individual craftsmen and perform finishing processes that required, for efficiency, the use of modern tools and machinery that were too expensive for the individual small producer: . . . As a result of such modern supplementation of the individual's work, and of more careful inspection andfinishing,the quality of the product was so much improved that the better prices obtained paid for the cost of the establishment. Organisationally, suchfinishingcentres belonged to a community or to several villages on a co-operative basis.1 In other cases it may not be necessary or possible to "de-integrate" a particular production process, but rather to adapt existing, or devise new, tools or simple machinery so as to enable it to be performed efficiently within a small undertaking. Technological research carried out by a joint or state-aided agency may make this possible.2 Such an agency may also be able to provide help with problems of layout and maintenance. It is characteristic of many small firms that they have grown in a haphazard fashion, so that a layout that may (or may not) have been well thought-out initially has become entirely irrational with the installation from time to time of new machines or other pieces of equipment wherever there happened to be room for them. Some technological institutes devise model layouts for small firms in different size groups and in different Unes of business. Bad maintenance of machinery is a common and costly fault in many small firms. Simple maintenance schedules provided by a technological institute may greatly help a small producer who is not familiar with modern machinery and who may have imperfectly understood the manufacturer's instructions, if any. For machinery that does break down, repair services may be organised on a joint basis. In production as in marketing, however, one should not exaggerate the disadvantages of the small firm, or assume that it never has advantages. The economies of large-scale production are especially important when the use of expensive equipment is combined with long production runs on a standardised product. When a firm has to switch continually from one product to another, the lower overhead costs of a small 1 1 AUBREY, op. cit., pp. 279-280. See also Chapter VIII below. See Chapter VI below. CHARACTERISTICS AND NEEDS OF SMALL-SCALE INDUSTRY 31 firm may operate in its favour; and when expensive equipment is not needed, the economies of large-scale production may be slight or nonexistent. LABOUR As has already been suggested, a smallfirmmay have some advantages in the matter of labour supply and labour relations. Small industry does not suffer from large-scale industry's disadvantages in procuring sufficient labour in areas where communications are poor and villages scattered. Most small undertakings can find sufficient labour in a single village or, at most, two or three villages in a single locality. They may be able to use rural labour having traditional skills. Even where there are no traditional skills in a particular rural area, labour costs tend to be low. Labour, even though it may not be skilled and accustomed to the discipline and rhythm of industrial work, is plentiful in rural areas in many underdeveloped countries, and wages substantially lower than those paid in the towns will give workers a comparable standard of living, since urban workers incur higher costs of living in respect of housing, transport and other items. A rural undertaking may also find it easier to avoid the high labour turnover and attendant costs that are characteristic of urban employment in underdeveloped countries. Again, the personal face-toface relationship between the head of the firm and the workers that is characteristic of small firms may make it easier to build up a sense of teamwork. Against these advantages must be set certain disadvantages. The fact that small firms often lack the means to provide wages and working conditions equal to those provided in big firms may mean, especially in towns where big and small firms compete for labour, that work in small firms is not attractive to the best workers. A personal face-to-face relationship with workers is not always an advantage—it may sometimes introduce an element of personal friction. A large firm may find it easier to introduce soundly based systems of payment by results that may reduce the amount of supervision required. In a small firm workers may more commonly have to be able and willing to turn their hands to a variety of tasks. This may be welcomed by some workers but not by all, and may complicate problems of supervision and of defining jobs in such a way that responsibilities are clearly determined and understood. In large firms formal training can be provided for new workers under qualified instructors. In small firms new workers commonly have to pick up the job as they go along, with such help, often rather casual, as foremen and old hands can give them. Nor is it only for new workers that a problem of training arises. The adaptation of products and 32 SERVICES FOR SMALL-SCALE INDUSTRY processes to changing conditions, which we have been stressing all along, may mean that existing workers have to learn new skills, and in a small firm there may be nobody who can teach them. Institutes, agencies or extension services organised by joint or government action may be able to help with some of these problems, especially in matters of training.1 They may also be able to give advice on matters relating to the improvement of working conditions and the protection of safety and health. MANAGEMENT All the problems thus far discussed are in a sense management problems, and underlying all of them is a basic problem of management development and training. Management is a key factor in economic growth and progress. All the resources of a country—labour, land and other natural resources, buildings, machines, tools, power plants and the means of transport—are under the day-to-day control of the managers (using the term in a broad sense) of public and private undertakings. How well these resources are used, and with what results in terms of human welfare and standards of living, depends very largely upon how well managers do their jobs. This is not to say that it depends only on managers. It depends to an important degree upon how far governments succeed in creating or maintaining conditions in which managers can do a good job. It depends to an important degree on the co-operation of workers, though success in enlisting the co-operation of workers is itself a test of good management. But it is safe to say that a country with relatively poor natural resources can have a high and rising standard of living if it has good managers and if its government maintains conditions in which they can function well, while a country with rich natural resources may be condemned to a low standard of living if resources are dissipated through bad management. It has already been seen that in all countries a very large proportion of all managers are managers of small undertakings. Most of these have had no formal training for the varied and difficult work they have to do. If they have had any formal training it has usually been limited to one, or at most a few, specialised aspects of their work. Many small firms start as cottage or workshop undertakings. In these cases the head of the firm may be a good craftsman, but may have little interest in or understanding of the commercial, financial and other aspects of his work. Other small firms are started by merchants who have had experience in buying and selling but know little about production. It may be true that 1 See Chapter V below. CHARACTERISTICS AND NEEDS OF SMALL-SCALE INDUSTRY 33 some of the most essential attributes of a good manager—common sense, good judgment and an ability to handle people—can be acquired only to a limited extent, if at all, through formal training. It is certainly true that such training is no substitute for flair and experience. But there is ample evidence that it can, at the very least, help a manager to adopt a systematic approach to his problems, can help him to ask the right questions when he has a problem to solve, which is the first step towards finding the right answers, and can equip him with a certain number of techniques that will help him to find the answers. Apart from lack of training, another common characteristic of small firms from a managerial point of view is the lack of a clear definition of jobs and of clearly understood lines of authority and responsibility. This may arise because the head of the firm tries to keep everything in his own hands and is unwilling to delegate responsibility. Or it may arise because many small firms are family concerns and places may have to be found in the management team for relatives who are not well fitted to take responsibility. Formal and detailed definitions of functions and responsibilities may be unnatmal and unnecessary in a small firm where all members of the management team are in daily contact, but the efficiency of many small firms is impaired by lack of a clear understanding of who is responsible for what, and to whom. Related to the last point is the problem of ensuring continuity of effective management in the event of the death or retirement of the head of the firm. This is in all countries one of the weakest features of the small owner-managed firm, and arises largely from the character of the type of man who branches out on his own and from a very human reluctance to envisage the possibility of one's own death. It has caused many failures and represents a very real problem, which can be solved only if the owner-manager is willing to delegate responsibility and thus provide training and experience for those who will succeed him. One characteristic of a small firm that is favourable from the point of view of management should be noted : a small firm is usually much more flexible than a large one. Bureaucratic procedures and delays in getting decisions are difficult to avoid when many people have to be consulted. A small firm may have important advantages when quick decisions are needed—as, for example, when market conditions change from day to day, or when special service, or service at short notice, is required.1 But it is important that firms should take not only quick decisions but right decisions. It is clear that there is a great need for training for the managers of small undertakings both in general principles of manage1 See E. A. G. ROBINSON, op. cit., pp. 48 ff. 34 SERVICES FOR SMALL-SCALE INDUSTRY ment and administration and in the more specialised functions of management discussed earlier. How this may be provided is one of the main problems to be discussed in this volume. Suffice it to say here that training at two levels is required, namely— (a) training for individual plant owners who can be persuaded of its usefulness; and (b) more advanced and specialised training for the leaders of cooperatives, trade associations and other voluntary bodies, and for a corps of people whose task will be to provide advisory, training and consulting services. The difficulties of organising and financing such training on a scale at all commensurate with the needs are formidable and challenging. CHAPTER III SOME PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES The previous chapters have shown that some of the many processes involved in the production and sale of goods may, if they are to be efficiently performed, have to be carried out on a larger scale than is possible within an individual small firm. If those processes in which economies of scale are important can be " de-integrated " and performed by some outside agency on a relatively large scale for a group of small firms, the remaining processes may be carried out just as efficiently in small firms as in big ones. " De-integration " may be applied not merely to certain physical processes (for example, preliminary processing of raw materials or final processing of products) but also, and what is perhaps more important, to such services as research, training, specialist advice on problems of management or technology, and to various marketing functions. Large firms may employ specialists on their own staffs to provide all these services. If small firms, which could not afford to do this and would not have enough work to keep such specialists busy for more than a small part of their time, are in a position to hire or otherwise obtain speciahst advice and services when they need them, they may be under no disadvantage by reason of their smallness. To provide such services for a small firm is to provide it, in a sense, with an " extension " x of its own staff. To some extent, as already pointed out, private enterprise, if it is free to do so, will tend to provide the services and facilities that small firms need. Wholesalers and retailers can achieve economies by handling the products of many different producers and thus relieve small industrialists in many lines of what would be for them the inordinately heavy costs of selling directly to final consumers. Firms of management consultants come into being in response to a market demand for their services. But, especially in industrially less advanced countries, there is likely to be little or no effective market demand among small firms for the kinds of services that management consultants and research institutes can provide. 1 See Introduction, p. 2. 36 SERVICES FOR SMALL-SCALE INDUSTRY This is partly because many small managers, in highly developed as well as in less developed countries, are not aware of their own needs or of the possibilities of satisfying them and partly because, even if they are aware of their needs, they cannot afford to hire advisory and research services on a commercial basis. There is scope and need for action by governments and by associations of small producers to provide services and facilities for small industries that will supplement those that may be provided by individual private enterprise. Extension services have an important part to play in this connection. As indicated earlier, the main extension services are advisory (or consultancy), training, information and, as a supporting activity, research services. This chapter is concerned with certain general problems of organising and providing extension services for small-scale industry, with special reference to conditions in the less developed countries. PROBLEMS OF ORGANISATION There is considerable diversity of pattern and emphasis in the services that have been established in different countries to help smallscale managers. Some examples are given in Appendix I. This diversity is to be expected in view of the differing conditions, needs and resources in different countries, and no one pattern or type of organisation can be held up as a model to all countries. There are, however, certain problems of organisation that are encountered in varying forms in all countries. In the following paragraphs we shall touch on problems of the relationships between state assistance and voluntary efforts and between different government departments or agencies; considerations regarding the degree of centralisation and specialisation of services appropriate in different conditions; and finally questions of financing and staffing. On none of these questions is it possible to formulate detailed conclusions applicable to all countries, but on all of them there are points of a general character that it will be helpful to bear in mind. Co-operation between the State and Voluntary Associations One important question is that of the part that can be played by voluntary associations of small producers. Such associations are active in a number of countries. They have been perhaps nowhere more active or successful than in the Scandinavian countries, where local associations of craftsmen and small industrialists are affiliated to influential central organisations. The following account of the central organisation PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 37 in Sweden may serve to draw attention to features that are characteristic of the corresponding organisations in other Scandinavian countries also. About 480 local artisans' and small industry associations are affiliated, through regional associations, to the Swedish Artisans and Small Industry Organisation, or S.H.S.O. (Sveriges Hantverks -och Smâindustriorganisation), with a membership of about 35,000. It is a private organisation, and its purposes are (a) to represent the interests of artisans and small industrialists, in connection with legislation and related matters; and (b) to further—technically, economically, socially and artistically—the development and progress of small industry. The various departments of the S.H.S.O. furnish numerous services to small industrialists, designed to assist them in the efficient conduct of their businesses and to strengthen their competitive position. One important branch of activity is concerned with advisory services in business management. Experts employed by the organisation assist the members in matters relating to costing, taxation, merchandising and credit ratings. A separate department handles accounting for individual businesses, prepares from time to time statements of their financial position, and handles their income tax declarations. Recently, through the establishment of a Small Industry Sales Corporation (AB Smâindustriprodukter), the S.H.S.O. has undertaken to promote the marketing of the products of handicrafts and small industries. In the export field, the S.H.S.O. co-operates with a privately owned company which has established sales organisations in several markets for the export of furniture, hardware and other products of small-scale industry. The interest of the S.H.S.O. in matters of vocational training led it to establish an institute which formed the nucleus of the present Swedish Government Institute for Handicrafts, with which it remains closely associated, nominating four of the 11 members of the Board of Directors. It continues to devote much attention to matters of training. The training and examination of apprentices are supervised by a separate institution within the S.H.S.O. Craftsmen who meet required standards are awarded master certificates by the S.H.S.O., which since 1940 have been recognised by the Government. The action of the Government in taking over and expanding an institute already established on the initiative of an association of small producers is one of many examples of government action in various countries designed to supplement and extend services in the organisation of which small producers have themselves taken the initiative. In other cases the initiative in organising such services has come wholly or mainly from the government, but representatives of small producers are asso- 38 SERVICES FOR SMALL-SCALE INDUSTRY ciated with the efforts that are being made. There are good reasons for trying to establish some sort of working partnership between the government and associations of small producers in providing the initiative and direction for these services. Governments can provide resources, continuity and the co-ordination that is made possible by an over-all view of the requirements of the national economy. Representatives of small producers can provide enthusiasm, ideas and voluntary work. Helping people to help themselves is usually much more effective than doing things for them, and people are much more likely to avail themselves of services and facilities provided if they have felt the need for them and if they or their representatives have some say in the way in which they are organised. A method that has commended itself in a number of countries for associating representatives of small producers with the work of public or semi-public agencies or institutes providing extension services for small industry is to appoint representatives of small producers' associations, along with representatives of other interested sections of the community (for example, trade union organisations and universities or technical colleges), to the governing boards or executive committees of such institutes or agencies.1 Or they may be appointed to boards or committees having an advisory rather than an executive function. Other members of executive or advisory boards or committees may include representatives of central government departments and of local government bodies. Co-ordination of Government Agencies There is no one " best " solution to the problem of ensuring the most fruitful co-operation between public and private efforts in this field. Nor is there any one best solution to the very real problem of co-ordinating the activities of the different government departments or other public agencies that may have contributions to make. Because action to promote the healthy development of small-scale industry touches the life of the community at so many different points it is likely to be of concern to a number of different government departments and to government bodies at a number of different levels—central, regional and local. Ministries of finance, commerce and industry, labour and social welfare, and education may all be concerned with different aspects of work in this field.2 So also may public development boards or development 1 Examples of this are provided by the Board of Representatives of the Copenhagen Technological Institute and the Board of Directors of the Swedish Government Institute for Handicrafts, both described in Appendix I. 2 In some countries there are also ministries of co-operation. PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 39 corporations in countries where these exist. In most countries it will probably be conducive to good administration and to the avoidance of the worst features of bureaucracy if the main responsibility for carrying out such work as the central government wishes to undertake to promote the development of small-scale industry is entrusted to some one central department, clear decisions having been taken and announced regarding (a) the kinds of help for which it can look to other central departments and (b) the functions and responsibilities that are to be decentralised and entrusted to regional or local government bodies.1 The definition of the functions and responsibilities of the different departments and agencies concerned needs to be preceded by as careful a study as it is possible to make of the needs and requirements of smallscale industry and an analysis of the factors that hamper its development. Since needs and conditions change and evolve over the course of time, a continuous programme of research into the economic, social and technological problems of small-scale industry is called for, and decisions taken regarding the kinds of services to be provided and the way in which they are to be provided need to be reviewed from time to time in the light of research findings.2 Activities undertaken to aid small-scale industry may be misdirected if they are not based on careful study and analysis. For example, measures that might be appropriate to help certain smallscale undertakings absorb unemployment in an area with a high population density not greatly exposed to competition from large-scale industry may be quite inappropriate in areas where a different socio-economic structure gives little scope for the expansion of small firms using handoperated manufacturing techniques. Or vocational training programmes may be undertaken without adequate regard to the question whether there will be a sufficient demand for the skills that are being imparted. Or efforts may be made to improve a backward technology without regard to market prospects (or, alternatively, efforts may be made to open up new markets when technology is too backward to take advantage of them). In short, efforts may be abortive because they are not what is required in a given situation, or because they cannot succeed in isolation 1 See General Resolution concerning Small-Scale and Handicraft Industries in Asian Countries, adopted by the Fourth Asian Regional Conference of the I.L.O. (New Delhi, November 1957), para. 5 : " The manner in which, and the institutions and agencies through which, state assistance can best be provided to small undertakings are matters which can only be determined by each government in the light of the circumstances prevailing in the country concerned. It is, however, important to define clearly the functions and responsibilities of, and the relations between, different government departments and agencies concerned, with a view to avoiding overlapping and duplication of efforts and evolving a co-ordinated approach in this field." {Official Bulletin (Geneva, I.L.O.), Vol. XL, 1957, No. 6, p. 294.) s The emphasis placed on economic surveys and research in the Government of India's programme for the development of small-scale industry is noted in Appendix I. 40 SERVICES FOR SMALL-SCALE INDUSTRY though they might be very successful if accompanied by appropriate measures of other kinds. Well designed research projects can not only throw light on the urgency of different needs and the nature of obstacles to progress; research can and should also be designed to evaluate the results of efforts made and services provided. Types of Organisation Extension work has to cater for different regions and for different industries, each having its own specific problems, and it has to provide different types of services—consultancy services, training or research. Questions arise as to how these different requirements are to be reflected in the organisational structure of the extension service or services. At one extreme, one might envisage a single central service, catering for all regions and all industries and providing all types of services; but its work would presumably have to be split up in some way into divisions or departments. At the other extreme, one might envisage a multiplicity of institutes or agencies, each providing one type of service for one industry in one region; but without some co-ordination there would almost certainly be a great deal of waste and overlapping. The important practical question in each case is how much autonomy is to be enjoyed by individual working units, whether they be sections, branches or departments of a centralised service or independent agencies subject to some measure of central co-ordination. Between the two extremes distinguished above the possible combinations are legion. Some, but not all, services may be provided on a national basis for all industries ; others may be provided on a regional basis for all industries or on an industrial basis for all regions ; yet others may be provided by institutes or agencies that are both decentralised by region and specialised to serve a particular industry. Nor can these problems be approached merely as abstract problems of organisation. Certain services will have come into being in a certain way and with a certain orientation, and while some gaps will undoubtedly remain to be filled, an abstract and rigid organisational plan may interfere with natural growth. Once again, there is no one " best " answer to the questions raised in the last paragraph. Certain guiding principles may, however, be suggested. In the first place, the purposes of centralisation are to prevent waste and duplication and to ensure that, so far as possible, important gaps in services provided are filled. Waste and duplication may arise if a new unit is set up to provide some service that could be provided more effectively and economically by existing agencies. Economies of scale may often be achieved by providing certain services in combination and PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 41 spreading their overhead costs. For example, the same people who are equipped by training and experience to provide consultancy services are likely to be well qualified for " vetting " and reporting on the merits of applications for loans. They will probably also be well qualified to provide at least certain kinds of formal training. Again, a laboratory equipped to test materials and products of a certain industry in a certain region may be able to provide the same services for the same industry in other regions more economically than they could be provided by establishing separate laboratories for each region (whether this will in fact be so or not will of course depend, among other things, on the size of the country : services may appropriately be much more centralised in a small country like Denmark than in a big country like India). As regards the question of specialisation by industry, the purely technological problems of different industries are apt to be entirely different, but many of their more general management and marketing problems are very similar. While one would not normally expect the same expert to advise on, say, cutting speeds for machine tools and glazes for ceramics, one would expect that an expert in cost accounting could give useful advice both in a small engineering works and in a small pottery. These differences between specialised technological problems and other more general problems of management need to be taken into account in organising extension services. A second general principle that may be suggested is that there is no virtue in centralisation over and above what may be needed for the purposes indicated above. On the contrary, there is a strong case for the largest measure of decentralisation that is compatible with adequate co-ordination and the achievement of available economies of scale. Overcentralisation tends to lead to bureaucratic red tape, and to the referring of decisions from people on the spot who know the local conditions and problems to others who are higher up but more remote. Regional decentralisation and specialisation by industry, to the extent that these are possible and economical, may help to ensure that small-scale managers have confidence in the experts who advise and help them, because these experts come from, or at least are very familiar with, their own regions and their own industries, and speak to them, literally and metaphorically, in their own language. Thirdly, one should hesitate, merely for the sake of imposing a tidy and logical organisational pattern, to clip the wings of or otherwise interfere with an established service that is functioning well and meeting a need. It may be of interest to give some concrete examples of how these various problems have been tackled in different countries. 42 SERVICES FOR SMALL-SCALE INDUSTRY An example of a government-sponsored consulting service providing assistance for small firms in all the main branches of industry, but with some specialisation according to the types of services provided, and regional decentralisation of some but not all branches, is to be found in the Netherlands, where a " Technical Consulting Service " (Rijksnijverheidsdienst) has been set up for the purpose of promoting the development of small and medium-scale undertakings by providing information and consulting services on technical and organisational problems, improving accounting methods, and providing various research and testing facilities. The organisation comprises the following branches: (a) a group of field officers who pay visits to small undertakings which seek their advice on a wide range of questions (for example, the establishment or extension of factories, and problems of raw materials, product improvement, equipment, energy supply and financing). The Netherlands being a small country, this and the handicraft service for very small firms referred to below are the only branches of the service in which the principle of regional decentralisation has been applied. There are 12 field offices in principal towns throughout the country, grouped in four districts. The other branches are central services designed to aid or supplement the work of the field officers and those engaged in the handicraft service in dealing with rather specialised problems ; (b) two or three chemical engineers, stationed at The Hague and charged with assisting the field officers on chemical questions, the field officers being mainly mechanical engineers; (c) a documentation and information service set up within the patent office at The Hague, whose library is thus made available to small-scale industrialists and field officers through the services of two engineers who advise on, and help to find, documentation, literature and technical information. Small manufacturers with new ideas can consult these engineers on the advisability of applying for patents. This branch also operates an international mail inquiry service and serves as a centre for international contacts in the technical field; (d) an efficiency team consisting of ten engineers stationed at Amsterdam to assist small industrialists on questions of management and efficiency that are too specialised to be handled by the field officers or that call for more sustained work in individual plants than the field officers can combine with their other duties. On the request of a field officer, a member of this team may visit a plant for a week or a fortnight, talk over the main problems with the management, study the situation and administration and make suggestions for improving the efficiency of operations; PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 43 (e) a handicraft service, consisting of ten assistants stationed at various places throughout the country; and (f) a mechanical workshop with seven mechanical engineers working on ideas for new machinery developed by small entrepreneurs, and testing and demonstrating new machinery and production methods. These six branches of the organisation are headed by three mechanical engineers. The organisation is summarised in table III. TABLE III. N E T H E R L A N D S : ORGANISATION O F T H E TECHNICAL CONSULTING SERVICE (1956) Personnel Branch Location Engineers Head office The Hague Field officers South Holland: The Hague Rotterdam North Holland: Amsterdam Utrecht North-east provinces: Zwolle Arnhem Assen Groningen Southern provinces: Tilburg Middelburg Maastricht 3 Technical Adminisassistrative tants staff — 9 3 3 1 1 4 2 • 2 1 3 2 2 1 2 2 1 1 1 1 — 2 1 1 3 1 2 Chemical specialists The Hague 2 — — Documentation and information service The Hague 2 — 2 Efficiency service Amsterdam 10 — 2 Handicraft service Decentralised — 10 — Mechanical workshop Delft 7 12 2 52 22 30 Total personnel . . . 44 SERVICES FOR SMALL-SCALE INDUSTRY In Denmark, the Copenhagen Technological Institutel provides vocational training, consultancy services and documentation on a national basis 2 to firms in all the main branches of industry. Its departmental structure is based mainly on the principle of specialisation according to branches of industry served, but its departments for business economics and management development provide advice and assistance to firms in all industries. The service that has been set up in India to promote the development of small-scale industry combines central direction with a large measure of decentralisation in operation. The structure comprises an All-India Small-Scale Industries Board under the chairmanship of the Minister: of Industry; a Development Commissioner (Small-Scale Industries); a national Small-Scale Industries Corporation, organised as a private limited liability company although its capital has been subscribed by the Government, to handle certain commercial and financial aspects of the programme ; six Joint Development Commissioners, who are responsible for liaison between the central and state governments ; a number of state Small Industries Service Institutes reporting directly to the Development Commissioner, with branch institutes reporting to them; and a considerable number of extension centres. The functions of and relations between these various bodies are described in Appendix I. The Japanese Smaller Enterprise Agency, also described in Appendix I, likewise combines central direction with a considerable measure of decentralisation in operation. Financing and Staffing Methods of financing services for small-scale industrialists differ. Although in certain countries certain services are provided free of charge, there appears to be a good case for making some charge for services rendered to individual small firms. For one thing, people are apt to value a service more highly if they have to pay something for it; if a fee is payable only those small industrialists who are serious in their desire to make use of a service are likely to request it. Secondly, fees strengthen thefinancesof a service : a given amount of money provided from public sources will go further and permit setting up a more extensive and more useful organisation if it is supplemented by fees. Thirdly, a service that depends at least partly for its revenue upon fees voluntarily paid by •See Appendix I. Except that firms in or near Aarhus would normally avail themselves of the services of the smaller technological institute more recently established in that city, which, though an independent institute, works in close co-operation with the Copenhagen Institute. 2 PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 45 users has an incentive to give satisfaction that may be lacking in one that is entirely financed from public funds. Moreover, comparisons of the amounts received in fees from year to year for different kinds of services will help to show which of the latter are in greatest demand1, and will create an incentive to expand these rather than other forms of activity. On the other hand, if a service is intended to be entirely self-supporting financially, it will inevitably be rather costly to the users. Though good administration and concentration on essentials can keep down the costs, nevertheless it is likely that many small industrialists who could benefit from the service will be deterred from doing so by the relatively high fees that will have to be charged. In most countries some combination of grants and fees probably constitutes the most appropriate type of financial arrangement. Of the annual budget of the Copenhagen Technological Institute about half is received in the form of tuition fees and consultation fees, rather less than half in the form of a grant from the Government, and the rest in the form of grants from municipalities and various organisations and institutions. As will be seen in Appendix I, the revenue of the Swedish Government Institute for Handicrafts is derived from very similar sources in much the same proportions. It goes without saying that the success of services for small-scale industry will depend very largely indeed on the calibre of the staff. If there is any degree of specialisation within the service (as there normally is) the qualities and qualifications required will vary in some degree according to the type or branch of activity concerned. The combination of qualities that will make a man a good management consultant is not identical with the combination required of a good classroom instructor in vocational subjects or of a good research worker. An extension service must, however, demand of its staff in all branches a high standard of technical knowledge and professional competence, qualities of integrity and devotion, a sincere interest in their work, an ability to express themselves in simple language and a fair understanding of the jargon of the branch of industry concerned. Moreover, since an extension worker, whatever his main specialisation, is liable to have to turn his hands to a great variety of different jobs, versatility, flair and imagination are of major importance. These combinations of qualities are rare indeed, even in highly developed countries, and still more in the less developed countries. It 1 If the fees charged for some types of service are relatively lower than others in proportion to the total costs of providing the services, this will have to be taken into account if amounts received in fees are used as indications of the relative strength of the demand for different types of service. 46 SERVICES FOR SMALL-SCALE INDUSTRY would be a false economy to try to save on the salaries of the staff. To get the right people it will be necessary to offer satisfying careers, with salaries and conditions of service comparing favourably with what men with the qualifications required can earn elsewhere in the country. And if this means that fewer people can be employed, it will always be far better to have two first-rate men than three mediocrities. THE CHOICE OF EXTENSION METHODS In a good many countries at different levels of development the establishment of national or regional technological centres or institutes (or techno-economic institutes if economic research and surveys are included within the work of the institute) has commended itself as a good way of organising extension services for small-scale industries.1 Whatever the name given to the operational unit or units of the service, however, questions arise as to the methods to be adopted. Different methods of extension work are adapted to different purposes, and the choice of method should be largely governed by the purpose in view, with due regard to the resources available. The purpose may vary considerably : for example, activities may be designed to induce small industrialists to adopt an improved technology (such as the use of chemicals in tanning processes), to improve quality, increase production or lower costs, or to apply new techniques for the manufacture of new commodities (e.g., the use of glaze and high-temperature kilns for the production of modern crockery) ; they may involve a major change in the operational practices of the small unit—for example, when the introduction of power-driven machinery is propagated in handicraft establishments (which in turn may call for the application of new administrative devices); the aim may be to adjust production to current trends in consumer demand through improved design, finish, grading and packing; or to improve a defective commercial structure through cooperative action. The various methods that may be employed may be grouped as follows : (a) the individual approach, in which direct contacts are maintained between the extension worker and the small industrial unit ; (b) the group approach through training classes, the establishment of pilot plants and other devices catering for groups of small industrialists; and (c) the mass approach through meetings, exhibitions and other mass media, such as radio and films. 1 See United Nations : First Expert Working Group on Technological Centres (Copenhagen, 10 May to 4 June 1954), Sales No. 1955. II.H.2 (New York, 1955), and " Establishment of Technological Research Institutes in Underdeveloped Countries ", in Industrialisation and Productivity, op. cit., p. 56. PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 47 The individual approach in disseminating technical information is a most effective one, as the methods to be applied can be fully adapted to the particular conditions of the individual unit, taking into account the skills and aptitudes of the head of the firm and his workers, and his financial and other resources. An individual approach is particularly effective when extension work is directed towards small-scale units which are mechanised or semi-mechanised and employ an appreciable amount of hired labour: as the manufacturing unit grows in size and becomes technically and organisationally more complicated in comparison with domestic and cottage industries, improved methods and modern forms of industrial organisation have to be adapted to specific individual requirements if the best results are to be obtained. If an individual approach is possible, the extension worker may review a variety of problems affecting the production and earning capacity of the unit, such as wastage of raw materials, technical innovations, plant layout, the quality of production in relation to market conditions, the need for simple administrative procedures and similar problems—these leading up to a review of the manufacturing unit as an organic whole, and to an appreciation of the interdependency of the steps that need to be taken. An important advantage of the individual approach is that it provides an opportunity for disseminating information both to the head of the firm and to the workers, which may contribute to a general understanding within the unit of the advantages to labour and management alike of the measures proposed. On the other hand, in domestic and cottage industries, with only minor variations in methods and conditions of work between the various units, the main emphasis may be placed on extension methods directed at groups of small industrialists, although here too there is scope to apply the individual approach. The group approach is most effective when the information to be given is generally applicable by selected groups of small industrialists of the same social and economic level and technical skills, and where variations in methods and conditions of work in the individual units are not large. Thus, it may be used to provide training in simple management techniques such as bookkeeping, elementary cost accounting and principles of co-operative action. The group method may be supplemented by individual training, to meet specific demands of particular small enterprises. It is also a valuable device for providing general technical training in production techniques such as the use of new raw materials or the manufacture of new commodities within the scope of existing skills. The group approach is more or less indispensable for the introduction of a modern method which is only fully applicable through the joint 48 SERVICES FOR SMALL-SCALE INDUSTRY efforts of a group of small industrialists. It is more or less indispensable, for example, when common servicing plants are established in the textile, ceramic, metalware or other trades, e.g. plants designed to serve a group of hand or power-loom weavers with prepared yarn or to finish the cloth manufactured in the small weaving units; or to supply well-prepared clays to small pottery works for shaping, decorating and glazing, after which the goods are fired in central kilns. The " de-integration " and centralisation of certain manufacturing processes, while other processes are performed in the individual workshops, requires for its efficient operation close collaboration between the participating units and the common plant. It is therefore highly desirable that the small industrialists acquire a full understanding of the need to shape their individual activities in conformity with the manufacturing and operational pattern of the common plant. Joint technical training under a group approach can help to instil in the participating small industrialists an appreciation of the collective action which is the basis for success in this kind of industrial development. The mass approach cannot, of course, be expected to have the same result, in depth, as the individual or group approach in the teaching of new methods, especially when training in these requires a certain educational level or a degree of concentration and sustained activity. It has its value, however, especially for propaganda purposes. It can help by means of meetings, films, radio, exhibitions and other media to create a livelier understanding of the place of small industry in the national economy and a keener awareness of the opportunities offered by modern methods and forms of organisation to raise the social and economic status of small industrialists and workers. Mass extension methods may contribute to a change in outlook which is often an important prerequisite of social and economic progress ; they can most usefully supplement the individual and group approaches by preparing the ground for a fruitful application of specific methods and forms of organisation. Indeed, all these three types ot extension activities are complementary rather than competitive and may be usefully employed in combination. Thus, in the development of common servicing plants on a co-operative basis each of the three approaches may play its part: the individual approach to induce an influential member of a small industrial community to take the lead in carrying out a comprehensive set of measures designed to modernise his plant; the group approach both for the training of a few outstanding and well educated small industrialists in methods of co-operative organisation and management, and for demonstration and initial training of workers through the establishment of pilot manufacturing plants; and the mass approach in order to arouse the interest of the PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 49 industrial community to be served by such plants, initiate them in the basic principles of co-operation, and develop their loyal and active participation in the co-operative group through which the central plant is organised. It is evident that the choice of the extension approach will also be greatly influenced by the availability of funds and of qualified extension personnel. Being frequently understaffed, and operating with limited financial resources, extension services are usually faced with a dilemma. The mass approach may have some impact on a large number of people; the individual approach is likely to have a much deeper impact on a much smaller number. The group approach combines in different degrees the advantages and disadvantages of the other two approaches. The most effective combination will depend upon circumstances and is a matter of judgment. This is one of the questions in respect of which research designed to appraise the effectiveness of different services provided can be very helpful in providing a factual basis for sound decisions.1 SOME SPECIFIC EXTENSION SERVICES In the following chapters we shall have more to say about consultancy services, training, information and research. The separation of these different types of activities for purposes of discussion is, however, a matter of convenience of arrangement only, for if they are to have their full impact they must be carried out in such close combination as to be, in effect (whatever the formal organisational structure through which they are undertaken), complementary parts of a single service. Before discussing them separately, therefore, it may be helpful to give some examples of specific ways in which two or more of these activities may be combined. Individual Demonstration Plants Training is much more effective when accompanied by practical demonstrations. It may sometimes be possible to persuade an individual small industrialist to allow his plant to be used as a demonstration plant. A progressive small industrialist may be selected who is prepared to apply improved methods suggested by the extension worker and to allow others to visit his plant for the purpose of acquainting themselves with the benefits of improved techniques and methods of production and 1 See Chapter VI below. 50 SERVICES FOR SMALL-SCALE INDUSTRY marketing. Both the plant and the owner-manager should be carefully selected and the plant should be reasonably representative of others in the industry and region so that those to whom improvements are demonstrated can see how to apply them in their own plants. Credit or other facilities may be employed to induce the small industrialist to have his plant used as a demonstration and information centre. To avoid allegations of favouritism, after a basic understanding has been reached with him a group meeting should be convened at which the purpose of concentrating attention on one unit only is clearly explained by pointing out that the whole community will be served. The effectiveness of the demonstration and the incentive it provides for others will be all the greater if, under the guidance of the extension worker and on the basis of carefully kept accounts, the increased earning capacity of the unit can be clearly demonstrated. This method has the additional advantage of keeping the extension worker practical in his advice, as he can see for himself the financial consequences of his activities; in addition, the pooling of the more theoretical knowledge of the extension worker with the practical experience of a progressive small industrialist increases the likelihood that the right solutions will be found for the problems encountered. This point is especially important as many extension workers are trained in institutions where technical operations are conducted under controlled conditions which generally differ considerably from those under which small industry actually operates. Extension work performed through a selected individual demonstration plant offers only limited opportunities of providing actual training for workers from outside, for which adequate facilities are usually lacking in a plant that is already operating as a going concern. This method thus serves mainly to demonstrate the benefits of improved techniques applied consistently within an existing small industrial establishment with a view to encouraging other small industrialists to apply similar techniques. If for this purpose they or their workers need specific training, this extension method has to be supplemented, e.g. by itinerant demonstration and training units. Demonstration projects may be of value not only to managers and workers in individual plants selected as demonstration plants, and to others in the neighbourhood who can see and copy the improvements that are made, but also as a means of providing training and experience for extension workers. They have been used for this purpose in Japan where in 1955, for example, groups of extension workers known as surveyors (because they are trained to make general surveys of the management and operations of small undertakings) were placed in 51 factories partly, at least, in order that they might acquire experience PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 51 in supervising and guiding the installation of improvements within individual small firms.1 Demonstration and Training Plants A method of extension work whereby training in new techniques and methods of production is provided on a commercial basis may be arranged through the establishment of special plants for demonstration and training.2 Such plants are designed to reproduce actual operating conditions as accurately as possible and to ensure that training is carried out as an integrated part of the production process in the demonstration unit. Training can be placed on a realistic commercial footing and improved methods can be tested on their practical merits in actual production. This type of unit helps, like the selected individual demonstration plant, to assist the extension worker toward full recognition of actual working conditions in small industry and thereby to make extension activities increasingly practical. An additional advantage is that the cost of training can be wholly or partly covered through sale of the products of the plant. The demonstration plant is especially effective when a new manufacturing process is to be introduced of which the community has no experience. In certain cases it may be appropriate to start with the training of workers in those parts of the manufacturing process, if any, that can be carried on in the workers' own homes, organised through the demonstration and training plant on a sub-contracting basis. As training is gradually extended to other processes as well, full-fledged small industrial units may develop, so that later the plant may be transferred to other areas for similar development work. Itinerant Demonstration and Training Teams Extension work through itinerant demonstration and training teams, whereby training is given to small industrialists in specific methods of work, is a useful technique for spreading training over a wider area than is possible through the establishment of training centres and demonstration plants. It is necessary for such teams to have a permanent technical base, which could be, for instance, an extension centre or a techno-economic institute.3 This permits two-way traffic to develop 1 The Smaller Industry in Japan (Tokyo, Asia Kyokai, 1957), p. 89. These are sometimes called pilot plants, but it may be conducive to clarity to reserve this term for plants set up to test the applicability to commercial conditions of a new material, process or type of equipment developed through laboratory research. See Chapter VI below. 3 See, for example, in Appendix I, the use that is made of mobile workshops by the two technological institutes in Denmark and by the Small Industries Service Institutes in India. 2 52 SERVICES FOR SMALL-SCALE INDUSTRY between the technical base and the itinerant team, technical guidance being steadily provided to the latter and a continuous flow of practical information being channelled to the former. This method of extension work can only be applied in cases where the training does not require elaborate technical equipment or extensive accommodation; the method is suitable where the location of the industry is such that concentration of a number of units is found in widely dispersed areas. It can be used for the improvement of specific skills within the existing technological and organisational framework of a particular small industry. The length of time that an itinerant team ought to stay in any industrial community depends on a number of factors, including the nature of the techniques to be imparted, and might range from a few days to six months. Periodical follow-up visits by the team are advisable to assess results of the training imparted, and occasionally post-training refresher courses may be needed; follow-up with other appropriate extension methods has also to be considered. In case it becomes clear in the course of time that the technique imparted has not taken firm root in the community, it will be necessary to examine the need for revising either the technique in question or the method of training—or, more likely, for removing certain other obstacles to progress, such as deficiencies in raw material supply, or credit or marketing arrangements. Since institutional factors may greatly affect the applicability of improved methods, it will often be desirable to attach to itinerant teams, in addition to technical specialists and instructors, extension workers well versed in commercial problems and in general industrial organisation. This will enable the team to approach the problems in an integrated manner by evolving appropriate institutional measures to support technical modernisation. To facilitate such a process, the team may also be authorised to recommend or advise on the disbursement of grants or loans through appropriate agencies, thus linking technical training with the supply of necessary material facilities. In appropriate cases co-operative specialists may usefully participate in the work of such teams; suitable measures should in such cases be taken to ensure close collaboration and a common policy between the industrial and cooperative services, if these operate as separate agencies. Marketing Clinics The holding of " marketing clinics " may be an effective method of disseminating useful information to small industrialists on the marketability of their products. Such a " clinic " may in appropriate cases be conducted by itinerant demonstration and training teams. In suitable PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 53 centres of small industrial production, exhibitions may be arranged of selected products manufactured in various small industrial units; these products are inspected and appraised by one or more specialists of the team, paying attention to features of design and packing, quality, weight, size, and other factors that affect marketability and price; on the basis of this appraisal, suggestions are made to each exhibitor as to ways of improving the marketability of his product and information is given to him regarding market requirements. Since, in many instances, small industry is not fully geared to the requirements of an expanding market economy, with its changing consumers' tastes and preferences, such marketing clinics may help small industry towards an intelligent appraisal of the place of its products in the market and of the measures to be taken to improve their saleability. INTERNATIONAL TECHNICAL ASSISTANCE Mention has already been made of the shortage of qualified personnel as a major obstacle to the development of effective extension services for small-scale industry in the less advanced countries. A limited but important contribution towards overcoming this shortage can be made through the technical assistance that is available to less developed countries through international organisations or on a bilateral basis from individual more advanced countries. Such assistance makes provision both for placing temporarily at the disposal of the less developed countries experts and specialists from more advanced countries, and, through fellowships, for the training abroad of selected nationals from the less advanced countries. Under the Expanded Technical Assistance Programme of the United Nations and its specialised agencies help is available at the request of governments of individual countries or on a regional basis.1 Such help has been provided by the United Nations and the International Labour Organisation in the field of handicrafts and small-scale industries for a number of countries. Broadly speaking, the United Nations is concerned with economic aspects of problems of promoting development and productivity in small-scale as in large-scale industries, while labour and social aspects are primarily matters for the I.L.O., which also has recognised contributions to make in matters of management development and the promotion of co-operative activities. These different 1 It may also be noted that many of the research projects in the work programmes in industry of the United Nations and other participating agencies are based upon and designed to provide indirect support to their technical assistance activities by evaluating experience of field operations, or more generally by providing a fund of knowledge regarding problems in the fields in which assistance is provided. 54 SERVICES FOR SMALL-SCALE INDUSTRY aspects of work relating to small-scale industries cannot easily be separated in practice, and governments have addressed requests for technical assistance in this field to both organisations, which have been able to co-operate in meeting such requests without duplicating each other's work. The activities of the two organisations being closely related, they have co-operated in several joint projects; thus United Nations and I.L.O. experts have collaborated in carrying out surveys of possibilities of development of small-scale industries in Burma and Libya. Since the inception of the technical assistance programme, experts have been provided by the I.L.O. and by the United Nations to governments for surveying, advising, training personnel and assisting in carrying out programmes for developing small industries. In some countries over-all surveys have been carried out; in others special surveys have been conducted for particular areas or for the development of particular industries. Assistance has been provided for initiating and carrying out training and development programmes in handicrafts and small-scale industries within the framework of community development or fundamental education projects in Asia, the Middle East and Latin America. Advisory services have been rendered and training programmes conducted for the development of particular industries such as textiles, coir and other fibres, lacquerware, pottery, tiles and bricks, and tanning and leather works. Assistance has been provided for dealing with particular problems in this field, such as the development of co-operatives and the improvement of designs of products and marketing practices. Some countries have also received assistance in drawing up comprehensive development programmes for small-scale industries or in training government personnel for the organisation of government services in this field. As part of its more general work to promote higher levels of productivity, the I.L.O. has also provided experts for a number of countries to help, chiefly by means of training and demonstration, in spreading knowledge of methods by which productivity may be increased.1 Several of these missions have provided successive courses of about eight weeks' duration in the elements of work study, including practical woik carried out by trainees in selected plants under the supervision of the experts. Though these productivity missions have been concerned with plants of all sizes and have not thus far given special attention to the problems of small-scale industry as such, some trainees have come from, and some practical work has been carried out in, relatively small plants. The United Nations has made available technical assistance over the entire range of problems of economic development, from the formulation 1 See "I.L.O. Productivity Missions to Underdeveloped Countries", in International Labour Review (Geneva, I.L.O.), Vol. LXXVI, Nos. 1 and 2, July and Aug. 1957. PROBLEMS OF SMALL-SCALE INDUSTRIAL EXTENSION SERVICES 55 of plans and policies at the country level to economic and technical matters at industry and plant levels. Assistance has also been extended for the establishment of institutional faciUties related to economic development, including technical research organisations and service institutes. The United Nations and the I.L.O. have, in addition, provided numerous fellowships for the training abroad of carefully selected persons from less advanced countries in methods that will help them make valuable contributions to the development of small-scale industries in their own countries. Both organisations have, for example, enabled several fellows to attend the international courses on small-scale industries provided annually at the Research Institute for Management Science (formerly the Training Courses and Research Foundation) at Delft in the Netherlands.1 Besides technical assistance, certain other activities of the United Nations and other international agencies have been designed to assist the less developed countries in promoting the development of their small-scale industries and in dealing with problems arising in connection with efforts in this direction. The United Nations convened an Expert Working Group on Technological Centres which met in Copenhagen in 1954 and produced a valuable report.2 Another valuable United Nations report is that of a group of small-scale industry experts who visited Japan 3 and there acquired much experience in the field of smallscale industry development that can be of value to other countries. A Panel of Experts in Industrial Management in Underdeveloped Countries was convened by the United Nations in September 1957 with a view to evaluating problems in this field in the light of experience of operations under the technical assistance programmes. The I.L.O. and other specialised agencies were represented on this panel. The report prepared by the Secretariat on the basis of the Panel's discussions contains a number of references and recommendations relating to the special problems of management of small-scale industry.4 The Fourth Asian Regional Conference of the I.L.O., meeting at New Delhi in November 1957, discussed and adopted resolutions on " Labour and Social Problems of Small-Scale and Handicraft Industries in Asian Countries ". References have already been made to the report 1 For a description of these courses, see Appendix III. First Expert Working Group on Technological Centres, op. cit. 3 Report of the Study Group of Small-Scale Industry Experts on Their Visit to Japan, op. cit. 4 United Nations : Management of industrial Enterprises in Underdeveloped Countries, Sales N o . 58.II.B5 (New York, 1958). 8 56 SERVICE FOR SMALL-SCALE INDUSTRY prepared by the International Labour Office to serve as a background for this discussion 1, and to the resolutions adopted.2 U.N.E.S.C.O. has in hand studies which have not yet been published of small-scale industries in India and the Philippines, designed to throw further light on their role in the economies of these countries and their social implications. Technical Co-operation Missions from the United States under its " Point Four " programme of bilateral aid have provided technical assistance in the development of small-scale industries in a number of countries. An example of help given under this programme in Chile is given in Appendix I. Help has also been given in this field in India and certain other countries by the Ford Foundation. 1 Labour and Social Problems of Small-Scale and Handicraft Industries in Asian Countries, op. cit. » Official Bulletin op. cit., pp. 293-305. CHAPTER IV CONSULTANCY SERVICES To enable small-scale industry managers to obtain advice and assistance from expert consultants who visit their firms and study their individual problems on the spot is one of the most important and effective services that can be provided for small-scale industry.1 It probably has a greater educational value for individuals, and can achieve more far-reaching results in individual firms, than any other type of extension service. Because of the heavy demands it makes on scarce trained personnel, however, it is a relatively costly type of service. It is a major question of policy in the organisation of extension services for small-scale industry to decide how much emphasis can . be given to individual consultations as compared with other activities which, using the group or mass approach, may have an individually smaller impact, but may help a larger number of people. One way of bringing down the cost of a consultancy service and thus making it available to a larger number of small industrialists is to operate it on some sort of subscription basis. For example, about 100 Danish cabinet makers have subscribed to a regular consultancy service provided by the woodworking department of the Copenhagen Technological Institute. The subscription covers three consultations a year, given in the course of plant visits by specialists in machine work, hand work and cost accounting respectively. Each visit lasts half a day. Additional consultations are provided on request, and firms that do not subscribe to the regular service may also have consultations, but the subscription plan, has at least three advantages. In the first place, it brings down the cost of consultations. Itineraries can be planned for the consultants so as to keep them continuously occupied and avoid the need for special journeys. Secondly, budgeting by the Institute is simplified when it can count on a certain assured minimum income in the form of consultation fees. Thirdly, there is less danger that small firms will procrastinate in seeking expert advice. A small industrialist may have 1 For a detailed study on this subject, based on the experience of some 20 different countries, see J. E. STEPANEK: Small Industry Advisory Services—An International Study, Publications of the International Industrial Development Centre, Stanford Research Institute (Glencoe, Illinois, The Free Press, 1960). 58 SERVICES FOR SMALL-SCALE INDUSTRY every intention of seeking advice on some problem or problems but, immersed in day-to-day routine work, he may put off doing so from week to week and from month to month. If he has subscribed to the service he will receive a letter from the Institute announcing that the consultant expects to call on him within a certain period. Later he will receive a telephone call, and the exact date will be fixed. This will be the occasion for him, if he has not already done so, to consult his workpeople, list the problems that have cropped up since the last consultation, and make sure that he gets full value out of the consultant's visit. Some problems may be solved on the spot. In other cases the consultant may have to arrange for the testing or analysis of samples of materials or products in the Institute laboratories. A subscription scheme not unlike that provided for woodworking firms is also provided for laundries. It covers both consultations and tests. For ah annual subscription of 240 crowns a laundry anywhere in Denmark is entitled to send to the Institute six test pieces per year. Having been washed a prescribed number of times in the laundry, these test pieces are examined for tensile strength, whiteness and deterioration through chemical attack. Results are discussed and advice given on ways of improving washing methods in the course of three plant visits per year by the Institute consultants. Laundries subscribing to the service are also entitled to send in up to ten articles per year which have given rise to claims for damage. The Institute will report on whether or not the claims are justified.1 SUBJECTS AND TYPES OF CONSULTATION The advice and assistance of consultants may be of value to smallscale industry managers in connection with the whole range of management problems, including problems of production and technology, costing, buying and selling, finance and labour management. Subjects on which small-scale managements in Israel have most frequently requested help from the Management Advisory Service provided by the Productivity Section of the Manufacturers' Association of Israel are the following: (a) Records. Often small firms keep practically no records ; in other cases the records that are kept do not provide management with the 1 In addition, under a scheme which has recently come into operation, laundries whose washing methods conform to standards laid down by the Institute are entitled to make use of a special seal. The Institute is also endeavouring to obtain the co-operation of representatives of the textile industry with a view to ensuring that new textiles shall be labelled in a common-sense manner. Clothing made of new textiles (for example, " drip-dry " shirts which are at present labelled in a multiplicity of different ways) may be seriously damaged if laundered by traditional methods. CONSULTANCY SERVICES 59 necessary means of control over the operations of the undertaking. An exaggerated fear of paper work causes many small-scale managements to shrink from the keeping of orderly records. Yet adequate records are a necessary requirement for dealing with problems arising in most of the other fields listed below, and advice as to what records are needed and how they can be kept with a maximum of usefulness and a minimum of work is one of the most important services that a consultant can provide. (b) Layout. A large number of small undertakings use premises that were not designed, and are quite unsuitable, for their present purposes. Their problems have frequently been enhanced by the installation of new machines haphazardly located wherever there has happened to be room for them, with little regard to the efficiency of operations. (c) Working methods. These are frequently antiquated, and consultants can often suggest improvements which, calling for little or no investment in additional equipment, nevertheless greatly increase productivity. The improvement and standardisation of methods of work sometimes make possible the adoption of a soundly designed system of payment by results which further enhances productivity. (d) Production planning and control. Proper planning and control of the production process can help greatly to ensure a full and balanced utilisation of plant capacity, which is essential for efficient operation. (e) Organisational structure. There is a widespread but mistaken belief that small plants do not need a sound formal organisational structure. Yet experience has shown that lack of clear definition of functions, delegation of authority and appropriate standard procedures is a major source of inefficiency in many plants. (f) Costing. It is important that the managements of small firms should know the relative profitability of the different items produced and the analytical distribution of costs of production. A small plant requires a simple system of cost accounting to replace the many improvised calculations, based mainly on guesswork and intuition, that management will otherwise have to make. (g) Quality. To expand its markets, and even in some cases to maintain its existing markets, a small firm must give great attention to the quality of its products. The problem is twofold : to define appropriate standards, having regard to consumers' requirements and production possibilities, and to devise an appropriate quality control procedure for ensuring that production meets the standards defined. (h) Materials control. This field covers the efficient utilisation of materials, prope rstorage methods, including efficient utilisation of 60 SERVICES FOR SMALL-SCALE INDUSTRY storage space, and keeping track of stocks of raw materials, goods in process and finished products. (i) Maintenance and machine utilisation. Small plants usually do not practise preventive maintenance, nor do they commonly record time lost by different machines. The introduction of a preventive maintenance schedule and proper recording of breakdowns has been found helpful. (j) Technological problems. These have not figured as prominently in the experience of the Israeli Management Advisory Service as might have been expected, although successful solutions of technological problems have been found in different branches of industry. The main help provided in this field has been in the designing of jigs and fixtures and the supply of technical information. The Service maintains a library of catalogues. There is a desire for the establishment of technological laboratories for different industrial branches. The experience of another advisory service for small plants in Israel —that provided by the Israel Institute of Productivity—provides some typical examples of the problems of small-scale undertakings and the manner in which an advisory service can help managers to tackle them. A small factory with about 20 employees was engaged in the production of wooden chairs. The owner asked for help in planning the layout and location of machinery in a new building into which he was moving his factory. His original premises were cramped and inconvenient. Parts were produced in two rooms on the ground floor and assembled in a third room on an upper floor (on which the office was also situated), from which finished chairs had to be lowered through a small door. Lumber was stored in the loft of an adjacent building. The new factory was on one floor and the layout to be designed was required to provide for an efficient flow of material from one machine to another with the least amount of backtracking, for adequate storage of the timber, for aisles through which every machine could be reached by carts, and finally for sufficient storage space by the side of each machine for work in process, with due regard to the capacity of each machine and to the extent to which there was a lack of balance between their operations. The number of times each of the machines was employed in the production of a chair and the amount of storage needed by the side of each for work in process were assessed with the aid of a flow process chart x and an analysis of the operations of each machine. A suitable layout was worked out to allow for all the production requirements and 1 In work study terminology, a chart setting out the sequence of the flow of work or of a product, or any part of it, through the factory or department by recording all the events under review, using the appropriate symbols. See I.L.O.: Introduction to Work Study (Geneva, 1957), pp. 89 ff. CONSULTANCY SERVICES 61 also for storage of raw materials and finished goods. At the same time the Advisory Service endeavoured to point out ways of improving work methods by reducing idle time of machines, transferring operations from heavily loaded to less loaded machines, introducing more universal jigs and improving existing jigs to make them quicker to operate, and initiating some planned maintenance, at least to the extent of marking machine parts for lubrication. A second example of interest was that of a small plant engaged in the production of water sprinklers for irrigation and employing about ten workers. The factory consisted of a small brass foundry, a machine and assembly shop, and a testing department. Apart from this there was a storeroom, an office and a separate small building for housing the tumbler. Although on a very small scale, the establishment was under an alert management. The foundry was small and old-fashioned, operations being done by hand, although an electric vibrator was used for sieving the sand and there was also a moulding machine. The machine shop consisted of old machines manually operated, with some jigs and fixtures of a rather rudimentary nature. In view of the small number of workers and the nature of the equipment a surprisingly large amount of work was turned out. Standards for daily output had been fixed and a simple system of production control was in use. The major problem of the plant was to improve the quality of the product, and advice was sought in setting up an inspection system. The individual parts of the product were examined and a short list of the gauges required (of the simplest types) was drawn up. Use of these gauges would permit a simple system of inspection to ensure that the parts would be interchangeable. In one of the operations (drilling) a jig was designed to reduce rejects. Advice was also given on how to introduce the checking procedure and the steps to be taken when the gauges showed that the production of a certain part was not according to specifications. The project was of special interest as small factories often pay little attention to quality and to inspection procedures. It showed that, with a comparatively small investment, rejects could be reduced considerably and that increased production and higher quality could be achieved simultaneously, even in a small plant. Two further examples may be given from Sweden. With the help of the Swedish Government Handicrafts Institute a small firm employing four men to make water colour paints in tablets was able to save 3,000 Swedish crowns a year by installing a machine to make the tablets in one operation instead of two (stamping of identification marks on the otherwise completed tablets had formerly been a separate operation). 62 SERVICES FOR SMALL-SCALE INDUSTRY The same firm was able to save 4,000 crowns more by collecting and utilising scrap which was formerly being wasted. The owner of another factory—a furniture-making plant employing about 40 workers—had an idea for the construction of a simple machine that would effect a considerable saving as compared with the processes of cutting and gluing currently in use. A machine that would have done the job could have been purchased for 60,000 Swedish crowns, but it was considerably more elaborate than the owner required. He lacked the skill and knowledge to carry out his idea unaided, but was enabled to realise it, with the help of an engineer from the Swedish Handicrafts Institute, at a cost of 10,000 crowns. Some additional examples of help provided by consultants to small firms, rather more technical in character, or requiring more space to describe, are given in Appendix II. Most of the above examples relate to cases in which a consultant was called in because the manager of a small plant was confronted with some specific problem and needed help infindingthe best solution. Some such consultations are in the nature of rescue operations, as when a small manager calls in a consultant only after losing much money and under penalty of being forced out of business by his failure to come to grips with some problem. Not all consultations, however, are of this character. A small-scale manager, even if he is not in special difficulties over a particular problem, may realise that he is not making the best use of his resources and is losing opportunities for expanding his markets and enlarging his profits, and may seek a general survey or evaluation of the working of his firm. A consultant called in to undertake such a general survey may be able to put his finger on a weak spot and deal with a problem before it becomes serious. Such general surveys are a feature of the consultation services provided for small firms in such countries as Japan and the Netherlands. In Japan the service operated under the auspices of the Smaller Enterprises Agency of the Ministry of International Trade and Industry1 surveys small firms on request. A specialist in technological problems, or an efficiency expert qualified to deal with management problems, whichever is requested, makes an over-all investigation of the operations of an undertaking, draws up plans for improvement and shows the entrepreneur how these plans can be carried out. Group surveys (evaluating the problems and performance of a group of small producers in the 1 See Appendix I. CONSULTANCY SERVICES 63 same branch of industry) and industry-wide surveys are also undertaken.1 Evidence of the value of the survey facilities provided is to be found not only in the yearly increase in the number of surveys conducted but also in the results of an opinion poll carried out among establishments that had been surveyed : 80 per cent, of the persons questioned reported that the surveys had had favourable effects, such as increases in production capacity as well as in total or individual output and reductions in production costs.2 In the Netherlands general surveys of the operations of a plant as a whole, or of specific activities (for example, production or selling) are carried out by the Research Institute for Management Science. The purpose is to provide in the shortest possible time (three to five days) a kind of X-ray of the business which will show up both its weak and its strong points and indicate the points where help is needed.3 A survey does not in itself provide solutions for problems, but with the help of a survey report the manager, the consultant or (preferably) the two together can work out plans for introducing improvements where they are most needed. Such general surveys can contribute greatly to the effectiveness of an extension service, but need careful preparation. To make sure that nothing of importance is overlooked full check lists need to be prepared of points to be investigated, and consultants conducting the surveys will need thorough training, e.g. in methods of interviewing and of collecting and recording data. If consultations can be repeated at more or less regular intervals they can serve the very valuable purpose of providing routine checks on the performance of an undertaking and its success in implementing suggestions made in the course of previous consultations. The subscription plans for Danish cabinet makers and laundries described at the beginning of this chapter are examples. 1 The latter, which provide data about problems typically encountered by firms in the industry, and serve as a basis for establishing appropriate facilities and goals, are in the nature of a research rather than consultation service. 8 For further details see The Smaller Industry in Japan, op. cit., pp. 87-88. 3 A very valuable method of showing up the weak and the strong points of each of a group of firms is the preparation of comparative cost analyses or productivity comparisons—for example, statements showing, for each of a number of firms, output per machine-hour or per man-hour in particular processes. It will often be found that firms with a good performance in respect of some activities will have a bad performance in respect of others. The preparation of such statements calls for co-operation between a group of firms on the one hand and an agency collecting and analysing data on the other, and is perhaps better described as a form of research than as a method of individual consultation, although data that can be used in preparing comparative analyses can be obtained from firms in the course of individual consultations. This subject is discussed in Chapter VI and an example is given in Appendix II. 64 SERVICES FOR SMALL-SCALE INDUSTRY QUALIFICATIONS OF CONSULTANTS The success of a consultation service will depend very largely on the quality of the consultants. A good consultant needs adequate technical knowledge, practical as well as theoretical. If, when things are not being done in the right way, he can demonstrate with his own hands how they ought to be done, the lesson is likely to be far more effective than any amount of theoretical instruction; and practical demonstrations of this kind may help to overcome the prejudice against getting one's hands dirty that is found among managerial and supervisory staff in some countries and is sometimes a major cause of inefficiency. Since records and data that would show conclusively what is wrong are often not available in small firms, and since there is often not time to collect such data, a good consultant needs, along with his technical knowledge, a flair for diagnosis and an ability to improvise sound solutions to problems encountered. At least as important as the technical qualifications of a consultant is his personality. He serves as the confidential adviser of the managers of small undertakings, and he must inspire trust and confidence. He should have a critical and analytical mind, but at the same time a positive approach to his work. He will need a great deal of tact, patience and perseverance in " selling " new ideas to managements and in overcoming that resistance to change which is a nearly universal human characteristic and which is apt to be especially strong in those cultures where industriahsation is still in its early phases. He will need an understanding of the point of view and attitudes of typical smallscale industry managers, and of the reasons that may make it difficult for them to absorb new ideas or to introduce changes in accepted and traditional ways of doing things. He needs to be able to express his ideas clearly both in speech and in writing. While it is desirable that all consultants should have these qualities, they will of course be especially necessary in senior consultants who are responsible for investigations and advice. One cannot expect the same practical knowledge and experience in a young man in the early years of his career. Young men with at least secondary technical education and a talent for solving practical problems may serve as junior consultants or assistants to senior consultants. It is important, if the best use is to be made of scarce resources, that the latter should spend their time on work that demands all their qualities and abilities. Junior consultants, working under their supervision and direction, may be able to relieve them of a great deal of time-consuming routine work in matters of collecting and recording data and assisting in implementation. Working in this way CONSULTANCY SERVICES 65 under the supervision of an experienced senior consultant is, moreover, excellent training for a junior consultant. It is worth going to a great deal of trouble to select and recruit personnel with the right qualifications. Candidates should be interviewed by officers experienced in the type of work they will be called on to do. The group interview method, in which a group of candidates are given a problem or problems to discuss among themselves with an interviewer participating in the discussion, can often be very revealing in cases where there is a choice of candidates. It will also be valuable to arrange that, as a part of his training or during a probationary period, a candidate for a permanent post as a consultant should work with an experienced person who will be able to observe him at work over a period long enough to form a good idea of his personality, attitudes and capabilities. CONSULTANCY METHODS A plant visit will usually involve three main steps, all of which are second nature to an experienced consultant, but should be stressed particularly in the training of new personnel—getting the facts, solving the problems and reporting the conclusions. Getting the Facts Whether he is being consulted in regard to some specific problem or whether it is intended that he should make a more general survey of the operations of a firm, the first and usually the most difficult task of a consultant is to obtain the relevant facts—to diagnose and locate the problem or problems in respect of which his help is needed. There are three main ways of getting at facts : through interviews, by observation, including the examination of available records, and through the collection and recording (or arranging for such collection and recording) of additional data. A consultant's visit to a small firm will almost certainly start with an interview with the owner or manager. The consultant should be willing to listen in the first place; his turn to speak will come when he is sure that he has all the facts he needs. He should remember that the real problem may not be what the manager thinks it is : the latter may have some preconceived notion that has led him to a faulty diagnosis. The consultant should therefore ask for information about symptoms— inadequate performance, overdue deliveries, and so on. To obtain all the facts that he requires he will almost certainly need to talk to other people in the firm besides the man at the top. He should inform, or 66 SERVICES FOR SMALL-SCALE INDUSTRY request the management to inform, the people concerned about the purpose of the consultation. The manager may ask him to explain the purpose of his visit, or the manager may prefer to do this himself, giving the consultant an opportunity to supplement what he says. In either case the consultant should use this as an opportunity to gain the confidence of other members of the undertaking. He should observe carefully the formal and informal hierarchy in the organisational structure. He should not assume direct authority, e.g. by instructing people to give him information. He should not express criticism to anybody: his function is to diagnose and find a solution to a problem, not to apportion blame. Besides talking to (or rather, chiefly asking questions and listening to) people in the undertaking, the consultant should seek opportunities for personal observation to give him the " feel " of the factory. He should also make a careful examination of books and records. On the basis of what he has learned from those working in the undertaking, and of his own observations, the consultant should decide what additional facts, if any, he needs to know before he can give sound advice. He should either collect and record these additional facts (or have his assistant do so if he has an assistant) or arrange with the management for the facts to be collected and recorded by people working in the firm. If he can pay only one visit to a firm it may be difficult to collect and record the information he desires in time for it to be of use to him. Even so, he may be able to install, or assist the manager in installing, an improved system of records that will yield data needed by the manager. He should provide very carefully designed forms, with very clear instructions as to how they should be completed, and do his best to ensure that whoever is to be responsible for completing the forms thoroughly understands what has to be done. If the consultation consists of several visits, repeated at intervals, he will have greater opportunities. He can provide at least intermittent supervision of the recording until it is running smoothly, and he can assist the manager in interpreting the new data and drawing the correct conclusions. Solving the Problems When the facts are properly arranged they will often speak for themselves, and the conclusions to be drawn as to how problems should be solved may then be obvious. In other cases these conclusions will be debatable. But in any case a wise consultant will try to present matters in such a way that the manager finds the solution, or at least important parts of it, for himself. The manager is then likely to be pleased both with himself and with the consultant, instead of possibly being rather CONSULTANCY SERVICES 67 resentful, at least subconsciously, that the consultant has been able to teach him how to run his business. It is a human characteristic to be eager to apply ideas of one's own, but to make difficulties and look for reasons for not carrying out advice given by others. A consultant should not feel obliged to " save face " if he cannot find an immediate solution to a problem. Sometimes the facts needed for a solution can only be obtained over a period of time or as a result of a laboratory test (in which case the consultant will try to arrange for materials or samples to be tested). To propose a solution that will not work is worse than proposing no solution or saying that further study is needed. If the consultant has thought of a solution that may or may not work, he should propose it on an experimental basis only. He should avoid exaggerated claims for solutions that he does propose, and in making any such proposal he should bear in mind all aspects of the problems—economic and psychological as well as technical. It is of no use to propose a technically sound solution if it is too costly for the firm to adopt or if on account of human factors, such as inertia or misplaced professional pride, it has no chance of being adopted. It is wise to restrict proposals, in the first place at least, to essentials and to proposals that do not involve heavy expense. A modest proposal that works successfully will build up confidence in the consultant and may make management willing to consider later a more radical and expensive solution that would not have been acceptable at first. Reporting the Conclusions In addition to whatever he may tell the manager at the conclusion of the consultation, a consultant should subsequently present a written report setting forth his considered findings and suggestions in clear and simple terms and giving the management as much guidance as possible in the task of implementing the proposals. It is worth taking trouble about the presentation and " finish " of a report—good typing, graphs that convey their message accurately and vividly, and so on. High standards of performance and pride in workmanship are always better inculcated by example than by precept. QUESTIONS OF IMPLEMENTATION The test of the value of a consultation service is the extent to which sound proposals are implemented in practice. However pertinent and well presented the proposals of a consultant may be, the manager of a small firm may often, unaided, have great difficulty in implementing 68 SERVICES FOR SMALL-SCALE INDUSTRY them. Any help that the consultation service can give to small managers in carrying out improvements proposed will be of great value. If a manager has not been convinced that the advantages predicted by a consultant will in fact follow from adopting his suggestions, he will probably either not attempt to adopt them or be discouraged from doing so at the first difficulties. The first necessity, therefore, is for the manager to have been convinced by the consultant that the suggestions made are both desirable and feasible. In this connection, it is well to bear in mind that exaggerated claims made on behalf of a proposal will tend to arouse distrust. But, even if the manager has full confidence in the consultant and his proposals, other difficulties of implementation may arise. Firstly, unforeseen problems may come to light after the consultant has left the plant. Secondly, neither the head of the firm nor any member of his staff may have the time to do the necessary work. Thirdly, implementation may require training in new techniques either for the head of the firm or some member of Ins staff or for workers engaged on particular processes. The danger of unforeseen problems arising will be less the more careful and thorough the analysis made by the consultant of all aspects of the problem. If it is possible to arrange for follow-up visits, these will be extremely helpful. The Smaller Enterprises Agency in Japan, for example, has inaugurated a special follow-up service to aid firms in carrying out improvements suggested in initial surveys. When improvements require sustained work over a period of time and no existing member of the staff has the time to spare, one solution that has proved quite successful in certain countries is to attach to the firm a partly trained person. Practical work in plants is a necessary part of the training of students in work study and other productivity improvement methods. In Israel, for example, persons taking work study courses at the Israel Institute of Productivity have been attached in this way to small firms. In the Netherlands the Research Institute for Management Science has initiated a programme of so-called " student projects ". Students participating in this programme are drawn from technical colleges and receive a special four-week course of training in advance. They are usually aged from 22 to 25 and especially selected for this purpose. During his temporary employment in the firm the student is required to analyse, record and solve a certain problem, to assist the management in the implementation of improvements, and to evaluate the final results. He is employed on a full-time basis for a period of three to four months, during which he is paid a modest salary. He performs his work under the supervision of an experienced consultant, who visits CONSULTANCY SERVICES 69 the firm once a week. The consultant determines in collaboration with the management the problem that will be assigned to the student for solution. The work of the student is regarded as part of his regular training. In this way effective expert assistance is provided for small firms at a cost that is well within their reach. Two examples of work done by students under this programme may illustrate the type of problems that can be solved in this manner. In a non-ferrous foundry, it was observed that productivity was affected by an inefficient plant layout. There was an acute shortage of space and inadequate gangways caused many materials-handling difficulties. As the foundry had a wide variety of products, it was found advisable to adopt a process layout, i.e. to departmentalise the plant according to the processes employed in production. For the correct location of the departments the main flow of material through the plant was determined by a routing analysis of 37 selected products, constituting 60 per cent, of the total production. This flow was modified to suit the physical conditions of the building and to meet other requirements, such as good natural lighting, ventilation and smoke exhaust. The layout improvement was for the greater part carried out in the evenings and at week-ends, in order to avoid interruption of production and to execute the alterations at minimum costs. The changes resulted in a 52 per cent. reduction of transportation distances, corresponding to a cost saving of 2,100 florins for the first year. Observations by ratio delay analysis 1, made before and after the layout change, confirmed this improvement. A second example is that of a small machine factory in which ratio delay studies showed that operators were spending some 10 per cent, of their time in consultations with other operators and supervisory personnel. To a certain extent this seemed justified, as the factory was producing high quality products that required much care and skill in setting up the machines and performing the operations. An analysis of the time records, however, showed a wide variety in recorded times for similar operations. These facts indicated the necessity for a detailed analysis of the operations and of the factors influencing them, such as workplace layout, types of machine tools, and the jigs and fixtures used. Such a study having been made, it appeared that several methods were in use for performing the same operation. These different methods were first tested from the point of view of the quality of the product. Of two methods that yielded products of the required quality, detailed time 1 " Ratio delay ", in work study terminology, refers to a method used to determine the proportion of the working day during which workers or machines are producing and hence the ratio of delay to total working time. See I.L.O. : Introduction to Work Study, op. cit., pp. 292 ff. 70 SERVICES FOR SMALL-SCALE INDUSTRY studies showed that one required a set-up time of 81 minutes and an average time per piece of 3 minutes, as compared with 75 minutes and 3.9 minutes under the other method. Thus the first method, requiring six minutes more to set up but thereafter saving 0.9 minute per piece, was found to be quicker for lot sizes from seven pieces upwards (7x0.9=6.3 minutes) and, since the lot sizes were generally much larger than this, was accordingly adopted as the standard method. Instruction sheets for the standard method were distributed in the shop and the operators were instructed in its use. As a result, time spent in consultation and excessive variation in operation times were reduced, and this led to a 12.5 per cent, saving of wages and machine costs. The student projects are conducted on a regional basis in order to promote contacts between the various colleges and the small industries in their vicinity. Experience has shown that these contacts may well open up further opportunities for co-operation, to the mutual advantage of industry and the colleges. For example, data collected and experience obtained in the course of the students' work provide excellent teaching material, while industry secures some appreciation of the training facilities and the possibilities offered by technical colleges in the field of modern developments in production management and methods. Finally, as already mentioned, successful implementation of proposals made by a consultant may call for training in new techniques either for one or more management officials or for workers. This subject will be discussed more extensively in the next chapter. CHAPTER V TRAINING AND INFORMATION SERVICES Training is required for management and supervisors, for workers and for extension service officers. We shall discuss training for these different groups in turn, and conclude with a few pages on the related subject of information services. TRAINING FOR MANAGEMENT The main responsibility for raising productivity in any undertaking rests with the man at the top. Managers, being human, tend to blame their troubles on external factors, such as shortage of capital, limited markets, government policies or the alleged inefficiency or irresponsibility of labour, when the root causes of their problems may lie in their own failure to recognise and deal with the basic factors influencing their businesses. The ability to distinguish the basic factors in the many short and long-term problems that beset the small manager requires training, which needs to be supplemented by sound teaching of the management methods best suited to overcoming the difficulties encountered. The major problem is to convince small-scale industry managers that they need and can benefit from training. This difficulty is aggravated by the fact that it is often extremely difficult for the man at the top (frequently the firm's only executive) to leave his business even for a day or two to attend courses or conferences. The experienced owner-manager is usually a knowledgeable man in his own field and is seldom prepared, even if he has the time, to sit at the feet of a teacher and absorb uncritically what the latter has to tell him. He must be convinced that what is being taught corresponds with the facts as he has experienced them. Formal management courses of the kind given to students in business colleges may be very useful for the sons of small business owners who are destined to succeed them, but would seldom be appropriate for men actually running small businesses even if they had time to attend them. Training for such men needs to be especially tailored to meet their requirements. The wide dispersion of small businesses, especially in countries where distances are large, makes administrative arrangements for the training 72 SERVICES FOR SMALL-SCALE INDUSTRY of small managers exceedingly difficult. One solution would be the setting up of relatively small agencies for management education all over the country. This, however, in a large country, would make very heavy demands on funds and personnel, and in most countries it is a long-term objective rather than an immediately feasible solution to the problem. It has been suggested in Chapter III that a valuable contribution can be made by organising touring teams. This has been done, for example, by the European Productivity Agency. Its teams of United States and European experts under a project manager tour member countries and hold seminars in the principal industrial centres in which many small managers participate, under the auspices of the national productivity centre or equivalent organisation. The British Productivity Council has specialised in training in work study and maintains a team of experts who conduct conferences and courses in different parts of the country. These range from one-day courses to one-week conferences with practical exercises and demonstrations. Similar methods have been used in India. Purposes of Training and Types of Participants In courses provided for management a distinction is sometimes drawn between " appreciation " and " application " courses. The former are short and designed to provide management with a general understanding, using practical illustrations, of basic factors affecting the operation of their undertakings and of the contribution that can be made to the solution of their problems by certain selected management methods. They are not, however, designed to equip managers who are as yet unfamiliar with such methods to make use of them themselves. Appreciation courses may well benefit lower-level management, but are above all intended for heads of firms and top managers. It is very desirable that they should be attended by heads of firms themselves, for unless the latter have an appreciation of the potential value of management methods that may be expounded in detail in application courses they are not likely either to understand or to support efforts made by subordinate members of their staffs to introduce such methods. " Application courses " are designed to provide training in the practical application of modern management methods, and usually have to be longer and more systematic than appreciation courses. Because of the more specialised subject matter and the length of time required; such courses will as a rule be attended by lower-ranking managers or technicians, although some courses may be short enough, especially if they can be arranged at convenient times, for heads of firms to be able to attend them too. Certain refresher courses in technology may be TRAINING AND INFORMATION SERVICES 73 of this nature. In many trades—painting is a good example—a large variety of new products and new tools have been placed on the market in recent years. The small industrialist or craftsman needs help in familiarising himself with their properties and their suitability for his purposes. Without knowledge of the new possibilities open to him he will lose opportunities of increasing his profits and of doing the work better, more cheaply or with less effort. This knowledge may be supplied by a course like that of the Copenhagen Technological Institute, which in 18 hours of instruction covers the properties of new painting materials compared with old ones, and introduces painters to new methods and new tools—for example, spraying equipment, rollers, sanding machines and steam equipment for removing wallpaper. For some purposes, appreciation and application may be combined, especially when training is designed to improve the over-all management of a small business. For example, the Research Institute for Management Science at Delft has organised a series of short intensive courses designed primarily for top managers of small-scale firms which combine both approaches, with emphasis on the application of improved methods. The purposes of these courses are—• (a) to provide management with tools that will help to achieve short-term results in the form of lower costs or a larger volume of sales; (b) to impart to management the knowledge required for effecting basic changes in the firm's structure or policy, resulting in long-term benefits; and (c) to help to deal with the problems of management succession by providing training for the sons or successors of owner-managers. The programme consists of five separate courses, each lasting about one week, on the following subjects: organisation and mechanisation as a means of raising productivity; organisation of sales; financing; management and daily control; and personnel structure and continuity of the company. In addition to theory, practical exercises, demonstrations, case work and discussion of problems raised by the participants themselves are included in the course. By way of example, the curriculum of the course on organisation and mechanisation is as follows: First day: characteristics, possibilities and limitations of small firms; systematic approach to trace avoidable wastes in production. Second day: maintenance of equipment; cost calculation, hourly machine rates. 74 SERVICES FOR SMALL-SCALE INDUSTRY Third day : work simplification, workplace layout, use of tools and auxiliary equipment. Fourth day: arrangement of machines, plant layout; utilisation of capacity, planning, scheduling, work preparation, issue of orders. Fifth day: purchasing and replacement of machines; financing and credit supply. A course in production techniques for woodworkers given by the Copenhagen Technological Institute provides another example of a course designed to provide both a general appreciation of basic factors affecting the operation of a business and a knowledge of how to apply certain principles. This course should be especially valuable for a master craftsman intending to set up a business on his own. A pupil starts by making a drawing of his own factory, or the factory he hopes or intends to establish. This will be adapted to meet his special requirements from model layouts designed by the Institute. When the drawing is complete the cost of the building and the plot will be assessed, and the annual cost per square metre will be worked out, for comparison with the corresponding costs of established businesses, or with the cost of renting premises. Staffing and machine requirements will then be worked out and costed, and annual turnover estimated. On this basis the initial requirements for fixed capital and working capital can be worked out. Instead of taking a leap in the dark, the prospective small entrepreneur will have had expert advice in making sure that his projected scale of operations is within his means and that the capital he owns or is able to borrow is invested in a properly balanced fashion, sufficient account being taken of working capital requirements for which, in the absence of proper planning and forecasting, provision is often very inadequate. The course also includes instruction in simple production planning techniques. Methods of Training The particular method of management training to be used must be adapted to the subject being taught and to the preferences of participants. Broadly speaking, three methods may be distinguished: discussion groups, " circuit schemes " and formal courses. Discussion Groups. Discussion groups or seminars can play a very important part in management training. They call for more active participation by managers themselves than merely listening to lectures, and give managers TRAINING AND INFORMATION SERVICES 75 an opportunity for learning from each others' experience as well as from the knowledge of an expert discussion leader. They may also sometimes point to the possibility of joint action for the solution of a common problem. Managers are more likely to be willing to participate in discussion groups than to attend lectures; and a solution to a problem that has been hammered out in the course of discussion is more likely to be acted on than a solution recommended by a lecturer. For a successful discussion the discussion leader should bear in mind, first, the need for careful preparation, including choice of subject or subjects for discussion and selection of participants. He should, of course, make sure that he is himself well prepared for the discussion and should give some thought in advance to the viewpoints that are to be expected from the participants. The composition of the group should be such that various viewpoints are represented. The number of participants should be large enough to develop a general discussion (at least six to eight) but not so large as to make it difficult for all members of the group to take part (12 to 15 at the most). The choice of a suitable conference room and the arrangement of table and seats are important. The discussion should not be interrupted by telephone calls or visitors. Seats should be arranged in such a way that each participant can easily hear and see all the others. A blackboard is usually indispensable as a means for focusing the discussion on the vital points, recording the most important remarks, and clarifying, step by step, the progress of the discussion. At the outset of the discussion the participants should, if they are meeting for the first time, be given an opportunity to say a few words about their personal background, their firm and their function in it. The discussion leader may begin by saying a few words about his own background. Furthermore, it may be useful for him to indicate that certain " rules " will make for a fruitful and orderly discussion. He may stress, for example, that everyone is free to express his own opinions; that everyone should give other participants an equal chance to do so; that respect should be shown for opinions different from one's own; that statements should be concise and to the point; and that personal remarks should be avoided. The discussion leader should start the actual discussion with a short introductory statement, lasting from five to ten minutes, outlining the subject to be discussed. Thereafter he should not try to dominate the group. His task is to stimulate and direct discussion by putting questions, summing up and drawing conclusions. He should also see that the group sticks to the subject and respects the agreed rules. Ultimately, he should summarise the conclusions reached in the discussion, paying special 76 SERVICES FOR SMALL-SCALE INDUSTRY attention to any conclusions that may suggest further action to be taken by the participants either individually or as a group. After the discussion the leader should mentally review the various elements in the discussion, and his own conduct of the proceedings, with a view to drawing any conclusions likely to help him improve his technique. Discussion groups may be organised on a regional or on a branch-ofindustry basis. An example of the former kind is the discussion group of ten heads of smallfirmswhich was organised by the Training Courses and Research Foundation \ at Delft, in 1956. The idea was to bring together a number of managers with a progressive outlook for the purpose of discussing small industry's problems and, by exchanging experiences and ideas among them, to create a group with relatively advanced knowledge of the nature of typical problems of small industry and appropriate methods for their solution. The group meets once a month. Industries represented include tool and appliance manufacturing, metalware, readymade clothing, ceramics and engine maintenance and repair. Discussion has so far been concerned mainly with problems of organising and planning production. Otherfields—commercial,financial and social— will also be covered. The Copenhagen Technological Institute has encouraged the setting up of groups for the specific purpose of permitting exchanges of experience among firms in the same industry. Firms in direct competition with each other—e.g., bakers in the same street—do not become members of the same group. The members of each group pool their trade secrets, if any, and reveal thefinancialresults of their operations. Thus a member is able to compare his own costs and profits not merely with those of other anonymous firms2, but with firms whose identity he knows. Interfirm comparisons frequently provide excellent material for discussions, particularly when these are organised on a branch-of-industry basis. In return for imparting one idea or item of information a man may come away from a meeting with six or seven ideas or items of information contributed by others. He is able to realise that he is not alone in facing certain problems, and the experience of other members of the group may help him to solve his problems. A member of the Institute staff acts as secretary of the group and leads the discussion. From the pooling of ideas and information the group may go on to co-operate in practical ways. For example, joint purchasing may enable them to obtain discounts for quantity. 1 2 Now the Research Institute for Management Science. As in the case of the inter-firm comparison of costfiguresdiscussed in Appendix II. TRAINING AND INFORMATION SERVICES 77 Circuit Schemes. Besides discussion groups, another informal educational device that allows of active participation by managers and provides opportunities for learning through an exchange of knowledge and experience is the socalled " circuit scheme ". Circuit schemes are programmes intended for groups of entrepreneurs in the same region. The whole group pays a oneday visit to the firm of one of its members, to see and discuss the problems encountered by the firm and the solutions arrived at. At intervals of perhaps two or three weeks each firm in the group is visited. The participating factories are not necessarily in the same branch of industry. This type of " community approach " may create a great sense of solidarity in a region. It may also give valuable ideas to participants. The encouragement of circuit schemes which, while not designed specifically for small firms, do not exclude them, has been a feature of the work of the British Productivity Council. Formal Courses. While a great deal can be learnt from well conducted discussion groups and circuit schemes, and can be learnt, moreover, in a manner that is both more acceptable and more likely to be acted on than classroom instruction, small-scale industry managers may also benefit greatly from more formal and systematic courses of training if they can be persuaded and can find the time to attend them. Even in such cases, however, a good deal of emphasis needs to be placed on, and sufficient time allowed for, free discussion among participants. Thus the une of demarcation between discussion groups and more formal courses is often a vague one. Because of a reluctance of experienced businessmen to " go back to school ", courses designed for top management in all types of firms have to avoid any suggestion of " talking down " or " lecturing ". They must be given an air of informality. In particular, university (or technical college) type lecturers, often young and without extensive executive experience, may fail to carry conviction to businessmen older than they are. Courses run by foreign experts are generally appreciated and well attended but the practices described may well be regarded as " not applying to us ", and there is often a tendency on the part of the owners to send their sons or assistants rather than go themselves. The type of activity that has probably proved most successful in awakening the interest of top management in the more industrialised countries is the two or three-day residential conference held in comfortable surroundings, usually during a week-end. A few talks are given on selected subjects by acknowledged experts (wherever possible, successful managers), these 78 SERVICES FOR SMALL-SCALE INDUSTRY talks being followed by questions and discussions. Time is allowed for formal and informal exchanges of experience between delegates. These exchanges are often regarded as the most valuable part of the conference and are more likely to be frank and successful if membership is confined to directors and top managers. For some years the British Institute of Management has run an annual conference for managers of small firms on these lines, which has from the first proved highly successful and has been much appreciated. The possibility of using such courses with success in most underdeveloped countries is, however, limited because of the small size of the average firm and lack of facilities. Subjects of Training Numerous examples have been given above of subjects in which training may usefully be provided. Subjects need to be selected carefully with due regard to the nature of the problems typically confronting small firms in the industry or area concerned and the methods appropriate for their solution. Among the methods that will often be found most helpful in small firms are work study and especially method study, production planning and control, cost accounting and quality control. To learn enough about such methods to be able to apply them calls for attendance at " application courses " rather than " appreciation courses ", and participants will usually be subordinate members of management or technicians rather than heads of firms. As an intrcduction to modern management methods, work study in particular has the great advantage of being able to produce tangible and often startling results that open the eyes of management to the possible improvements in the operation of their plants. It can also be taught, up to a certain point, rapidly and economically. Furthermore, if systematically applied, it usually reveals shortcomings in other parts of the organisation than those with which the study is primarily concerned, and enables management to improve its performance all around, if it is willing to do so. The best training for work study is undoubtedly a short theoretical course, supplemented by some months of practical work under the guidance of an experienced consultant, but this is rarely possible for small firms. A type of course in which small firms can participate and which has given good results is one consisting of two to four weeks' theoretical training, followed by supervised practical work in the trainee's plant over an approximately equal period, this in turn being followed by a week or two in which participants discuss and compare the results of their practical work and receive some final lectures. This type of course TRAINING AND INFORMATION SERVICES 79 is now being provided, with technical assistance from the I.L.O. 1 , by the Indian Productivity Centre and by the Productivity and Vocational Training Department of the Ministry of Industry of the United Arab Republic (Egyptian region). The Israel Institute of Productivity, which has also received technical assistance from the I.L.O., has now given such training to many hundreds of people—workers as well as management officials. Although these courses are not confined or especially directed to small firms, members of small firms do participate and the results obtained are often very striking. One owner-manager of a very small plant making umbrella handles in Baroda doubled the productivity of his plant after attending such a course. It should be added that the experience of I.L.O. productivity missions confirms the importance of doing everything possible to ensure that the head of a firm has at least a general understanding of the objectives and advantages of work study even if he does not fully master its methods. It would be a mistake, in selecting subjects for management training, to emphasise only subjects having to do with production. One of the most valuable and popular of the courses given in Israel is a course on how to read a balance sheet. This can be expanded into a course on the use of financial returns for control and planning purposes. Budgeting and budgetary control, marketing and certain aspects of personnel management are other subjects that may be of particular importance to small industrial managers unable to employ specialists in these fields. TRAINING FOR SUPERVISORS Although it barely begins to meet the needs, a great deal is now being done in many countries to provide training for managers of smallscale undertakings. Much less appears thus far to have been done to meet the training needs of supervisors and foremen. In any small firm that is too big for the man at the top to do all the supervision himself, these are an extremely important group. There is no doubt that good supervision is a key factor in bringing about higher productivity, and that the training of supervisors can play an important part in improving the quality of supervision. The duties of supervisors usually fall into three groups—technical duties, administrative duties and human relations. In the more highly industrialised countries foremen or other firstrank supervisors in small firms have usually come up from the ranks of the workers and possess a good knowledge of their trade. They 1 See above, Chapter III, pp. 53 ff. 80 SERVICES FOR SMALL-SCALE INDUSTRY have, however, commonly received no formal training in the administrative or human relations aspects of their work, and it is in these respects that their training needs are greatest. Because of the hmited functional specialisation in the management structure of a small firm, the administrative duties of a first-line supervisor may be more extensive than in a large firm, and he will not be able to call on staff specialists for help in dealing with problems requiring specialised knowledge. In many of the less industrialised countries it cannot even be assumed that first-line supervisors will have a good knowledge of their trade. Literacy being usually considered a minimum qualification for their work, they will have been selected from among persons who have had at least some formal schooling, and theie is in many of these countries a prejudice against manual work among persons with some formal education. They may therefore lack even the technical knowledge required for effective supervision and for showing workers how to do things. The difference in their educational background may also place them at a social distance from the often illiterate workers whom they supervise, and whom they may tend to treat with some disregard for the importance of good human relations and teamwork. Probably the most practical means available in most underdeveloped countries for training supervisors is training within industry (T.W.I.).1 T.W.I, organisations, generally run by governmental agencies and, in some cases, set up with the assistance of the I.L.O., are operating today in Burma, Ceylon, India, Pakistan, Singapore and Thailand. The three basic courses in job relations, job instruction and job methods not only provide the elements of sound workshop management and human relations, but have the advantage that the training of the instructors themselves is relatively short, permitting the training force to be expanded fairly rapidly. The courses should, however, be adapted to the needs and psychology of the country concerned. As an example of a more comprehensive type of training programme for foremen, mention may be made of an evening course provided for foremen in the machine industry in the Netherlands. Foremen attend the course in groups of 20. They are between 30 and 45 years of age, and have all received approximately six years of primary education. In addition most have received two years of vocational training before entering industry, usually between the ages of 14 and 16. The course consists of three-hour sessions on two evenings a week spread out over 15 weeks, i.e. a total of 30 evenings. The curriculum is as follows : 1 While these simple courses are primarily designed for supervisors, they may also prove useful to the head of a small firm who spends a large part of his time performing the functions of a working foreman, as many do. TRAINING AND INFORMATION SERVICES 81 Number of evenings Subject Organisational structure of the small firm, the function of the foreman, his relationship to other management functions Job analysis, including some motion and time studies, job preparation and job instruction Production control, scheduling and issue of orders Plant and workplace layout Maintenance and control of machine utilisation Quality control and inspection Stockroom administration and layout Tool administration Wage systems, personnel administration, handling of grievances, collective agreements Total . . . 2 10 2 2 2 4 1 1 6 30 The five-day application courses in work study organised by the British Productivity Council are another example of a training programme from which foremen in small firms may greatly benefit. Before each course surveys are held in the participating factories in order to select one of them for conducting the practical exercises. During three days attention is devoted to method study, with practical exercises, the remaining two days being spent on time study, rate setting and other applications of work measurement. The purpose of the. course is to open the eyes of participants to the great possibilities for productivity improvement offered by work study and to give them enough background to be able to tackle at least some of the simpler problems in their factories that may be solved by a work study approach. Apart from courses that may be specially provided for supervisors in small undertakings, there will be opportunities for some such supervisors, especially in larger towns, to attend more general courses provided by technical colleges or other institutions. TRAINING FOR WORKERS Certain possibilities of providing training, including training for workers, through demonstration or pilot projects or by itinerant teams of extension workers have already been discussed in Chapter III. The possibilities of providing systematic training for workers through these means are, however, limited, and they go a very little way towards meeting the need that exists in most if not all underdeveloped countries for basic and relatively long-term training for workers in small-scale industry. This is a part of the broader problem of providing such training for the 82 SERVICES FOR SMALL-SCALE INDUSTRY labour force as a whole, and cannot be discussed in detail here. Nor can it, however, be entirely ignored. Such training schemes should be broadly based and flexible enough to cover the needs of a wide range of small industries. Apprenticeship appears to provide a good method for organising this kind of training, and efforts are being made in a number of industrially less advanced countries, for example Burma, Ceylon, India, Malaya and Pakistan, to promote its development on a systematic basis. Although directed primarily to large-scale industries at present, these efforts cover, in some cases, small-scale industries also. In Japan, the apprenticeship laws and regulations apply to both large-scale and small-scale firms. Apprenticeship in small-scale firms, however, presents some special features. There is no doubt that there are certain advantages in a small factory; for instance, apprentices receive more personal guidance and supervision and get a good insight into all aspects of the organisation of the factory. On the other hand, there is the disadvantage that the small employer is seldom equipped to provide all-around training in the chosen trade up to the level of the skilled worker. To overcome this difficulty, several small firms may join together and organise the training on a co-operative basis. The trainees are then moved from firm to firm to ensure all-around experience, and related instruction is given in a local technical school. Such co-operative schemes are organised sometimes by local associations of small employers, in other cases by joint apprenticeship committees or by local authorities. It would also seem useful to organise short intensive courses to meet the special needs of a particular industry, or to bring knowledge up to date in the light of technological progress or changing economic circumstances. There should be close co-ordination between various training schemes so that a uniform and integrated training policy may be developed and duplication of effort and resources avoided; it would seem particularly important that, wherever possible, short-term intensive or refresher courses should be co-ordinated with the training activities carried out through extension methods. It is important that training facilities should be related to existing or expected future employment opportunities. The launching of training schemes without due regard for the capacity of industry to absorb new trainees has, in some countries, led to the problem of lopsided development of particular technical skills; for example in Ceylon, where nearly half of 700 rural training centres are concerned with textile weaving, the lack of adequate employment opportunities in the textile industry has aggravated the problem of unemployment and is reported to have aroused a feeling of frustration among the unemployed trainees. TRAINING AND INFORMATION SERVICES 83 In framing a training policy, care should be taken to ensure that it meets the conditions and requirements of small as well as of large industry. Generally speaking, in countries where large-scale and smallscale operations have been closely integrated and the two sectors have attained a fairly uniform level of technological progress, specialisation of training programmes on occupational lines would seem to be more important than the organisation of different kinds of training for workers in firms of different sizes. In most underdeveloped countries, however, lack of uniformity in the stage of technological and organisational development of large-scale and small-scale industry and various other factors make it necessary to provide special training facilities for smallscale firms as a distinct type of industrial and technological unit. This, however, does not necessarily mean that the training programmes for small industries should be developed on the basis of the existing conditions and requirements of small industry; they should also take into account possible changes in methods and job content. For example, if in the light of the over-all development policy it is intended to modernise a small industry or group of industries in a particular manner, the training programme should, as far as possible, be related to the educational requirements of the modernisation process. In Japan, in particular, training centres situated in various prefectures have made a great contribution to the improvement of the methods used in small industries. In 1952 there were some 268 centres which provided training for 18,700 persons for periods ranging from six to 12 months: the training given covered 60 different trades of which a good many fall within the category of small industry. In Burma, in addition to courses provided in polytechnic schools, special training facilities are available in ceramics, sericulture, hand-made paper and textile industries. In Thailand polytechnics and trade schools offer instruction in carpentry, blacksmithy, bricklaying and other trades; a special two-year training course is arranged in lacquerware for a limited number of students. In the Philippines training centres have been established in ceramics, weaving and wood industries. In Ceylon industrial schools provide two-year courses in textiles, coir manufacture, carpentry, smithy, pottery, brasswork, ironwork, and lace-making; in addition, advanced training is available in selected trades at the Central Research Institute. In India, where great importance is being attached to the problem of training, more than 60 institutes have been set up to provide training in various types of small industry. In pursuance of a recommendation of the All-India Khadi and Village Industries Board, a Central Training Institute and various regional training institutes have recently been set up. In addition, the plans of state governments include provision 84 SERVICES FOR SMALL-SCALE INDUSTRY of various training facilities with a view to promoting small industry development. In spite of these encouraging developments, it seems that in most industrially less advanced countries there is an urgent need for promoting a well co-ordinated training system that will adequately meet the educational requirements of the modernisation process and be closely related to development plans and employment opportunities in the small industry field. Apart from these general aspects of training policy, there are various practical problems involved in the organisation of training schemes. Among them is the fact that most of the training facilities are concentrated in towns and urban areas, and do not adequately reach the villages where a large proportion of small undertakings are located. Even in Japan, where the training facilities are relatively well developed and where not only the Government but also educational agencies and industry take an active part in the promotion of training, there exists a popular demand for increased training facilities in textiles, ceramics, bamboo, wood and lacquerware, engineering, sericulture and paper manufacture. The concentration of training facilities in towns may give rise to another kind of problem, as is exemplified by the case of the former carpet-making section in the Kabul vocational school in Afghanistan: a number of young men were trained in carpet-making at the school, but few of them returned to the trade in the village, preferring to follow different occupations in the urban setting of Kabul. Attempts are being made in some countries, for example Japan, India and Ceylon, to provide basic training on a geographically decentralised basis. However, the heavy financial and administrative burden involved makes the establishment of a network of full-fledged industrial schools in many less developed countries almost impracticable. An effective way of providing some rudimentary training on a wide scale would seem to lie in making manual training and industrial education an integral part of the general educational system, which in many less developed countries would seem to lay too much stress on non-vocational studies. In Japan attention has already been given to this problem, and in Burma some technical training is provided in post-primary schools. Some rudimentary training for work in small industry can also be imparted on a fairly wide scale through fundamental education. In countries where facilities, through apprenticeship or otherwise, for basic training for workers in small-scale as in large-scale industry are reasonably adequate, there is still a need for advanced vocational courses for workers who intend to set up on their own as owner-managers of TRAINING AND INFORMATION SERVICES 85 small firms or who occupy or who may be promoted to responsible positions in small firms. Brief accounts of the wide range of vocational training courses provided to meet this need by the technological institutes in Denmark and by the Swedish Government Institute for Handicrafts are given in Appendix I. To help in meeting the difficulty experienced by managers, foremen and workers in outlying areas in attending courses given in large centres, the Danish institutes have organised itinerant courses. In connection with such courses a further difficulty is sometimes encountered, namely a lack of adequate equipment in some of the places where it may be desirable to offer courses. The Copenhagen Technological Institute has two coaches equipped as mobile classrooms, which are driven by the instructor. The Aarhus Institute has equipped a certain number of railway vans to serve the same purpose. When teaching is not carried out in these mobile classrooms, accommodation is provided in local workshops, preferably equipped with machinery and power; teachers bring their own instruction material. In the Netherlands after the Second World War vocational training workshops for adults were developed with government aid to supplement the vocational training facilities already provided for young people. Their proposed aim was twofold : on the one hand, to help meet the need for skilled labour required by a rapidly expanding industry and, on the other, to enable workers to qualify for better-paid jobs and to reduce the risks of unemployment. The workshops also provide for retraining in case employment opportunities contract in one trade while they expand in another because of changing economic conditions. The programmes are fully adapted to the special requirements of adult training. No one is admitted unless he has successfully passed an aptitude test, and manual exercises designed to develop the necessary skill in handling tools are given as a preliminary to the training course. Each training programme is based on an analysis of the job for which the training is designed. The curricula consist of a series of assignments starting with the simplest and ending with the most complicated. Each assignment consists of making a workpiece of which a description and drawing are given to the trainee, and evaluations are made of the quality of the workpieces made and the performance rates. Apart from the practical exercises, some theoretical instruction is also provided. The training given covers a great variety of jobs in the metal and building industries and in other trades. Its duration varies from six to 18 months according to the kind of job. There are 34 such workshops in the Netherlands, with a total capacity of 5,000 trainees. 86 SERVICES FOR SMALL-SCALE INDUSTRY TRAINING FOR EXTENSION SERVICE OFFICERS 1 Three main types of extension work have been distinguished in the foregoing pages—consultancy services, training and research. While the same persons may provide more than one of these types of service, training requirements are not the same in all cases. Persons whose main occupation is to train others in vocational subjects will usually not need university degrees; they will need a good knowledge of their trades and some training in the art of imparting knowledge and skills. Research workers, on the other hand, will probably require a good university degree in their particular field of research. The following pages concern mainly the training of consultants, among whom three main classes may be distinguished, namely (a) general consultants, such as the field officers employed by the Netherlands Technical Consulting Service 2, able to give help and advice on a wide range of questions in a wide range of industries; (b) consultants specialised by subject, e.g. cost accountants; and (c) consultants specialised in the technology of a particular industry or branch of industry. General consultants will usually need a university degree or equivalent qualification in mechanical engineering or industrial management, and consultants specialised by subject will usually need a university degree or equivalent qualification in their special subject. A university degree, though valuable, will perhaps be less essential for technological specialists, since a good knowledge of the technology of a particular industry can be acquired without it, but such specialists will need a very thorough and broadly based training in and experience of the technology of the industry concerned. As to how the basic university or other training is to be provided, this—both in the case of consultants and of instructors or research workers—is a matter of general educational policy and can therefore not be discussed here; but there is no doubt that it is more difficult and costly to provide university or equivalent training in science and engineering subjects than in arts subjects, if only because (a) more equipment is required and (b) there is a greater demand for the services of graduates in science and engineering and therefore more difficulty in providing good teaching staff both in schools and in higher education establishments. In a good many countries there appears to be a lack of balance between arts subjects on the one hand and science and 1 Including leaders or officers of co-operative associations, trade associations or other voluntary bodies providing advisory, training, research or similar services for small-scale industries. 2 See above, Chapter III, pp. 42 ff. TRAINING AND INFORMATION SERVICES 87 engineering subjects on the other, both in facilities provided and in the number of students taking courses. In India, for example, there is a good deal of discussion of the problem of the " educated unemployed ", jobs not being available for all those trained in arts subjects although there is a shortage of scientists and engineers. In some countries more might be done both to persuade a larger proportion of students going to universities to take science and engineering subjects and to provide facilities for them. In addition to an appropriate general educational background, all types of consultants need some specific training for their work. All of them, for example, are liable to be called on to give advice on questions of marketing and finance, and will therefore need some knowledge of business economics. Even more important, all of them need to be good at human relations. Ability to inspire confidence, respect for other people's feelings and opinions, and the capacity to get people to work together as a team are personality traits that are naturally much more highly developed in some people than in others, but that can be developed to a considerable extent by training and that it is exceedingly important to develop in consultants. Nor is theoretical training enough. A theoretical approach is apt to be distrusted by practical and experienced small-scale managers, especially if it is adopted by young consultants straight out of college, and more particularly if such young consultants permit themselves to adopt any airs of superiority. On-the-job training under expert coaching by an experienced consultant should either form part of the training programme for future consultants or should be provided as a " followup " of such a training programme. Examples have already been given of how students in the Netherlands and Israel may, as part of their training, be temporarily attached to small firms under the close supervision of an experienced consultant. This serves the double purpose of providing practical experience for the student and of helping managements to implement recommendations made by experienced consultants. After a young man has completed his formal training and been appointed to the staff of an extension service, he should for the first year or longer work as an assistant to, or at least in very close co-operation with, an experienced consultant. It is very desirable that before being employed as a consultant a man should have had, apart from his academic training, several years of practical industrial experience, some of it in executive positions. Even experienced consultants can benefit greatly from refresher courses from time to time. Advances in technology and new developments in management methods are taking place so rapidly at the present 88 SERVICES FOR SMALL-SCALE INDUSTRY time that even with the help of periodical refresher courses it will be exceedingly difficult, and without them almost impossible, for busy consultants to keep abreast of important new developments in their fields. Refresher courses may take the form of discussion groups or seminars, or of more formal training courses in new methods, or both. An example of a course designed to serve, among other things, as a refresher course for consultants is the European Course on Small Industries given by the Research Institute for Management Science in the Netherlands. This course is designed for staff members of (a) extension services for small-scale industries, or extension institutes associated with universities or training colleges and providing services for small industries as part of their normal activities; (b) training institutes for engineering, supervisory or managerial staff of small firms; (c) employers' associations or trade unions providing assistance to small industries in the field of productivity improvement; and (d) productivity centres or similar institutes dealing with the promotion of productivity in small industry. Experience in industrial and production management or an advanced university education in these fields is required for admission to the course. Enrolment for each course is limited to about 15 persons in order to ensure that each receives individual attention and to provide ample opportunity for discussion after each lecture. The participants come from various countries and are not all engaged in the same type of work. For example, some may be consultants, others productivity officers and others still training instructors. In order to meet the particular requirements of the various participants to the fullest extent there is a high degree of flexibility in the programme of the course. This flexibility is achieved by dividing the programme into two parts, namely (a) a general programme, common to all participants, and (b) project work, with special arrangements for smaller groups of participants having similar interests. Moreover, a one-day excursion is arranged to cater for individual interests. The general programme includes the following subjects: basic types and functions of small industry; principles and methods of scientific management and its application in small industry; human relations in small industry; commercial, financial and cost accounting problems in small industry; productivity surveys and institutes for promoting productivity; training programmes for the management of small industry; and case studies of small industry. The project work is done in small groups of participants with similar interests. It consists of group discussions, field work and visits to industry. A choice can be made from the following subjects : application TRAINING AND INFORMATION SERVICES 89 of management methods in small industry; organisation of productivity projects (e.g., management training programmes, or promotion of work simplification); and organisation of a productivity centre or advisory service for small industry. The experiences of the project work are then discussed by all the participants. The duration of the course is two-and-a-half weeks. Lecturing and discussion under the general programme cover about ten days, project work and excursions about a week. The course was held for the first time in June 1957 when participants came from Greece, Iceland, Italy, the Netherlands and Norway. It is conducted once a year. Teaching and discussion are in English. The Institute has also set up an annual international course of 25 weeks' duration on the problems of small-scale industry. Information about this course and about a somewhat similar course given for the first time in 1959 by the Stanford Research Institute and the Stanford University Graduate School of Business, and repeated in 1960, is given in Appendix III. Experience derived from these and other courses organised by the Netherlands Institute confirms the conclusion that in order to be effective courses must provide ample opportunity for discussion. Furthermore, it is considered essential that a large proportion of the time available be allotted to individual work by participants. The Smaller Enterprise Agency in Japan provides three types of training for " surveyors "-1 These are— (a) a short refresher course for people already employed in surveying organisations, to provide them with knowledge of the latest developments in technology and management methods; (b) training of future " leader surveyors ". This programme includes two months of study in the fundamentals of manufacturing and mining, another two months for advanced studies in the same fields, and a one-month commercial course; and (c) practical experience in field work. Study groups composed of surveyors are placed for a period of approximately six months in factories in order to give them experience in supervising and guiding improvements in an enterprise. It has been found that this experience and study contribute greatly to improving the ability of the surveyors and the technical level of surveying. Fifty-one such groups of surveyors were placed in factories in 1955. 1 Consultants who make surveys of small firms or groups of small firms (see above, Chapter IV, p. 62). The training courses are described in The Smaller Industry in Japan, op. cit., pp. 88-89. 90 SERVICES FOR SMALL-SCALE INDUSTRY Mention was made in Chapter III of the help that can be provided in training extension officers and similar personnel through international technical assistance. An example may be drawn from the activities of a joint United Nations-I.L.O. technical assistance mission which assisted the Government of Burma in the development of co-operatives. The mission conducted four co-operative staff seminars at which 72 junior co-operative officers were trained in elementary principles of industrial co-operation between 1952 and 1954. To impart more comprehensive training in problems of developing industrial co-operative societies the mission also conducted a special training course in November-December 1953 for a small group of selected co-operative officers previously trained at one of the seminars just mentioned. The purpose was to form a specialised corps of industrial co-operative officers for field work as well as for supervising activities at headquarters. The course was attended by 14 junior officers. Much attention was paid to field work, i.e. the investigation of and reporting on the working of individual industrial societies, diagnosing their defects and making suggestions for improvement, as well as to group discussions. The curriculum was as outlined in the following table: Percentage of total Subject Lectures on industrial co-operation . . . Lectures on business economics Group discussion Field work Work on reports Excursions 14% 11 9 5% 5 3% 30 23 19 11 10 7 Total 48 y2 100 INFORMATION SERVICES Not always easily distinguished from the less formal kinds of training, but hardly—if at all—less important, are information services. Consultation and training services are concerned with the provision of information through the individual and group approaches, whereas this section has to do chiefly with mass media.1 Information provided through such media is an important means of arousing " productivity-consciousness ", which must be the first step in any widespread campaign for raising productivity. It is also an important 1 The distinction between these three types of approach and the part played by each have been discussed in Chapter III, pp. 46 ff. TRAINING AND INFORMATION SERVICES 91 means of keeping industrialists and others informed of new developments of general interest. Its limitations include the fact that the information is often not specific or detailed enough to be acted on by individual managers, and that the role of those for whom it is designed is a passive one, i.e. that they are not called upon to take an active part in solving their own problems. Information provided through mass media will therefore be most effective if it is co-ordinated with and followed by other activities, such as discussion groups, formal training or consulting, that provide more specific guidance for the solution of particular problems in individual firms and that call for more active participation by those for whom the services are provided. Mass media in common use include meetings; broadcasts; exhibitions; films, filmstrips and other visual aids; and printed matter. Several of these may, of course, be used in combination. Meetings and Broadcasts Though the convening of meetings is perhaps a " group approach " rather than a " mass approach " activity, large meetings may nevertheless be a useful way of conveying information to a substantial number of people. Public lectures or conferences on subjects of general interest may be organised by management associations, productivity centres or other bodies. For example, one-day work study conferences, attended by 30 to 120 people, are organised in various parts of the United Kingdom by the British Productivity Council. Lectures and radio talks are among the media used by the Smaller Enterprise Agency in Japan for promoting understanding of the problems of small industries and spreading knowledge of measures taken by the Government to assist in dealing with them. Exhibitions People are often more readily influenced by what they see for themselves than by what they hear or read. Thus exhibitions are an important publicity medium. Taking advantage of the many canals and other waterways in the Netherlands, an exhibition travelling on two barges, with the slogan " All Hands on Deck ", was organised by the Dutch Productivity Centre to contribute to the initial impetus for a national productivity drive in the early 1950s. One barge served as a moving picture theatre; the other contained three showrooms. Exhibits on the upper deck were designed to present vivid and typical illustrations of the economic life of the country and the problems which it raises (for example, how the lack of indigenous raw materials necessitates large imports that have 92 SERVICES FOR SMALL-SCALE INDUSTRY to be paid for by exports of goods and services of high quality and at competitive prices). The theme underlying the exhibits on the second deck was how much productivity can be improved by common sense alone. Many examples were shown of simplifications and improvements made in Dutch firms. Illustrations of the results that can be achieved by co-operation between different managements, or between managements and experts, were shown on the third deck. The staff running the exhibition consisted of a director, four technicians, three guides and an officer travelling three or four weeks in advance of the exhibition to make contacts, appointments and arrangements with the local industries and authorities. Visits to each town were thoroughly prepared by an extensive propaganda campaign (e.g., by press bulletins, articles in newspapers and periodicals, opening addresses by the mayor, essay competitions and radio talks). The two barges travelled about the country for 18 months, stopping in 34 towns for periods varying from three to 16 days. About 80,000 persons visited the exhibition, mainly from industry but also from schools, trade unions and various societies. So far as possible, it was arranged that people should visit the exhibition in groups with common interests so that the information given, in the form of explanations,filmsand pamphlets, could be adapted to the needs of the visitors. Films, Filmstrips and Other Visual Aids Films, filmstrips and visual aids in general, like exhibitions, derive their importance from the fact that things that people see often make a bigger impact on their minds than things that they hear or read. As the production of these aids is rather expensive, special agencies have been established in many countries with government help which not only make available films and filmstrips and distribute them as widely as possible, but also hire out the equipment for projection. As a sideline they often run courses on how to make the best use of the various aids available. Another important task they perform is selecting and adapting foreign material to the specific conditions and needs of the country concerned. A Technical Film Centre was established in the Netherlands in 1954. Its activities are as follows: (a) producing and purchasing films and filmstrips relating to productivity questions and distributing or hiring them out to industry, commerce, educational and training institutes. In 1957 the film library contained 600 films with 2,300 copies in all. In the same year there were 3,552 performances at which 7,220 films were shown to over 160,000 people. The Centre had 66 filmstrips at its disposal, of which 1,200 copies were sold ; TRAINING AND INFORMATION SERVICES 93 (b) international exchange of audio-visual aids, including sale of filmstrips to many foreign countries and the production of Dutch versions of foreign films ; (c) making available projectors and other equipment; and (d) organising one-day courses on the use of visual aids. Up to 1957, 58 such courses had been given to 587 participants. Another type of visual aid is the model layout. Plans and scale models showing a good layout for a furniture factory employing about 30 workers and for a similar factory employing five or six workers have been prepared, for example, by the woodworking department of the Copenhagen Technological Institute. Printed Matter The importance of having books, scientific and technical reports and periodicals available for reference and study in any institute providing research, training, information or counselling services for small industry cannot be overemphasised, and will be discussed in the next chapter. Apart from such specialised literature, however, printed media designed for wide circulation may be effectively used either primarily for publicity, or primarily to impart technical information in a relatively " popular " way, or for both purposes. Associations of small industrialists, or agencies or institutes providing extension services for small industries, may issue brochures or pamphlets which can serve a valuable purpose in acquainting people with their aims, methods and activities. Attractive, well printed and illustrated brochures of this kind have been issued, for example, by the Copenhagen Technological Institute and by the Swedish Government Institute for Handicrafts. Another example is a brochure in English entitled Small Business in Sweden issued jointly by the Swedish Artisans' and Small Industry Organisation and the Swedish Retail Federation. In publications of this kind the emphasis is mainly on publicity. At the other extreme, with emphasis almost entirely on imparting technical information, are such publications as manuals and textbooks. The Copenhagen Technological Institute, for example, has found it necessary to take steps to overcome the shortage of technical literature in the Danish language by publishing over 80 textbooks, mostly dealing with handicraft techniques. Cheaper to produce and easier to read than textbooks are pamphlets giving practical advice on how to deal with particular problems of smallscale management. A series of such pamphlets that will be found very 94 SERVICES FOR SMALL-SCALE INDUSTRY helpful is the Small Business Management Series issued by the United States Small Business Administration in Washington.1 Combining in various proportions the purposes of publicity and of conveying technical information are periodicals of various kinds. Many trade associations publish periodicals for their members. These are mostly designed to cater for a particular branch of industry, including large as well as small firms. In some countries special periodicals designed to appeal to small-scale industrialists may be justified, if for example there is a widespread need for information on specific topics of interest to them, such as special credit facilities or co-operative activities. Another reason for publishing a special periodical for small industrialists might be that material designed to appeal to them should be presented more simply than is customary in trade or technical periodicals published largely for the benefit of large firms with specialists on their staffs.2 The contents of a periodical published especially for small industries might include— (a) information about events of interest to small industrialists, such as industry fairs, training courses and meetings ; (b) articles on various management problems (sales, production, finance or personnel) illustrated with actual case material obtained in small undertakings. As special features, series of articles might be published on particular problems, going into considerable detail and trying to provide practical guidance on ways of dealing with the problems; (c) articles providing full information about facilities available for assisting small industrialists, such as credit facilities or assistance by consultants; and (d) reviews of books and other literature. 1 Some 20 pamphlets have been issued in this series and many of them have been translated into Spanish. Titles include: An Employee Suggestion System for the Small Plant, Human Relations in Small Industry, Improving Materials Handling in Small Plants, Cutting Office Costs in Small Plants, Design is Your Business and Executive Development in Small Business. Mention may also be made of the annual volumes entitled Management Aids for Small Business, No. 1 (1955), No. 2 (1956), No. 3 (1957) and No. 4 (1958) also issued by the Small Business Administration, which contain articles on a wide range of subjects of interest to small firms, particularly (but not only) in the United States. 2 Examples of periodicals catering specially for small industrialists are the monthly Smaller Enterprise Bulletin and the semi-monthly Financing the Smaller Enterprises published by the Smaller Enterprise Agency in Japan, the monthly Hantverk och Industri published by the Swedish Artisans' and Small Industry Organisation, the monthly Bulletin d'information published by the Institute for Economic and Social Study of the Middle Classes (Institut d'étude économique et sociale des classes moyennes) in Belgium, and the Gazzetta della piccola industria published monthly by the Italian General Confederation of Industry. CHAPTER VI RESEARCH The research needs of small-scale industry fall under two main headings, namely (a) technological research and testing; and (b) economic and social research, including research into non-technological problems of management. The present chapter discusses these two kinds of research in turn, and concludes with a few remarks on the organisation of research. TECHNOLOGICAL RESEARCH AND TESTING Research into the technological problems of small-scale industries is of vital importance both for the long-term development of such industries and for the solution of short-term problems. Technological research may not only serve existing firms and industries but may in some cases provide a basis for the development of new branches of industry as well as for the modernisation and adaptation to changing conditions of traditional branches of small-scale industry that are unable, with their present methods, to compete with large-scale production. Such research requires highly specialised experts and expensive equipment, both of which are beyond the reach of the individual small firm. Since there is now a great deal of technological research going on in all parts of the world, and a certain danger of duplication, institutes that may be set up to conduct such research on behalf of small-scale industry will be well advised to draw as fully, as possible on published research results1 and to concentrate their own research efforts on problems that are of special significance to small industry in the country or region they serve. Some research projects will probably be undertaken on the initiative of the research institute itself, because they are felt to be of national importance, or at least of importance to large numbers of small industrialists. Others may be undertaken at the request and on behalf of individual small firms or small groups of firms. For reasons discussed 1 For this purpose they will need good libraries and documentation services (see below). They will also find it useful to maintain liaison with other research laboratories or scientific or technological institutes both within the country and abroad. 96 SERVICES FOR SMALL-SCALE INDUSTRY in Chapter III, it would seem usually desirable to charge fees for projects of the latter kind, although the fee need not cover the costs entirely, especially if the research is of a kind that may directly or indirectly benefit others besides the sponsor or sponsors. Fields of Technological Research The various fields of technological research may be discussed under five main headings, namely (a) product design; (b) manufacture; (c) analysis and testing of materials and products ; (d) development of new materials; and (e) fuel and energy problems. Product Design. When a small industrialist wishes to establish a new business or introduce a new line of production he may seek help from a research institute in the design of a new product. A research engineer providing such help will need a good appreciation of the marketing and financial limitations of a small undertaking. Generally, however, most of the work of a research institute in the field of design will relate to the improvement of existing designs or to substituting new designs for old ones within the same product line. Research on questions of product design may serve different purposes. One of these may be to improve the performance or quality of the product. This may be illustrated from the experience of a small manufacturer of centrifugal pumps. Co-operation with a research establishment led to a new design of the fluid circulation system and of the blades. This new design reduced the internal resistance of the pump and greatly improved its performance. The research engineer performed almost all the research work while the factory undertook to build a few prototypes which were tested in the institute's laboratory. Or the aim may be to improve the product's appearance. Examples of this type of assistance may be found in the improvement of the patterns of hand-woven textile fabrics, or the design of ceramic household products. Again, a change in design may result in large savings in production costs. For example, it may permit the use of certain mass-produced standard parts in place of components expensively produced on a small scale in the firm. Standardisation of the product itself may be desirable for marketing purposes. Often it will be found advantageous to pool the output of a group of small firms in order to permit the use of large-scale marketing methods, e.g. exhibitions and showrooms, advertising campaigns, and RESEARCH 97 sales promotion campaigns abroad. This will be difficult, however, unless the consumer gets a standard product, whether it comes originally from one small firm or another. This does not mean that each small firm need produce a product identical with that of every other, but that reduction of excessive variety and concentration on a limited range of standard products of good design may make for more efficient marketing as well as more efficient production. Research to establish appropriate standard designs for a product may need to be accompanied by action to encourage small producers to adopt these standard designs. Such action is not, of course, in itself a research function but is mentioned here for completeness since it is so closely related to research into the design of products. Manufacture. Help may be provided for small firms in dealing with problems arising out of the technology of manufacturing processes, and in particular the design of equipment, including problems of mechanisation and safety of operation. A research institute may be called upon to help a small entrepreneur in developing a completely new process, or in adapting existing processes to the use of local materials or to local economic conditions. The use of auxiliary equipment, such as dies, jigs and fixtures, can contribute greatly to productivity improvement in small firms. The manufacture of such equipment requires highly skilled personnel and the use of precision machinery and instruments. This is a task in which research institutes can provide very valuable help for small firms. The Copenhagen Technological Institute, for example, advises firms on problems encountered in the manufacture of tools, and tests the efficiency of machines and their suitability for various purposes. Some more specific examples of help on technical manufacturing problems given by this Institute to small firms may be of interest. An imported condenser in a gasworks had worked well for 30 years but was due for replacement. The contract for a new condenser had been given to a local small-scale undertaking, but the new article was found to be badly corroded after two years and had to be replaced. Could the replacement safely be entrusted to the local undertaking ? Why had the condenser corroded ? The Institute found that the only reason for this was that the producer had used new tubes fresh from the factory and that heat scale had formed on the tubes. De-scaling would have occurred naturally if the tubes had been left for a year or so before being used, or the scale could have been chemically removed. The only advice that it was necessary to give to the producer was that 98 SERVICES FOR SMALL-SCALE INDUSTRY if, in replacing the condenser, he used new tubes, he should have them de-scaled. A small undertaking made paper bags coated with plastic for breakfast foods. Complaints were received that the cornflakes were damp. Testing of the material by the Institute confirmed the maker's claim that it was indeed damp-proof. The joins and folds in the bags made from this material were then carefully examined. It was found that the plastic coating was damaged at the folds. When the pressure applied in making the folds was reduced, complaints ceased. A small firm made adhesive plaster with a textile base covered with a mixture of rubber and resin. It was found that the rubber tended to perish rapidly in the relatively high temperatures and high humidity frequently encountered in hospitals. The problem was solved by finding a suitable additive which preserved the rubber without injuring the human skin. This was a comparatively simple problem to which the solution was rapidly found. The same firm later requested the advice of the Institute regarding the manufacture of adhesive cellulose tape. This had not previously been manufactured in Denmark and its manufacture under licence from abroad would have been unduly expensive. This inquiry involved a long and difficult research project for the Institute, but the various problems were eventually solved and the firm's production of adhesive cellulose tape now considerably exceeds its production of adhesive plaster. A small firm in the ceramics industry wanted to make a floor covering of small tiles, the size of postage stamps, in different colours. Such tiles have to be baked at a very high temperature if they are to be sufficiently hard. But the colouring matter affects the melting point and also the contraction of the clay. Research by the Institute solved the problem of finding a composition for the clay such that its melting point and contraction were virtually unaffected by the different colouring matters used. An Indonesian research institute developed a wooden handloom with a capacity 30 times greater than that of the traditionally used handlooms. In ten years over 4,000 of these looms were produced and under the supervision of instructors from the research institute workers were trained in their use. This greatly strengthened the capacity of the local handloom industry to face foreign competition. Analysis and Testing of Materials and Products. A large part of the work done by a research institute for small industries consists of analysing and testing materials and products and reporting on their quality and suitability for various purposes. RESEARCH 99 The Copenhagen Technological Institute provides a wide range of such services for small metalworking firms. Its laboratories are equipped to test the physical and chemical properties of steels and other metals, e.g. impact strength, hardness, hardenability and tensile strength. For example, a firm making dental burrs asked for a report as to whether a certain steel was suitable for the purpose and received a favourable report. The painting department of the Institute has laboratories equipped for testing the properties of painting materials, including resistance to rain, sunshine and abrasion, drying properties and ease of application. It also tests new tools, and advises users regarding their requirements for tools, and makes suggestions to manufacturers regarding improvements that might help them to expand their markets. In the same way the woodworking department tests new woodworking machines and also lacquers, stains and glues. An example of the testing of products might be the X-ray or supersonic testing of steel products. Not only materials, machines and physical products, but also services provided by firms can sometimes be tested. Mention was made in Chapter IV of the service provided for Danish laundries by the Copenhagen Technological Institute in testing sample pieces for tensile strength, whiteness and deterioration through chemical action. Development of New Materials. One valuable service that a research institute can sometimes provide is to develop the use of locally available raw materials. This may be illustrated by the development of an industry manufacturing rope from coconut fibres in Indonesia. A special process was developed in order to obtain fibre of the required quality. In addition a special spinning machine adapted to this quality of fibre was designed. Research work of this kind may be of direct national importance as well as of importance to small industries. During the Second World War, for example, Denmark could no longer obtain the imported tanning extracts on which its leather industry depended. With a view to producing homemade substitutes careful analyses of the bark, roots and wood of Danish trees, especially oaks, were carried out in the tannery experimental station of the Copenhagen Technological Institute, and as a result of these laboratory investigations a method of production was devised which was applied at first on a pilot plant basis. This showed that extraction of tannin from Danish materials could be commercially profitable, and a small factory was established near Hillerod in northern Zeeland. Far from going out of business when imported tanning extracts once more became available, this factory continues to meet a substantial 100 SERVICES FOR SMALL-SCALE INDUSTRY proportion of Danish requirements, and has also developed export markets in Latin America and elsewhere. Another example is the replacement of imported asbestos cement which, in Indonesia, was very scarce after the Second World War. A research institute succeeded in developing a cement product strengthened with local fibres. An important aspect to be considered in finding a substitute for existing or scarce materials is the possibility of using scrap and waste material. Besides developing entirely new materials, research institutes also aid industry in improving the properties of materials already in use—for example, increasing the tensile strengths of metals or developing new alloys. Fuel and Energy Problems. One consequence of increased mechanisation in small industry is the growing importance of an adequate power supply. Questions of fuel economy also become increasingly important. Here also research has an important part to play. Mention may be made of attempts made in Burma to improve the fuel economy of the pottery industry. In the region of the village of Twante, for instance, firewood is becoming ever more scarce and has to be supplied from increasingly long distances at higher prices. Fuel costs account for about a quarter of total manufacturing costs. The feasibility of introducing a more efficient type of kiln as well as the use of oil instead of firewood as fuel was investigated. Ceramics is an industry that makes particularly heavy demands on fuel, but fuel economy is important in many other industries too. For example, investigations might be made into the possibilities of reducing the consumption of steam in laundries or in certain chemical factories. Activities Related to Research Research, even though it may have been initiated with a view to solving a particular problem in a particular firm, often yields results that are widely applicable. Such research will be largely wasted if the results are not widely diffused and brought to the notice of those who can use them. Consultation, training and information services, including publications, all of which have already been discussed, provide important means of doing this. But between the completion of a laboratory experiment and the commercial application of the research findings there is often further work to be done. Experimentation in pilot plants is a method of spanning RESEARCH 101 this gap. 1 It involves the use, often on a miniature scale, of the proposed machine or process, or a " trial run " on the new product or new material that has been developed through research. These pilot plant activities are undertaken because it is more economical to make and to correct errors on a small scale than on a large one. Pilot plant experimentation provides means of testing the applicability of laboratory findings to commercial conditions, and adapting them when necessary. It may also permit estimates to be made of costs of commercial operations. Finally, in the case of new products, samples may be obtained from the pilot plant production for purposes of market research or sales promotion. A technical research institute engaged in the development of new processes and machines will require a workshop to design and construct the equipment needed for research purposes. In some cases pilot plant equipment will be made in this workshop. In other cases the workshop may build prototypes of a new product. In order to fulfil its purpose the workshop will have to be very versatile and equipped to work with metals, wood, plastic and perhaps other materials. Research institutes may sometimes be able economically to combine with their research activities the provision of production equipment for small firms on a temporary basis. For their research and testing activities research institutes may have to install certain equipment, for example electric furnaces, that it would not be economical for small firms to buy but of which they may wish to make occasional use. Or a workshop belonging to a research institute may be a convenient place to install such equipment even though it may not be needed for research purposes. The Copenhagen Technological Institute has installed certain machines that may be hired by the hour by small industrialists—for example, a jig-boring machine accurate to one-thousandth of a millimetre. A good library and documentation service is indispensable for research work. Purchase of books and subscriptions to scientific and technical periodicals are expensive, but niggardliness in these matters will be a false economy. The service will serve a double purpose. First, it will be needed by the research workers themselves. Research workers must be able to keep abreast of developments in their fields if they are to go on doing good work. Moreover, as suggested at the beginning of this chapter, unless they are able to keep in touch with research in their fields that is being done elsewhere, they may waste time and money duplicating it. Secondly, books, reports and periodicals may be consulted by, and perhaps lent to, individual small-scale industry managers, engineers or others employed by them who are interested in particular 1 The use of a pilot plant in the project that led ultimately to the establishment of a factory for producing tanning extracts in Denmark was noted above (p. 99). 102 SERVICES FOR SMALL-SCALE INDUSTRY problems or are anxious to improve their technical knowledge. Desires of this kind deserve every encouragement. Abstracts of scientific or technical articles are sometimes prepared and circulated, usually in mimeographed form. A translation service that will make available to research workers in the institute and to the small industrialists they serve, in the language of the country, important scientific and technical literature published in other languages may also be very valuable. Some libraries and documentation centres provide a " question-and-answer service ", replying by correspondence to specific questions addressed to them. Finally, a service to give advice on questions relating to patents may be a valuable adjunct to research. Research is an expensive activity. Small-scale managements may be less reluctant to undertake it, or to ask (and pay) research institutes to undertake it on their behalf, if they can count on sound advice as to steps that it may be advisable to take to protect their interests in new processes or products that may be developed as a result of such research. This, as we have seen, is a service provided to small industrialists by the Netherlands Technical Consulting Service. Moreover, questions may sometimes arise as to whether a research institute should take steps on its own behalf to protect its interests in processes or products developed by it. In general, research findings should be made widely available, but there may be occasional exceptions, particularly in connection with work done in pilot plants. For example, a research institute might wish to lease or sell patent rights for exploitation by small firms individually or in groups, in order to cover at least part of the cost of research undertaken by it. ECONOMIC AND SOCIAL RESEARCH Economic research may be directed towards solving particular economic problems of an individual small firm, or of a group of small firms, or of an entire small-scale industry in a certain region. It may also be of value to governments in deciding what types of small-scale industries to encourage, where to encourage new firms to set up, and what types of help to give them, and to extension services in evaluating the results or probable results of different types of services that they are providing or might provide. We are not concerned here with investigations of an economic character that may be made within the small firm itself, important as these are. Fields in which economic investigations that would be beyond the resources of an individual small firm may serve the purposes mentioned above include, among others, studies of the advantages of altern- RESEARCH 103 ative production methods or of alternative locations for small plants or industries, surveys of cost breakdowns in a number of firms, productivity comparisons, and surveys of market prospects. Choice of Production Methods The subject of production methods could equally well have been discussed in the first part of this chapter, for it is a matter in which economic and technological considerations are equally important, and in respect of which research will call for the closest co-operation between economists and technologists or industrial engineers. Comparatively little is yet known about the full range of industrial activity in which small enterprise might be developed on a technically and economically sound basis. On the one hand, there are fields of manufacturing, such as steelworks and aircraft production, that obviously do not lend themselves to production in small establishments. On the other hand, the feasibility, at least from a technical point of view, of small-scale production has been demonstrated in a number of industries by the very existence of small firms. Relatively little research work seems to have been undertaken, however, into the possibilities and conditions of developing new lines or types of small-scale manufacturing production in fields in which, in countries that are already industrialised, larger factories now predominate. On the whole, production technology seems to be taken for granted to a larger extent than may be necessary or desirable. Such research would require the services both of economists and of technologists. Since the potential field for such research is very broad, the first necessity, in any country, would seem to be the selection of the most appropriate industries for study. These would no doubt vary from country to country, depending upon such factors as raw material supplies, traditional skills, markets (including export possibilities), the savings in foreign exchange to be expected from producing domestic substitutes for different kinds of imports, and other factors of a predominantly economic character. Certain industries having been selected for special study, a second phase might take the form of a careful examination of the processes characteristic of these industries in typical large-scale factories by a team of technologists, addressing themselves primarily to the question how far large-scale methods involving the use of expensive capital equipment are in fact necessary for efficient operation in low-wage countries, and paying special attention to the possibilities of designing simpler equipment capable of saving capital at the cost of utiUsing additional labour. Possibilities of adapting traditional small-scale production methods, perhaps gradually, to incorporate the use of such 104 SERVICES FOR SMALL-SCALE INDUSTRY equipment, and of extending the use of locally available materials, should also be studied. On the basis of such studies it might be possible to prepare estimates of capital requirements and labour requirements per unit of output under a range of alternative methods. In a third phase, the advice of economists might again be called for in assessing the implications of the choice between these alternative methods. A rational choice should take into account all that is known, or can be ascertained, about the probable effects of the different methods on costs, employment, prices, aggregate labour income, profits and the rate of capital formation.1 The Location of Small-Scale Plants The factors that influence the choice of location for a small firm or industry fall into two broad groups : first, the factors that determine where the transport costs involved will be at a minimum and, second, the factors that make for lower costs of actual production at some places than at others.2 Transport is necessary both for raw materials and for finished products. Proximity to raw material sources reduces costs of transporting materials; proximity to markets reduces costs of transporting finished products. 3 Thus an important consideration is whether the raw materials or the finished products are the more expensive to transport. There will be advantages in a situation that is near to the source of raw materials whenever the finished product embodies comparatively Utile of the weight of the raw materials employed in its manufacture. Thus the production of a ton of aluminium requires the working of many tons of clay and the use of large quantities of water. Similarly, the coal employed in heating glass furnaces is not embodied in the weight of finished sheets of glass. On the other hand, there will be advantages in a situation that is near to markets when the final product is more bulky, more fragile or more perishable than its raw materials. Houses are an extreme example. Cakes and ice are other examples. But a situation that, on balance, gives the lowest transport costs may not give the lowest production costs. Some factors of production 1 An individual small industrialist will be concerned mainly or exclusively with the effects on his costs and profits, but the other considerations will be equally relevant to governments in deciding how much, if any, special assistance they should give to particular branches of small-scale industry. 2 See on this subject E. A. G. ROBINSON, op. cit., Chapter X. 8 Transport costs are, of course, affected not only by distances but also by differences in freight rates for different types of goods and by different methods of transportation. RESEARCH 105 are cheaper in some places than in others. Land, for example, is expensive in large cities. Wages also tend to be higher than in rural areas. On the other hand, despite these possible advantages of a rural site, it is a familiar fact the world over that, when there is a free choice of location, a large proportion of new undertakings, large and small, tend to be established in or near large centres where an industrial nucleus already exists. Besides proximity to markets, other reasons for this tendency may include dependence on other undertakings for materials or components and availability of power, transport facilities, a more or less trained labour force accustomed to the discipline of industrial work, and various ancillary services such as repair services and banking and credit facilities. Studies of the importance of factors of this kind in their influence on costs of production may be extremely helpful to small industrialists who have to make a choice between different sites. Governments, in deciding where to encourage small industries to settle and develop, need to take into account other considerations besides short-term monetary costs of production in different places. Social costs may not coincide with private or money costs.1 Some of the reasons why the rapid world-wide movement of population from the countryside to towns, and especially to large towns, is causing concern in a number of countries have been discussed in Chapter I.2 The problem of creating conditions in which workers and their families from the countryside can make a reasonably rapid and satisfactory adjustment to urban conditions is not merely a problem of providing the necessary physical facilities, such as housing or sewers. No less important are schools, vocational training facilities and at least a minimum range of social security provisions. The more rapid the influx of population to the towns, the less adequate these services and facilities are likely to be. They are exceedingly inadequate in the cities of many industrially less advanced countries today, and the funds and personnel for expanding them rapidly are not available. In their absence the burden of supporting dependent relatives continues to a large extent to be borne, in accordance with traditional family and community obligations, by the active and productive members of the community in the towns as in the villages. But traditional social security arrangements (if this term may be used to describe age-old obhgations) were never meant to deal with the risks and hazards of urban industrial life. It is one thing to acknowledge the claims of dependent relatives to share in the food and accommodation 1 2 See above, Chapter I, p. 25. See p. 21. 106 SERVICES FOR SMALL-SCALE INDUSTRY available in villages; it is quite another to feed them, house them and clothe them out of the wages earned in low-paid, insecure urban jobs. A strain is placed on traditional obligations which they were never meant to bear and which is greater the more rapid the influx of people to the towns. There are also the arguments that the exodus to the towns of many of the more able, ambitious and hard-working villagers may further impoverish village life, and that small industries in rural areas can serve to counteract seasonal unemployment or underemployment in agriculture. Some of the disadvantages of a rural site are becoming less important as transport and communications improve and as the supply of electric power extends to the countryside. Indeed, the coming of electricity to rural areas and the development of a wide range of electrically driven small tools to replace hand operations tend to reduce the gap between many types of rural smallfirmsand their urban rivals. Properly utilised, these can be powerful factors in retaining industry in villages and even attracting it away from towns. On the other hand, it is not only present advantages that should count in the choice between urban and rural locations, but also the prospects of increasing productivity in the future. The dispersal of industrial activity in small, scattered units, so desirable from the several points of view indicated above, is at the same time a major impediment to the organisation, whether by governments or through joint action by small producers themselves, of the technical, financial and managerial services and facilities of which they stand in need if the latent possibilities of establishing and developing viable small-scale industries are to be realised. It is in respect of further increases in the population of the few largest cities that the social costs and disadvantages of further rapid urbanisation are greatest. It is, in general, these cities, rather than smaller towns, that have shown the greatest power to attract new industrial undertakings, large and small. Apart from undesirable social consequences, this may reflect an uneconomic allocation of resources, since it is in these cities that the discrepancy between private costs and social costs seems greatest. By encouraging the growth not of the few largest cities but of a number of smaller industrial nuclei, containing moderate concentrations of population, good transport facilities and power supplies, and seeking to develop in them the ancillary services which are attracted to centres of industry and which themselves attract additional industrial undertakings, it may be found possible in some measure to combine the ad- RESEARCH 107 vantages and avoid the disadvantages of both rural and urban industrial localities. Economic research may throw fight on the comparative costs per head of providing essential services—e.g., public utilities, housing, basic educational and health services—in cities and in small towns or villages respectively, and so help governments to take decisions regarding the places in which small industry should be encouraged—for example, the places where industrial estates might be set up—with fuller knowledge of the relevant facts. Such research may also help to throw light on the relative importance of different measures that may need to be taken if it is desired to attract new undertakings, large or small or both, to small towns or larger villages, and on how the advantages already possessed by smaller centres can best be enhanced and their disadvantages as compared with larger centres overcome. In addition, research may in some cases be usefully undertaken into the possibilities of establishing or developing rural small-scale industries to provide off-season employment for agricultural workers. Problems for study would include ways and means of ensuring an adequate utilisation of the necessary capital equipment and of adjusting seasonal production to continuous demand. Proper programming of production and adequate physical and financial facilities for storage would be necessary; they would call for high-level managerial ability and a certain amount of capital. Cost and Productivity Studies The owners of many small firms have only rather vague information as to the proportions of their total expenses that are attributable to different cost elements or to different products. A progressive business man will go to a good deal of trouble to obtain such information, which is important for many reasons. Such information will be all the more valuable if it enables him to compare his own position with that of other firms in the same hne of business. This can be done if a number of firms voluntarily submit their accounts to an agency in which they have confidence, which will break down their costs into the various elements according to a uniform classification and publish the results without disclosing the identity of individual firms. Each manager who receives such a report will know his own code number but not that of any of his competitors. If he finds on studying such a report that his material costs, or his labour costs, or his selling costs, or some other elements in his costs are abnormally high, and if there is no obvious reason why this should be so, this will be a strong indication as to where he should look first for possible cost savings. An example is given in Appendix II of a 108 SERVICES FOR SMALL-SCALE INDUSTRY scheme operated along these lines for Danish bakeries by the Copenhagen Technological Institute. Apart from their value to the individual owners or managers of small businesses, studies of the relative importance of different cost elements (for example, labour costs, material costs and capital costs) in relation to output in firms of different sizes may be of great value for purposes of public policy. They will permit comparisons to be made between the productivity of labour and of capital in firms of different sizes, which may help governments in deciding what types of small industry to encourage and what kinds of help to provide.1 Studies that compare the costs incurred under alternative methods of production may be of great value to smallfirmsin helping them to choose the most suitable methods and, in particular, to avoid the expense of investing in needlessly costly equipment when simpler equipment will do the job equally or more cheaply, having regard to the scale on which the firm operates and the relationship between wages and capital costs in the country concerned.2 Finally, firms producing more than one product may benefit greatly from studies to ascertain the production costs per unit of each product. The "direct" costs (notably labour and materials costs) of each product are ascertained, and remaining indirect or overhead costs are apportioned among the different products. Unit costs of the different products can then be compared with the prices charged and the management can see which are its most profitable and its least profitable lines. It is not at all unusual to find that afirmis actually losing money on some products. In a small cotton textile mill in El Salvador a costing study was carried out in close collaboration between the management, the El Salvador Production Development Institute and an I.L.O. mission providing technical assistance in productivity and vocational training. The study established with a reasonable degree of accuracy the costs and profits relating to the various products, and showed that there were very great differences in the profitability of each. As a result of the information obtained, the management was able to change its working plans and to direct its activities along more profitable Unes. 1 See, e. g., P. N. DHAR, op. cit. ; see also " Problems of Size of Plant in Industry in Underdeveloped Countries ", in Industrialisation and Productivity, op. cit. ; and M. LALOIRE: " Survey of Productivity and Efficiency of Small and Medium-Sized Firms in Belgium ", in Productivity Measurement Review (Paris, European Productivity Agency), No. 11, Nov. 1957, p. 37. 2 Mention may be made of a series of case studies prepared and published jointly by the Research Institute for Management Science, Delft, and the Netherlands Economic Institute, Division of Balanced Economic Growth, Rotterdam, namely Progress Reports No. 1: Filing and Grinding (1957); No. 2: Techniques of Lathing (1957); No. 3: Multi-Purpose versus Single-Purpose Woodworking Machinery (1958); and No. 4: Wooden Window Frame Production (1959). RESEARCH 109 Market Research Many small firms will be able to undertake at least some of the simpler types of market research for themselves. But it will often happen that a group of small firms producing a similar product will have a common interest in having a more thorough survey undertaken of the market prospects for their product. Such a survey may be carried out by an economic research agency on behalf of the group. It may throw light on a number of important questions. Who, for example, are the customers? To what income groups do they mostly belong? This will be important in.taking decisions regarding both the quality of the product and the most effective types of advertising and sales promotion, for these should be adapted to the particular type of market in view. Where do the final customers live ? This is important for deciding where sales efforts should be concentrated. Finally, is demand highly responsive to changes in prices ? In addition, market research may make possible forecasts of future market conditions, which may be very valuable in helping firms to decide whether they should install new capacity or make changes in their " product mix ". Such forecasts have, of course, to depend upon certain assumptions that may not turn out to correspond with the facts, and the longer the period of time over which a forecast extends the more speculative it becomes. Nevertheless it is possible, through so-called " correlation analysis ", to separate out the effects on demand of a number of different factors such as the growth of population, the rise in average incomes, and changes in the price of the product and in the prices of important substitute products. If reasonable assumptions are made as to what is likely to happen to these different factors over a period of time the result may be a sounder market forecast than could have been made by intuition alone. Apart from market research of this type, studies of how small firms tackle their marketing problems may be of interest both to small firms themselves and to governments and others interested in the problems of small industry development. Thus, the Research Institute for Management Science at Delft has made a survey of the marketing organisation and sales practices of 100 small metalworking establishments in the Netherlands.1 1 Research Institute for Management Science: Marketing Behaviour of 100 Manufacturing Firms in the Small Metal Industry in the Netherlands (Delft, 1959). no SERVICES FOR SMALL-SCALE INDUSTRY Other Economic and Social Problems Co-ordination of Development Policies. An important question for governments is the co-ordination of policies aimed at assisting small industries with over-all development plans, including programmes for the development of large-scale industries and measures designed to promote rural development. A well co-ordinated approach would seem essential in developing complementarity between small and large-scale industries, allocating an appropriate proportion of national resources to small industry and assessing its role in over-all social and economic development. Research into questions of this kind may be needed as a basis for action. Management Problems. A number of management methods that yield good results in large firms may seem too complex and too costly in terms of overheads for use in small undertakings. True, it is essential to keep administrative overheads low in the small firm. Yet business decisions have to be taken somehow, for better or for worse, by the management of even the smallest undertaking. The purpose of adapting and simplifying systematic management methods for use in small-scale undertakings is not to overburden managements with new tasks, but rather to help them to do the work that has to be done, and to take the decisions that have to be taken, in accordance with certain relatively simple principles, and in the light of such relevant facts as it is economically worth while to assemble, instead of doing their work and taking their decisions in an unsystematic, haphazard fashion. Methods of market research, work study, costing or budgeting applied in a small undertaking will often have to be relatively unsophisticated, and the information which they will yield as a basis for decision-making will be very imperfect—but still a great deal better than nothing. Research designed to assist in adapting various management methods to the requirements of different types of small firms in different industries may be of great value. The Research Institute for Management Science at Delft has undertaken research on the development of simplified management methods for application in small factories in such fields as work study, improved utilisation of factory space and quality control. Training Problems. It was suggested in Chapter V that there appears in many countries to be a need for further research into the problems of organising training facilities for the various groups that need training, and into ways of tailoring the training courses to the special requirements of these groups. RESEARCH 111 Labour Problems. In most of the industrially less advanced countries especially, information about labour conditions and labour remuneration in small-scale industries is extremely scrappy. In determining their policies in regard to small industries, or for purposes of more general social policy, governments may often wish to know more about such matters as the differences in wage levels between small and large undertakings in different regions ; differences, in rural areas, between industrial and agricultural wages; or the extent to which small firm employees enjoy fringe benefits (if at all). In Japan a study on labour and wages in small industry is being undertaken by the Institute of Statistical Research for the Japan Productivity Centre. Mention was made in Chapter III of studies being carried out by U.N.E.S.C.O. on certain social implications of small-scale industries in India and the Philippines. Managements and workers in particular small industries may benefit from investigations undertaken with a view to determining a sound basis for systems of payment by results that would enable workers to augment their earnings as their productivity increased. Problems of Co-operative Organisation. There are certain problems of co-operative organisation (to be discussed in Chapter VIII) on which research may usefully be undertaken. Subjects for study would include the form and manner in which co-operative principles can be most effectively applied in different conditions; the ways and circumstances in which they can be extended in new directions; the means and machinery for promoting education and training in the working of industrial co-operatives; and the measures to be adopted to facilitate an integrated growth of the movement. Evaluating Extension Service Activities. With limited resources, agencies providing extension and other services for small-scale industries have to select their activities with care. Important problems of choice and priorities arise. Some services will be more valuable and effective in particular situations than others, and, as suggested in Chapter III, research may help in deciding which these are. True, it may not be easy either to devise or to carry out research projects that will effectively serve this purpose. As in so many areas of economic and social research, a major problem will be to establish causeand-effect relationships by eliminating the influence of other factors simultaneously at work. If there are signs of progress in a particular small industry or area where extension services have been at work, it cannot always be assumed that the progress is necessarily attributable, 112 SERVICES FOR SMALL-SCALE INDUSTRY or wholly attributable, to the extension service activities. There will be difficulties in selecting the criteria by which progress is to be judged and in collecting data that will permit the measurement of progress in terms of these criteria. The subject could be discussed at considerable length. It may suffice to say, however, that careful thought and common sense should make it possible to devise and carry out research projects whose results would be, if not conclusive, at least highly suggestive. THE ORGANISATION OF RESEARCH It is difficult to generalise about the organisation of research. For reasons discussed briefly in Chapter III and having to do with the spreading of overhead costs and the full utilisation of the services of trained personnel, research will often be undertaken by agencies or institutes that provide other services—notably consultancy, training and information services—as well. Considerations affecting the degree of centralisation or specialisation of research (by region or by branch of industry) as of other extension services were also discussed briefly in Chapter III. In an institute specialising in technological research three groups of functions can usually be distinguished, namely (a) research proper, including laboratory experiments and tests, experimental work in pilot plants, if any, and ancillary operations carried out in the workshop; (b) services, including documentation, library, and perhaps translation and patent services; and (c) administrative functions. This grouping of functions may appropriately be reflected in the organisation chart of the institute, giving some such pattern as this: GOVERNING BOARD DIRECTOR ADMINISTRATIVE DEPARTMENTS Secretariat Personnel office Finance and accounts RESEARCH DEPARTMENTS Laboratories Pilot plants Workshop SERVICE DEPARTMENTS Documentation Translation Library Patents RESEARCH 113 of course, if other services, such as consulting and training, are also provided, the organisation will have to be more complicated. Research results are generally the product of teamwork rather than of the work of any one individual. In organising particular research projects, the constitution of the research team is therefore of great importance. A team will often be organised on an ad hoc basis with a view to pooling the knowledge and experience required to tackle a particular problem. If knowledge in a variety of different technical fields is called for, the team may include members of different departments of an institute. A team may also with advantage include some members whose interests and aptitudes are mainly in the field of basic science and others who are concerned mainly with engineering and practical application problems. When experimental work is being done in a pilot plant and it is desired to estimate the costs of alternative methods, a cost accountant may be associated with the team. A representative of the sponsor of a research project may sometimes also serve as a member. A team leader will be appointed to guide and coordinate all phases of the project. As already pointed out, it may be necessary on certain types of projects for industrial engineers and economists to work in very close co-operation, and the question may therefore arise as to whether economic research should be carried out by the same agencies as carry out technological research. The answer will depend largely on how far it is intended to carry out projects that will call for continuous co-operation between industrial engineers and economists. Economists will not need the equipment required by the engineers, and they will need an entirely different type of library and documentation service. The type of books and periodicals required will, on the other hand, be similar to those needed for economic research on other problems than those of smallscale industries, and it may be preferable that economic research into problems of small-scale industries should be undertaken by agencies, either universities or special research institutes, carrying out economic research of a more general character. Research into problems of smallscale industries has been carried out along with other types of economic research by the Oxford University Institute of Statistics *• and the Netherlands Economic Institute, among others. Economic research is not included among the functions of the Swedish Government Institute for Handicrafts or of the Netherlands Industry Assistance Service. In India, on the other hand, the small-scale industries extension service does 1 See, e.g., H. F. LYDALL: "The Impact of the Credit Squeeze on Small and Medium-sized Manufacturing Firms ", in The Economic Journal (London, Royal Economic Society), No. 267, Sep. 1957, p. 415. 114 SERVICES FOR SMALL-SCALE INDUSTRY employ economists as well as engineers. They serve on the same teams and co-operate in the preparation of economic surveys and " industrial outlook " reports.1 1 For further details, see Appendix I. CHAPTER VII FINANCIAL AND PHYSICAL FACILITIES FINANCIAL ASSISTANCE As pointed out in Chapter II, a chronic shortage offinancialresources, both for renewing and expanding equipment and for meeting the running expenses of the business, is one of the most widespread and typical characteristics of small industry in all countries. The cost of handling small loans, including investigation of the credit standing of loan applicants, and the risk of default are factors placing small firms at a disadvantage and tending to raise the rate of interest charged to small borrowers. The capital needs of small-scale industry, as of all industry, fall into three main categories : owned capital (also called " proprietorship ", " equity " or " risk " capital), long-term loans and short-term credits. Owned capital, as its name implies, has to be owned, not borrowed. It consists of the original contribution of the owner or owners, together with reserve funds accumulated out of past surpluses. It is intended to absorb the impact of unforeseen financial difficulties and to protect creditors, if any, against the danger of default. It is thus the capital which the owner is prepared to run the risk of losing—whence the name " risk " or " venture " capital. Long-term loans are required, over and above owned capital, for long-term financing of fixed assets. The need for long-term loans is often greater at some periods in the life of a firm than at others because investments in new plant and machinery are, for good reasons, often concentrated over a fairly short span of time rather than spread out evenly over a long period. The function of short-term credits, finally, is primarily to keep the firm going—to finance stocks of raw materials, goods in process, finished products and accounts receivable. These credits are mostly of a selfliquidating nature and are intended to span the interval between paying out money for materials and wages and getting it back in the form of sales proceeds. Since conditions are liable to vary considerably from one country and from one industry to another, there are no hard or fast rules as to the 116 SERVICES FOR SMALL-SCALE INDUSTRY relative importance of these various forms of capital, but various balance sheet ratios which will be discussed further need to be kept under careful review. The sources of funds to which a small business may turn vary from country to country. Many small undertakings are started out of the personal savings of the owner. These may be supplemented from a number of other sources. For instance, the owner may be able to borrow from relatives, friends or professional moneylenders. He may be able to obtain credit from suppliers, or tighten up the credit that he gives to customers. He may also be able to obtain loans or overdrafts from banks; in most countries ordinary commercial banks prefer to grant loans or overdrafts only for short periods, though if they are satisfied with the security they may be willing to renew these repeatedly and so convert them in practice into longer-term credits. Otherwise, longerterm loans may be secured, usually on the security of the businessman's fixed assets, from finance houses, mortgage banks and other investing institutions. Finally, in many countries special institutions have been set up or special arrangements made in other ways for helping to meet, on favourable terms, the capital requirements of small businesses.1 The individual small businessman may retain, and often improve, his access to these sources of loans, while at the same time bringing fresh capital into the business, if he converts the latter into either a partnership or a jointstock company. These various methods of raising money are not, however, available in all countries to the same extent. In the more highly developed countries loans can usually be obtained from banks and investing institutions provided the firm can offer what they consider to be adequate security; but it may not be easy for small firms to do this, and this is one of the reasons why so many governments have provided special facilities for helping to meet the financial requirements of small businesses. Many underdeveloped countries, notwithstanding the efforts that have been made to modernise their banking systems and credit institutions, do not have even the facilities that existed in Europe at the time of the Industrial Revolution, when the money and capital markets existing today were already fairly highly developed. In countries in which banks and other credit institutions are few and dispose of scanty funds, small businesses are often obliged to depend for credit to an unhealthy degree on merchants and dealers of various kinds. In Asia, for example, the moneylender who extorts a usurious rate of interest is quite a prominent figure. He has been much abused, but his risks are high. The rate of interest 1 The role of co-operative credit societies in this connection is discussed in the next chapter. FINANCIAL AND PHYSICAL FACILITIES 117 he charges frequently places the borrower permanently in debt. If the moneylender is a middleman-merchant, the entrepreneur often has to place himself completely in his hands for his supplies of raw materials and the distribution of his products. Moreover, small entrepreneurs in country districts often use the merchant as a source of temporary loans for marriages, funerals and other social expenditure. In these various ways the small entrepreneur may almost entirely lose his freedom of action: if an occasion for a sale at a higher profit arises he may not feel able to take it for fear of offending his principal customer, the mainstay of his business. He may be equally unable to take advantage of an opportunity for purchasing materials from a different and cheaper source of supply. For reasons of this kind it is especially important in underdeveloped countries that governments should do all they can (consistent with the shortage of capital and the many competing demands for it) to make sure that loans are available on reasonable terms for deserving small businesses. We are not concerned here with the sources of funds available to small firms through ordinary commercial channels in the absence of special arrangements, but rather with the special arrangements that may be made by governments, by associations of small producers or through some combination of government and joint action, to supplement the financial facilities available to small firms on ordinary commercial terms. Some attention will also be given to the question of how credit institutions investigate applications for loans and determine a firm's credit standing. Owned Capital The most crucial problem in the financing of small-scale industry is usually that the owned capital is insufficient. Admittedly, this is not a problem peculiar to small undertakings; it is encountered in many undertakings of all sizes. Nor is it by any means confined to countries that lack a well developed capital market, although it is likely to be particularly acute in such countries. The explanation of this state of things is the obvious one that capital—and particularly " risk " capital which owners are willing to run the risk of losing in the hope of high returns—is scarce. It is only natural that many people should not be prepared to risk their money by becoming part-owners of an undertaking, even though yield expectations may be good. Small savers, in particular, may prefer to place their money on a deposit account or in government bonds in spite of their having a much lower yield. They are usually concerned chiefly with ensuring that their money is not tied up but can be withdrawn 118 SERVICES FOR SMALL-SCALE INDUSTRY at short notice without the risk of losing part of it. But even small savers who might be willing to accept greater risks in return for the prospect of higher yields may be prevented from doing so by a rather widespread ignorance about investment in shares. Even in a country in which people are comparatively well educated and well-to-do—namely, Sweden—a recent survey of savings, incomes and finance in individual households carried out by the Bureau of Economic Studies showed that three-quarters of those interviewed had no views whatever on the advantages or disadvantages of share-owning, and 60 per cent, of them did not even know where to buy shares. 1 One inference to be drawn from this is that much information needs to be provided if small savers —who in some countries now constitute a much more important potential source of savings and investment capital than in the past—are to play a larger role in supplying industry with the funds needed for renewal and expansion. Even, however, if it should be possible to increase the total supply of risk capital in this way, it is far from certain that small-scale industry would automatically benefit therefrom. A public issue of share capital is generally successful only in the case of firms of a certain size and standing, quite apart from the fact that the costs are often disproportionately high for a firm that wants to raise only a relatively small amount of capital. One way of meeting this difficulty is to set up special investment institutions of a sufficient size and standing to be able to make public issues of shares. Small firms in need of additional capital can then turn to the investment institutions and, if found sound and credit-worthy, can obtain equity capital from them against the transfer of shares or by otherwise ceding part-ownership. In the United States institutions of this type have been in existence for many years. Thus, privately sponsored civic corporations for the development of new and the expansion of existing local enterprises date back to 1911. They are run on different lines. Some of them create a fund by asking a group of leading citizens to subscribe to their capital or to underwrite a public issue, and out of this fund small enterprises can obtain capital if their owners are judged to be sound businessmen and the project is held to have prospects of success. Other organisations create a similar fund which is used only to finance inquiries into the credit standing of applicants and the provision of engineering and other counselling faculties. When a project offers good prospects the members of the organisation can make investments themselves or try to find other 1 Hushâllens Sparande Ar 1955, Del I, Meddelanden frân Konjunkturinstitutet, Serie B : 25 (Stockholm, Konjunkturinstitutet, 1959). FINANCIAL AND PHYSICAL FACILITIES 119 persons willing to do so. It is not unusual for these corporations to have a standing list of prospective investors. Their activity has been on a fairly limited scale. One of the oldest and most soundly managed of the corporations has, on an average, given assistance to not more than ten firms each year over a period of nearly 40 years. They have also been very selective in their policy; a case is recorded in which more than 1,000 applications were received in one year, of which only 58 were considered deserving of close investigation. Even though, as experience in the United States suggests, the establishment of special investment companies may be expected to make only a limited contribution to meeting small-scale industry's needs for capital, this approach nevertheless seems to offer some very considerable advantages as compared with the traditional method of obtaining capital from friends or relatives having confidence in the business. For one thing, an investment company is in a much better position to evaluate the prospects of a venture. Its purchase of a firm's shares would normally be preceded by careful examination of the standing of the firm, and thus in a way be a guarantee of the soundness of the investment. Furthermore, an investment company is, in its capacity as a shareholder, in a position to supervise the use that is made of the equity capital provided. Finally, there is the added advantage that risks are spread; in an investment company investors do not " put all their eggs in one basket ". The United States investment companies discussed above have been established by private enterprise; but there might in some countries be scope for the setting up of similar companies by associations of small producers, with help from central or local government authorities. Besides, or instead of, raising additional owned capital from outside sources, smallfirmsas well as big ones may, of course, add to their owned capital by accumulating reserves. Tax policies that make this difficult for small firms can very greatly handicap their growth. Thus another important contribution that a government can make is to ensure that its tax policy affords all reasonable help and encouragement to the accumulation of reserves by small firms. This will depend partly on the level of taxation of business profits and partly on the way in which depreciation is treated for tax purposes. At any given level of taxation of business profits, the larger the allowance that may be made for depreciation (i.e., the larger the amount that may be treated as a cost and deducted from gross earnings before net profit is arrived at) the less will be the tax payable. In addition, more or less generous " investment allowances " may be granted, under which a certain proportion of net profits may be exempted from taxation, or taxed at a specially low rate, provided it is devoted to new investment. 120 SERVICES FOR SMALL-SCALE INDUSTRY Long-Term Loans Whereas an increase in equity capital from an outside source means a cession of part of the ownership of afirm,a long-term loan, like any other form of credit, normally gives the lending institution no direct influence on the management of the firm, except where specifically agreed upon, and apart from the rights which creditors normally enjoy in the case of default or bankruptcy. Another difference is that the funds obtained under a loan are repayable after the lapse of a certain period, which may vary from one year to ten or 15 years or even longer. Term loans, as this type of loan is often called, are not self-liquidating in the sense that many short-term loans are, but a loan that enhances the earning capacity of a firm will provide the means for its own repayment, generally in a series of instalments. There is reason to believe that in many small firms long-term loans take the place of owned capital to an extent that is due to the inadequate supply of equity capital rather than justified by strict criteria of business finance. This does not mean that facilities for obtaining long-term loans are abundant or even adequate ; it only means that it may be rather less difficult to raise money in this way than to raise additional equity capital —partly because of the special arrangements that have been made in many countries to increase the supply of long-term loans to small businesses.1 In point of fact, small business is commonly at a relative disadvantage in obtaining long-term loans as well as in adding to its owned capital. One reason for this is that small firms are generally unable to adopt the procedure most commonly used by large firms, namely that of floating bonds or debentures on the capital market. A second reason why small firms find it difficult to raise long-term loans is that commercial banks and certain other lending institutions are usually principally concerned with short-term credit extension, for lending institutions that accept short-term deposits have to watch their liquidity, and lending on a long-term or even medium-term basis may subject them to undue risks. In many countries, however, these institutions have sought ways and means of overcoming this limitation and increasing their capacity to grant longer-term loans to industry, including small-scale industry. A recent example may be quoted from Sweden where the commercial banks have set up among themselves a special 1 Nor should it be overlooked that owners of small firms may sometimes be disinclined to raise equity capital which may earn a higher return than has to be paid on borrowed money. Moreover, interest is a cost that can be deducted before net profit is arrived at, while dividends on additional equity capital have to be paid out of net profits. Reluctance to cede part of the ownership of a family business may also be an important consideration. FINANCIAL AND PHYSICAL FACILITIES 121 institute, with the sole purpose of granting loans to small businesses running for a period up to ten years. Most of the funds will be raised by floating bonds on the market. A third difficulty in respect of long-term loans to small firms is the provision of the security needed. It is a very common requirement— sometimes as a consequence of legal provisions or the by-laws of banks— that a loan must be covered by a specific security, either in the form of collateral such as mortgages, stocks or bonds pledged or deposited, or of a guarantee by a person other than the borrower. Small firms often have difficulty in providing an acceptable security for long-term loans; partly because they often need their assets as backing for shortterm loans and partly because of the difficulty in some countries of hypothecating or mortgaging land as security for loans. It would seem, however, that, at least in many countries, credit institutions today are less insistent on requiring collateral security than in the past. Yet- another factor that may sometimes make it difficult for a small firm to negotiate a long-term loan is that the borrower must expect to pay a higher rate of interest than would apply to short-term or seasonal credits, because of the greater risk involved and the cost to the lending institution of handling periodic payments over an extended period. While the cost of paying dividends on new equity capital may be much higher still if the firm flourishes, it will of course be necessary to pay interest on a long-term loan whether it flourishes or not. To fill the gap that often exists in the credit market in spite of the efforts made by private enterprise, governments in many countries have provided long-term financial assistance to small firms either directly or indirectly. In so far as state schemes contain an element of subsidy by providing loans at lower rates of interest than are warranted by the risk or actual market situation, this is, of course, at the expense of taxpayers. The question of how much public money should be spent on financial assistance to small industry thus raises important issues of public policy that will not be discussed here, save to point out that there are two questions of priority involved: first, given the shortage of capital and the many competing demands for it, and given the broad economic and social objectives of public policy, how much public money should be spent on all forms of assistance to small-scale industry; and, second, how much of this should be devoted to financial assistance, as distinct from other forms of assistance such as the establishment of advisory, training and research services. As regards the form which state assistance should take, two lines of approach are, broadly speaking, possible. One is the estabhshment of financial institutions wholly owned and operated by the government. 122 SERVICES FOR SMALL-SCALE INDUSTRY It would, however, seem that this system is relatively uncommon. One explanation may be that entrepreneurs are often reluctant to turn for help to purely or predominantly state-owned institutions, lest this involve losing some of their freedom of action. Provided on a broad scale, such assistance may result in the government ultimately becoming a major owner or creditor of small-scale industry. Moreover, the danger exists that political pressure will be brought to bear upon government credit institutions. Whatever the reasons may be, governments have generally preferred to render their financial assistance in an indirect form, often by setting up finance corporations owned and operated jointly by the government and private institutions, and sometimes in the form of government guarantees for loans extended by private institutions. Government guarantees are a useful form of assistance.1 If there is careful investigation of applications for loans and supervision of their use, such guarantees should involve little actual cost to the government, but the fact that they exist may make it possible for private or co-operative enterprise to lend considerably more than would otherwise be considered safe. Arrangements may also be made, with or without government assistance, for insuring against the risk of default. Under such arrangements a contingent liability of uncertain magnitude becomes converted into an annual premium of known magnitude. In some countries facilities have been provided for financing the hire-purchase of machines and other equipment by small firms. Such facilities are provided, for example, by the National Small Industries Corporation in India 2 and by the Industrial Loans Board in Burma. Applications for loans from government-assisted sources, like those for loans from private banking institutions, are as a rule subject to thorough investigation, even though it is generally intended that the lending policy should be fairly liberal. Security requirements tend usually to be less strict than those applied by private lending institutions, and increased weight is attached to the professional skill and business experience of applicants. So-called unsecured loans, i.e. loans based wholly on confidence in the borrower, may be granted in some countries. It is sometimes a condition for the granting of a loan from state funds that the borrower should have insufficient resources of his own and should not be able to obtain a loan from ordinary banking institutions. Sometimes special conditions, designed to promote particular objectives of public policy, are attached to the granting of loans. For example, a 1 See, for example, M. HOUIN: "Les garanties en matière de crédit", in Le financement des petites et moyennes entreprises (Rennes, Centre régional d'études et de formation économiques, 1956), p. 67. 2 See Appendix I. FINANCIAL AND PHYSICAL FACILITIES 123 firm may be eligible for a loan from public funds, or may receive a loan on specially favourable terms, only if it is situated in an area in which there is surplus labour, or in which housing is available for workers. In Norway a state-financed industrial fund extends loans primarily to enterprises in areas where industrialisation has so far made little progress. Most industrialised countries today have state-financed institutions or schemes to help small business in obtaining long-termfinancialassistance. A number of examples are given in Appendix I, and facilities provided in France, the Netherlands and the Scandinavian countries are described at greater length in Appendix IV. Many of the less industrialised countries have established similar machinery. In 1953, for example, a special institution was set up in Mexico to facilitate the provision of loans to small industry. This is likewise described at greater length in Appendix IV, as are also facilities provided in Japan. Short-Term Credits It is usually less difficult for small firms to obtain short-term than longer-term credits. Short-term credit is extended in two main forms: bank credits and commercial credits from suppliers. The typical shortterm bank credit was—and in some countries still is—the bill of exchange. Under this arrangement, a firm buying materials or supplies, instead of paying cash for them, accepts a bill of exchange drawn on it by the supplier. The supplier discounts the bill for cash at a bank, and the bank recovers the amount from the acceptor of the bill when it matures, perhaps 90 days later. Nowadays, bills of exchange are used less, and overdrafts—i.e., authorisations to draw cheques on a bank up to a certain amount—are used more. Interest is charged only for the actual credit utilised; in addition, the customer is sometimes charged a minor commission on the whole amount of the credit authorised, whether utilised or not. Commercial credits from suppliers are a common and natural form of short-term finance. They may, however, be more costly than is commonly realised.1 In most countries there would seem to be less need for special state measures in the field of short-term than of long-term finance. In many industrially advanced countries there is strong competition between 1 Though terms of payment vary considerably, it would appear that a rather usual practice is to grant a 2 per cent, cash discount when payment is effected within ten days and, beyond this, to charge net price up to 30 days. If a small firm cannot avail itself of the discount this means that it is paying 2 per cent, for disposing of the creditor-supplier's money for 20 days. On an annual basis, this comes to over 36 per cent. 124 SERVICES FOR SMALL-SCALE INDUSTRY different banking institutions granting short-term loans. But in many less developed countries the credit system is not sufficiently well developed or widely spread to meet the needs of small industry for short-term credits, and in these countries, as mentioned earlier, many small firms are in the hands of moneylenders who charge very high rates of interest, partly because their risks are high, but partly because the small firms have nowhere else to turn. Where this is the case, action by the authorities to foster and encourage the growth of banking and savings institutions and, if necessary, to set up such institutions themselves, may be of great value. Co-operative credit societies, which are discussed in the next chapter, may also have an important role to play. Investigating Credit Standing and Supervising the Use of Loans When making an application for a loan, particularly for a long-term loan, the applicant must be prepared to supply the lending institution with full information about himself and his business. On the basis of this information the lending institution tries to form an opinion of the quality of the management, the financial position of the enterprise and the prospects of the project for which the loan is requested, taking into account such factors as probable future demand for the product, the extent of competition, and other factors affecting the credit-worthiness of the enterprise. The lending institution may make the investigation itself, or it may seek advice from management consultants or other specialists before taking a final decision. Among the factors to be investigated, the lending institution will probably include *— (a) the personal qualifications and integrity of the applicant and his ability and experience as a manager. His personal finances will also be investigated to the extent that they affect the credit standing and earning capacity of the firm; (b) the firm's accounting methods, depreciation schedules, reserve policy, and similar matters. The methods applied may be far from satisfactory even though they comply with legal requirements. Indeed, the application of faulty principles regarding, say, depreciation, can often give the owner himself an erroneous picture of thefinancialposition of thefirm; (c) the earning power, liquidity and solvency of the business. Special attention will, of course, be given in the course of this financial 1 This presentation owes much to P. G. HASTINGS: Term Loans in Small Business Financing, Small Marketers' Aids, No. 22 (Washington, Small Business Administration, 1957). See also on this subject Le financement des petites et moyennes entreprises, op. cit., especially pp. 226 ff. FINANCIAL AND PHYSICAL FACILITIES 125 analysis to the projected availability of cash for repayment of the loan. The relationship or ratio between various items in the firm's balance sheet will probably be closely scrutinised. For example, if a firm's " proprietary ratio " (the ratio between its owned capital, including accumulated surpluses, and its total liabilities), or its " working capital ratio " (the ratio of current assets to current liabilities) or its " quick assets ratio " (the ratio of current assets excluding stock on hand to current liabilities) * are lower than is usual among similar firms in the industry and country concerned, the reasons for this state of affairs will probably be thoroughly examined in the light of the further explanations that the applicant may be able to give ; (d) the state of inventories, if any. It may be that the entrepreneur has valued his stocks too optimistically and not taken into full account the possibility that, for instance, part of the inventory is made up of not fully marketable goods. The present value and probable rate of depreciation of fixed assets—particularly of any that may have been offered as security for a loan—will also be appraised ; (e) market prospects for the merchandise or services sold by the firm. This is of particular importance if the funds borrowed are to be employed in the manufacture of products not introduced earlier on the market. This part of the investigation is perhaps the most difficult, since there are relatively few objective criteria on which to base judgment. It may often be that the applicant tends to overrate the market prospects of a product whereas, on the other hand, the lending institution may take too cautious a view. The applicant will probably in many cases be given the benefit of the doubt, provided he has on earlier occasions shown sound judgment; (f) probable effects of a possible recession or other contingency on the business. As far as business fluctuations are concerned, there is a great difference between various types of goods: some are much more sensitive than others to a downturn in business conditions. This part of the analysis will also take into account special risks connected with credits intended to be used for the production of goods for export, due to possibilities such as the imposition of higher tariffs or quota restrictions in importing countries; and (g) the particular purpose or purposes for which a loan has been requested, and whether the firm may not have other and more urgent needs that have not been recognised by the management. 1 For more detailed definitions see, for example, A. A. FITZGERALD: Analysis and Interpretation of Financial and Operating Statements, Commonwealth of Australia, Department of Labour and National Service, Industrial Training Division, Technical Publication No. 24 (Melbourne, 1946), p. 71. 126 SERVICES FOR SMALL-SCALE INDUSTRY Although the " vetting " of credit applications primarily serves the purpose of protecting the lender from losses, the applicant too may often derive benefit from a thorough investigation. It may well be that he has overrated the earning prospects of a new investment by underestimating the extent of competition, the marketing costs or other factors. A careful investigation of his credit standing and of the prospects for the success of the project he has in mind may save an applicant from heavy losses. Or the lending institution may be able to suggest modifications which may make the new investment a much more profitable one. An examination of the financial management of a business may also lead to the detection of various forms of waste and other irregularities that impair the firm's earning capacity. It is, therefore, in the interests of both the lender and the applicant that loans should not be granted without careful investigation. This certainly applies as much to loans that are granted out of state funds as to loans from private sources. The procedures adopted for "vetting" applications for loans from small firms in a number of countries are described in Appendix IV. They commonly include arrangements for obtaining advice from committees on which small producers are represented. A loan once granted, the borrower is in many cases permitted full freedom in using the money extended to him. Supervision may be limited to an examination of the firm's balance sheet once a year. In other cases, however, the granting of a loan may be subject to certain conditions. The borrower may be required to use it for certain specific purposes, or he may be required to give up certain practices that are not approved by the lending institution or to adopt certain practices which it does approve of. Borrowers may be less disposed to resent supervision of the use of loans if they can be convinced that such supervision, like careful investigation of their credit standing, is in their own best interests, and that it often means continuing financial and technical assistance, given free of cost. Many small business entrepreneurs carrying out, perhaps single-handed, the whole range of managerial functions with little or no training, recognise that they need help and advice. One authority has pointed out that— . . . lending money to inexperienced small business people without supervision is often equivalent to pouring it down the drain. What these people need is first supervision and advice, and only secondarily capital. . . . Special financial institutions ought, therefore, to regard their main duty as being to have a staff of experienced business administrators who can give advice to small business people who ask for it (just as industrial consultants do in advanced industrial countries, or agricultural extension workers in the countryside). And when money is lent, its use should be supervised carefully; the officers of the institution should have power to enforce changes in managerial FINANCIAL AND PHYSICAL FACILITIES 127 practice, as a prior condition of the loan, and to check unprofitable practices at least until the loan has been repaid.1 A combination of financial and managerial assistance not only helps to prevent waste of scarce capital: it is also perhaps the best means of ensuring that managerial performance will improve. Good advice to managers is much more likely to be heeded when it comes from people who dispose of funds. There is, thus, a strong case for integrating very closely the provision of financial assistance with that of advisory and other extension services for small-scale industries. INDUSTRIAL ESTATES The purpose of special loan and credit facilities is to help small firms solve their financial problems by increasing the supply of funds available to them. Another approach to these problems is to take steps that will reduce the amount of funds they need. This can be done by enabling them to hire, instead of having to buy, land, premises and certain types of equipment. In a number of countries industrial estates have been set up, on which physical facilities can be hired by small businessmen on reasonable terms.2 This too may be done either by central or local government bodies or by associations, co-operative or other, of small producers, or through some combination of government and joint action. The establishment of industrial estates may serve other purposes besides reducing the amount of capital needed by an individual who wishes to set up a small business. They can be used to encourage firms to set up in areas in which it is desired to encourage the growth of industry—for example, for implementing a policy of industrial decentralisation or of encouraging the growth of industry in relatively depressed areas: in the United Kingdom, they have been used for both these purposes. They can also be used as an instrument for orderly town planning. The grouping of factory buildings on industrial estates may permit economies of scale in construction and maintenance, and in the provision of transport, power and other services and facilities that may be provided on a communal basis. Experience has shown that well 1 2 W. A. LEWIS, op. cit., p. 199. For a detailed study on the subject, published under the auspices of the International Industrial Development Centre of the Stanford Research Institute, see W. BREDO: Industrial Estates—Tool for Industrialisation (Glencoe, Illinois, The Free Press, 1960). This study is based on experience with industrial estates in Europe (where data were gathered for the Stanford Research Institute by the Research Institute for Management Science, Delft, and the Netherlands Economic Institute, Rotterdam), North America, India, Pakistan, and other places where industrial estates have been introduced. 128 SERVICES FOR SMALL-SCALE INDUSTRY designed standard factory buildings can be adapted without much difficulty to the requirements of firms in a wide range of light industries; thus the construction of such multi-purpose factory buildings instead of a single-purpose building such as might be constructed by an individual owner who had only his own requirements in mind reduces the risk of misdirected investment and of loss of capital if an individualfirmbecomes insolvent—a very important consideration for countries in which capital is scarce. Because of the economies that may be secured in these various ways (and reflected in the rents and prices charged to tenants for facilities or services provided) more small firms may come into being than could have been set up otherwise, and industrial growth may thus be stimulated. The concentration of small firms in industrial estates also makes for greater ease in the provision of technical and managerial counselling and training services, and of central processing or servicing facilities. The establishment of industrial estates has been a feature of British policy for the promotion of employment in so-called development areas —i.e., areas where there is a special danger of unemployment.1 In these areas the Board of Trade may build factories for letting to firms in suitable industries. The Board of Trade factories are built and managed by industrial estate companies. The directors of these companies are unpaid and are appointed by the Board of Trade, and their capital is provided from government sources. Industrial estates or trading estates have been set up in other areas besides the development areas. The earliest and perhaps the best-known of these is the Slough estate, covering 640 acres with 500 factory buildings occupied by 230 tenants in a wide range of industries and employing 25,000 workers. Though many small firms take advantage of the facilities offered on industrial estates, these are by no means confined to small businesses: as the abovefiguresshow, the average number of workers per tenant on the Slough estate is over 100. In India financial assistance from the central Government is available on generous terms to state governments for the development of industrial estates, including the acquisition of land, construction of buildings and factories, layout of roads and the supply of power and water. The factory buildings may be offered to small industrialists either on a rental basis 2, on a hire-purchase basis, or by outright sale.3 In selecting the location of industrial estates the criteria chiefly applied are— 1 See Board of Trade : Room to Expand : Facilities Which the Development Areas Offer to Manufacturers (London, H.M. Stationery Office, 1955). 2 In cases where it is necessary initially to fix a sub-economic rent the central Government meets half the losses over a period of three years. 3 In these respects the Indian estates differ from the British, which remain under single ownership and control. FINANCIAL AND PHYSICAL FACILITIES 129 (a) the desirability of relieving congestion in industrial areas in big towns; (b) the desirability of stimulating the growth of small industries in and around new townships established by major industrial plants ; (c) the desirability of decentralisation, involving suitable patterns of industrial development in small towns and large villages ; and (d) the desirability of meeting the special requirements of certain problem areas. In the early phases of the programme the greater number of industrial estates were established in large or medium-sized towns. However, while continuing to recognise that the requirements of urban areas have to be met, the Government of India has now laid special emphasis on the establishment of small industrial estates in suitable rural areas. Of 62 sanctioned industrial estates, 11 had been completed in 1958, and another 19 were expected to be completed in 1959. Among those opened in 1958 was the industrial estate at Guindy, Madras. This was established by the state government, with financial assistance from the central Government, at an estimated cost of 7,017,000 rupees. The estate, covering over 74 acres, was designed to accommodate 90 factory units, in three standard sizes, with all amenities provided. Of the 52 units completed at the time of the official opening of the estate by the Prime Minister of India, 44 had been allotted to small industrialists producing a wide range of merchandise, including hand tools, switch gears, spectacle frames, builders' hardware, and industrial leather belting and washers. Rents charged during the initial years are to include an element of subsidy. Workshops and service centres of various kinds have been set up near the estate for testing products, supplying raw materials at cost price, providing technical information and undertaking certain operations requiring costly machines which small units cannot afford to purchase. Facilities include a chemical laboratory, a model foundry and service centres for hand tools, electrical goods, and woodworking and timber seasoning. A " servicing corporation " has been set up for the purpose of purchasing essential materials, including iron, steel and coal, and supplying them to all units on the estate on a daily requirements basis, without requiring them to lock up their own capital. Another example of government initiative in this field is to be found in Nigeria, where an industrial estate has been established, as a pilot project, at Yaba, a suburb of Lagos. Tenants may acquire a licence to occupy a single unit, a series of units or a part of a unit, each unit being partitioned off so that the occupants are independent of each other. Besides providing factory space, the estate offers its tenants accountancy 130 SERVICES FOR SMALL-SCALE INDUSTRY advice in maintaining their books, and the services of an engineering workshop. Tenants are educated in correct maintenance methods for their machinery and plant (the maintenance of the buildings and facilities is included in the rent). This example shows that advice and assistance in dealing with managerial problems can well be combined with the provision of factory space and physical facilities, just as it can be combined with the provision of financial help. A special feature of the scheme is the engineering workshop, which contains some of the finest modern machine tools in Nigeria and employs trained machinists able to carry out engineering work not only for tenants on the estate but also, on a commercial basis, for outside firms. The estate has been designed for a total labour force of 200 to 300 workpeople, and includes a canteen for their use as well as racks for their bicycles and garages for the lorries of the tenants. To cover the whole cost of the amenities provided on the estate, including amortisation of the capital outlay, would mean that the rent charged would have to be so high that the type of tenant for whom the estate is designed would not be able to afford it, at least at first. Accordingly, the monthly rent payments have been graduated, increasing at the end of the second year and again at the end of the fifth year, so that it is not until five years have elapsed that the full economic cost is recovered. The type of industry which is considered suitable for the estate varies from food processing to light engineering, and includes upholstering, printing, tailoring, weaving, machine repairing, manufacture of electrical appliances, leather work, shoe making and joinery: . . . The industrial estate might be described as a nursery for industrial enterprise. After a few years on the estate tenants should have developed their industries to the stage where they can set up their own factories in one of the new industrial areas planned in the environs of Lagos. New tenants can then take their places, and in turn develop to the stage where they can launch out independently. Even before the estate was finished, a number of firms had signified their intention to take up workshop space, and only a few weeks after the completion of the estate all but eight of the units had been let. The scheme is operated and maintained by the federal Department of Commerce and Industries which provides the skilled engineers and accountants to advise the tenants on their maintenance and accountancy problems. If the estate is as successful as the present demand for space suggests it will be, there is no doubt that larger industrial estates must be set up in other areas of Nigeria.1 In Denmark and Sweden the initiative in providing physical facilities on favourable terms to small industrialists has been taken by voluntary associations with help in some cases from public sources. In Denmark 1 Federal Nigeria (Lagos, Federal Information Service), Vol. I, No. 11, Dec. 1958, p. 2. FINANCIAL AND PHYSICAL FACILITIES 131 examples are to be found of industrial estates owned by co-operative societies established for the purpose of financing their construction with the help of Marshall Plan funds. A site has been purchased at Valby on the outskirts of Copenhagen with very good communications and transport facilities. Finance has come from three sources—20-year loans at 5 per cent, from Marshall Aid funds, 40-year mortgages from a credit union, and the share capital contributed by the members to the co-operative societies.1 The share capital subscribed by each member is proportional to the amount of floor space occupied by him, at the rate of 55 Danish crowns per square metre (20 crowns per square metre of cellar space). The share capital is payable in instalments—20 per cent, when the co-operative society is formed, 50 per cent, during the construction period, and the final instalment when the member moves into his new premises. In addition, members pay rent to their co-operative society. The annual rent is at present equal to the share capital (55 crowns per square metre). It is used for paying interest and amortisation on the money borrowed, and for maintenance. As amortisation proceeds, the rent will be reduced. It is expected to be reduced by 10 per cent, after the first 10 years and by 50 per cent, after the first 20 years. The initiative in promoting the establishment of the co-operative societies was taken by a national association known as Dansk Arbejde (Danish Enterprise), whose main purpose is to promote Danish industrial development by providing various services to both large and small industry. About 20 small firms were established on this estate in 1957 and further building was in progress. They included, among others, a lithographic printing works, an upholstering firm, a paint factory and a number of metalworking establishments. Apart from the advantage of being able to borrow money on favourable terms from Marshall Aid funds, this method of financing the construction of small workshops has yielded a number of other advantages. The price of the land was lower than it would have been if purchased individually in smaller sites. Both the constructor and the architect—a specialist in his field—were able to provide their services more cheaply to the co-operatives than they could have done if they had been working for separate individuals. A small variety of standard designs were used in constructing workshops, and arrangements were made so that basic units might be combined in various different ways to meet individual requirements. A member who wanted some special 1 There are three co-operative societies which have purchased contiguous sites. Consideration was being given in 1957 to the possibility that they might amalgamate if difficulties arising from the fact that they bought their land at different times and at different prices could be overcome. 132 SERVICES FOR SMALL-SCALE INDUSTRY feature, e.g. an especially deep cellar, had to pay extra for it. A disadvantage is that there is no room for extension—or at least there is no certainty of being able to extend : there is only the possibility of buying out a neighbouring fellow member who may be willing to sell his share in the co-operative, as has happened in one or two cases. Power and heating are provided, and there is a central canteen ; each workshop has its individual washroom as required by Danish law. Other services may be provided centrally in the future; there was discussion in 1957 of providing a central transport service, a central bookkeeping service, and possibly a central correspondence office to deal especially with correspondence in foreign languages. In Sweden, the Stockholm Town Handicrafts Association (Stockholms Stads Hantverksförening), one of the local associations affiliated to the Swedish Handicrafts and Small Industry Organisation, has constructed a building in southern Stockholm in which floor space can be rented for 30 to 35 Swedish crowns per square metre per year. The original building contains 5,870 square metres of workshop space and accommodates 12 small businesses, including, among others, a printing works, a bookbinding estabhshment and a firm making pianos. An extension slightly larger than the original building has been completed and a second was being planned in 1957. Electricity and gas are provided. Each workshop has its own washroom. There is a restaurant which serves meals and where workers may eat their own food, and a sick room. It is claimed that the annual cost of hiring premises in this building is considerably lower than the annual cost of owning similar premises elsewhere. The Stockholm City Council has two buildings providing comparable facilities, and similar buildings exist in some other Swedish towns. CHAPTER VIII CO-OPERATIVE ASSOCIATIONS Small industrial undertakings may suffer from various disadvantages merely on account of their smallness. Admittedly, economies of scale are not equally important in all lines of business, and small firms are both more prevalent and more successful in some lines than in others; but, wherever economies of scale are important, consideration needs to be given to ways in which the disadvantages of smallness may be overcome. There are in principle two ways of overcoming these disadvantages. The first and obvious way is for a number of small firms to amalgamate into a larger unit. But this (which will of course mean that they lose their identity as individual small firms) will not always be necessary. Economies of scale may be important only in a limited number of processes. If those processes in which economies of scale are important can be " de-integrated " and performed by some outside agency on a relatively large scale for a group of small firms, the remaining processes may be performed just as efficiently in the small firms as in big ones. 1 Processes that may thus be " de-integrated " include not merely certain physical operations but also a wide range of services, including purchasing, marketing, transport, maintenance and repairs, research and training. The establishment of co-operative associations is one important way of helping small firms to overcome the disadvantages of smallness.2 It is not, of course, the only way. To some extent, as already pointed out, private enterprise actuated by the profit motive will tend to provide the facilities and services that small firms need: wholesalers and retailers, for example, relieve small producers in many lines of what would be for them the inordinately heavy cost of selling direct to final consumers. Thus, the process of marketing to the final consumer tends in many fines to be " de-integrated " spontaneously from the processes of physical production. Private businesses that do not exploit a monopolistic posi1 See above, Chapter I, pp. 22 ff. For a detailed discussion of the characteristics of co-operative societies compared with other forms of associations, see I.L.O.: Co-operation—A Workers' Education Manual (Geneva, 1956) ; and Co-operative Management and Administration, Studies and Reports, New Series, Mo. 57 (Geneva, 1960). 2 134 SERVICES FOR SMALL-SCALE INDUSTRY tion can provide other useful services for small firms. Trade associations may render important services to member firms. The establishment of small industry extension services and technological institutes may be regarded as methods of " de-integrating " and performing on a relatively large scale for a number of small firms such processes as training and research. But these things have already been discussed. What remains to be seen is what contribution can be made by the co-operative movement to the solution of these problems. Co-operative associations may not only help small firms to achieve economies of scale; they may also strengthen their bargaining position in the market. And, besides these economic objectives, the co-operative movement has equally important social objectives. It is a democratic movement aimed at economic and social well-being through self-help and joint action. A co-operative society is essentially a voluntary association of persons who have come together for their material and moral benefit, to conduct, at their own risk, and on the basis of equal rights and obligations, an undertaking to which, in order to meet common needs, they have entrusted one or more economic functions. In the field of small-scale industry, various functions and activities can be undertaken by co-operatives. Co-operatives may collectively buy raw materials and supplies on behalf of their members, they may market the products of members, undertake selected processing, transport, storage and similar operations, or render other services. The principles of co-operation can also be applied in the field of financing. The most intensive form of collaboration between members is realised when they decide to amalgamate their individual production processes into a single co-operative unit. In determining what activities can advantageously be undertaken by a co-operative, economic considerations are important. For example, among the range of processes undertaken in small firms, which are those in which economies of scale are important? Is it technically possible to " de-integrate " these from other processes ? But, although economic considerations may show where the greatest advantages from co-operation may be expected, the potential advantages will be realised only if there is a genuine will to co-operate (implying a willingness to accept the obligations as well as the advantages of co-operative membership) and only if the necessary physical and, above all, managerial resources and leadership are available. The attitudes of the people concerned towards co-operation—whether, for example, they wish to co-operate only for certain limited purposes or whether they wish to pool their resources in a more thoroughgoing fashion—and the quality of the leadership available are therefore no less important than economic CO-OPERATIVE ASSOCIATIONS 135 considerations in deciding whether a co-operative society should be set up, and with what functions. The question whether members or potential members live close enough together to co-operate effectively is also important. There is no one universally recognised system of classifying cooperative societies. Since the present work is concerned only with cooperatives in the field of small-scale industry, perhaps the most useful distinction will be that between " joint enterprise " co-operatives x on the one hand and " common facility " or " common service " co-operatives (sometimes called " common facility service co-operatives ") on the other. The former type of co-operative society is one in which members amalgamate their individual production processes and business operations in one unit, thus ceasing to function as individual enterprises. Members of the latter type of society maintain the separate identity of their operations, the society providing one or more specific facilities or services which they all need. Societies of the latter type may be further classified according to the functions they perform or the services they render, such as purchasing, processing or marketing. Joint enterprise societies are, by their very nature, composed of members working in the same industry; this is usually true of common facility societies too, although these may sometimes include members drawn from different industries, where this is compatible with the type of service provided. The Danish co-operative societies established to acquire land and erect factory buildings at Valby, described earlier 2, are examples of common facility co-operatives with members drawn from a variety of industries. JOINT ENTERPRISE CO-OPERATIVES A joint enterprise type of co-operative, as already explained, is one in which a number of small units or craftsmen pool their activities, under one or several roofs, for joint procurement of raw materials, production and sale of products. The operations of the individual members are amalgamated in the sense that control and direction of production and related activities are transferred from the individual members to the co-operative. Ownership of the material in process is normally vested in the co-operative, as is frequently that of the production facilities themselves. 1 In some countries in Europe, co-operative societies of a similar type are known as " workers' production co-operatives " or " workers' co-operative productive societies ". However, although a large number of these societies operate small and medium-sized production units, their operations are not confined to these sizes only. Some of the units owned by such societies are fairly large. s See Chapter VII, p. 131. 136 SERVICES FOR SMALL-SCALE INDUSTRY The case on economic grounds for the establishment of a joint enterprise society will be strongest when there are important economies to be derived from operating on a substantial scale, or from specialisation, in each of a number of different processes, and where these processes cannot, or cannot easily, be " de-integrated " from the others. These conditions may be found, for example, when heavy items of equipment have to be used in production, and at the same time the supply of raw materials and the sale of products can be more economically handled in bulk. Stone-crushing and manufacture of cane sugar are examples. In other cases it may be necessary to operate on a fairly substantial scale if full advantage is to be taken of the economies deriving from specialisation and division of labour and if production is to be of a satisfactory and sufficiently uniform quality. The skills required in certain industries, e.g. the production of lacquerware, are so varied that individual craftsmen or very small units may not be able to master all the skills that are required to produce a readily saleable finished product. The physical set-up of joint enterprise societies varies from place to place and from industry to industry. They may be organised more or less on factory lines, with production and related facilities under a single roof or in a single compound, as, for example, in the cases of the clothing, footwear and similar productive societies in England. Or such a society may have only its offices and possibly its warehouse and sales shop in a single place, production being carried out in a decentralised manner, as in the case, for example, of some of the handloom weavers' societies in India. The choice, where there is one, between centralised and decentralised production will depend partly upon cost considerations (e.g., which system will result in the lowest transport costs and permit the most efficient utilisation of equipment) and partly perhaps on historical and geographical factors (e.g., the origin of the society and the distance of the society's premises from the homes of the members). It may be noted that decentralised production implies a de-integration of certain functions, at least in a physical sense; and a question may arise as to whether, in conditions in which decentralisation is physically and economically possible, a joint enterprise society is the most appropriate type of society, or whether the purposes for which the members desire to co-operate might not be as well or better served by a common facility society performing only those functions which are to be centralised. In countries where extension activities have been organised for the benefit of small-scale industry, the centralised location of production as well as related facilities presents very great advantages in facilitating these activities and enhancing their effectiveness. CO-OPERATIVE ASSOCIATIONS 137 In a joint enterprise or productive co-operative, the organisation of the society in terms of the rights and obligations of members presents some difficulties. Participation of members in a joint enterprise society is represented by their contribution of (a) share capital and (b) labour, whereas in a common facility society it is represented by (a) share capital and (b) the use of the facilities offered by the society. The extent of the use by members of common facilities (e.g., the value of goods purchased through a supply co-operative) is more easily measurable than is the contribution of members in the form of labour. Labour contributions may be measured on the basis of the time during which a member has worked for the society, often with allowances for differences in the type and quality of labour, or on the basis of the quantity of a member's production, or on the basis of a combination of these factors. With a view to equalising the contributions of labour by different members, a revolving scheme of work is sometimes applied under which every member performs, in a work cycle, the same tasks as his colleagues. It is, however, evident that such a revolving scheme is not suitable if there are some functions that can only be performed, or can be performed better, by members who have special qualifications for certain types of work. In a joint enterprise society, goods are produced and sold on the society's account, profit accruing to or loss being borne by the society. In such a society, since members cannot wait for remuneration until the financial results of the co-operative are definitely known, they earn wages as an advance payment for their labour. These wages are based on the type of work they do. Thus, the machine operator, the clerk or the accountant earn different wages and salaries. In the case of production workers, the wages may furthermore be determined by the type and quantity of goods produced and delivered to the society. Normally, at the end of the financial year, the net proceeds of the society's activities are allocated to (a) a reserve fund; (b) interest on the share capital held by members ; and (c) a dividend or bonus to the members, which may be based on the wages and salaries earned by them during the year. 1 Rules of the society normally prescribe maximum or minimum limits for each of these allocations, and sometimes also prescribe the maximum which each member may receive in the form of interest and dividend 1 Throughout this chapter, in accordance with widespread co-operative usage, the term " interest " is used to denote payments made on the basis of shareholding; and the terms " dividend ,", " bonus " or " patronage refund " to denote payments in respect of the use made by members of the services of the co-operative or in respect of other forms of participation by members in its operations. 138 SERVICES FOR SMALL-SCALE INDUSTRY combined.1 Allocations may also be made for such social purposes (for example, to an education fund) as may be prescribed in the by-laws. Joint enterprise or productive co-operatives are to be found in a number of European countries, e.g. Denmark, France, Italy, the Netherlands and the United Kingdom, and in India, Japan, and a number of other countries in Asia and the Middle East. In Japan joint enterprise co-operatives are found mostly in the woodworking, food, metal, ceramics, chemical and printing industries. In the United Kingdom, most of the workers' productive societies are in the clothing, footwear, printing, building and allied industries. In Pakistan such societies are engaged in making cycles and cycle parts. There are about 680 such societies in France with more than 35,000 workers, and a turnover exceeding 400 million francs (new).2 They are strongly represented in the printing and the building and building materials industries and are also found in the furniture-making, textiles, leather and clothing, foodstuffs, glassware, diamond-cutting, optical instruments and watchmaking industries, among others. Some studies made during the past few years indicate that the earnings of workers in the productive societies in France were on an average 5 to 15 per cent, higher than those of workers in competing private undertakings.3 These societies are said to have been successful in providing stability of employment even during periods of economic crisis. The largest societies have their own pension schemes for workers and the smaller ones are members of joint pension funds. Moreover, since managerial posts in these undertakings are entrusted to workers freely elected by their fellow workers, it is claimed not only that there are good human relations in the undertakings, resulting in high productivity, but also that the system provides training for workers' leaders to undertake management responsibilities if they have shown themselves competent and reliable. COMMON FACILITY CO-OPERATIVES The examples quoted in the foregoing section show that the joint enterprise form of co-operative organisation has some impressive 1 From an idealistic standpoint, arguments are sometimes advanced in favour of an equal share in the net proceeds of the society for all members irrespective of their contribution. It is also sometimes suggested that net proceeds should be distributed on the basis of individual need. This approach, however, may prove difficult to apply in practice. 2 A. ANTONI: "Les co-operatives ouvrières de production en France", in Les annales de l'économie collective (Geneva, Centre international de recherches et d'informations sur l'économie collective), Nos. 527-530, May-Aug. 1957, pp. 373 and 376. s Ibid., p. 383. CO-OPERATIVE ASSOCIATIONS 139 achievements to its credit. The common facility type, which is now to be examined, is no less significant and is more widespread. The purpose of this type of society, as already pointed out, is to provide for its members one or more specific facilities or services, while the members continue to conduct the other operations involved in the production and sale of their products individually, in whatever manner they think fit. The types of services or facilities such a co-operative may provide—e.g., purchasing, processing or marketing—are varied. There is not much in common in the physical set-up of different types of common facility societies, since this depends on the types of services and facilities provided. A purchase and supply co-operative may have a warehouse, an office and a fleet of lorries ; a marketing or sales co-operative may have in addition a sales shop or even a chain of sales outlets; a processing co-operative would probably have a central workshop where the process was carried out on behalf of members ; and a co-operative providing other types of services, such as repairs and maintenance, might have a central workshop, a team of roving technicians, and perhaps a repairs and maintenance van. The operations of each of the main types of common facility co-operative can best be discussed separately, but there are certain more general characteristics which deserve attention first. A common facility co-operative may be either a primary (or local) society or a secondary (central or federal) society. The former is a society whose membership is composed of individuals, the latter a society whose membership is composed of primary societies of either the joint enterprise or the common facility type. For example, a group of powerloom weavers may form a co-operative for operating a powerhouse or a repair and maintenance service; this is a primary common facility society. Or a group of joint enterprise weavers' societies may form a co-operative to operate a sizing, dyeing and calendering plant; this is a secondary common facility society. One may also find other federal co-operatives whose membership is made up of secondary societies—for example, a group of secondary societies may form a federation to import materials or to operate a chain of sales outlets to exploit a far-flung market. Secondary and other federal co-operatives perform other activities besides buying, selling and processing. They may engage specialists to assist the member co-operatives in dealing with common legal, organisational, fiscal and other problems. Sometimes auditing, educational and other services are also organised by these higher-level societies. In addition, they maintain contact with governmental and semi-governmental bodies for the benefit of members and try to safeguard their interests at the national level. 140 SERVICES FOR SMALL-SCALE INDUSTRY In a joint enterprise type of society all business is done on the society's account. But in a common facility society goods and services are produced, sold or supplied to members either on the members' account, profit or loss being borne by them, or on the society's account, profit or loss being borne by the society. A common facility society may provide services on the members' account during the initial stages of its development. As knowledge of the methods of operation and nature of risks are gradually acquired, the society may begin to assume more risks and operations may be undertaken more and more on the society's account. A co-operative providing electricity for its members may divide the entire cost of running the installation, including appropriations to the reserve fund and interest, by the number of units of energy supplied. The members may then be charged on the basis of the number of units consumed by them. Here, the business may be said to be conducted on the members' account. To avoid all risk of loss to the society, however, members may have to be required to pay in advance. More generally, one may say that business is conducted on the members' account if members buy from a society goods or services at prices that equal the society's costs or, in the case of a marketing society, if members receive from the society prices equal to those subsequently received by the latter for the sale of the products, less the society's handling charges. In other cases the transactions are on the society's account and the risks are borne by it. For example, a raw materials supply co-operative may purchase materials for stock to meet the demands of its members as and when they arise, or a marketing society may acquire goods from its members for sale subsequently, the members being charged or paid prices based on market prices ruling at the time when they buy from or sell to the society. Thus if raw material prices fall between the time when the society bought them and the time when members buy them from the society, or if the prices of finished products fall between the time they are delivered by members to the society and the time they are sold by it, the society stands the loss; in the opposite cases it receives the profit. Members are thus relieved in their individual capacity of the risks associated withfluctuationsin the prices of materials or products held in stock (but stand to gain or lose in their capacity as members of the society). The net proceeds of the co-operative are allocated at the end of the financial year to (a) reserve and other funds, (b) interest on the share capital and (c) dividend or bonus to members. The usual principle, made familiar by the consumers' co-operatives that flourish in many countries, is that dividends x are proportional to the volume of business 1 Sometimes, in connection with this type of co-operative, also called " patronage refunds ". CO-OPERATIVE ASSOCIATIONS 141 conducted by members with or through the society. This gives an incentive to members to make as much use as they can of the facilities of the co-operative, which in turn helps to build up its size and strength. Common facility co-operatives may be classified according to the kind of service which they perform for their members. The main types distinguishable on this basis are briefly reviewed below. Purchasing and Supply Societies A purchasing (or supply) co-operative pools the requirements of its members and obtains the goods from primary producers, wholesalers or other sources. By placing larger orders than any one of its members could do, it may obtain discounts not available to them individually and it may benefit in other ways from a stronger bargaining position. It is often able to prospect for requirements over a wide area and negotiate with a number of potential suppliers, and may thus afford a means of escape from the dominance of a local middleman. In addition, such a co-operative may be in a better position than an individual small producer to control the quality of goods purchased. It may purchase only materials, or it may purchase and supply tools and equipment as well. It may undertake activities related to purchasing, such as transport, storage, and pre-processing of raw materials. In some cases a co-operative may be formed with the combined functions of supply and marketing, thus leaving the members to perform only the work of actual production. Purchase and supply co-operatives may be formed for a range of materials. However, if this range consists of items which differ widely in their sources of supply, or in methods of transportation or storage, the economies of group action will often be limited. For example, it may be difficult and uneconomical to combine in a single co-operative the purchase of yarn for weavers with that of iron and steel materials for blacksmiths. In such a case, moreover, the interests of the members are unlikely to be the same: some may want the society to use funds for one purpose, others for another, a factor which can seriously affect the internal unity of the society. It is therefore more usual for co-operatives of this type—as indeed for co-operatives handling other functions or services—to be organised on a single-industry basis. There are various ways in which such a co-operative can supply its members with the goods they require. It may secure indents from members, call for tenders, obtain the goods and distribute them to the members. On the other hand, it may buy when market conditions are favourable and hold stocks in anticipation of its members' future demands. In the first case, very little capital is required and the risks are 142 SERVICES FOR SMALL-SCALE INDUSTRY negligible, whereas in the second case more capital is required to finance the purchase and storage, and the risks arising from market fluctuations and storage are higher too. The pricing policies under the two methods are entirely different also. When purchases are made on the basis of indents, each shipment is dealt with separately, and the members take possession of their indented requirements after paying for their share of the total cost of the shipment. This total cost is the amount of the invoice increased by the working and other expenses incurred by the co-operative. When purchases by the co-operative are made in anticipation of demand, the same policy of charging a price that just covers costs could be applied, but in practice certain difficulties arise. In a falling market the loyalty of members will be strained if they are expected to buy from the society at a price sufficient to cover costs incurred by it some months ago, when they could now buy more cheaply elsewhere. The usual alternative is to charge each member a price equal to the market price on the date of purchase made by the member. If this policy is adopted it should be applied both on a falling and on a rising market. It will mean, as already pointed out, that the co-operative and not the individual member will bear the risks of price fluctuations. It will also mean that the co-operative must be financially strong to withstand losses in a falling market. It is advisable for cooperatives adopting this price policy to create special reserves for this risk. This pricing policy has the disadvantage that, since the prices charged to members are the same as the market prices, the advantages of co-operation are not self-evident. The financial advantages to members accrue at the end of the financial year, and even then only if the cooperative has done its business well. But these advantages can be very substantial. Purchase and supply societies have proved useful in a number of countries and in a number of industries. In Japan co-operatives in the small industryfieldwhich confine themselves to purchasing, or undertake this function in conjunction with other activities, number over 2,200. In India joint purchasing of raw materials such as cotton and silk yarn, iron and steel, cement, coal and coke for use by smallfirmsis extensively undertaken by co-operatives. Not only do primary societies undertake this activity, but in a number of cases^ as in the handloom industry, " apex " or secondary societies make bulk purchases of materials. These secondary societies provide considerable assistance for primary societies, which are often financially weak, in the purchase and supply of yarn. It appears, however, that the purchasing societies have had a strong position in respect of raw materials and supplies the distribution of which has been controlled by the Government. With improvements in CO-OPERATIVE ASSOCIATIONS H3 the supply position of these raw materials or relaxation of distribution controls, the position of these societies, in a number of instances, would appear to have deteriorated. Societies undertaking joint purchasing also exist elsewhere in Asia and the Middle East. In Burma, for example, six societies in the Inle Lake region, where silk weaving is carried on extensively, supply yarn to the owners of about 75 per cent, of the total number of looms in production. These societies, Uke a large number of weavers' societies in Burma, are solely engaged in the purchase of yarn. This area has about 6,000 looms and produces about half of all the silk lunggyis sold in Burma. Credit Societies From the point of view of an individual small producer, a co-operative credit society is rather closely analogous to a purchasing society. The one may help him to meet his financial requirements, the other his physical requirements, more economically than he otherwise could. The credit provided for members by a credit society may come partly from the savings and deposits of members themselves and partly from outside funds channelled through the society. There are numerous reasons why small producers may wish to form a credit co-operative : they may need relatively large sums of money in relation to their own resources in order to carry on various operations; they may be subjected to usurious pressure by local moneylender-merchants ; the facilities extended by normal banking institutions may be too limited or beyond the reach of the small man; or the terms of these or other alternative private sources of credit may be unfavourable. The credit co-operative makes use of the combined strength of its members in order to accommodate their individual credit requirements, and usually attempts to strengthen thefinancialposition of the body of members (as well as its own) by promoting thrift and saving habits among them. The financial resources of a credit society consist normally of share capital, reserves, deposits, and advances. The share capital and reserves constitute the society's " owned funds ". When thefinancialresources of members are limited, share capital may often be paid in small regular instalments, the payment of the first instalment entitling the payer to membership, but default in the payment of one or more instalments beyond prescribed dates resulting in forfeiture of membership. Until the society has sufficient owned funds at its disposal, it may have to rely heavily on borrowings (in the form of deposits or advances) in order to service its members. The society's ability to borrow is based on the liability of members to the society. This liability may be either unlimited, or limited in terms of afixedmultiple of the value of each share. 144 SERVICES FOR SMALL-SCALE INDUSTRY The major business of a primary credit society is the extension of credit to its members. As a rule, such societies provide only short and medium-term credit. Short-term credit may normally extend for periods up to one year, but is more generally granted only for a few months or weeks, in order to meet demands for funds to cover current expenses and the purchase of raw materials and consumables. Medium-term credit is required for purchase of machinery and for renovation of or additions to buildings and other fixed installations; it is normally given for periods varying from one to three or four years. The security in the case of both short and medium-term loans is primarily personal, although pledges of raw material stocks or equipment are sometimes given in addition. It is desirable for the credit co-operative to have access to sufficient resources to finance all short-term needs of members. Failing this, members may resort to outside borrowing, and if this is done without the society's knowledge the latter may overestimate the capacity of members to repay its loans. A credit co-operative should normally not extend medium-term credit without being sure of having either owned funds or medium-term deposits sufficient to cover all medium-term loans. Secondary societies in this field (sometimes known as co-operative district or central banks) serve a useful purpose in cushioning peakfinancialrequirements of member societies and draw deposits from them which they themselves can spare at certain times. Anyfinancialsurplus earned by a credit co-operative will mainly arise from the difference between the rate of interest that it charges for loans to members and that which it has to pay for funds it borrows. When both the persons providing funds and those needing them are members of the same society, interest charges can sometimes be a source of friction between members who save more than they borrow and members who borrow more than they save. Normally, the interest charged on loans to members is kept within reasonable limits, as the main object of credit co-operatives is to provide a loan service at moderate cost for small producers. In credit societies with unlimited liability, the customary basic procedure is for the annual surplus to be carried wholly to reserve, including provision against bad or doubtful debts; where such societies have share capital, interest on shares may be paid at a restricted rate after the reserve fund has grown beyond a certain limit fixed by law or the rules, and provided that a specified proportion of the disposable surplus continues to be allocated to reserve. In credit societies with limited liability, it is usual to stipulate that a specified proportion of the disposable surplus shall be allocated each year to reserve; that, from the remainder, interest at a restricted rate may be distributed on fully paid-up shares; and that any residue thereafter shall also be trans- CO-OPERATIVE ASSOCIATIONS 145 ferred to the reserve or placed in some other permitted fund within the society. In India most of the societies for handloom weavers started primarily as credit societies. However, these societies now engage in many other activities as well, such as yarn supply and marketing, because the need for these services has proved to be as great as the need for credit. A large number of central and state co-operative banks now provide credit for industrial co-operatives in the cotton and silk textile, coir and other industries. These are examples of secondary societies providing a service for primary societies. Special co-operative banks for small industries have been started in the states of Bombay, Mysore and Uttar Pradesh. A recent study indicates that only one out of six district industrial cooperative banks has been able to build up owned funds or loan business on any appreciable scale, and loans received from the Government constitute the major resource of the banks. 1 The urban co-operative credit societies in Germany started on the initiative of Schulze-Delitzsch in the latter half of the nineteenth century initially worked on a basis of unlimited liability, but gradually came to adopt limited liability on account of their scale of operations and varied membership. These societies, or " people's banks ", extend credit mainly to craftsmen, small industrialists and tradesmen and also, to some extent, to farmers. In Japan there is a Central Bank for Commercial and Industrial Cooperatives and a system of credit guarantees, which are discussed briefly in Appendix III. Processing Societies A processing society may undertake several types of processing operations. Pre-processing of raw materials may be undertaken before the members receive the materials for production purposes as in, for example, the preparation of clay for small potteries. Or a processing society may undertake the final production operations before the product goes to the market (as in the baking of ceramics or clay products). Again, it may undertake an intermediate production process, e.g. a group of small firms making brassware may establish a co-operative to operate an electro-plating plant and may take back the products for polishing after the electro-plating. Sometimes the size or cost of the equipment used for a particular process determines the need for co-operative processing : it will not pay to install costly equipment unless it can be rather intensively utilised. At other times the need for skilled personnel 1 Government of I r dia, Ministry of Commerce and Industry : Report on the Working of Industrial Co-cperatives, July 1958. 146 SERVICES FOR SMALL-SCALE INDUSTRY in a particular process determines the need for co-operative organisation. But in all cases the determining factor is the extent to which economies can be secured through joint action in a particular process. Processing may be combined with other functions performed by the same society. If the co-operative processing comes at the beginning of the chain of production processes it will be relatively easy to combine it with the purchase and supply of materials, and from the point of view of pricing policy the cost of processing may be regarded as an additional handling cost to the society, similar to that of storage, to be covered by the price at which materials are supplied to members. If the cooperative processing comes at the end of the chain of production processes it will be relatively easy to combine it with the function of marketing, and again the cost of processing can be regarded as an additional handling cost to the society, in this case to be deducted from the price paid to members. If processing is the only function performed by the society, the members may wish to fix a price that will only just cover the cost of the service provided, with a small margin for reserves and contingencies, or they may prefer to fix a higher price that will cover all risks, a high dividend accruing to members in years in which these risk contingencies do not have to be met. In either case, in estimating or determining costs adequate allowance should be made for depreciation in view of the need for replacing equipment, and for maintenance and repairs. A large number of co-operatives engaged in the processing of materials andfinishingof products for small undertakings exist in Japan. A number of countries in Asia and the Middle East have embarked on programmes for the establishment of such co-operatives as part of their small industry mechanisation programmes. In Indonesia, for example, central production or processing plants known as induks (the Indonesian word for mother animal) or " centrals " have been established in such industries as ceramics, leatherwork, metalwork, woodwork, umbrella-making, rubber and textiles. These " centrals " are organised either as co-operatives or as " foundations " (a pre-co-operative form of organisation intended to prepare the way for the establishment of a co-operative, but in the meantime managed by a government officer). The main function of these " centrals " is to provide mechanical facilities for the processing of raw materials or thefinishingof products. Some centrals also undertake purchasing and marketing operations; others provide in addition technical guidance for small units in their production operations. In India processing societies have taken varied forms, from the establishment of spinning mills for handloom weavers to the organisation of small electro-plating shops for brass workers in particular localities. The CO-OPERATIVE ASSOCIATIONS 147 co-operative cotton spinning mills in India are mostly owned and operated by weavers' " apex " or secondary societies. In some of them the cotton growers are associated with the handloom weavers. In other cases it has been found not convenient to attempt to make the same society serve the interests of these two distinct groups. Marketing Societies A marketing or sales society may serve simply as a sales agency, selling on the members' account, but usually it operates by pooling the output of a number of small producers. This kind of society provides a number of advantages for its members. Economies of scale in selling are frequently important. A salesman can book a large order just as cheaply as a small one. Besides incurring lower selling costs per unit by making fuller use of salesmen and sales facilities, co-operative marketing societies may be able to make contact with larger numbers of potential customers, perhaps providing a means of escape from the dominance of local middlemen and thus obtaining higher returns. They may undertake market promotion (e.g., by advertising, organising displays or appointing agents) in distant parts of the country or abroad. In addition, such societies may grade products according to quality, enforce quality standards in the market and pay members according to the grade of their products, thereby inducing them to improve quality. Being in constant touch with markets, they may advise members on market trends and alternative production lines. Finally, with their ability to pool market orders, they may have a steadying influence on the rate of production in individual units, which in turn leads to certain savings in costs. There are two main ways in which a marketing co-operative can market the products of its members, corresponding to the two main ways in which a purchasing or supply society operates. It may obtain orders, distribute these to its members according to certain agreed principles (e.g., equally, in proportion to the production capacities of each, or on the basis of work on hand and idle capacity) and set dates for the delivery of products to the society. On the other hand, it may purchase goods for stock, selling them either continuously or when market conditions are favourable. The latter procedure requires more capital and the risks are greater; the society will need sufficient reserves to meet losses on a falling market. The alternatives in the matter of pricing policies and methods of payment to members correspond similarly to the alternatives open to purchasing and supply co-operatives. Where individual orders obtained in advance are distributed among members, the members are paid on 148 SERVICES FOR SMALL-SCALE INDUSTRY delivery of goods to the society at a price representing the society's selling price less the amount required to cover its working expenses, appropriations to reserves and similar commitments. Where goods are purchased for stock, two alternative methods may be followed. Members may be paid an advance price on delivery of the goods. This advance price should be less than the final price. The co-operative settles its accounts with its members periodically on the basis of the final prices it receives, deducting enough to cover its expenses. The same kinds of difficulties are likely to arise as in a purchasing co-operative if the members are not obliged to sell through the co-operative at all times, and particularly if they sell outside the society when they can get a higher price by doing so. The second alternative is to pay the members a price based on the market price on the day of delivery (with the usual deductions to cover the society's costs). In this case, since the members cannot be asked to return the difference if there is a loss on sales, the co-operative takes the business risk on itself. Such an arrangement is sometimes criticised as contrary to co-operative principles, since members receive different prices for the same goods depending upon the date at which they are delivered to the co-operative. In all cases, the net results of the business and financial operations are accounted for at the end of the financial year and the net proceeds allocated to the members in the usual manner, dividends (or " patronage refunds ") being proportionate to the volume of sales to or through the society. In Sweden there are about 40 local handicraft societies which operate independently but which are associated together in a national promotional body. These societies service their member-craftsmen by providing patterns, models and sometimes materials, as well as by arranging for the sale of the finished products. The last-named service is performed either through the societies' own shops or through a joint marketing enterprise to which most of the local societies also belong. A similar pattern of organisation can be seen in the co-operative marketing societies in the small-scale textile and handicraft industries found in many Asian countries. The local co-operatives handle local sales along with other services, but a federal society helps in the exploitation of a wider market. A number of co-operatives in handicrafts in Greece (e.g., the rug weavers' co-operative at Arakhova) undertake marketing operations along with related activities such as market promotion and quality control of the products marketed. In Japan there are over 1,300 industrial co-operatives engaged in various kinds of marketing activities. Some merely assist the individual members in marketing their products, mostly by providing advice and facilitating contacts. Others sell the products themselves on a commission basis, and still others CO-OPERATIVE ASSOCIATIONS 149 purchase the goods outright from members and resell them. In addition to the normal type of marketing societies in the industrial field, a unique form of co-operative in Japan is the sub-contracting co-operative. This is a form of marketing society, since the main objective is to obtain orders for the member units, although other activities such as providing credit may also be undertaken. The greatest number of such co-operatives are to be found in the metal trades. Most of these co-operatives subcontract with one " parent " firm, but a few sub-contract with two " parent " firms. In certain respects the latter have some advantages over the former in that they are free to choose between contractors, but the former appear to obtain other advantages from the " parent " firm, such as technical advice and assistance, loans and lease of building space. Other Types Other types of societies may be organised to provide a variety of services and facilities other than raw materials supply, marketing and processing. For example, a co-operative may be formed to provide a design service for its members. Such a service is often combined with marketing, and may indeed be essential for efficient marketing, if differences in design and quality would otherwise prevent the pooling of the output of different small firms seeking to produce standardised products. Or a machinery repairs and maintenance service may be owned and operated by, say, a group of small powerloom weaving units. A pool of equipment (or tools) may be operated as a co-operative, permitting, for example, small producers of salt by solar evaporation to operate diesel pumps. Societies may be formed to provide storage and transportation services for groups of small producers. A building may be owned, and electricity, water or compressed air may be provided on a co-operative basis, although members may own their production equipment and conduct their production operations individually. Several of these services may be combined, or particular services may be combined with other activities such as supply, processing or marketing. The problems of pricing and the distribution of costs are similar to those of processing societies. The organisation of co-operative societies to provide services and facilities other than in the well-known fields of supply, marketing and processing provides scope for testing the co-operative idea in fresh areas of economic and social activity. Very often such a new service or facility is provided as an offshoot of an existing basic activity of a co-operative society, or is started as a " pre-co-operative " undertaking to be eventually converted into a co-operative one if it proves successful. In Ceylon, 150 SERVICES FOR SMALL-SCALE INDUSTRY Burma and other countries, repair and maintenance services have been established in this way for decentralised powerloom textile units. In India the industrial estates 1 may be regarded as a " pre-co-operative " form of organisation for the provision of building, electricity, water and other facilities to small-scale units. In Denmark the Association of Co-operative Laundries provides various services for its member cooperatives, including technical assistance. Some of the handicraft societies in Sweden are primarily marketing societies but also provide a design service for their members. The salt production societies in India are likewise primarily marketing societies, but also facilitate the use of brine-pumping equipment in common by their members. In Japan co-operative societies in thefieldof small industries provide a variety of other services. There are over 600 societies engaged in providing various kinds of welfare facilities including medical attention. THE CO-OPERATIVE AS AN ASSOCIATION A co-operative is an association of persons having common needs, which seeks to promote the satisfaction of these needs through the operation of a common undertaking or enterprise. The foregoing discussion has been concerned mainly with the co-operative as an undertaking or enterprise. The co-operative as an association, however, has certain institutional characteristics, of which the rights and obligations of members and the functions of the different organs of administration are among the most important. Membership of a co-operative association confers on each member of a primary society the right to one vote in the general meeting, and the right to stand for election as an office bearer. Whereas the rule of " one man, one vote " applies almost universally in primary societies, in secondary and other federal societies, where the membership consists of co-operatives and not of individuals, the voting rights of each affiliated society may be determined according to the size of its membership, or according to the volume of its business with the federal society in the preceding year or years, or by reference to a combination of these and other considerations. In order to preserve the democratic character of a co-operative institution, precautions are generally taken in secondary societies to ensure that a small minority of the members does not control the majority. In the matter of members' rights to the trading surpluses, the rule of equality that is normally applied in primary societies in matters of con1 See above, Chapter VII, pp. 128 ff. CO-OPERATIVE ASSOCIATIONS 151 stitutional organisation is often seconded by the rule of proportionality, under which (as already mentioned) the distributable surplus is shared by each member in proportion to the use he has made of the society's services. The obligations of membership include the duty to observe the rules of the society (which define, among other things, the obligations of members to subscribe to the capital of the society) and the obligation to refrain from conduct prejudicial to the rights of other members. The co-operative movement stresses the principle of mutual aid and looks to members to take an active interest and play an active part in running the affairs of their society. Loyalty of members towards a society built up by their own efforts helps to increase its size and strength and to enable it to take advantage of the economies of scale. The co-operative movement is essentially a voluntary as well as a democratic movement. People are generally free to join or not to join a co-operative society and to resign from it (subject to a reasonable period of notice and to certain safeguards ensuring that they discharge all their liabilities). The democratic nature of co-operative organisation means that the individual member can influence the society's conduct and course of development. His specific possibilities in this respect are defined in the rules or by-laws, and are largely exercised through the medium of the general meeting of members. The general meeting (which in very large co-operatives may be a meeting of representatives of members), holds the supreme power and is the source of all authority in the society. It has a determining function and a review or critical function. Broadly speaking, the determining function relates initially and basically to the adoption of the society's rules or by-laws (including the statement of the society's general objectives) and thereafter to any amendment to them; to the election and removal of the board of directors and such other committees as may be set up (e.g., supervisory or audit committees); to decisions or confirmation of decisions as to the disposal of major assets such as real estate; to the disposal of the trading surpluses according to the law and by-laws; and to the admission or exclusion of members. The review function of the general meeting relates to the control of the board's conduct of the affairs of the co-operative in relation to the society's broad objectives as laid down in the by-laws, on the basis of reports and audited financial statements submitted to the general meeting at least once a year. General meetings may, however, often be held more frequently: by-laws or rules commonly prescribe the periodicity of general meetings, and also provide for non-scheduled meetings if requested for a specific purpose by a sufficient number of members. At such meetings, on the basis of the pre- 152 SERVICES FOR SMALL-SCALE INDUSTRY determined agenda, or of a motion for the discussion of which a meeting may have been expressly convened, members have the right to ask questions, express views and adopt resolutions constituting guides or directives for the board of directors. In co-operatives with a very large membership, or covering very large territorial areas, an adaptation of the general meeting system may be desirable in order to keep the members fully in touch with the society (e.g., through the holding of " district meetings " which appoint representatives or delegates to the general meeting). The board of directors (or the " management committee ", as it is sometimes referred to) is responsible to the general meeting for ensuring that the affairs of the co-operative are conducted so as to achieve the objects set out in the rules or by-laws. In fulfilling this responsibility the board is required to exercise two major functions—that of formulating such policies as are necessary for the practical implementation of the stated objects of the co-operative, and that of supervising the application and execution of such pohcies by the manager and staff of the co-operative. It has also a representative function: the board of directors has the right and duty to speak and to make representations on behalf of the co-operative as such. The board derives its authority and powers by delegation from the members, in accordance with the rules or by-laws. Members elect and may remove the board at the society's general meeting. The members of the board of a primary co-operative usually serve in an unpaid capacity (although they may be paid expenses and, less often, fees for attending meetings of the board). The board may set up committees and subcommittees to help it to maintain close supervision over particular aspects of the operations of the society. The manager, or chief executive officer, is a paid official entrusted by the board with the day-to-day conduct of the operations of the cooperative, within the framework of the general policy or policies laid down by the board. It is usually his responsibility to procure the facilities and means, and to hire the staff, required for the practical operations and to co-ordinate and control them in a manner conducive to the success of these operations. He is in general charge of buying and selling, and will usually be responsible for fixing prices within limits laid down by the board. He will also be responsible for the accounts, cash and books of the society, and for drawing up the statistical reports and records required by the board. Inevitably, he has a good deal of responsibility not only for the current operation of the society's business, but also for forward planning. Co-operatives being business enterprises, it is therefore necessary for them to attract as managers persons with adequate CO-OPERATIVE ASSOCIATIONS 153 professional qualifications, and the rate of remuneration may be an important factor. Economy in salary scales may prove to be a false economy, particularly if the board itself is lacking in specialised management skills. ORGANISATION AND MANAGEMENT The internal organisation of a small industry co-operative depends on whether it is a joint enterprise or a common facility type of society, and on the type of service or facility it provides. Its success or failure will depend upon a number of factors. In the first place, a vigilant and forward-looking attitude on the part of members, leading to their active participation in the affairs of the co-operative, is of the greatest importance; a passive and uninterested membership discourages initiative on the part of the board of directors and the management and may tend to reduce their efficiency, at worst, it may encourage dubious practices on the part of those in a position of trust. Secondly, the functions and responsibilities of the general meeting, the board of directors, its committees and subcommittees (if any), the district meetings and committees (if any) and the manager need to be determined, defined and maintained. In determining these, a proper balance has to be maintained so that the organs having major executive functions are given " wide freedom of action but are subject to a vigilant control which gives aid or registers disapproval, without undue interference".1 If the various responsibilities have not been clearly defined, or have been determined in such a way that a proper balance has not been maintained, then difficulties are likely to arise in the working of the society. Broadly speaking, it should normally be the board's duty to work out general policies for implementing the society's objectives, and the manager's duty to develop and apply procedures for putting these policies into effect. Similarly, it is for the general meeting to consider and approve such policies and control their implementation. In most countries model rules or by-laws, based on the experience of successful co-operatives, are available as a guide to such matters for those engaged in establishing new co-operatives. But defining on paper an organisational structure that will provide the necessary checks and balances is one thing; maintaining it in a healthy condition is another. To no small extent this will depend upon the appreciation and understanding of members, board and manager of their respective roles. In the final 1 1.L.O. : The Co-operative Movement and Present-Day Problems, Reports, Series H (Co-operation), N o . 5 (Montreal, 1945), p. 165. Studies and 154 SERVICES FOR SMALL-SCALE INDUSTRY analysis, it will depend on the enlightenment and vigilance of the members as such, and this is one fundamental reason why an active and interested membership is so important. Thirdly, the range of functions and activities that a co-operative is called upon to undertake influences the complexity of the management functions. Usually a common facility society is easier to manage than a joint enterprise society. This statement may not hold good universally, because the type of activity and the geographical area covered by the society may bring in complexities far greater than the range of functions undertaken by it. However, the greater the complexity of operations, the greater is the need for professionally qualified management. This leads to the point that, fourthly, the success of a co-operative society is to a very great extent dependent on the quality of its leaders. The leadership role of the members of the board of directors and the manager is especially important. The chairman of the board may have a particularly significant part to play in this connection, since not only is he the official representative of the co-operative vis-à-vis the public, but it also falls to him to prepare the meetings, and he may be vested with authority to deal with a number of matters referred back by the manager between board meetings. Members of district committees too, where such exist, also form part of the leadership group. All these persons, if they are to provide effective leadership at their respective levels, should have the ability to look ahead, organise and co-ordinate action, and develop a team spirit. The board of directors provides the link between the will of the members and the expression of that will in the practical operation of the co-operative enterprise; it must therefore keep familiar with trends in the wishes of the members, on the one hand, and maintain close touch with the problems of the management on the other. A great deal depends, too, on the manager. In any fair-sized cooperative he is a full-time paid official. The board of directors and its committees, if any, meet only from time to time. They are composed often of busy people with many other preoccupations. They will probably not have the detailed knowledge of the affairs of the co-operative that the manager acquires in the course of his daily work. They must therefore rely greatly on the advice he gives them. He is responsible to them for the conduct of the day-to-day operations of the co-operative and all that this entails in the form of shaping his decisions to meet the requirements of the board of directors, organising economic activities and the work of the staff, and (in so far as responsibilities, such as purchasing, which affect the liquidity of the society, are delegated to him) maintaining the finances of the society in a sound condition. In a CO-OPERATIVE ASSOCIATIONS 155 large undertaking, he may be assisted by a group of specialists in various fields or be able to call on their services from time to time, but in a small undertaking he may be a " general practitioner " carrying out all the management functions. The detailed problems of management will vary from one type of society to another, depending upon the functions performed, but all types of societies have financial problems, and special importance attaches to the principles of sound financial management. Recommendations as to appropriations to reserves, decisions regarding the purchase of expensive items of capital equipment and negotiations regarding loans or credits will normally be matters for the board of directors, but sound advice on these questions from the manager will be of great value to the latter. CO-OPERATION AND THE STATE In some countries governments have attached considerable importance to the development of co-operative institutions as a means of harnessing and channelling people's impulses towards self-help and mutual aid in ways which will increase their efficiency in agriculture, small-scale industry and the distribution of essential goods. Depending on the degree of importance attached to the movement, governments have taken various steps to promote the formation and successful development of cooperatives. In some cases they have done no more than provide enabling legislation; in others they have gone so far as to accept responsibilities for guiding and improving the working of individual societies. A well designed legislative framework provides a basis for the smooth working of co-operative societies. The type of legislation varies from country to country. It may only give co-operative institutions a legal status; it may lay down in greater or lesser detail the conditions that must be fulfilled before a society may be registered as, and have the status and privileges of, a co-operative society; and it may define in greater or lesser detail the supervision to be exercised by the government to ensure that co-operative societies not only fulfil these conditions at the time they are registered, but continue to do so. In some instances, particularly in countries where the movement is still immature, the law may also provide for co-operatives to be accorded certain fiscal reliefs or exemption from certain dues. Government departments and agencies with responsibilities for promoting the co-operative movement have been established in various countries. Their tasks may be confined to such matters as incorporation, registration, de-registration and dissolution of co-operatives, and collec- 156 SERVICES FOR SMALL-SCALE INDUSTRY tion and maintenance of statistics, or they may be extended to cover some or all of the following functions : inspection and auditing of accounts, promotional or extension services, education of members and training of office bearers and employees of co-operatives, technical advisory services and evenfinancialassistance. In a large number of the more developed countries, most of the latter functions are carried out by co-operative institutions themselves. In less developed countries, where the co-operative movement is at an early and critical stage of development, it may be appropriate for guidance and help that later will come from central or federal co-operative institutions to be given by the government, e.g. in matters of publicity, education in co-operative principles and training in accounting and other management functions, and advice in dealing with management problems. A small industry extension service may provide advice and assistance to small industrial co-operatives as well as to other small businesses, or a separate service may be organised for co-operatives. Industrial co-operatives will normally benefit from the promotional and advisory facilities made available by the authorities for co-operative development in general. In addition, special measures may be adopted for the encouragement of co-operative organisation in the small industry sector. Thus the Government of India, in its Industrial Policy Resolution of 1956, affirmed the importance of building up a large and growing co-operative sector. Having regard to that objective it was decided that cottage and small-scale industries should be organised more and more on co-operative fines, so as to enable the small producer to secure the advantages of buying raw materials and selling his products on à large scale, of getting access to industrial credit and of utilising improved methods of production. The Second Five-Year Plan (1956-61) provides for an outlay of 2,000 million rupees for the development of small industry on thè above lines. Marketing assistance, credit facilities and the improvement of methods of production are some of the measures that are to be taken during the Plan period. Six all-India organisations have been established to deal with particular sectors of small industry; their purpose is to strengthen and foster specific industries, in particular by promoting the development of co-operative organisations. In Japan, too, the Small Enterprise Agency of the Ministry of International Trade and Industry, which is responsible for the small industry sector, places considerable emphasis on the development of co-operatives. Organisation of co-operatives in the small industry field is facilitated by the Smaller Industries Co-operative Act promulgated in 1949. The Agency helps the development of co-operatives by distributing educational material on such subjects as co-operative accounting and auditing; CO-OPERATIVE ASSOCIATIONS 157 it has established a system of surveying co-operatives by sending special surveyors who examine the working of individual societies and suggest possible improvements; it also grants certain subsidies in the initial stages of the formation of the co-operatives and performs various other functions. Government assistance to industrial co-operatives may thus be of a general or a special kind. In either case, its provision should be accompanied by recognition of the voluntary and democratic character of the co-operative movement, and of the importance of active participation by members in organisations which they should be able to regard as their own creation, built up (with help if necessary) by their own efforts. In this as in other fields there is much to be said for the view that governments should not do things for people that the people could reasonably be expected to do for themselves. APPENDICES APPENDIX I THE ORGANISATION OF EXTENSION AND SIMILAR SERVICES FOR SMALL-SCALE INDUSTRY IN DIFFERENT COUNTRIES : SOME EXAMPLES 1 Belgium Assistance to small-scale industry in Belgium is provided by a number of institutes and associations. One of these is the National Technical Assistance and Applied Research Centre (Centre national d'assistance technique et de recherche appliquée—CENATRA), a non-profit-making association, whose aim is to place at the disposal of small and medium-sized undertakings research services that will assist them in solving problems arising from the increasing complexity of economic organisation and will promote and facilitate their adaptation to changing conditions resulting from technical progress. It carries out technical studies of raw materials, products or services, installations, mechanical equipment and methods of work in small firms, and research into methods of increasing the output and improving the quality of products or services through a continuous adaptation to technical progress. With a view tò stimulating the rapid spread of technical progress, it provides a consultation service to which small and medium-sized undertakings may look for help in dealing with problems of a technical character that they cannot normally solve with their own resources. Another non-profit-making association which functions under the auspices of a government department (the Ministry for the Middle Classes) is the National Export Promotion Office (Office national pour la promotion de Vexportation) . This is concerned solely with small and medium-sized undertakings producing for export, and provides help only in dealing with commercial problems. Acting either on its own or through intermediaries, it seeks to put buyers and sellers in touch with one another and to extend foreign markets. It provides help in connection with packaging, dispatch, insurance, the financing of deliveries and, in some cases, the financing of production. 1 The pains taken by many people in many countries to provide the information used in the preparation of this and the following appendices are gratefully acknowledged. It is not possible to publish here more than representative selections in abbreviated form from the material so obtained. For information, or further information, about facilities and services provided in Argentina, Brazil, Chile, Colombia, Denmark, Egypt, Indonesia, Iran, Israel, Mexico, Pakistan, the Philippines, Turkey and Yugoslavia see United Nations: First Expert Working Group on Technological Centres, op. cit. (Appendices). See also Stanford Research Institute, International Industrial Development Centre: Notes on Small industry and Handicraft Development in Mainland China, 1952-1958 (multilithed) ; and, for information on Ceylon and Central America, " Establishment of Technological Research Institutes in Underdeveloped Countries ", in Industrialisation and Productivity, op. cit., pp. 63 ff. Reference should also be made to an international directory, recently published by the Stanford Research Institute, of organisations concerned with action and research in the field of small industry development : see Stanford Research Institute, International Industrial Development Centre: Small Industry Development Organisations—A Worldwide Directory, compiled by D. R. LIGGETT (Glencoe, Illinois, The Free Press, 1959). 162 SERVICES FOR SMALL-SCALE INDUSTRY There is also an Institute for Economic and Social Study of the Middle Classes (Institut d'étude économique et sociale des classes moyennes) established as a public body, which carries out studies of economic (including financial and fiscal) and social questions affecting cottage and small-scale industry and retail trade. It serves as a documentation centre and publishes the results of its work in a monthly information bulletin and in monographs and pamphlets. Other Belgian organisations which, without specialising in small-scale industry as such, provide help for small firms as well as large ones include the Belgian Productivity Centre (Office belge pour l'accroissement de la productivité), the Food Industry Training and Research Centre (Centre d'enseignement et de recherches des industries alimentaires) and the Belgian National Committee for Scientific Management (Comité national belge de l'organisation scientifique). Chile GOVERNMENT AGENCIES One of the functions of the Department of Manufacturing Industries of the Ministry of Economic Affairs (Departamento de Industrias Fabriles, Ministerio de Economía) is to promote the establishment of new industry, large¿ medium or small-scale. It is especially concerned with the location of new industry, endeavouring to prevent excessive concentration in the cities or in particular regions. AGENCIES IN WHICH THE STATE PARTICIPATES The Corporation for the Development of Production (Corporación de Fomento de la Producción—CORFO) was established in 1939 under the direction of a board presided over by the Minister of Economic Affairs, and including representatives of the Government, employees and workers. The Corporation has been concerned less with small-scale than with large-scale industry. It has, however, stimulated the development of the fishing industry, which consists essentially of small units, organising fishermen's co-operatives and granting loans to them for the purchase of equipment, such as motors for fishing boats. In collaboration with other agencies it established in 1953 an " Industrial Technical Co-operation Service " (Servicio de Cooperación Técnica Industrial) for the benefit of industrial establishments of all sizes, to which further reference is made below. The State Bank (Banco del Estado) is probably the most important of all Chilean agencies concerned especially with the development of small-scale industry. The Bank was established in 1953 through the amalgamation of a number of previously existing institutions, absorbing, in particular, the Industrial Credit Institute and assuming responsibilities for providing financial assistance to industrial establishments of all sizes. It is empowered— (a) to grant loans for all purposes connected with the development of industrial activities, including the purchase of land, machinery and raw materials, covering the costs of installing or repairing equipment, etc.; (b) to buy, sell and distribute raw materials; (c) to organise industrial co-operatives; and (d) to intervene, with the agreement of its debtors, in the direction and management of industrial establishments. By March 1957 it had extended credit totalling 6,965 million pesos, in 6,800 different operations. Law No. 11940 of 1955 laid greater emphasis on, and defined further, the responsibilities of the Bank for granting loans to small industrialists. This APPENDIX I 163 work is handled by the Industries Department of the Bank; this Department employs 100 highly qualified and experienced officials at the Bank's head office in Santiago and in its 147 agencies scattered throughout the country. The law provides that the Bank shall provide annually for an amount of not less than 650 million pesos to be granted in the form of loans to small industry. Of the funds thus provided 25 per cent, shall be available for applicants from the province of Santiago and 75 per cent, for applicants from the rest of the country ; 20 per cent, of each of these amounts shall be reserved for loans requested by persons having obtained certificates indicating that they have completed technical studies at a university, technical college or industrial school, or by workers or artisans with not less than five years' experience in industrial undertakings or workshops recognised by the Department of Industries of the Ministry of Economic Affairs who have shown a capacity for independent operation. Detailed information of the kind usually required in other countries has to be provided by applicants for loans. Having granted a loan, the Bank supervises the manner in which it is spent and the operations of the undertaking to which it has been granted. OTHER ORGANISATIONS ASSISTING SMALL-SCALE INDUSTRY By agreement between the Corporation for the Development of Production and the Institute of Inter-American Affairs1 (Instituto de Asuntos ínteramericanos) an Industrial Technical Co-operation Service (Servicio de Cooperación Tecnica Industrial) has been set up for the purpose of assisting medium-sized and small industry by introducing more efficient industrial techniques and stimulating and increasing the exchange of knowledge, methods and skills. The programme has included a visit to Chile by a group of North American specialists. The Service has established departments of productivity, industrial engineering, industrial training, cost accounting and industrial safety, each of which has been actively engaged in efforts designed to raise the level of productivity and in providing technical assistance for small industry. The plan of action drawn up by the Service in 1954 included— (a) the grouping of small industrial establishments in accordance with the type of production carried out; (b) the selection of one plant or workshop of each type as a " demonstration plant " presenting typical problems; (c) the organisation of courses for small industrialists dealing with basic aspects of productivity; and (d) diffusion of knowledge of the basic principles of industrial engineering, industrial training and costing by means of pamphlets and other printed material published by the Service2 and widely distributed among small industrialists. The technical assistance provided by the Service with a view to helping small industrialists to rationalise their operations has been provided free of charge. 1 This Institute handles the so-called " Point IV " programme of United States bilateral aid in the Western Hemisphere. ' Among the publications of the Service, mention may be made of the following : Entrenamiento industrial (Industrial training) ; Entrenamiento industrial para supervisores (Industrial training for supervisors); Entrenamiento para métodos de trabajo (Training for methods of work); Entrenamiento para relaciones en el trabajo (Training for good working relations); Importantes razones para prevenir accidentes (Important reasons for preventing accidents); Normas técnicas en la industria (Technical standards in industry); Empuje su producción y mejore la productividad (Increasing your output and raising productivity); and Estudio y operación de una pequeña fundición de hierro (Study and operation of a small iron foundry). 164 SERVICES FOR SMALL-SCALE INDUSTRY Between December 1955 and September 1956 the Service organised a free course for 15 directors of the Association of Small Industrialists, the principal purposes of which were to stimulate their interest in the problems of management of a small undertaking and to train them in ways of solving their problems. The programme for 1957 included other courses on problems of control, organisation, marketing and accounting in small undertakings. The Service has thus done much to draw the attention of small industrialists, who were formerly preoccupied almost entirely with such questions as the supply of credit, reduction of taxation and facilities for importing machinery and raw materials, to the management problems confronting the undertakings themselves. Denmark The Copenhagen Technological Institute is an independent institution, under the direction of a Board of Representatives comprising 44 members nominated by the Ministry of Trade, the Council of Handicrafts, the Federation of Danish Industries, the Confederation of Danish Trade Unions, the Municipality of Copenhagen and a number of other organisations and associations. The Board appoints from among its own members a Managing Committee of 14. The annual budget is of the order of 9 million Danish crowns, of which about half is received in the form of tuition fees and consultation fees, rather less than half in the form of a grant from the Government, and the rest in the form of grants from municipalities and various organisations and institutions. The Institute employs over 200 permanent staff members, and in addition engages about 300 part-time teachers or instructors for various courses. The Institute's teaching, advisory, experimental and research activities are carried out by its technical departments. Many of them have advisory committees to help ensure that their activities conform to the requirements of each trade. The technical departments are divided into four main groups, concerned respectively with metals and plastics, construction, chemistry, and works management. The first group (metals and plastics) includes the plastics department; the steel laboratory and hardening shop; the toolmaking department, machine laboratory and workshop; the automobile and motor department; the foundry department; the electrical and radio department; and the welding department. The second group (construction) is made up of the wood department (including the hand joinery, machine joinery, fungus laboratory and wood research department); the building department; the acoustics department; and the heating and ventilating department. The third group (chemistry) consists of the textile department (with laundry, dry-cleaning and dyeing, and textile chemistry sections); the painting department; the tanning department; the foodstuffs department (with milling, bakery and butchery sections); and the material-testing and analysis department and metal-finishing laboratory. Finally, the fourth group (works management) consists of a business economics department and a management development department. The Institute engages in three main types of activities, namely— (a) vocational courses, including courses on materials and technology, the practical use of tools and machines, and commercial subjects such as bookkeeping, costing and commercial law. The courses are designed for persons who have already completed apprenticeship training or other basic training in a craft. In 1958-59, 574 courses, including day and evening courses given in Copenhagen and courses given in the provinces, were attended by 12,368 students; APPENDIX I 165 •(b) consultations and advice on the basis of research and technical experimentation. Most of the technical departments have well equipped laboratories for testing materials, machines, tools and products. In 1958-59 about 38,400 major and minor consultations took place; and (c) a documentation service, comprising a library and reading room and a publishing department. The Institute has found it necessary to take steps to overcome the shortage of technical literature in the Danish language by publishing over 80 textbooks, dealing more especially with handicrafts. Most of these have been written by staff members of the Institute. The department of business economics provides advice and assistance to firms in all trades. Its activities fall under three main headings, namely— (a) teaching (in bookkeeping, cost accounting and management economics, courses in all subjects being specially tailored for different trades) ; (b) consultation (analyses of costs and profits, and assistance in tax problems); and (c) information (lectures followed by discussions on problems of business economics, and general economic information). The Institute thus provides help in dealing especially with technical, but also with managerial and financial problems, for firms in all or most branches of small-scale industry. It provides such help individually through vocational training courses and consultations and collectively through publications and in other ways. While it is mainly small firms which avail themselves of the facilities provided by the Institute, large firms are not excluded from the scope of its activities. It may be added that the Institute accepts and provides training, especially of a technological character, for large numbers of trainees from abroad, including trainees holding fellowships under the United Nations Expanded Technical Assistance Programme. The Institute was established in 1906. A second institute, founded at Aarhus in 1940, is run largely on the same lines but on a smaller scale. The two institutes are independent, but co-operate closely. India Small-scale industries in India are distinguished from village industries and handicrafts. Village industries are, generally speaking, of a traditional nature, catering for local markets. They come within the jurisdiction of the Khadi and Village Industries Commission. Handicrafts, which come within the jurisdiction of the All-India Handicrafts Board, are industries which have a special artistic value. The line of demarcation between small-scale industries and the industries described above is not always clear. In general, however, the smallscale industries sector is composed of firms of a rather larger size, employing up to 50 persons if power is used or up to 100 persons if power is not used, mostly organised on a small factory basis (i.e., with a more extensive division of labour in the manufacturing processes than is found in artisan workshops and household industries) and catering for a wider market. The following notes are 1concerned only with services provided for small-scale industries in this sense. 1 In view of the importance and special problems of the small-scale sector of the textile industry, a separate special organisation, namely the AU-India Handloom Board, has been set up to promote the development of this industry. 166 SERVICES FOR SMALL-SCALE INDUSTRY Under the Constitution, small-scale industries fall within the purview of state governments. The central Government's role is in the following directions: (a) evolving a co-ordinated programme for the development of small-scale industries through the agency of the Small-Scale Industries Board, which is an all-India body; (b) contributing a major portion of the finances required by state governments for the implementation of this programme through loans and grants; (c) providing direct assistance to small industrial units through the Industrial Extension Service and the National Small Industries Corporation; and (d) carrying out certain pilot projects, as in industrial estates at Okhla and Allahabad and in workshops for the educated unemployed. In the Second Five-Year Plan considerable emphasis is laid on the development of small-scale industries, and a programme to promote their development has been drawn up on lines that in general follow recommendations made in a report by a Ford Foundation team in 1954.1 The central Ministry having primary responsibility for this programme is the Ministry of Commerce and Industry, and the Minister serves as chairman of the Small-Scale Industries Board referred to above. The latter is composed of the Directors of Industries of most of the state governments, representatives of various ministries of the Government of India and of the Reserve Bank, the State Bank and the industrial sector, and a number of private persons appointed to the Board as specially qualified experts. Action to implement decisions by the Board is taken by the Ministry, and in particular by the Development Commissioner (Small-Scale Industries) who is an officer of the Ministry. He is assisted at headquarters by a staff of development officers. Some of these officers are technical experts in certain special subjects, but technical expertise is provided mainly on a decentralised basis through the Industrial Extension Service. This consists of a number of principal " small industries service institutes ", one for each state, reporting directly to the Development Commissioner, each under a director with a staff of technical officers and economists ; a number of branch institutes reporting to their respective state institutes; and a number of smaller units known as extension centres, which are in effect still smaller branch institutes, usually specialised in providing service for a particular type of industry in a given locality. In 1959 there were 15 full-fledged small industries service institutes and four branch institutes. The establishment of 64 industrial extension centres has been sanctioned, of which 16 have already started functioning. The whole Service in 1956 employed 146 technical officers and 83 officers on the economic side.2 The main functions of the Extension Service have been defined as follows : (a) to conduct economic surveys in particular industries and areas, making concrete recommendations for a development programme; (b) to advise small units on improved technical processes and use of modern machinery and equipment ; (c) to demonstrate the use of such modern technical processes through workshops in extension service centres; 1 Government of India, Ministry of Commerce and Industry: Report on Small Industries in India, by the International Planning Team, the Ford Foundation, 1954. • For further details see Government of India, Ministry of Commerce and Industry, Development Commissioner (Small-Scale Industries) : Small-Scale Industries: Industrial Extension Service (New Delhi, 1959). APPENDIX I 167 (d) to instruct small industrialists on proper methods of business management, including marketing; (e) to act as an information centre, and in particular to publish bulletins, pamphlets, model schemes and the like for the guidance of small industrialists; and (f) to carry out research on questions such as proper use of raw materials and improved designs of machinery, among others. An interesting feature of the programme is the scale on which it provides for economic surveys of selected industries and areas. The purposes of such surveys are (a) to provide background information for the formulation of government policy relating to small-scale industry—for example, to assess the scope for expansion in existing and new kinds of small industry, with a view to helping the Government to concentrate in the first place on those industries where there is not only no likelihood of displacement of labour but where wider employment opportunities are most readily available; and (b) to provide factual information and forecasts that will be helpful to small industrialists themselves. Over 140 economists and engineers have been selected and given training for this work. Most of them are located in the small industries service institutes at Delhi, Bombay, Madras and Calcutta and in the central office of the Development Commissioner. Experts from the Stanford Research Institute in the United States, at present five in number, have served as advisers in this part of the programme and in the training of economic investigation officers. The industrial economic research staff has prepared a large number of industry outlook reports, surveys of the industrial development possibilities of particular areas, with special reference to small industry, market analysis reports, and various other studies. Another interesting feature of the programme is the use of mobile demonstration workshops, a number of which are already on the road. There will eventually be 45, arranged in 15 units of three—one for carpentry, one for blacksmithy and the third for general servicing or some other particular industry. Units will be attached to small industries service institutes or branch institutes. They will tour the areas adjacent to the institutes, giving special attention to areas in which community development projects are under way, and remaining long enough at each centre visited to give effective instruction to village artisans. The Extension Service works in close co-operation with the state directorates of industries, and though its basic functions are to provide advice and help directly to small undertakings, its advice and services are at the disposal of the state governments when required. To provide the necessary liaison between the central and the state governments, six "Joint Development Commissioners " with regional jurisdiction have been appointed, whose functions include scrutinising and finalising state government schemes that require financial assistance from the central G overnment, expediting the implementation of schemes by the state governments, ensuring that they comply with the conditions laid down by the central Government for the grant of financial assistance and suggesting schemes that would comply with such conditions. They are the chief representatives of the central Ministry of Commerce and Industry in their regions. There is, in addition, a " National Small Industries Corporation (Private), Limited ", set up in 1955 to deal with commercial aspects of the programme that cannot be carried out effectively through departmental administration. It is organised as a private limited liability company, although its capital of 1 million rupees has been entirely contributed by the central Government, and its chairman is the Development Commissioner (Small-Scale Industries). 168 SERVICES FOR SMALL-SCALE INDUSTRY It is proposed shortly to set up four subsidiary regional Corporations, to be financed and controlled by the central Corporation. The work of the Corporation falls under three main headings, namely— (a) hire-purchase of machines. In co-operation with the Industriai Extension Service the Corporation finances the purchase of machines by approved applicants over a period which may be as long as six to eight years. Up to the end of October 1956, 489 machines valued at 4.2 million rupees had been ordered by the Corporation for this purpose. Applications for machines are made to officers either of the state departments of industries or of the Industrial Extension Service of the central Government. They are then forwarded to the small industries service institute for the state concerned, and finally to the National Small Industries Corporation, provided a firm recommendation is made by the state institute. The Small Industries Corporation also supplies sewing machines on easy terms, with a view to helping women in lower-income groups; (b) marketing. Work in this field is carried out by the following four divisions : (i) the government purchase division, which helps small industries to secure a reasonable share of government contracts; (ii) the marketing news service, which tours the countryside in mobile marketing vans carrying suitable products of small industry, selling the products and obtaining information for a "marketing bulletin" which publicises the style and quality of goods required in particular places; (iii)a division entrusted with the marketing of quality goods; with a view to providing àn incentive to small industries to improve the quality of their products, the Corporation has set up standards of quality for a number of products and established wholesale marketing depots which purchase only goods meeting the standards; and (iv) an export marketing division, which obtains export orders for products of small industry, distributes the orders among a number of concerns, and supervises production; and (c) industrial estates. Work is in progress on two industrial estates as pilot projects. The factories in these estates are offered to small industrialists, who have a choice of leasing, purchase over time, or outright purchase. Italy Assistance to small-scale industry in Italy is provided by the National Handicrafts and Small Industries Bureau (Ente Nazionale Artigianato e Piccole Industrie—ENAPI). This organisation operates on a national scale and provides assistance for small undertakings; both on an individual and on a collective basis, in all branches of industry. It provides help in the commercial, financial and technicalfields,including questions of artistic design. It organises training courses and publishes a journal and illustrated brochures. Also operating on a national scale and providing help for small undertakings in all branches of industry, both on an individual and on a collective basis, are the National Committee for Small Industry (Comitato Nazionale per la Piccola Industria) and the Central Commission for Small Industry (Commissione Centrale per la Piccola Industria) of the Italian General Confederation of Industry (Confederazione Generale dell'Industria Italiana), a private organisation which publishes the monthly journal Gazzetta della piccola industria. The National Productivity Committee (Comitato Nazionale per la Produttività) and the National Accident Prevention Institute (Ente Nazionale per la APPENDIX I 169 Prevenzione degli Infortuni) provide services for undertakings of all sizes, but the latter is more especially concerned with small and medium-sized undertakings. Japan Government aid to small industry in Japan 1 is administered mainly through the Smaller Enterprise Agency (a branch of the Ministry of International Trade and Industry), largely under the Smaller Industries Co-operative Act of 1949. Financial help is also provided from various other sources.2 The Smaller Enterprise Agency has the main responsibility for improving productivity in small industry. One of the services it renders is to conduct various kinds of surveys of small and medium enterprises, individually or in groups, making recommendations for increasing efficiency and publicising the lessons to be drawn from such surveys. Surveys of small firms are carried out on request by the enterpreneur. A technical expert or a management expert (or both), will make a thorough inspection of the enterprise and draw up a concrete plan for improvement. This service is also available to co-operatives. All expenses are paid by the central Government, local governments and municipalities. In addition, group surveys of whole districts are made to seek out means of increasing the general level of productivity in the local industries. On an even larger scale, industry-wide surveys assess opportunities for the development and rationalisation of all firms engaged in a given line of production. The number of surveys made each year has been increasing, and the Agency is taking steps to make this method of assistance even more effective. The training and experience of surveyors is being improved by extending the period of instruction, and a one-year training course has recently been established. In addition, study groups of surveyors are being placed in factories to gain experience in the actual implementation of improvements designed to increase productivity. In 1953 the Agency began a follow-up service to aid firms in making the changes suggested by the original survey. Half of the expenses involved in this scheme are paid by the Government. An additional incentive to take advantage of surveys is provided by an annual award to the firm which has shown the greatest improvement since it was surveyed. Provision of guidance for " petty industries ", i.e. establishments employing four or fewer workers, presents a special problem because of the great number of establishments in this class. In co-operation with local governments and municipalities, several hundred counselling offices have been set up, at which proprietors of very small firms can obtain advice on their problems. The offices are divided into three classes according to the demands made on them. Class A offices have two resident experts, class B offices have one, and class C offices are visited by consultants about 50 times a year. The Smaller Enterprise Agency publishes a monthly bulletin as well as various books and pamphlets. Lecture courses are provided to acquaint entrepreneurs with particular production methods in selected industries. A number of model factories have been selected and the results achieved therein have been publicised. The Smaller Enterprise Agency sponsors, with the help of local governments, annual exhibitions of industrial products made by small undertakings; the market for such products is thus enlarged. It also encourages the use of uniform methods of accounting and auditing in small firms. Co-operatives are considered to be the best means of organising small industry under Japanese conditions, and their number has steadily increased 1 See also The Smaller Industry in Japan, op. cit., and Asian Affairs (Tokyo, Asia Kyokai), Vol. II, No. 2, June 1957 (special issue devoted to small business in Japan and containing a number of valuable articles). * See Appendix IV below. 170 SERVICES FOR SMALL-SCALE INDUSTRY since the passing of the Smaller Industries Co-operative Act of 1949. At the end of 1958 a total of 35,912 co-operatives (commercial and industrial) were in existence, and more than 40 per cent, of the smaller firms were members. Co-operatives are of six kinds—business (or common facility) co-operatives, petty business co-operatives, joint enterprise co-operatives, credit co-operatives, mutual fire insurance co-operatives, and co-operative federations. Through the Smaller Enterprise Agency, the Government subsidises part of the cost of building joint facilities for co-operatives. The Japan Productivity Centre, as part of its work to promote productivity, provides a number of services for firms of all sizes. Some of its activities are directed more especially towards small and medium undertakings. These include the following: (a) establishment of a Productivity Committee for Medium and Small Enterprises, consisting of men with knowledge and experience in this field, which works out plans for intensifying activities designed to serve small and medium-sized undertakings; (b) setting up of experimental factories to provide concrete examples of how productivity can be increased and of the benefits that can result; (c) organising groups of roving consultants to help small and mediumsized undertakings in dealing with management or labour relations problems of special importance for efficient operation; (d) provision of technical inquiry services for medium and small undertakings. Factories with technical production problems can receive help and advice freely; (e) conducting one-year courses for the training of consultants for medium and small undertakings. These courses were started in 1958. A charge is made for consultations; (f) devising uniform cost accounting systems specially designed for medium and small undertakings in various industries. Uniform systems have already been established in several industries and are tending to develop in others; and (g) establishment of a labour-management relations committee for improving industrial relations in medium and small undertakings. Netherlands For an account of the organisational structure and functions of the Netherlands Technical Consulting Service (Rijksnijverheidsdienst) see above, Chapter III, pp. 42-43. Pakistan The Government of Pakistan attaches great importance to the adaptation of small industrial units to modern conditions, and especially to their mechanisation. Major obstacles to the mechanisation of small-scale industry in Pakistan, as in any industrially underdeveloped country, are the scarcity of machine tools, dies and gauges, as well as the difficulty of producing them locally, and an acute shortage of highly skilled technicians. With a view to overcoming these difficulties the Government decided to set up an Industrial Research and Development Centre at Lahore to make a study of the manufacturing operations of small industry, particularly from the point of view of the correct use and application of tools and machinery, to provide assistance in planning, design, organisation and other aspects affecting quality and quantity production, and to improve the skill of technical personnel in specialised trades—tool-designing, tool-making, heat-treating and others. APPENDIX I 171 The Centre is designed to serve as a nerve centre particularly for small mechanised undertakings producing quality consumer goods. It has a general purpose workshop specialising in metal trades, and a section for planning pilot plant projects, and it also deals with manufacturing processes of non-metallurgical industries. The work of the Centre includes— (a) giving technical, managerial and market advice to small undertakings, including research and suggestions in the use, cost, and storage of raw materials, the setting up of cost and quality controls and the fixing of consumer prices; (b) designing and manufacturing new tools, dies and spare parts for small industrial undertakings and simple types of machinery for cottage workers; (c) training technical personnel in the maintenance and correct use of machinery; and (d) promoting the publication of literature of general technical interest to private industry. Help in staffing and equipping the Centre has been provided by the United States under its bilateral aid programme. The Centre offers all kinds of technical and managerial advice, but direct financial assistance is beyond its scope. For this purpose, the Government of Pakistan has set up a semi-governmental body, the Small Industries Corporation, under the Small Industries Corporation Act of 1956. The Corporation is responsible for financial assistance to small-scale industries and is concerned with the supply of imported raw materials and the disposal of finished products through promotion of sales and exports. It is hoped that in the future it will also provide training in the supervisory and technical fields, in particular by setting up pilot projects. Although the Centre and the Corporation are independent units, they work in close collaboration. There are also a number of cottage industries development centres run by the government of West Pakistan, whose aim is to aid in the development of cottage industries, with particular attention to the resettlement and rehabilitation of refugees. They are responsible for studying existing designs and workmanship and effecting modifications in design to make products more easily saleable. Mechanical aids are provided with a view to enlarging production, and imported raw materials are distributed according to the working capacity of each craftsman. Special attention is given to cottage industries having export possibilities. The centres try to ease marketing problems by establishing sales and display depots. Some training is provided, including supervisory training. Poland In Poland the term " small industry " covers several types of enterprises. The first major division is between the socialised and the non-socialised sector. The socialised sector comprises— (a) co-operative enterprises; and (b) other socialised undertakings, including— (i) state enterprises planned and managed by the local authorities and formerly supervised by the Ministry of Small Industries and Handicrafts 1; and (ii) enterprises supervised by appropriate ministries, such as the Ministry of Construction and Building Materials. 1 The Ministry of Small Industries and Handicrafts was superseded in the summer of 1958 by the Committee for Small-Scale Production. 172 SERVICES FOR SMALL-SCALE INDUSTRY Non-co-operative socialised small-scale undertakings are to be found in various branches of production, particularly woodworking, metallurgy and food. The non-socialised sector comprises private undertakings. It would appear that small-scale industries are in a difficult position owing to the priority given in development plans to key industries. Until 1956 the central planning organs could not supply them with the materials they needed in order to utilise local resources to the full. Moreover, many of the socialised undertakings (other than co-operatives) were taken over from private owners who, in their uncertainty as to the future of their ownership, did not maintain adequate standards of repair and investment. The Small Industry and Handicraft Institute in Warsaw is a governmental institute whose activities are on a national scale and cover several fields: technical, managerial, social, financial and commercial. The Institute provides assistance for the following branches of small-scale industry: metal and lumber products, chemicals, minerals, and food and kindred products. It aids firms engaged in small-scale industry both collectively and individually through basic research, laboratory research, consultations on technological and organisational problems, and top management and supervisory training. It publishes a bi-monthly review and monographs. Apart from help provided through the Institute, a number of other measures have been taken in recent years to assist small-scale industry in Poland. The Ministry of Labour and Social Security, for instance, operates a fund specifically designed to provide employment facilities in depressed areas; many enterprises have drawn upon its resources. A number of enterprises which were established (as distinct from those only assisted) by it went into production in the second half of 1957. By 1958, however, the increased general supply of consumer goods made for a shift towards a " buyers' market " and a consequent fall in demand for the goods produced by these enterprises. It has been suggested that the Polish National Bank should, through an appropriate credit policy, contribute toward the adaptation of these enterprises to market requirements. In 1958 the Ministry of Foreign Trade decided to provide small industry with facilities and material for analysing the possibility and profitability of production for export, or production designed to decrease imports. An important measure designed to assist small undertakings followed the eleventh plenary session of the Central Committee of the United Polish Workers' Party, which passed a resolution to the effect that small enterprises should be better equipped and stabilised through the grant of various concessions. On 1 July 1958 an Act dealing with the licensing of private enterprises was passed. Some enterprises were no longer required to obtain licences, whereas the licensing of others was to be geared to the planning of balanced economic development, i.e. production aimed at the effective satisfaction of demand, taking into consideration the availability of productive resources in the national pool. Sweden The Swedish Government Institute for Handicrafts (Statens Hantverksinstitut), though financed in part by the Government, enjoys a considerable measure of independence. The 11 members of its Board of Directors are appointed by the Government on the nomination of various organisations, including the Swedish Handicrafts and Small Industry Organisation (four nominees), the Swedish Industry Organisation, the Swedish Confederation of Trade Unions and the City of Stockholm. The annual budget exceeds 1.5 million Swedish crowns. About half of the Institute's revenues takes the form of various government contributions. In APPENDIX I 173 the year ending in June 1956 fees charged for courses brought in over 400,000 crowns and consultation fees over 250,000 crowns. Other sources of income include contributions from small industry organisations, municipalities and other sources, and the sale of publications. The Institute has a full-time staff of about 80 and engages hundreds of part-time teachers and instructors. The Institute engages in three main types of activities, namely— (a) vocational courses. These are designed for advanced training and thus are not open to apprentices. Applicants must possess qualifications of at least the level of an approved journeyman's test as well as some years' practical experience in the trade. Courses given include master courses, chiefly intended for masters and their understudies; continuation courses, similar to the master courses but also open to skilled workmen; special technical courses designed for specific branches of various trades; and courses in industrial design, business management, bookkeeping, cost accounting and commercial law. They include day and evening courses and courses given in the provinces as well as in Stockholm. They usually last from one to two weeks and group from ten to 30 students. Longer courses or series of courses for special branches are, however, also arranged. During the year 1954/55, 339 courses were attended by 7,901 students; (b) a consultation service, backed by research and experiments carried out in departmental laboratories and workshops equipped to test materials, machines, tools and products in a considerable variety of trades. The subjects dealt with by the various technical departments include food processing, chemistry, heating and plumbing, building and woodwork, and electro-technics. There are workshops for metalwork, welding, and there is also an experimental workshop for the clothing trades. Finally, there is a rationalisation service which, on the basis of research and consultations, provides assistance for firms in all branches of industry on management problems such as organisation, work simplification and cost accounting; and (c) a documentation service, comprising a library and a publishing department. The library has about 22,000 books and subscribes to over 500 Swedish and foreign technical periodicals. The publishing department edits and publishes handbooks, compendia and pamphlets for the benefit of handicrafts and small industry, and an annual volume (Hantverk och Kultur), which contains technical, economic and cultural articles and an account of the activities of the Institute during the preceding year. The Institute thus provides help in dealing especially with technical, but also with managerial, commercial andfinancialproblems, forfirmsin many branches of small-scale industry. It provides such help individually through training courses and consultations, and collectively through its publications and in other ways. While it is mainly small firms which avail themselves of the services provided by the Institute, large firms are not excluded from the scope of its activities. The Institute was established in its present form in 1941, when the Government took over and expanded an institute established in 1922 by the Swedish Artisans and Small Industry Organisation (Sveriges Hantverks -och Smâindustriorganisation) to sponsor and organise advanced training for master craftsmen and small industrialists.1 Turkey Two government departments in Turkey have sections dealing especially with the problems of small-scale industry. These are the Ministry of Public 1 For an account of the services provided for small industry in Sweden by this voluntary association, see above, Chapter III, p. 37. 174 SERVICES FOR SMALL-SCALE INDUSTRY Education, which provides training for managers, supervisors and skilled workers, and the Ministry of Economic Affairs, which provides help on management questions. A People's Credit Bank (Halle Bankaú), organised as a joint-stock company and concerned exclusively with small-scale industry, provides financial assistance and help in dealing with commercial problems, both on an individual and a collective basis, for small undertakings in all branches of industry. It has issued a number of publications. A number of co-operative associations of small-scale producers have been established, more than 50 of which are grouped in a national co-operative union. United Arab Republic (Egyptian Region) A Rural Industries Commission was established in 1946 by the Egyptian Government with a view to aiding rural industries. It was first placed under the auspices of the Ministry of Industry and Commerce until 1953, when it was transferred to the Ministry of Labour and Social Affairs. The activities of the Commission are on a national scale. Its work falls under two main headings, namely— (a) a programme of research and consultation to encourage the development of rural industries; and (b) co-ordination of governmental activities in the field of rural industries. In 1956 the Council of Ministers created a fund which was also placed under the control of the Ministry of Labour and Social Affairs. The Assistant Undersecretary of State in the Ministry serves as chairman of the committee administering this fund, which provides aid for rural industries through loans and grants. United Kingdom Assistance to small-scale industry in the United Kingdom is available from a variety of sources. The Development Commission is a government body whose functions include aiding and developing agriculture and rural industries, the development and improvement of fisheries, and other related functions calculated to promote economic development in Great Britain. The main duty of the commissioners is to consider, and report to the Treasury on, applications referred to them for advances from a Development Fund. Advances may be made with the sanction of the Treasury (from which funds are received) by way of a grant, loan, or combination of both. In the field of small-scale industry, the commissioners recommend financial aid for the development and encouragement of most rural and craft industries. Some services—mainly advisory and instructional—are provided for rural industries in the smaller country towns. The principal technical agencies through which this work is carried on are the Rural Industries Bureau for England and Wales, and the Scottish Country Industries Development Trust for Scotland. Research and development on a limited scale are undertaken in the application of new methods to, and the use of new materials by, small-scale rural industry. Advances are made to craftsmen by the Rural Industries Loan Fund, Limited, for the purchase of equipment and the construction and improvement of workshops; the revolving credits from which these advances are made were built up from the Development Fund, and are from time to time replenished from the same source. Financial assistance from the Development Fund has been given for the provision of factories to alleviate unemployment in selected areas whose population is predominantly dependent upon agriculture or the fishing industry for its livelihood. APPENDIX I 175 The Rural Industries Bureau is a governmental agency supported by an annual Treasury grant for the purpose of aiding small-scale industries (excluding agriculture and fishing) in England and Wales. Individual assistance is given to small undertakings in the form of instruction and advice in both technical and business matters, including, among other things, advice on costing and simplified management accountancy. Individual training in manual skills is given to master craftsmen and journeymen in small workshops. Collective assistance is given by publishing results of experimental work and through the testing of plant and materials. There is also a design service for certain industries, and a market intelligence service. The Scottish Country Industries Development Trust is a semi-governmental organisation financed by the Treasury but having its own Board of Trustees. It is concerned exclusively with small-scale industry, and particularly with undertakings employing not more than 20 persons, excluding apprentices. It confines its activities to rural industries and provides services relating to technical, managerial, commercial and financial problems. It serves as the agent in Scotland for the Rural Industries Loan Fund, Limited, and in this capacity receives applications for equipment and workshop loans. A staff of instructors is employed in the fields of welding, wrought-iron work, woodworking machinery, engineering, blacksmithing and farriery, and handloom weaving. A library of designs for craftsmen is maintained. While the Trust does not at present itself undertake research, it disseminates the results of research undertaken elsewhere. The Rural Industries Loan Fund, Limited, to which reference has been made above, is organised as a non-profit-making industrial and provident society operating on a national scale and dealing exclusively with small-scale undertakings employing not more than 20 skilled men and situated in rural areas or small towns. It administers two loan fund schemes (for which the capital has been provided by the Government) under which loans can be made towards the cost of purchasing up-to-date equipment for installation in workshops, or towards the provision of improved working accommodation. There is also a Revolving Fund for Industry operated by the Board of Trade and established as part of a Conditional Aid Programme to help small and medium-sized manufacturers in the United Kingdom to increase their productive efficiency. An advisory service dealing with problems of increasing efficiency and productivity and intended principally for small and medium-sized firms has been set up by the National Union of Manufacturers with financial assistance under the Conditional Aid Scheme mentioned above. In January 1957 the National Union of Manufacturers' Advisory Service, Limited (NUMAS) was registered as a non-profit-making company. Its service is nation-wide. It employs a staff of industrial advisers, industrial engineers and cost accountants. It gives advice on problems in such fields as marketing, finance, costing and production, and practical assistance in carrying out such advice. The assistance of the service has been sought in connection with problems arising in such fields as financial management, problems of capital and sources of finance; management policy, problems of organisation structure, executive development and selection; sales promotion and distribution problems; costing and estimating procedures; work study, production methods, plant layout and mechanical handling; incentive schemes; production planning, control and processing; and statistical methods of inspection and quality control. The practical assistance given by management experts and cost accountants is mainly in the fields of work study and costing. The need for such assistance usually emerges from a survey by an industrial adviser, who subsequently assumes responsibility for a programme of assistance agreed with a firm. 176 SERVICES FOR SMALL-SCALE INDUSTRY The British Productivity Council and the British Institute of Management provide services and facilities for firms of all sizes, including small firms. The same is true of the Scottish Council, a non-profit-making organisation supported by contributions from local authorities, banks, industries, trade unions and private members, which provides assistance in procuring contract or subcontract work, in tapping sources of finance for small concerns, in developing export markets and in making available technical advice and information. Another organisation confining its activities to Scotland—in this case, to the Highlands of Scotland—is the Highland Fund, Limited, a non-profit-making organisation concerned with assisting small-scale industrial undertakings, crofters and others who desire to increase their production and efficiency. It provides advice on technical and organisational questions, and financial aid. United States The Small Business Administration 1 in Washington is an independent federal agency working at the national, regional and local levels. The Administration was created in 1953 by the Small Business Act of that year. The Administrator is assisted by three deputies in charge of procurement and technical assistance, financial assistance and administration respectively. The Administration is authorised to serve small business concerns exclusively (but these are defined as undertakings employing fewer than 500 persons) and provides assistance both on an individual and on a collective basis. Its activities include— (a) enlisting the help of state and municipal government agencies, civic and business groups and private firms, including lending institutions, and encouraging the formation of local groups through which local experts can advise neighbouring businessmen. Advisory groups operate at national and local levels to assist the Administration in developing and carrying out its projects, and also help to provide on-the-spot assistance; (b) co-operation with government purchasing agencies to determine which of their purchasing contracts shall be awarded to small firms. Advice and assistance is provided to small firms in selling to the federal Government; (c) a vast publication and pamphlet service on important managerial subjects. This material is produced jointly with the Department of Commerce a ; (d) financial assistance through the authorisation of loans from a revolving fund appropriated by Congress for this purpose. Business loans are made to finance construction, expansion and the purchase of equipment, and to supply working capital. In addition, so-called " disaster loans " may be granted for purposes of rehabilitation; and (e) managerial counselling and help with technical production problems. 1 See Small Business Administration—What It Is ; What It Does (1955) and SBA Business Loans (1956), both published by the Small Business Administration, Washington. ' For some titles see above, Chapter V, p. 94. APPENDIX II HELP PROVIDED FOR SMALL FIRMS : SOME CASE STUDIES Burma: Mechanisation of a Village Pottery Plant The first case dealt with in this Appendix is one in which the efforts made were attended by very limited success. It is worth recording, however, not only because of the successful results that were achieved in one undertaking but also as an example of the opportunities that exist for adapting a traditional rural small-scale industry to modern requirements and as a reminder of the difficulties of introducing new ideas among people accustomed to traditional ways of doing things. In addition, it provides an 'example of help provided through international technical assistance in co-operation with national agencies. Thirty thousand people find employment in the traditional pottery industry of rural Burma. The Government therefore asked the small industry specialists in the United Nations and I.L.O. teams sent to Burma in 1951 to give special consideration to the development of this vital industry. Attention was focused on Twante, the major pottery centre in southern Burma, lying along a canal 15 miles from Rangoon. The studies started at Twante in 1952 and were carried on more intensively during 1953 when a pottery expert assigned there on a full-time basis indicated many areas for improvement. The efforts made to improve the Twante industry were not wholly successful. The villagers were content to continue in their accustomed ways. Even afterfiveyears of effort on the part of government officials assisted by foreign specialists, there was no significant change in the village as a whole. One single potter, however, out of all those in the area, did see the value of modernisation. With some outside advice, but primarily through his own efforts, he partially mechanised his small plant. This achievement was studied in September 1957 by the Ceramics Department of the Union of Burma Applied Research Institute. At least 600 villagers were gaining a livelihood from the industry. Almost half were engaged in the transport of raw materials and products and other supporting activities. The remainder were directly employed in 30 small factories. The product, marketed in Rangoon and throughout most of southern Burma, consisted exclusively of unglazed or partially glazed Pegu jars used for the storage of water and food. The ten-gallon size predominated. Twante was found to offer many advantages to an expanding pottery industry. The population of the village area (20,000 before the war) had been increased to 40,000 by refugees. There was a plentiful labour supply. The area abounds in good pottery clay. A non-plastic lateritic clay is obtained from the higher ground outside the village. It is mixed in equal proportions with a highly plastic river clay transported by boat a distance of two miles. Rangoon offers a large market easily reached by canal. Detailed economic studies were made to show the advantages of cooperative action for the development of the industry, e.g. for such purposes as 178 SERVICES FOR SMALL-SCALE INDUSTRY the purchase of glazes or the operation of mechanical raw material preparation equipment. Plans were made showing how the introduction of clay preparation equipment alone might decrease over-all costs by as much as 10 per cent. It was pointed out also that the most effective use of such equipment would come through a co-operative operating a central plant for the benefit of all members. It was not found possible, however, to induce the Twante potters to form such a co-operative. Later there was also some question as to the ability of the Government to provide the management and finance to operate such an enterprise: neither appeared to be available from among the pottery plant owners. Another promising area was found to be the introduction of new products. It was demonstrated that local red clays, with white clay from central Burma used as an engobe, could be converted into household ware of acceptable quality. The modified kilns required for the more refined product were not expensive and were within the capabilities of the local potters to operate. But the advantages of such development failed to attract interest among the mass of potters at Twante. They were at that time still content to follow the traditional pattern and were fearful of change. Young potters in Twante offered a training opportunity at the Government's Moulmein pottery plant failed to respond. One producer, however, did make use of the advice and technical help offered, and mechanised his small plant. Like virtually all potters in Twante, he was the son of a potter. He differed from most, however, in having accumulated a little capital out of profits. This enabled him, with the advice of the pottery specialist working in Twante, to purchase a ten-horsepower diesel engine, two stamp mills and a pug mill. All were of Japanese manufacture and were purchased from an importer in Rangoon. The auxiliary equipment, such as pulleys, shafts and belting, was fabricated in Rangoon under the owner's supervision. The equipment was installed with the assistance of the United Nations pottery specialist. The whole project cost 13,000 kyats ($2,700), which were paid in cash by the owner. This plant was still in operation after four years. Maintenance had not been a problem. The diesel engine was designed to run five years without a major overhaul. For minor repairs, there was a diesel mechanic in Twante at the electric plant operated by the Government's Electricity Supply Board. He had a small stock of parts and had been able to handle the repairs required to date. Unfortunately the E.S.B. plant operated only to supply town lighting at night. Had there been sufficient demand, it could have operated in the daytime, allowing this enterprising potter to dispense with his diesel engine. The most recent study showed him to be prospering and very satisfied with the results of having established the first mechanised pottery plant in rural Burma. As a result of mechanisation the plant production rate had increased from an average of 100 ten-gallon jars per working day to 150 per day. In addition, the number of working days at full capacity per year had risen from 150 to 300. Normally, during the rainy season the potters at Twante can supply the full market demand by operating at half capacity. The combination of more difficult transport plus Burmese buying habits reduce the demand during half the year. Increased operating capital, presumably out of increased profits, enabled the plant in question, however, to maintain a full operating schedule during the rainy season. Those jars that could not be sold were held over until the next dry season. Thus the gross effect of mechanisation was to double annual production from 22,500 to approximately 45,000 jars. In spite of his enlarged and improved plant, the proprietor did not find it necessary to keep operating records. However, from memory he was able to present the following information. Whereas formerly he had required a crew of ten men during the busy season and half that number during the rainy season just to pulverise and mix the clay preparatory to throwing on a potter's wheel, APPENDIX II 179 the same operation carried out by machine produced 50 per cent, more clay per hour and required only six men. The proprietor recognised increased productivity and the added skills required by paying the six machine operators 4 kyats per day ($0.84) as compared with the 3 kyats received by the unskilled workers previously. By long-standing local custom the remainder of the operation was kept on a piece-rate basis using teams of two men to form the jar and to fill the kiln. One such team on the average was able to turn out 50 ten-gallon jars per day. A master potter on piece-rates could make as much as 7 kyats per day. While the unit rate was not increased, more potters were assured of work during the entire year. While the owner had no way of measuring the exact economic return from the new machinery, he felt that increased profits from the first two years of operation were sufficient to reimburse him for the investment. Since the market has been long established for a jar of a certain appearance and quality there was no incentive to change the design. Thus the improved quality clay coming out of the pug mill was not utilised. Later, however, a market could well develop for new products made of the better clay. The jars sold wholesale at Twante for 4 kyats each. The proprietor felt that he was selling as much as he could of this particular product. This may well have been so, since there is evidence that the Pegu jar market is slowly declining in Burma. As more towns and villages gain a central water supply with taps in the individual houses there is less need for large water storage jars. This change in demand has already taken place in most of Rangoon and is spreading slowly through the rest of Burma. The demand for other ceramics products, such as table ware, porcelain rice bowls and tea sets, has been increasing with an improved standard of living. The demand has been met both by chinaware imports and by a shift in consumer demand to utensils made of enamelware or spun aluminium. A negligible portion of the market is supplied from the one semi-modern pottery plant in Rangoon. It is unfortunate that the proprietor in this case study did not feel able to go a step further and manufacture new products. Like the other potters in Twante during 1953 he had witnessed the experimental production of a number of new but relatively simple items. The only reason given by him was that he was afraid to risk additional capital in a new venture. Perhaps an equally valid reason was that his two sons who were in a Rangoon school might not wish to continue the family pottery business. Thus the father, who was economically well off, had less incentive to expand the business further. There is no indication that the increased production of the one plant disturbed the market for the others. They appeared to be operating as usual. While lacking capital to continue full production during the low demand season, the other potters were still able to finance their own sales. Middlemen coming to Twante by boat pay only half the value of the jars on delivery. The remainder is paid after the sale of the jars, which may take as long as three months. It is understood that no interest is charged. Thus the potters of Twante, unlike those in Moulmein and most other pottery centres in Burma, are independent of middleman financing. Their very independence, and perhaps complacency, may be a contributing factor to their lack of interest in change. Obviously the Government cannot force change but can only induce it. It would have been a mistake, as can be seen in retrospect, to have established a government-financed central facility service in Twante. The potters were not yet ready for it. Government officials have given considerable thought to the development problem at Twante. Efforts will be continued to bring young potters to Moulmein for training. On their return they may in time bring about change. The offer of mechanical equipment on hire-purchase terms would minimise the risks to the individual potter and make possible more rapid development. 180 SERVICES FOR SMALL-SCALE INDUSTRY While the use of larger-scale machinery through a co-operative might be economically advantageous, it might be better as a practical measure to mechanise individual plants. The provision by some central authority of improved glazes at reasonable prices might make the change to new products easier. Also the Government is finding that other pottery areas in Burma not so well off economically are more willing to request assistance for changes in methods. They in time may force the potters of Twante to innovate. Denmark : Inter-Firm Comparisons of Costs The owners of many small businesses have only rather vague information as to the proportions of their total expenses attributable to different cost elements. A progressive businessman will go to a good deal of trouble to obtain such information, which is important for various reasons. Such information will be all the more valuable if it enables him to compare his own position with that of other firms in the same line of business. This can be done if a Finn A Item Percentage of sales proceeds 1. Sales proceeds : Retail Wholesale Total . . . 2. Purchases: Raw materials Finished products Total . . . 3. Sales less purchases (1—2) . . . 5. Owner's production work . . . . 6. Power 7. Gross profits (3—4 to 6) . . Overhead costs : 8. Wages of sales staff 9. Transport 10. Interest on borrowed capital 11. Rent 13. Owner's managerial work . . 14. Work of owner's wife 15. Interest on owner's capital . 16. Other overheads Net profit or loss : Profit ( 7 - 8 to 16) Loss (8 to 16-7) . . . . . . . . Danish crowns Firm B Percentage of sales proceeds Danish crowns 83.8 16.2 84,800 16,400 96.9 3.1 113,800 3,600 100.0 101,200 100.0 117,400 37.8 19.4 38,300 19,600 27.5 20.0 32,300 23,500 57.2 57,900 47.5 55,800 42.8 16.6 7.9 6.2 43,300 16,770 8,000 6,300 52.5 8.3 6.8 4.4 61,600 9,700 8,000 5,200 12.1 12,230 33.0 38,700 8.3 1.1 1.3 6.4 4.7 3.4 9,740 1,280 1,470 7,530 5,500 4,000 1.0 6.3 1,200 7,370 0.5 610 0.4 2.4 1.6 4.0 5.9 410 2,410 1,600 4,000 6,000 5.5 5,600 7.7 7,800 181 APPENDIX II number of firms voluntarily submit their accounts to an agency in which they have confidence, which will break down their costs into the various elements according to a uniform classification and publish the results without disclosing the identities of the individual firms. In making such cost breakdowns and comparisons, care needs to be taken to include all elements in costs that should be deducted from gross profits before net profits are arrived at, including certain elements that are not always recognised as costs because they may not call for regular cash disbursements. For example, the owner is entitled to remuneration for the work he does as manager (and perhaps for part of his time as a production worker too). He is entitled to interest on whatever capital of his own he has invested in the business, and his wife and other members of his family are entitled to wages for any work they may do. Allowance has to be made for depreciation of machines and equipment. For a firm to make a profit it is not sufficient that its total income should exceed its total cash disbursements. If the firm affords to the owner and his family a poorer livelihood than they could have got by working for wages and lending out their capital at interest, then even though it may bring in more money than has to be paid out, it should be regarded as operating not at a profit but at a loss. Cost breakdowns can be prepared in a number of different ways, going into greater or less detail. Certain elements should always be shown—material costs, labour costs and the main elements in overhead costs. The aim in a small firm should be to devise a system of classification that will provide just enough detail to serve as a guide and, on occasions, a warning to the owner, without going into so much detail that the returns are excessively difficult to prepare and to absorb. One example is the cost breakdown used by the Copenhagen Technological Institute for a number of bakeries in Copenhagen. Similar standard classifications, varying only in details, have been prepared by the Institute for firms in other branches of small industry, including blacksmiths, bricklayers, painters, shoemakers and woodworking establishments. The table on the preceding page is a slightly simplified version of the returns prepared for the baking industry, including the actual figures for two small bakeries in Copenhagen. Most of these items are self-explanatory; a few call for a word of explanation. The value of the owner's labour, for instance, was assumed to depend upon the size of his undertaking, in accordance with the following table: Size group 1 2 3 4 5 : . Annual turnover (Danish crowns) Assumed annual value of owner's labour (Danish crowns) Under 100,000 100,000 - 200,000 200,000 - 300,000 300,000 - 400,000 Over 400,000 10,000 12,000 15,000 18,000 24,000 Both of the examples come from group 2. If the owner did any production work, this was assumed to be remunerated at the rate of 5 crowns per hour. The difference between the total that he was assumed to earn in this way and the assumed total value of his labour was regarded as remuneration for the work of management. It will be seen that in each of the examples the owner spent the greater part of his time as a production worker in his bakery (1,600 hours per year at 5 crowns per hour). A wife's labour was assumed to be worth 6,000 crowns a year if she worked full time or proportionately less if she worked part time. 182 SERVICES FOR SMALL-SCALE INDUSTRY The publication of cost breakdowns for Copenhagen bakeries has been taking place since 1952, when 13 bakeries—all of them clients having sought consultations with the Institute—were persuaded to submit their accounts to the Institute. Each firm is told its own code number, but not that of any other firm. Each owner can compare his own profits and costs with those of a number of his competitors without, however, knowing which firms they are. The returns are explained at meetings of the bakers' association by members of the Institute staff, and the interest aroused by the returns is revealed by the following figures, which illustrate the growth in the number of bakeries willing to submit their accounts to the Institute for analysis : 1952 . . . . 13 1954 . . . . 64 1956 . . . . 103 1953 . . . . 34 1955 . . . . 85 1957 . . . . 106 Not all these bakeries are clients of the Institute.1 The bakeries are classified in the five size groups shown above; this adds to the interest and significance of the comparisons, which may throw valuable light on the strong and weak points in the organisation and methods of the different bakeries. A baker who is doing less well than the average in his size group may find from studying the returns that his material costs or his labour costs or his selling costs or some other elements in his costs are abnormally high. Thus, if the owner of firm A in the case mentioned earlier compares his results with those of firm B, he will find that, despite his smaller sales, he pays slightly more—and, in relative terms, a great deal more—for his materials. He also pays nearly twice as much in wages in the bakery (he has no wages for sales staff—it looks as if his wife does the selling) and nearly half as much again for power. However, he pays exceedingly little in the way of interest on borrowed capital and seems to have no capital of his own invested in the business. He also pays very little in the way of depreciation. All these things suggest that the owner of firm B has a much better-equipped bakery, and perhaps this is why he pays so much less in wages to production workers. Firm B also pays three times as much in rent : perhaps its higher sales turnover is partly due to a better site. If the owner of firm A is able to make comparisons of this sort not only with one competitor but with 10, 20 or 40 competitors within the same size group, a number of trains of thought may be started in his mind, and he is likely to have a fair idea of where he ought to begin if he wishes to increase the efficiency of his undertaking. It is of interest to note, incidentally, that the returns for 1955 show that ^he smaller bakeries in Copenhagen have much greater difficulty than the larger ones in showing a net profit. This can be seen from the following table : Number of returns Size group 1 2 3 4 5 Sales turnover (in Danish crowns) Less than 100,000 100,000 - 200,000 200,000 - 300,000 300,000-400,000 Over 400,000 Total . . . Bakeries showing a net loss Bakeries showing net profit Total 10 10 6 1 0 27 0 33 14 8 3 58 10 43 20 9 3 85 j 1 A similar project has been carried out for meat and delicatessen shops, with the following figures: 1956 170 1957 184 1958 235 APPENDIX II 183 For firms that are willing to pay for consultations the Institute prepares more detailed cost analyses, breaking down costs for each individual product. Costing of individual products is sometimes used as a basis for price fixing, though in other cases prices are determined by market forces. But in any case costing of individual products will almost certainly show that some are much more profitable than others, in the sense that the price received for them provides a larger margin over " prime " or " variable " costs (in which the main elements are labour and materials) and thus makes a larger contribution to overhead costs and profits. It is not essential that all products should account for an equal percentage of overheads and profits, but costing of individual products will sometimes reveal that the contribution made by some is slight or non-existent. Continued sale of such products will normally be justified, if at all, only if it is important for retaining the goodwill of customers and helps to sell other products that make a larger contribution. Costing of individual products provides a basis for rational decisions about a firm's " product mix " and prices. The firm may decide to eliminate certain lines, substituting others if it does not wish to narrow its range. Or it may decide that it can raise the price of certain items that contribute little to its overheads. Or, if it does not think that the market will stand an outright increase in the price, it may reduce the size or the quality of unprofitable lines without a corresponding price reduction. This is sometimes described, rather optimistically, as an " invisible " price increase. One of the more efficient Copenhagen bakeries, wishing to increase its efficiency yet further, had such a cost analysis undertaken by the Institute. It sold 22 products at prices which, on the average, exceeded the cost of materials and labour by about 45 per cent. It was found that none of the products was incurring a loss in the sense that the selling price did not cover prime costs, but four of the products were found to contribute much less than the average to overhead costs and profits, and two of these accounted between them for a rather high proportion of total sales. It was therefore concluded that these products offered the greatest scope for rationalisation. In the case of one product it was found possible to reduce the labour time by nearly 25 per cent, by installing a machine for coating it with chocolate. It was further decided to resort to an " invisible " price increase by cutting 108 instead of 96 pieces from the same materials, without change in the selling price. In these ways material costs were reduced from 69.3 per cent, to 62.8 per cent, of the selling price, labour costs from 12.5 per cent to 8.2 per cent., and the excess of the selling price over costs of materials and labour was raised from 18.2 per cent, to 29 per cent., or considerably nearer to the average of 45 per cent. In the case of another product, where no scope was found for rationalisation of production, a " visible " price increase was made, accompanied by a perceptible improvement in quality which, however, cost proportionally less than the increase in price. Production of the remaining two of the four products singled out for special attention was discontinued, and they were replaced by two new products. The combined effect of these various changes was to raise the excess of selling price over material costs plus labour costs from 45 per cent. to 48 per cent, for all products taken together. India : Market Research for a Small Firm As has been pointed out, market surveys are an important feature of the work of the Indian Small Industries Service Institutes. The following is one example. A small firm employing six production workers and two salesmen produced four types of animal foodstuffs, including a poultry feed which was produced 184 SERVICES FOR SMALL-SCALE INDUSTRY in concentrated and in ready-mixed form and was the slowest-moving of the firm's products. The installed production capacity was 235 lbs. per day, but only a small proportion of this was being utilised. In these circumstances the firm approached the Small Industries Service Institute in Bombay for marketing aid in May 1959, and a marketing survey was undertaken, the objectives of which were— (a) to suggest ways and means of promoting sales in the states of Bombay and Mysore; (b) to assess the competitive position of the product in the centres surveyed; (c) to suggest effective media of publicity and distribution; and (d) to find potential buyers interested in the product. Questionnaires were mailed to 91 poultry farms in the state of Bombay and 70 in that of Mysore. In addition the field staff visited 22 farms. The report 1 cannot be reproduced in full, but a summary will indicate the nature of the information provided through such marketing surveys and its value to a small firm seeking to expand its markets. Basic Information on Poultry Farms and Poultry Feed. Poultry farms can broadly be grouped into four categories: commercial farms, hobby farms, backyard farms, and government extension and experimental farms. The geographical distribution of the different types of farms in the two states was surveyed with a view to indicating to the manufacturer the areas where he should concentrate his sales efforts. On all types of farms except backyard farms more or less standard mash preparations are used for feeding, but these are mostly home-made, do not contain protective foods and do not vary in protein content according to the type of bird—chicks, growers, layers or table birds—as they should do for best results. There is a vast potential market for ready-made mashes which will give better results in terms of growth or egg-laying capacity—particularly when account is taken of the prospective increase in poultry farming. The recent growth and trend of the industry, as a result of various governmental measures, is indicated by the large number of commercial farms which have sprung up recently in and around cities. This growth, the survey indicated, might be expected to be accelerated by the availability of well-balanced poultry feed, the lack of which in the past was a great obstacle to the growth of the poultry industry. The urgency of developing a poultry feed industry has, in fact, often been emphasised by governmental authorities. Demand Prospects. The report pointed out that there were good prospects of demand for readymade mashes from all the four types of poultry farms, although the demand was likely to become effective more quickly on some types of farms than on others. To begin with, the product was likely to be demanded mainly by government extension and experimental farms, but also by a number of commercial and hobby farms; in time even backyard farms, as they became convinced of the superiority of ready-made mashes, might be converted to their use. Some such farm owners, finding it difficult to mix well balanced mashes themselves, and 1 See Government of India, Ministry of Commerce and Industry, Small Industries Service Institute, Bombay: Distribution Aid Survey No. 25 (mimeographed). APPENDIX II 185 expensive to do so in small quantities, had in fact already sent inquiries to government poultry extension centres about ready-made mashes. Comments on Competing Products. As regards competition, whether from home-made compositions or from other commercial products, the feed produced by the firm in question appeared superior in quality to most home-made mashes and somewhat cheaper than competing commercial products (of which there were only two or three). Poultry Farm Owners' Reactions. The attention of the manufacturer was drawn to certain criticisms of the product expressed by purchasers during the course of the survey. Dealers' Reactions. Poultry mashes being a new product, hardly any dealers handle them, though many stock individual mash constituents. A number of dealers handling agricultural implements and poultry feed constituents were contacted. They were of opinion that if the product were popularised there would be good scope for selling it through dealers. Four of the dealers were ready to stock the product immediately. Possibilities for Wider Distribution. Possibilities of extending the market were considered quite good. A number of recommendations were made to this end. These included the following: (a) The manufacturer might wish to compile a directory of poultry farms and traders dealing in feed constituents and to mail to them from time to time handbills advertising the product. A list of poultry farms in Bombay and Mysore states was appended to the report. (b) The manufacturer should advertise in poultry magazines. (c) Effective use should be made of annual poultry shows for publicising the product. (d) The poultry development officers in Bombay and Mysore states should be asked to keep stocks of the product and literature relating to it available for distribution at the poultry extension centres. (e) The Poultry Association of Bombay and various poultry clubs should be approached and their co-operation enlisted. Arrangements might be made for them to distribute the product on a commission basis. (f) The manufacturer might consider appointing exclusive agents on a region-wide basis. The names of four dealers already interested in taking up agencies were mentioned. (g) Rather detailed suggestions were made, based on the geographical distribution of poultry farms, regarding the areas where salesmen should concentrate their efforts and regarding the phasing of their activities. Besides poultry development officers, officers of the animal husbandry departments and officers in charge of the government extension and experimental poultry farms in Bombay and Mysore states should be approached. (ft) The quality of the product might be tested at government central farms or elsewhere. This would serve two purposes : to elicit suggestions for improving quality or reducing costs; and to publicise the product with the help of test certificates. 186 SERVICES FOR SMALL-SCALE INDUSTRY Israel : Production Control in Two Small Firms The following are two case studies of help provided by the Productivity Section of the Manufacturers' Association of Israel in installing simple production control systems designed to assist the managements in dealing with specific problems encountered in two small batch production plants. CASE A : RIBBON-WEAVING TEXTILE PLANT The first case was that of a plant manufacturing different types of ribbon, including satin ribbon, serge ribbon and twilled ribbon. The operations performed in the weaving department were warping, winding weft and weaving; and, in the finishing department, finishing, inspection, measurement and packaging. Dyeing was done by an outside contractor. Not all these operations were performed on all types of ribbons. The case study was concerned with the finishing department alone. The latter received batches of ribbons of known size from the dyeing plant, each batch consisting of ribbons of a different colour or different type. The department, employing about ten workers, had not used any production records in the past. The management was advised to introduce a simple type of production control system, using the procedure outlined and illustrated below. Procedure With the delivery of ribbons of a certain type and colour to the finishing department, a production order is made out by the sales department (see figure 1). Items (AA), (A), (B) and (C) are filled out. Item (C) is known since the ribbons are cut by the weavers into specified lengths. (AA) is a running number. Items (10) and (11) are also filled out, specifying how many metres of the current order are to be wound on cards and how many on carton rings. It should be noted that production orders are different for each type of ribbon, every type having its specific number and sequence of operations (which is printed on each type of order). Production orders are issued to the production department, and are hung up on a board. As production is started, the name of the operator (1), as well as the day (2) and the hour and minute of the starting time (3) are recorded. This is done by the foreman or one of the workers to whom this responsibility has been assigned. Whenever an operation isfinishedor interrupted, the time is noted (4), and the number of metres on which the operation has been completed is noted (5). This number is estimated fairly easily since the ribbons come in bundles, the lengths of which are standardised. Each time an operation is started or interrupted on the order, the appropriate entries are made in the same columns. When all operations have been completed the form is returned to the office. The office also receives in a box the faults which have been cut out of the ribbon of that order. The office computes, with the aid of tables, the total minutes on each operation run (column (4) minus column (3) for each line filled out) and the time expended per thousand metres (column (6) divided by column (5) for each line). It also counts the faults, and computes the number of faults per thousand metres. Total minutes expended on all operations performed on the order as well as average minutes per thousand metres are computed. The order form is then passed on to management, permitting comparisons to be made of minutes spent per thousand metres (7) both in successive phases of the same operations on the same order form (recorded on different lines) and with the corresponding figures on other order forms. Any abnormal delays will show up at a glance. The office records the total minutes on a weekly accumulation sheet which permits a rough cross-check of production minutes recorded with total minutes of attendance. The form is then filed according to type of ribbon. The system serves the following purposes: (a) Costing. The production order " collects " the work hours expended in the finishing department. Since the other costs are known, the introduction FIGURE 1. PRODUCTION ORDER PRODUCTION ORDER NO. (AA) BAND TYPE A COLOR: ( A ) DATE: (B) METRES: (c) PEROPERATION FORMED MINUTES DAY FROM UNTIL METRES MINUTES METRES BY: INSPECTION (1) PER 1000 (2) (3) (4) (5) NO. OF FAULTS (8) F A U L T S / 1 0 0 0 M. (9) MEASURING PACKAGING CARDS NO. (10) PACKAGING WHEELS NO. ( 1 1 ) TOTAL: (6) (7) 188 SERVICES FOR SMALL-SCALE INDUSTRY of the system makes possible the costing of the different products, hence the " pushing " of profitable ones and the elimination of others, as well as the analysis of costs. (b) Productivity. The calculation of time spent in each operation on a standard quantity of product—i.e., 1,000 metres—facilitates the comparison of productivity of different operators at different times. It is a well known fact that such comparisons—if they are accompanied by appropriate administrative action—raise the productivity of the individual operators. Experience in Israel shows that the introduction of work time recording and analysis alone has increased individual efficiency by as much as 20 per cent. In addition, the recording of direct work time is usually accompanied by an analysis of all time not expended in " direct " work. A weekly form for the recording and identification of any time not applied to one of the current production orders may be added for this purpose. This may suggest ways in which such "nonproduction " time can be reduced. (c) Planning. Efficiency is further increased by the production order form because the filling out of production orders paves the way for better work planning. The foreman has a better over-all view of the work ahead for the department, and mistakes in planning can be detected and corrected. (d) Quality. A further outgrowth of the introduction of production control in this case was the control of quality. The recording of the work time was accompanied by the counting of faults found (and cut out) in the ribbons of each batch. This leads up to quality control: attention is drawn to the need for a clear definition of what constitutes a fault that has to be cut out, on the one hand, and to the detection of the sources and causes of faults and their elimination or alleviation, on the other. CASE B: SHOE MANUFACTURING PLANT The second case studied affords an illustration of the working of a piece rate system. Any piece rate system must, of course, be accompanied by an appropriate method for recording work time for all workers and operations involved. The following is an example of how this may be done in a plant producing in batches, even though the requirements in this case were somewhat complicated. The factory in question was producing children's shoes. Production was in batches, i.e. components were cut and assembled for a specified number of shoes of a certain type in successive operations. Batches were distinguished from each other by colour and by type of shoe, but each batch contained several shoe sizes and was worked from the large size downward to the small one. The sizes ranged from 19 to 40 (continental). Each type of shoe, of course, followed a predetermined sequence of operations, which were closely defined, and timed. It had been found that it was not necessary to fix different piece rates for all the different shoe sizes on each operation. Rather, all sizes were divided into five groups—sizes 19 to 22, 23 to 26, 27 to 30, 31 to 35, and 36 to 40. Piece rates were identical for shoe sizes within each group but might differ from group to group for the same operation and type of shoe. Piece rates for shoes of different colour but of the same type were identical. Thus piece rates were fixed (a) for each type of shoe; (b) for each operation; and (c) for each of five size groups. The problem was to establish a production control system that would facilitate the correct remuneration of the workers in the simplest manner. The procedure which was devised is outlined below. F I G U R E 2. R O U T E SHEET TI T16 T31 ; 101 101 T17 SER. NO. 101 T32 101 T18 TYPE: "T" T33 T2 ! loi LOT NO. 101 101 T3 101 j 101 101 T19 COLOUR: T34 T4 ; loi 101 101 T20 T35 101 T5 101 19 20 21 22 101 T6 T21 T36 23 24 25 26 101 101 T22 27 28 29 30 T37 101 101 T7 101 101 31 32 33 34 35 T8 T23 T38 36 37 38 39 40 101 101 T39 ; ; ISSUED / T 4 0 ; STARTED / / ..: COMPL'D / / TÍO T25 : 101 T26 ! T41 • 101 101 ; 101 ": REASON:.. T43 : T13 T28 ! 101 101 101 T14 T29 : T44 101 « : loi T45 T12 i 101 101 101 101 Til T27 : T42 ; SPOILT.. 101 101 101 101 101 T9 T24 DATE / 101 101 1 \ T30 101 T15 : 101 190 SERVICES FOR SMALL-SCALE INDUSTRY Procedure The administration of the system is based on a route sheet (see figure 2). The route sheet has 45 detachable labels which are gummed on the back. Route sheets for different types of shoes are distinguished by a letter denoting the shoe type, which appears on the stub and on each of the labels (in the figure, it is type T). Separate route sheets are issued for each size group within each batch, each size group having sheets of its own distinguishing colour; thus sheets for shoes of sizes 19 to 22—size group A—are yellow. Spaces for the insertion of the number of pairs of each size of shoes manufactured in each batch are provided. Before manufacture of a batch is started, it is determined how many shoes will be produced of each size. This number is determined by the requirements of the sales department, with one restriction, namely that the total number of pairs ordered of a certain size group must be 12 or a multiple of 12 (the number 12 was determined by the size of the standard materials-handling equipment). Each label of the route sheet stands for a certain operation indicated by the number on the label, for the type of shoe indicated by the letter on the label, for the size group identified by the colour of the label, and for 12 pairs. If two dozen pairs are made of a certain size group (the distribution within the group is irrelevant) a line is drawn with special ink through all labels, and the " value " of each label is thereby doubled; two parallel lines—for three dozen—will increase the " value " threefold, and so forth. The route sheet is attached to each sub-lot (i.e., to each group of sizes) and it accompanies the sub-lot from operation 1 to 45 through the shop. Each operator detaches the label for the operation he has performed on the sub-lot whenever he completes this operation. This label is pasted by him on a weekly operator's card. Any time spent by the operator on time work, i.e. on work which is not covered by piece rates, is put down by the foreman on the weekly operator sheet, with an indication of the type of work performed and the time taken, and the signature of the foreman is affixed. Once a week the various sheets are collected and turned over to the office. The office computes the weekly credit of the worker in standard minutes by adding up the values of the different labels pasted on to the weekly summary sheet. Some refinements have been added to the method: (a) Route sheets are numbered consecutively and this running number of the sheet appears on each of its labels. This numbering is done automatically at the time of printing and it prevents frauds and helps identification in the case of loss or mistakes. (b) In case a pair (or one shoe of a pair) is spoiled in any operation, the labels for the operations following the one in which the pair was taken off the line are marked (— 1), and the value of these labels is reduced in this manner. (c) Computation tables have been provided for the office, on which the values for each operation for one, two and up to 20 dozens of pairs have been noted, to speed up calculations. It was found advisable not to print the value of each label on the route sheets, since values may change from time to time with the introduction of new methods, or other variations. The system thus serves the purpose for which it was designed—namely, that of providing a simple and easily administered means of recording the work done by each operative and calculating the wage due to him each week under the incentive wage system in use in the plant. Malaya : Mechanisation of Coconut Fibre Extraction One of the small-scale industries, the improvement of which is being encouraged and assisted by the Rural and Industrial Development Authority (R.I.D.A.) in Malaya, is the coconut coir industry. There is an abundant supply of the raw material, i.e. coconut husks, from which the fibre is obtained. (According to recent figures there are 494,000 acres of coconut trees in Malaya: the country is the fifth largest producer in the world.) There is also an everincreasing market for coconut fibre. If all the husks from the nuts were put 191 APPENDIX II to use, 32,000 tons of coconut fibre could be produced annually. With prices ranging from £26 to £40 a ton for ordinary fibres and up to £70 a ton (c.i.f. European ports) for selected fibres, the husks now wasted in Malaya could become a valuable source of income. The making of fibre from coconut husks is a cottage industry mostly found on the east coast of Malaya. The old biochemical method of obtaining the fibre from the coconut husks, which is prevalent in India, namely retting (soaking the husks in water for six to 18 months while micro-organisms within the husks disintegrate the tissues) is unpractical in the introduction of the industry to a new area, because of the length of time required and the freezing of the original capital outlay for several months. Further, the open water for the retting process is a breeding place for mosquitoes, making it undesirable from a sanitary point of view also. A mechanical process was sought as a solution. Several Japanese and European manufacturing concerns found new methods, but all retained the essential principle of soaking the husks in water. The thick exocarp of the coconut would be broken without damaging the fibre, yet permitting water to enter in order to separate the pith and fibre. This was done with special crushing machinery consisting of a chute leading into a pair of rotating, fluted iron rollers set just wide enough apart to grip the husk, cracking the exocarp, yet not affecting the fibre. This reduced the retting period, but the machinery was too costly and its capacity too large for a smallscale industry. However, this principle was adapted by a Japanese firm to a small hand-operated husk-crushing machine with fluted rollers on gears. The R.I.D.A. increased the gear strength of this machine and found that precrushing of the husks facilitated the next process, that of malleting. The Indian method of extracting the fibre by beating the soaked husks on a block of wood with a mallet is physically arduous and very slow. A simple machine for fibre extraction had to be developed. In Ceylon this process is carried out with the aid of two drums called the breaker drum and the cleaning drum. These are wooden wheels with treads fitted with iron nails. The drums revolve at high speed, driven by a belt from a shaft run by a diesel engine. However, the fibre gets torn on the nails, and the R.I.D.A. considers that the machine is not worth its cost. Another possible solution was a combing Worker Number of busks Time for pounding Hours Minutes Time for malleting Hours Minutes Weight of fibre (in ounces) BY HAND A B C D E F 4 4 6 27 27 11 10 10 10 10 10 10 4 4 4 2 4 3 21 17 45 55 10 12 9 10 12 10 30 25 28 20 20 18 12 13 11 12 12 11.5 5 —. BY MACHINE A B C D E F 10 10 10 10 10 10 0 0 0 0 0 0 15 12 13 10 10 12 0 0 0 0 0 0 192 SERVICES FOR SMALL-SCALE INDUSTRY machine designed by the same Japanese company that had designed the huskcrushing machine. It operates on more or less the same principle as that described above, but the results were found to be even more disappointing. It was impossible to get any long fibre and the central portion of the husk was left almost untouched. The problem was to find a real substitute for the hand mallet. The timing, speed and weight, which are characteristic features of the mallet beat, had to be correctly assessed. After several attempts, the R.I.D.A. has now devised a machine which, operating with a gear and flywheel, gives intermittent knocks to crushed husks. It still needs improvements, but it is so far the best solution to the problem, and it is expected that further improvements in these machines will revolutionise the coconut fibre industry. The table at the foot of page 190 compares the performances of the hand-malleting method and the machine method. Under the former method 63 ounces of fibre were extracted from 60 husks in about 30.5 man-hours; under the latter method 71.5 ounces of fibre were extracted from 60 husks in little more than 3.5 man-hours. Sweden : Improvement of Production Methods in Two Small Firms The owner of a small Swedish firm with about ten workers making milling discs was turning away orders and wanted to double his output. He applied for a loan of 100,000 Swedish crowns for the purpose of extending his premises and putting in a new heavy press (400 tons) since the only heavy press he possessed constituted a bottleneck. The Swedish Government Handicrafts Institute was asked to provide technical advice in connection with his application for a loan, and found that the desired expansion could be achieved much more cheaply without putting in a second heavy press and without any substantial extension of the premises. The heavy press was producing six discs an hour. It was standing idle for six-and-a-half out of every ten minutes, because one worker was engaged in both pressing and filling. On the recommendation of the Institute's consultant a second worker was employed on the press. While one disc was being pressed, the next one could then be prepared for pressing. In addition, rollers were installed to eliminate manual loading and unloading. Producing in small batches had necessitated continual changing of tools; larger batches further reduced the idle time of the machine. In addition, the method used for changing tools when necessary was simplified. The combined effect of all these improvements was to make it possible to produce 18 discs an hour in place of six. Thus the one heavy press ceased to be a bottleneck, and the heavy expense of installing a second was avoided. However, a new bottleneck developed. There was not sufficient furnace capacity to handle the increased output, and it was necessary, though at a much lower cost, to install a new furnace. The owner had inherited the business which had grown in a piecemeal and haphazard manner, new machines having been added wherever there happened to be room for them. Whatever logic may have prompted the original layout was no longer discernible in the tortuous journey, 249 metres in length, accomplished by the raw material in the course of its conversion into milling discs. The hydraulic presses and the furnaces could not be shifted. Therefore, these installations were taken as fixed points, and the other installations were regrouped in logical sequence, the total distance over which materials had to be transported within the shop being reduced to 101.5 metres. In addition, discs had formerly been carried by hand from the hydraulic presses to the drying rooms. Before drying they were very easily damaged and mechanical transport had not been considered safe. It was found, however, that discs could safely APPENDIX II 193 be stacked on trucks with pneumatic tyres, and when they were transported in this way, 50 at a time, a great deal of shuttling back and forth between the presses and the drying room was eliminated. The total cost of the new equipment and alterations required came to 55,000 crowns instead of 100,000 crowns which the owner had considered necessary. With two or three additional workers he was able to double his weekly output and increase his net profits by 30,000 crowns a year. The advice of the Institute was also sought by the owner of a factory employing about 15 men and producing 1.2 million flower pots per year. Work simplification and changes in his oven enabled him to reduce his costs and strengthen his competitive position considerably. To permit air to be drawn in from below, the floor of the oven was on a higher level than that of the workshop. Before baking the pots were off-loaded from a truck by a worker standing outside the oven and passed by him to another worker stationed inside the oven who stacked them for firing. When a ramp was installed to cover the step from the floor of the workshop to that of the oven the truck could be pushed inside the oven and the off-loading and stacking could be done by one worker in a single operation. After firing, the pots had formerly been placed on a shelf before being packed into boxes. This unnecessary operation was eliminated when they were packed directly into boxes. Certain changes were also made in the method of stacking pots in the oven. Another improvement was the installation of a fireproof door on pulleys, which could be lowered into place. Formerly the entrance to the oven had been bricked up for each firing. The cracks around the new fireproof door could be sealed and subsequently unsealed with far less labour than was required for the original processes of bricking up and breaking down the doorway. Yet another improvement consisted of applying thefinishingsurface to the pots by spraying them with oil instead of brushing it on. APPENDIX III TWO ENTERNATIONAL COURSES ON PROBLEMS OF SMALL-SCALE INDUSTRY Netherlands : Course Given by the Research Institute for Management Science, Delft The Research Institute for Management Science at Delft (Netherlands) conducts an annual international course of 25 weeks' duration (from November to April) in problems of small-scale industry.1 The course is based on research in the field of small-scale industry and experience gained in conducting other training courses. It is conducted on a post-graduate level, in the English language. Enrolment is limited to a maximum of 15 participants. The course is open to holders of bachelor or master of science degrees in engineering or equivalent degrees of recognised universities or colleges. Preference is given to applicants having several years of practical experience in industry. The purpose is to provide intensive training for a small homogeneous post-graduate group. The course consists of a general programme, which is the same for all participants, and a special programme drawn up according to the particular interests of each participant. The general programme (12 weeks) comprises a general introduction, giving a survey of economic, industrial and socio-political conditions in the Netherlands, and a theoretical course, supplemented by practical exercises. The curriculum of the theoretical course is as follows : (a) General aspects. Principles of industrial economics: the commercial, financial, technical and social aspects of small-scale industry; the role of institutes, government agencies, training centres and co-operatives in industrial development. (b) Organisation and production in small-scale industries. Principles of organisation and management: characteristics of different types of smallscale industry; cost control procedures; production control techniques; balancing of line-production systems; materials handling; operation analyses; cost estimation; work simplification; human relations; personnel and wage problems. (c) Establishment of new industries. Market analysis; plant location and layout; mechanisation: development of mechanised production methods, purchase and utilisation of machines and other equipment; training methods: accelerated training, training within industry, group dynamics. Lecturers in the theoretical course include professors from universities in the Netherlands, international experts on economic development, government officials, heads of industrial institutes, experts from industry, and management consulting engineers. 1 See Research Institute for Management Science : International Training and Assistance (mimeographed). APPENDIX III 195 The special programme (12 weeks) consists of field work in industry or institutions, under the guidance of an expert when necessary. In this work the participant is accompanied by a Dutch companion. The purpose of the special programme is to enable the participant to study problems concerning— (a) the setting up or development of new industries; or (b) the setting up or development of training centres and other institutions for the promotion of small-scale industries; or (c) the improvement of conditions in already established industries. The programme has three phases, namely— (a) a survey of a certain branch of industry (or institutes) in the Netherlands. The participant is required to write a report, giving special attention to possible differences between conditions in the Netherlands and the participant's home country; (b) practical work in industry (or institutes) in order to enable the participant to acquire thorough knowledge of technological data, production techniques and organisation problems. The participant is assigned some practical production problems to solve; and (c) planning the setting up of an industrial undertaking (or institute). Having collected the necessary data, and bearing in mind the differing conditions, the participant is requested to draft a plan for the setting up of a new industrial undertaking (or institute) under circumstances similar to those in the participant's home country. Participants may select one of various branches of industry such as leather, bicycles, canning, woodworking, plastics, textiles, ceramics, machine factories, or they may elect to plan the establishment of training centres or institutes for the promotion of industrial development. During this phase regular group meetings and additional visits to factories concerned are organised to enable the participants to exchange views and experiences. At the end of the course, a whole week is devoted to discussion and evaluation of its results. Excursions are organised throughout the duration of the course to acquaint the participants with various branches of industry and institutions for industrial development. This course, which has been given each year since 1955, has been followed by participants from Belgium, Brazil, Burma, Ceylon, Chile, Egypt, Greece, India, Iran, Korea, Nepal, Nigeria, Pakistan, the Philippines, Sudan, Thailand, Turkey and Yugoslavia. United States: Course Given by the Stanford Research Institute and the Stanford University Graduate School of Business The Stanford Research Institute and the Stanford University Graduate School of Business in California offered for the first time in 1959, and repeated in 1960, a course for small industry managers and counsellors. The following particulars among others, are given in a brochure announcing the course 1 : The programme in 1959 will be limited to ten managers and ten counsellors selected from various parts of the world.2... 1 Stanford University Graduate School of Business and Stanford Research Institute, International Industrial Development Centre: International Program in Small Industry Management. •The actual participants in the first part of the 1959 course came from the following countries: two each from Hong Kong, Indonesia, Iran, Japan, Mexico and Pakistan; one each from Burma, France and Nigeria. Additional participants for the later part of the course were expected from Indonesia (two), Poland (one), and Jamaica (one). 196 SERVICES FOR SMALL-SCALE INDUSTRY During the first period, counsellors and managers will study the typical problems faced by managers of small manufacturing plants. They will have seminars, lectures, study periods, and in-plant training in factories selected for their suitability to the programme. Introductions will be arranged for managers who wish to visit additional plants after completing the formal twelve-week course. The second twelve-week period, for counsellors only, will be devoted to the study of counselling techniques, organisations, and services for the assistance of small industry. FIRST PERIOD Orientation (three days, ...) Lectures and discussions on the role of small industry in industrial development. Seminars (four weeks, ...) Lectures and seminars under faculty members of the Stanford Graduate School of Business. The following subject material will be covered: —Accounting and control. —Production management. —Marketing. Four days of each week will be spent on lectures, seminars, and directed reading, and one day will be used to visit representative commercial, financial, and manufacturing firms in the San Francisco Bay area. In-Plant Training (four weeks, ...) Individually or in small groups, programme participants will be assigned as interns to small manufacturing companies in the San Francisco Bay area or in southern California. By working in various operating departments, the participants can study and observe the actual operations, management techniques, and problems in small, efficiently managed companies. During this internship, participants will return to Stanford University periodically for discussions, seminars, counselling with the faculty, and sharing individual experiences. So far as possible, each assignment will be made to a company operating in the same general industry as that of the participant, so that he may also observe relevant manufacturing technology. Seminars (four weeks, ...) Lectures and seminar discussions covering: —Business finance. —Industrial relations. —Small business management. The last topic will include problems of planning, co-ordination, control, policy, and growth in the small company. The purpose of this period is to relate the preceding course material to small firms in the environments of the countries represented. One-day plant visits will be made each week. At the end of this period, the small-business managers will have completed their course. If desired, arrangements may be made at that time for individual visits to other firms in the United States. SECOND PERIOD Advisory Service Training (twelve weeks, ...) Seminars and lectures with staff members of the International Industrial Development Centre of Stanford Research Institute, supplemented by reading pertinent reports and studies from many countries. The following subject material will be covered: —Policies toward small industry in newly industrialising countries. APPENDIX III 197 —Small industry development techniques—the most useful experience of various countries. —Administration of an advisory service, including: objectives and organisation, staff selection and training, information to be transmitted, counselling techniques, and evaluation. —Locating entrepreneurs and developing managerial talent. —Local and international sources of technical and managerial information. Short periods of internship and group visits will be arranged with private management consulting films, United States government agencies concerned with extension work, trade associations, and banks. These visits will be followed by discussions and seminars. An opportunity will be given to study the techniques used in agricultural extension and the courses provided for extension agents. Visual aid materials will be collected and studied. A short workshop will be given on the adaptation of such material to conditions in newly industrialising areas. The counsellors will also become familiar with current research on small industry development methods and will have the use of the world-wide collection of small industry literature in the small industry library of the International Industrial Development Centre. The final week will be used to summarise the discussions. The small industry managers admitted to the programme must have the following qualifications : 1—Education through high school or the tenth standard. 2—Five years' experience in business, preferably in small-scale manufacturing. 3—Position as owner-manager, managing director, or operating partner in a small manufacturing company. 4—Command of written and spoken English. Counsellors must have the following qualifications: 1—Professional training through technical school or university in engineering, business, or economics. 2—Two years' experience, preferably in business but possibly in an advisory service organisation. 3—Position as administrator or technician in an organisation, governmental or private, that offers advisory services to small industry.... APPENDIX IV SOME EXAMPLES OF FINANCIAL ASSISTANCE AVAILABLE TO SMALL-SCALE INDUSTRY IN DIFFERENT COUNTRIES Denmark In Denmark there is a scheme whereby the Government grants financial assistance on special terms to small industrialists and craftsmen. Loans under this scheme are not granted for the purpose of establishing new small businesses, but for assisting the extension or modernisation of firms that have been in existence for at least three years. The loans are granted at 5 per cent, interest, which is less than the rate that banks would charge, and they may be amortised over 15 years (in some cases starting after the end of the second year), whereas banks would insist on repayment within five to ten years. Buildings are accepted as security up to 80 per cent, of their current value, and equipment up to 50 per cent, of its current value, less the amount of any mortgages already outstanding. Additional amounts may be borrowed if guaranteed by persons of good credit standing or on the security of certain types of personal property belonging to the borrower. An applicant for a loan is required to complete a detailed application form, including information about the amount, purpose and duration of the loan requested, his personal qualifications, the balance sheets and profit-and-loss accounts of his firm over the past three years, the number of persons he employs and the number he expects to employ if the loan is granted. Application forms are sent to the Ministry of Commerce and Industry, which transmits them to the Copenhagen Technological Institute 1 for expert advice. A member of the staff of the department of the Institute which deals with the branch of industry in question then visits the firm, discusses the application with the owner, examines his plant and equipment, its efficiency and its prospects, and submits a technical report with a recommendation as to whether or not the loan should be granted. The application form then passes to the department of business economics of the Institute. A member of the staff of this department also pays a visit to the firm to examine financial aspects of the application, looking into such matters as the capital and the liquidity of the firm, and submits a financial report, which likewise contains a recommendation as to whether or not the application should be granted. With the help of these two reports and of advice from a committee representative of various interests, the Ministry takes the final decision. If a loan is granted, the department of business economics of the Copenhagen Technological Institute exercises control until it has been fully repaid. Starting on a small scale, the scheme has been in operation since 1928. Five million Danish crowns are now available annually for loans to handicraftsmen and small industrialists under this scheme. Loans up to 100,000 crowns may be granted, but the usual amount of a loan is about 20,000 to 50,000 crowns. There has been very little defaulting. 1 If the applicant is from the Copenhagen area ; other arrangements may be made in other areas. APPENDIX IV 199 France There are several types of institutions intended to provide credit facilities on special terms for craftsmen and small and medium-sized undertakings.1 Firstly, there is the French People's Credit Institution (Crédit populaire de France), which operates at the regional level through " people's banks ". It provides a specialised credit service based on a full knowledge of the special problems and needs of small and medium-sized undertakings ; in particular, it is able to grant them long-term loans at normal rates. Secondly, there are the occupational mutual guarantee societies (Sociétés professionnelles de caution mutuelle), from which small and medium-sized undertakings can obtain medium-term bank credit for the purchase of equipment on particularly favourable terms by means of bills backed by the National Public Contracts Fund (Caisse nationale des marchés de VEtat), a publicly owned establishment attached to the Ministry of Finance. The initial capital of these societies is usually put up by occupational organisations; to this is subsequently added the contributions of borrowers. The latter are required to subscribe the equivalent of 0.1 percent, of the loans they wish to obtain to the capital of the society concerned. In addition they are required to contribute to a guarantee fund, but this requirement can never entail more costly consequences than the equivalent of an 8 per cent, increase in the cost of the credit granted to them. Payments into the guarantee fund bear interest at an average rate of 4 per cent, and are repaid to the user when he has reimbursed the entire loan. The National Public Con raots Fund agrees or refuses to grant the credits asked for on the recommendation of the committee of the mutual guarantee society concerned and, in case of agreement, fixes the terms of the loan. In all cases the undertaking applying for the loan must finance part of the operation contemplated (between 10 and 40 per cent., according to the case) out of its own resources. The Fund—which, it will be remembered, does not advance moneys itself but merely backs the borrower—has a double guarantee; in the first place, it has that of the mutual guarantee society and, in the second place, that of the borrowing undertaking, the latter usually taking the form of pledges of equipment and material or, in exceptional cases, mortgages on the buildings. The procedure for obtaining credit is as follows : the applicant must submit two copies of the request, with full supporting evidence; one copy goes to the society and the other to the National Public Contracts Fund. A report is prepared from this information, on the basis of which the committee of the society makes its decision; once it has agreed to advance a loan it is liable for the whole of the amount decided upon, subject to approval of the transaction by the Fund. The latter makes its decision, which is communicated to the applicants, the society and the bank which will discount the bills backed by the Fund. Three months may normally be expected to elapse between the time of the application and the placing of the funds at the disposal of the applicant. The latter must in principle make use of the loan granted to him within six months. Proof that the money has been used for the purpose for which it was granted is given by submission to the Fund of receipted bills showing the date of delivery and the date and method of payment. Finally, small undertakings can obtain loans on favourable terms from the Economic and Social Development Fund in order to increase their productivity or modernise their plant. This system, however, is not reserved exclusively for craftsmen and small undertakings. Similarly, there are a number of regional 1 For more detailed information see Le financement des petites et moyennes entreprises, op. cit. 200 SERVICES FOR SMALL-SCALE INDUSTRY development societies (intended to promote regional economic expansion and to facilitate industrial decentralisation), which can in a variety of ways give useful assistance to small undertakings by furnishing funds to those which cannot turn to the ordinary money market. Japan State measures designed to alleviate the financial difficulties of small industry in Japan * have mainly taken two forms : the provision of funds directly through governmental and semi-governmental financial institutions, and the provision of credit guarantees. Among measures of the former type, mention may be made, first, of the establishment of the Small Business Finance Corporation in 1953. This agency is wholly government-owned; its purpose is to provide small firms with long-term funds. Most loans are made through the intermediary of private institutions acting as agents, but some loans are made directly. Another body is the People's Finance Corporation. This was established in 1949. It operates through local branches and agents and makes long-term loans to small enterprises unable to obtain funds from private banks. The annual rate of interest charged is 9.6 per cent. In 1936 a Central Bank for Commercial and Industrial Co-operatives was established jointly by the Government and co-operatives. Its funds, apart from those provided by the Government, come mainly from the issue of debenture bonds and from deposits made by co-operatives and their members. It extends loans, both on a long-term and a short-term basis, for equipment as well as for working capital, and it discounts bills, through its own branches and through credit co-operatives which act as its agents. It also functions as the parent bank of the urban credit co-operatives. The Government Trust Fund Bureau, whose funds are mainly made up of postal savings, is an important supplier of capital to small industry. Finally, budget surpluses are deposited on special accounts in the banks and are used for granting loans to small firms. As regards the second type of government measures—provision of credit guarantees—there is a credit insurance scheme under the Small and Medium Enterprise Credit Insurance System, which provides government guarantees for financial institutions as well as the Credit Guarantee Society (see below) against losses due to failures of small firms. The major types of insurance cover are— (a) loans advanced by financial institutions to smaller enterprises (the borrower pays a premium of 2.19 per cent, and in return the Government guarantees 50 per cent, of the loan); and (b) guarantees made by the Credit Guarantee Society on behalf of small enterprises. The Credit Guarantee Society is an organisation which facilitates, through the provision of guarantees, the supply of loans by financial institutions to smaller enterprises. The fund permitting guarantees to be given has been built up from contributions by local authorities, financial institutions and organisations of small industrialists. The Small and Medium Enterprise Credit Insurance Corporation, a fully governmental organ recently established, helps financially and insures guaranteîs. Mexico Until recently Mexican industry in general and medium-sized and small undertakings in particular suffered from a severe lack of funds. In 1953, to 1 For further information see The Smaller Industry in Japan, op. cit., pp. 82 ff. APPENDIX IV 201 improve the situation, an Act was passed establishing the Guarantee and Promotion Fund for Medium-Sized and Small Industry (Fondo de Garantía y Fomento a la Industria Mediana y Pequeña).1 The Fund is closely associated with the Ministry of Finance and the National Finance Corporation (Nacional Financiera), a limited liability corporation which supplies loans to large-scale industry and acts as their agent. The federal Government appropriates money to it, and in addition the Fund is authorised to receive contributions from individual states provided any such contribution is earmarked for the state in question. Up to the end of 1958 the Fund had received from the federal Government the sum of 110 million pesos. The Fund is governed by a committee composed of representatives of various institutions and government departments including the Ministry of Finance, the Ministry of Economic Affairs, the Bank of Mexico, the National Finance Corporation and the National Confederation of Chambers of Industry. The primary function of the committee is to approve the credit and guarantees granted by the Fund. The principles governing the operations of the Fund are as follows : (a) the Fund should encourage the supply of loans by private credit institutions and should intervene only as a supplementary measure; (b) the Fund should operate through private credit institutions; (c) only loans to meet fixed capital and working capital requirements should be considered; (d) the magnitude of a loan should be related to the development prospects, existing resources and credit-worthiness of the enterprise ; the applicant for a loan should submit an investment plan; and (e) loans should be contracted in accordance with normal banking practice. The major operations of the Fund are the following: (a) provision of guarantees for private credit institutions lending to small enterprises; (b) provision of guarantees for the bonds of small entrepreneurs; (c) discounting of bills submitted by private financial institutions for loans granted to small enterprises; and ' (d) the issue of securities entitling their holders to a fixed annual income, or a share in the earnings of the Fund, or both. As one of the major purposes of the Fund has been to facilitate the supply of cheap loans, the annual rate of interest attaching to its operations has been 10 per cent. In view of the chronic shortage of funds on the Mexican market this is considered a modest figure, and one which will not endanger the stability of small firms. The operations of the Fund have been concerned with loans granted for periods of 12 to 60 months—most frequently with loans of mediumterm duration not exceeding 24 months. The experience of the Fund since its establishment in 1954 has been encouraging. Far from exhausting its resources, it has succeeded in making profits and retaining at its disposal considerable assets. The volume of its operations has steadily increased and it has penetrated virtually all sectors of manufacturing industry. There has been little defaulting on the part of the firms benefiting frcm its activities. These achievements would seem to indicate that there are considerable possibilities for the initiation of similar projects with a high probability of 1 See Fondo de Garantía y Fomento a la Industria Mediana y Pequeña (Mexico City, Nacional Financiera, S.A., 1958). 202 SERVICES FOR SMALL-SCALE INDUSTRY success. It is emphasised, however, that an over-all improvement in the performance of the smaller enterprises will not be accomplished byfinancialmeans alone; it will depend to an important degree upon improvements in technical and administrative organisation. Netherlands The Netherlands Bank for the Middle Classes (Nederlandsche Middenstandsbank, N.V.) was established in 1927 by the Government, the National Bank and three private associations. It has from the beginning functioned as an ordinary bank, undertaking all normal banking transa-tions, but its clientèle is limited to craftsmen, retailers and small industrialists, and it receives state help in two forms, the State having provided part of its capital as well as guarantees against losses in connection with special loans to small firms. For ordinary loans to clients, mostly of a short-term character, ordinary banking principles are applied, and this is in itself a guarantee of sound management. This part of the Bank's business is, of course, facilitated by the safeguards to its deposits and liquidity afforded by the government guarantee referred to above. In addition, in collaboration with the Government, which has representatives on its Board of Directors, the Bank has developed over the course of time a number of special loan facilities designed to meet the most pressing of the financial needs of small businesses—the supply of long-term capital. Special long-term loans may be granted for new investment in additional plant and equipment, and also for improving an unsound financial position in which a well managed firm may have been placed for reasons beyond its control— e.g., if a sharp rise in material prices has jeopardised its liquidity. As a rule, collateral security is required of the borrower, mostly in the form of mortgages, but such loans are sometimes granted with little or no collateral, simply on the strength of the borrower's credit standing. The Bank has subsidiaries throughout the country. Their officials have an intimate knowledge of each region and are often well placed for obtaining reliable information about the trustworthiness and other personal characteristics of applicants. If an application is made for a loan to buy new equipment, the Netherlands Technical Consulting Service may be asked to advi ,e on the choice of equipment. As a rule the maximum duration for such special loans is ten years. Norway In Norway a special establishment, the Norwegian Industrial Bank (Norske Industribank) was founded in 1936 to grant long-term loans to undertakings with at least five employees. The Bank, in which the State owns 51 per cent. of the shares, is not exclusively a small business bank. A loan must not exceed 60 per cent, of the value of the land and buildings, nor 40 per cent, of that of the machinery, owned by a borrowing firm. The rate of interest has been 4 to 5 per cent, in the post-war years. Long-term loans are repayable in instalments over 25 years (ten years in the case of loans for the purchase of machinery). The Bank may waive repayment when a major part of a loan has been amortised, or if the loan is comparatively small. Interest, however, continues to be payable. The requisite funds are raised by floating bonds on the market. Craftsmen and small industrial entrepreneurs can obtain loans up to the amount of 10,000 Norwegian crowns (about 1,400 dollars) from a Handicraft Fund. The applicant should be able to prove his credit-worthiness; suitable training and personal probity may be sufficient requirements. These loans are extended primarily to firms already in existence and only exceptionally granted APPENDIX IV 203 for the foundation of new enterprises. Loans are intended for the purchase of machinery, engines or expensive tools that are expected to enable the borrower to expand his enterprise or to use better working methods. Loans may not exceed 75 per cent, of the price of the equipment to be purchased. The money is paid directly to the supplier. The rate of interest is 2.5 per cent, and loans must, after one year free of amortisation, be paid back in eight annual instalments. In addition, a so-called Productivity Fund, amounting to 10 million crowns, has been established as a revolving fund with assistance under the Marshall Plan. Loans from the Fund are extended primarily to small and mediumsized enterprises in industry, handicrafts or trade. A special feature of the Fund is that its loans must be designed to encourage competition and reduce prices. Priority is given to applications from undertakings manufacturing new products or applying a new production process, which may thus set an example for others. Loans are granted only to existingfirmsand must be repaid within five years. It is understood that indebtedness shall then be transferred to ordinary banking or investment institutions; this will have been made easier in so far as rationalisation made possible by the loan has increased the earning capacity of the firm. The upper limit for a loan is generally 250,000 crowns and the rate of interest applied has been 7 per cent. While loans from the Handicraft and the Productivity Funds are made only or chiefly to existing and established firms, there is also a Fund for New Industrial Projects which caters primarily for new undertakings, giving preference to those setting up in areas where industrialisation has made little progress. It is financed by the State and applications are examined in the Department of Industry. It makes loans to applicants who have not sufficient resources of their own and cannot obtain loans from other sources. The terms of repayment are agreed upon in each separate case. In some areas there are so-called industry offices which give technical assistance to handicrafts and small industry (serving also as central purchasing agencies) and which are empowered to grant credits from state funds. Sweden In Sweden, as in many other countries, commercial banks are a primary source of short-term loans to industry, including small-scale industry. Many small industrialists, however, find it difficult to provide the security which the commercial banks normally require; and, in addition, commercial bank loans are not intended to provide long-term capital, although short-term loans repeatedly renewed may be used to some extent for this purpose.1 Savings banks have been a traditional source of longer-term loans for Swedish smallscale industry but, in addition, special financial facilities have been provided for small business. In the first place, many of the trade associations referred to in Chapter III are empowered to grant loans. The State assists this loan activity (over 25 million Swedish crowns had been granted to trade associations up to the end of 1957) and defrays the administrative costs of making loans. The moneys granted to a trade association remain within the association as a revolving fund : repa; ments can be used to finance fresh loans. With repayments and fresh funds obtained from the State the associations have loanable funds amounting to about 5 million crowns a year. The maximum amount of a loan granted 1 A new institution was founded by the commercial banks in 1959 for the purpose of giving medium-term loans to small firms, mainly to such firms as are too small to have ready access to the bonds market. 204 SERVICES FOR SMALL-SCALE INDUSTRY by an association is usually 40,000 crowns. The rate of interest normally charged is 4 per cent, and the maximum period of repayment is ten years. The trade associations normally require an applicant first to seek a loan on ordinary commercial terms from a commercial or a savings bank: the assistance granted by them often supplements such commercial loans, enabling the borrower to establish, extend or modernise his business. There are no hard and fast rules regarding the security demanded by trade associations. They may accept second or third mortgages, bonds or stocks deposited as collateral, or guarantees by persons other than the borrower, and sometimes lend without collateral security on the strength of the confidence they have in the applicant. A second form offinancialassistance for small business is that whereby the State agrees under certain conditions to guarantee loans obtained from commercial or savings banks, agricultural credit associations or other credit institutions approved by it. During the past few years a sum of about 10 million Swedish crowns annually has been set aside for this purpose. Loan applications are dealt with on a decentralised basis, applications being investigated usually by trade associations. Those carrying out such investigations are required to take into consideration, among other things, the potential effect of a loan guarantee on local employment and the location of industry. The final decision rests with the Board of Trade (formerly the Ministry of Commerce). There are no general regulations governing the extent of a loan guarantee. Fixed repayment plans are drawn up, the maximum period being usually ten years. Loan guarantees are not, as a rule, granted in cases where the applicant would be able to meet his requirements by means of an ordinary commercial loan, nor are they granted for the purchase of established businesses. Purposes for which they may be granted include— (a) the building or rebuilding of workshops or the large-scale improvement of such premises; (b) the purchase of equipment, machines or tools; and (c) in some cases, the provision of working capital. The borrower is called upon to deposit such security as is commensurate with his financial standing and circumstances. Special attention is paid to the trade skill and managerial ability of the manager or owner of the business in question. Other factors taken into consideration are the amount of capital that the owner has invested in his business and the extent to which the measures for which the loan is sought are expected to improve the profitability of the business. In addition to the financial assistance made available in these ways there are other sources of funds to which small businessmen in Sweden may turn. They include a State Handicraft Loan Fund established in 1910 and administered by the Board of Trade, a Handicraft and Small Industry Credit Fund established in 1941 and administered by the National Bank, a Domestic Craft Loan Fund established in 1940, and the Industrial Credit Corporation (A.B. Industrikredit) organised jointly by the Government and a few leading commercial banks in 1934. PUBLICATIONS OF THE INTERNATIONAL LABOUR OFFICE Payment by Results Studies and Reports, New Series, No. 27 Second Impression A report prepared in order to provide governments, employers and other interested parties with up-to-date information concerning the various types of systems now in use, t h e procedures employed in introducing and applying them, the extent to which they are used in various countries and industries, their effects on output and workers' earnings, their advantages and disadvantages, and the various provisions that have been found necessary to safeguard the interests of employers and workers. The bulk of the report was prepared on the basis of information supplied b y the governments and organisations of a number of countries in response t o an Office inquiry ; a second part contains a statement of general principles concerning the use of systems of payment b y results, which was drawn up b y a meeting of experts held under the auspices of the I.L.O. 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