Case studies of small-scale forest-based

processing enterprises in Latin America.

by
Per Christiansen
Swedforest Consulting AB
Santo Domingo
Dominican Republic

Background

There has been considerable activity to help reduce rural poverty in Latin America.
Efforts have included policy reform and accompanying field programmes for rural
development. Many of these integrated development programmes have had forestry
components and it is in connection with work on these that the author has collected the
information with follows. Forest-based small-scale processing enterprises (FB-SSIs),
having good opportunities for growth, play a very important role as a promising source
for increasing employment, for better standard of living and in the long run for
developing rural areas. This paper describes and comments on experiences with such
enterprises with emphasis on the role, nature and structure of producer organizations and
of external institutions set up to assist them. It discusses main strengths and weaknesses
in achieving success and identifies key issues relate to the organization of producers and
of assisting agencies. Three specific illustrative cases selected from very different types
of location will be described.

Experience suggests that in discussing the institutional impact on development of small-

scale forest-based processing enterprises, It is necessary to consider the whole production
chain from the forest to the market. Problems such as infrastructure, social structure,
long-term wood supply, logging and transportation considerations, distribution system
and marketing policy and systems, have to be considered as activities closely interrelated
with the enterprise.

Most of the small-scale forest-based enterprises reviewed here as case studies are private
companies, often owned by individuals. There are, however, also different types of
cooperatives, usually supported by governments or other external institutions, some of
which receive international assistance.

The traditional and commonest small-scale processing activity besides firewood and
charcoal-making is pitsawing and mechanized sawmilling, the later being predominantly
the rustic circular sawmill. Many countries have up to 200-300 such small sawmills often
operating at well below their installed capacity.
These sawmills are often an essential base for other forest-based processing units, which
convent sawn lumber further into different end-use products such as furniture, boxes,
parquet, handles, mouldings. This secondary processing is often integrated with the
sawmilling on the same location. However, a sawmill often also supplies raw material for
a series of separate small wood-based processing units normally owned by families or
individuals.

This paper discusses only development of small rural wood-based enterprises as wood is
the most important forest product. Other activities, such as resin-tapping, use of fruit-
bearing trees, handicrafts from non-wood forest produce tend to have only localized
importance, and will not be dealt with here. So far, external support to these small
enterprises is very limited: Governmental institutions usually emphasize controlling
functions and enforcement of laws. They sometimes also organise special training
courses. In general, there is little systematic and direct advisory service on any aspect and
no financing or credit is made available.

In response to the limited external assistance, producers of similar products such as

sawmill owners, usually have some kind of cooperation with each other. They often form
special-interest associations, which are normally a forum for addressing marketing
questions, fixing prices etc. The associations are usually not able to achieve much, being
usually weak due to limited financing. For this reason they can offer little to their
members by way of necessary technical and financial support. A few small enterprises
control their own supply of raw materials including their own forest management system
and capacity for logging and transportation: they are obviously much stronger than those
which depend on other entrepreneurs for their raw materials or for distributing their
manufactured products.

Using a chain saw

Case study 1: FB-SSIs IN THE PLAN SIERRA PROJECT IN DOMINICAN

REPUBLIC

The setting

The Plan Sierra project is an integrated rural development scheme in the pine-forested
mountain region in the north. The project covers some 250 000 hectares spread over four
watersheds. The project started in 1979 and the national budget has been approximately
US $ 700 000 since them. Over the years, the project has been able to attract quite
substantial support from abroad - bilaterally from Sweden, Holland, Germany and USA
and from international institutions such as Kellogg's Foundation and the World Food
Programme of the UN. The more important activities are reforestation with forest trees
and perennial crops, soil conservation, annual crops, cattle grazing, and development of
wood-based processing industry with raw material from managed forests. Supporting
sub-programmes exist, such as development of infrastructure, health services, training
and education, and social organization.
One very important element in Plan Sierra's activities is providing credit to the farmers.
The project normally grants credits to groups of farmers but the individuals in the group
make the commitment to repay with the future harvest and the group's responsibility as
the only security demanded by the lenders. Although so far 70 percent of this credit has
gone to coffee production, the project started in 1985 to also give credit for forest
investment. This complements technical assistance to owners of private forests regarding
elaboration and practical application of forest management plans.

In the project area, 400 forest owners have now been identified, of whom 13 own a total
of 770 hectares. They are initially involved in development of afforestation, forest
management and roundwood production, but some of them can in the future establish
small wood-based industries to use their forest resources. To prevent overexploitation of
forests for quick revenue, the new forestry law of 1985 requires forest owners to obtain
special permits from “La Comision Tecnica Forestal” for harvesting their forests. The
permits will only be issued if a proper forest management plan exists.

Within the framework of the integrated project is a Swedish-funded subprogramme

(named “Celestina”) which implements a forest management plan for about 4 000
hectares of badly cut-over and degraded pine forests (Pinus Occidentalis) and utilizing
the harvested products in a processing industry unit with two sawmills and other installed
equipment. The main objective of this management plan is to restore and utilize the
degraded forests, thus achieving an improved long-term economic yield and also
obtaining a social impact on the project by employing and training people in working
ages from the 110 families (600 persons) living within the Celestina area. The ultimate
goal is to give economic self reliance by processing and marketing forestry products to an
annual total of about 6000 m3.

In the Plan Sierra region, about 40 small-scale wood-based enterprises are located and
developed, all with a maximum distance from Celestina of 30 km. They produce mostly
furniture and handicrafts and most of them are small and individually owned. The
processed furniture is of rustic type and is often only poorly finished. However, there is a
good local market for the small workshops and the bigger ones sell on the domestic
market. Some of these enterprises have up to 15 persons employed and the owners also
subcontract people, many times women, to prefabricate furniture pieces or make special
operations in their homes, which has a good spin-off employment effect in the
neighbourhood.

Institutional problems and support

The main problems encountered include bad internal organization and lack of cooperation
between enterprises even to solve common problems relating to financing and marketing;
raw material is of poor quality; sawn lumber is usually not sufficiently dry and the board
size is normally not related to the need, which results in unnecessary waste and raises
costs; the products normally have such defects that they can only be sold on the local
market at comparatively low prices. Furthermore, only the biggest enterprises have an
organized distribution system and good marketing contacts. Most of the other producers
lack a distribution system and have very little contact with the marketing centres. They
also lack low-cost credit and so do not invest enough in enterprise expansion.

The institutional support has been very poor up to date. Most of the enterprises could
have good opportunities to increase their production and the quality of the products if
they got sufficient technical and economic support. Nearly all of the producers buy their
raw material from the Celestina Project, which is the only producer of sawn lumber in the
region. In order to improve the situation, the Celestina project plans to create a special
programme to train owners and employees and try to find manufacturing techniques for
improving product quality. National instructors will be trained by international specialists
to run training courses, and to advise on production techniques and on new equipment
needed to improve production.

While detailed analysis of assistance requirements is only now being done, it is

nevertheless possible to say that the greatest need falls under the following elements:

a) assessment of enterprise raw material needs;

b) estimation of local and other markets as well as design of appropriate marketing and
distribution systems for maximum reach in the main selling centres;

c) review of transportation problems and assistance in their solution;

d) formulation of measures to improve quality of the products both through skills

improvement and by development of technical alternatives and new investments in
equipment;

e) provision of investment and working capital; and

f) promotion of better organization systems, especially regarding cooperation between

manufacturers of similar products for joint raw material purchase, marketing, price
policy, storage and distribution.

Case study 2: SMALL CIRCULAR SAWMILLS ON THE COLOMBIAN PACIFIC

COAST

The setting

This case will be briefly presented as an example of how some 40 traditional small
circular sawmill enterprises have survived under very bad economic conditions almost
without external support. The situation for this industry was studied in 1982: it appeared
that these enterprises have good development opportunities provided a common strategy
is worked out for new structure, marketing, credit possibilities, reliable raw material
supply and external assistance.
The Pacific coast has been the traditional area for forest harvesting activities in
Colombia. The coastal tropical rain forests constitute the main raw material source for the
hardwood-based industry. The characteristics for this coastland is a very high annual
rainfall of 6 000-8 000 mm, clay soils, low population and lack of infrastructure.
Construction of roads is very expensive under such conditions, which is the reason why
all transportation is done on waterways. The area has also a very poor social structure and
low standards of living. The case study covers about 40 riverside sawmills in the region
of the San Juan river about 50 km north of the harbour town of Buenaventura.

All installations are of traditional rustic circular sawmill type owned by small private
companies or by individuals. Sawmill installations and machinery are between 10 and 40
years old, although a few have new machinery, diesel motors and new buildings.

Some of the sawmills obtain yearly permits to cut specified volumes of wood but the
most common system of raw material supply is through special logging entrepreneurs
mostly natives living upriver who float the logs in bundles of 20 to 200 units to the mill
sites where they negotiate with the sawmill owners.

With only a few exceptions, the sawmills operate at only 10-30 percent of their installed
capacity. The main obstacles to improving production are:

a) Lack of logs - partly during the dry season when log floating may not be possible,
partly because of lack of funds to pay the entrepreneurs delivering the logs, who normally
require cash payment. The logging entrepreneurs sometimes have to wait up to three
weeks at millsite for payment;

b) Shortage of spare parts - the sawmills being old, they frequently need spare parts, but
lack operational capital to keep stocks of these. The sawmills often suspend operations
for months while awaiting delivery of spare parts or because they cannot finance the
purchase;
c) Product storage and marketing problems - the sawmill owners usually do not possess
their own boats to deliver their sawn products and do not have a storage or marketing
organization in Buenaventura. Usually they have to wait until purchasers or
intermediaries arrive and negotiate to comparatively low prices at millsite; and

d) High waste factor and poor quality - due to poor state of equipment and low operator
skills.

Some problems also arise from lack of a structured policy for all wood-based industries
where the best managed, equipped and located sawmills with possibility to survive can be
developed and be included in a reinvestment plan supported by external assistance. The
inferior group of sawmills with insoluble economic problems should then be allowed to
close down or not receive external support. The lack of a policy framework is worsened
by weak institutional support. The limited external support which is available tends to
concentrate on raw materials licencing and similar administrative support. An association
of sawmill owners exists whose main activities are price fixing. It gives little technical
and financial assistance to its members due to lack of funds.

Possible Role of Support Organizations

If adequate assistance was made available to tackle the above problems, the sawmill
owners as a group have good opportunities for growth and development. The access to
forest reserves in the region is favourable and there is room on the domestic market for
hardwood products at acceptable prices. To be effective, any assistance must be made
available over a long period and should be flexible. It must win the confidence of the
entrepreneurs; in this respect government assistance agencies appear to attract little trust
as they have in the past been frequently associated with politically motivated changes.

To improve the situation, international technical assistance (including training) and

financing must be given to the sawmill owners association which is also supported by the
Department of Agriculture and Industry and the national association of wood-based
industry. These should together form the programme of developing the sawmill
enterprises and solving their urgent problems. International technical assistance and
financing with a soft loans system to the owners and international assistance cooperation
would also be recommended. Execution would be through a selected team of technical
specialists which would work out a system how to organize and strengthen the
association for greater effectiveness in all fields.

Case study 3: FOREST COOPERATIVES FOR PRODUCTION IN GUATEMALA

The setting

This third case study covers a 48-member forestry cooperative for production - San Juan
Ixcoy Ltd - which started up in 1978. It is located in the north-western part of the
highlands, called “Altiplano”, where members own small forest lots of generally badly
cut and degraded pine trees. The members of the cooperative all belong to the ethnic
group “nativos” of whom 80 percent are illiterates. The region supports 50 percent of the
people (3 million) of whom only about 45 percent are economically active.

The highlands have a road density of only 1 metre per hectare (compared with a
recommended density of 10-20 metres per hectare necessary for adequate administration
of the forests). Because of this, large forest areas cannot be economically utilized. Where
logging operations are attempted, transportation costs are very high; this partly explains
the very low level of rural development.

It is estimated that over 50 percent of wood is burnt to waste during land clearing for
shifting cultivation. Of the balance which is harvested, about 90 percent is converted into
firewood and charcoal. The “modern” forest industry consists of 155 registered sawmills
for all of Guatemala. Most of them have an annual production of less than 5 000
boardfeet (one shift) which is much less than the installed capacity. Most sawmills are
located close to the capital, on both coasts and in the Province of Petén while in the
highlands (where the pine forests are concentrated), there are very few mechanized
sawmills. However, pitsawing is frequently done there. There are also a lot of small
enterprises for production of wood-based furniture, boxes and handicrafts, especially in
the towns.

The Institutional Framework: cooperatives and support agencies

The decree-law No. 1653 of December 1966 controls cooperatives in the state-owned
farms and grants the legal mandate to promote cooperatives in the whole country to the
Superintendence of the Banks (Ministry of Economy), the Ministry of Agriculture, and
the National Institute of Agricultural Transformation (INTA). A federation of only
forestry cooperatives does not yet exist. The forestry Institute, INAFOR, therefore has the
principal responsibility which it discharges through a special promoter group. The
members of San Juan Ixcoy Ltd Forestry Cooperative have participated in courses
organized by the Federation of the Agriculture Cooperatives (FEDECOAC).

Guatemalan co-operative workers cutting wood with a chain saw

Based on the forestry law, a new plan for developing the forestry sector was prepared in
May 1978 which proposes 26 different programmes including a project to develop
activities of forestry cooperatives. The sub-section “Forestry Cooperatives” under the
Promotion and Evaluation Unit in INAFOR has the direct responsibility for developing
and promoting forestry cooperatives in close collaboration with the Department of
Agriculture Cooperatives under the Ministry of Agriculture and with a special advisor on
cooperatives under the Presidency of the Republic. The local offices in the sub-districts
of INAFOR participate very little in these promotion and support activities.

The promoter group in INAFOR headquarters has carried out pre feasibility studies,
socio-economic studies, and training of the new forest cooperatives. Before August 1978,
a special FAO/TCP project gave technical assistance in the developing of this
programme. However, this international project which was co-sponsored by the Lutheran
Church and an international cooperative federation, finished too early to fulfill its main
objectives of advising pilot forestry cooperatives and training national staff or teams. The
performance to date has in some cases been commendable but it is clearly necessary to
strengthen this section of INAFOR and improve its technical and financial status up to a
level which will satisfy the needs. It may be necessary to replace it with a more
autonomous special federation for forestry cooperatives which should have the legal
power and economic base to take over most of the responsibilities. Such a federation
would in the long term be financed by contributions from the different forestry
cooperatives, but in the initial 10-15 years, external financial as well as technical
assistance support would be essential.

The forest cooperative movement is located in specific areas of the Altiplano with the
principal purpose of promoting production, industrialization and marketing of forestry
products by means of an intelligent utilization of privately owned and communal forests.
The cooperative has aimed to ensure that forest land now divided into very small plots is
grouped into bigger units in order to make possible a more rational use of the resources
and dispose sufficient raw material for future regional industrialization. Benefits foreseen
include better product prices, incentives to a long-term economic management of existing
forests, increased level of employment, and a better rural environment generally.

More immediate alms include ensuring rational utilization of forest resources through
establishment of forest industries which will permit optimum use of raw materials and
promotion of organized participation in roundwood sales to members' own mills as well
as to other industry. Creation of profitable markets for all products is also an essential
function. In the longer term, the cooperative would also aim to increase production of raw
materials in order to support a larger forest industry; and to improve the standard of
living in the rural communities.

In order to achieve an adequate development of the forestry cooperatives, experience has

shown that initial activities require comparatively big investments. These should in each
individual case be adapted to the production and marketing possibilities. The minimum
amount for such investments varied between US $ 70 000 and 90 000 in 1980. The new
cooperatives usually also lack working capital and it is therefore necessary to obtain local
bank credits or international cooperation. A great part of the investments made in the new
operating cooperatives has been obtained through international donations through pilot
projects.

The national development bank (BANDESA) had the possibility to give loans to
cooperatives in the country, based on a contract between the Government and the Inter-
American Development Bank (IDB). The conditions for these credits were favourable as
to pay-off time and interest rate. However, the steps to obtain such credits have been very
complicated, including a series of requirements not always possible to satisfy. For
example, two years after presenting its request to BANDESA, the San Juan Ixcoy
cooperative has not yet received credits.
A special problem in credit matters is the guarantee. The Government has discussed the
possibility to have the growing forest, the wooded land without forest and the products
obtained in the future constitute bank guarantees for long-term credits according to
periods which will be fixed in advance in the management plan. In such cases, INAFOR
should advise in the evaluation of the guarantee if requested by any of the interested
enterprises.

The existing cooperatives for production each have a circular sawmill, logging equipment
and a forest tractor, which INAFOR rents or lends out for the initial activities. The
income resulting from this will be earmarked for a special fund for the development of
new cooperatives.

In the forest cooperative San Juan Ixcoy, not all 48 members are forest owners. There are
also several people who contribute with their own work in the forest management
operations and in the processing of roundwood. The forest owners also participate in the
work because this is usually the only source of income for them. In all, the owners have a
forest area of about 1 000 hectares with parcels varying between 5 and 100 hectares. Part
of the forest belongs to the Municipality of San Juan Ixcoy. The forest management
includes an active plan for clear-cutting of degraded pine forests and reforestation.

The forest cooperative tries to achieve the best utilization of the trees and avoid waste in
producing logs for its own sawmills, poles, and firewood for sale and for its own lime
ovens. The most important non-wood based product is lime whose price is very low. A
small circular sawmill was established in 1978 with an installed capacity of 2 000
boardfeet per 8-hour shift, i.e. a yearly production of 450 000 boardfeet. However, two
years after start-up, the sawmill still produced only 40-50% of its installed capacity which
was due to a lot of defects in the administration and organization of operations.

Among other things, there was a constant change of specialized operators, which was
difficult to foresee. Due to the long distance to the domestic market centres, lack of a
local market in the region, and low prices, profitability was poor. Some products were
also sold at millsite, which made marketing easier, but the prices could be dictated by
intermediaries.

INAFOR made an economic financing plan to find a realistic method to improve

profitability by a rational utilization of the resources during the period 1978-1983.
According to this analysis, it could be possible to increase production from 175 000 to
300 000 boardfeet. It also appeared that breakeven point for 1983 was at an annual
production of 160 000 boardfeet. The analysis shows that the cooperative project could
have a good feasibility but there is a strong need of long-term technical assistance to
reach the goal, probably also supported by international cooperation.

A total of 32 members are employed by the cooperative. A quick analysis of worker costs
reveals considerable anomalies in wage levels. Earnings often vary little between
unskilled and higher grades. Management seems to be poorly paid. It is likely in general
that motivation is poor as a result of a poor pay structure.
Certain specific problems existed in the development and establishment of forest
cooperatives for production in Guatemala the most significant of which were as follows:

a) The prospective members often distrusted the objectives of the cooperative. They
doubted that the profit would be for the members and thought the cooperative would
instead be a centre to establish business with the forest resources in the region;

b) The basic schooling is very low which creates many problems, especially in
administrative, skill-transfer, and organizational aspects;

c) In general, the directors do not have the capacity to operate in a satisfactory way;

d) Low salaries and local conflicts cause frequent changes of specialized workers, which
reduces productivity;

e) Financing is a problem;

f) The forest cooperatives do not have a long-term programme (10-15 years) and they
have inadequate external assistance to start them off on a sound footing;

g) The cooperative movement lacks the legal protection available to private companies
which facilitates many administrative and financial matters.

Discussion and conclusions

Cases presented in this paper and experience from other Latin American countries or
regions have shown that producers' organizations are often established for small-scale
wood-based enterprises. These are needed to promote common interests and give
technical and economic assistance to members as well as to serve as a forum to solve
joint problems and support the progress of their industries. The ability of many existing
associations to fulfill these objectives is, however, quite low due to limited resources in
funds as well as in technical and administrative know-how to play an important role in
the development of members' industry.

A producers' organization should ideally have a firm anchorage in the region, enjoy
confidence among its members. It should become the main forum for addressing common
issues, such as production strategies, marketing (including price fixing), delivery and
storage of manufactured products, negotiation of credits and organizing technical and
administrative assistance to the members. The associations would employ a specialist or a
team of trained persons to carry out the activities. They would have a decentralized
administration operating close to the members' industry in order to be efficient and to
maintain close contacts with members.

The very poor support given by national institutions to privately owned wood-based,
small-scale enterprises is due mostly to lack of funds and technical know-how; attempts
to run too large and geographically spread programmes with too ambitious objectives in
relation to available resources; excessive centralisation of proposed assistance agencies;
and lack of inter-institutional coordination in the producers' region causing
misunderstandings and conflicts. Furthermore, far too many assistance programmes are
approved for short periods which are in many cases not extended. It seems essential to
ensure that the assistance be continued over two or three governmental periods with the
most intensive support being in the first years.

In view of the many problems facing small enterprises, the prerequisite for a well
balanced strategy for implanting support programmes to achieve objectives of progress is
strong and well balanced external institutional support. To benefit fully from such
assistance, the producers also normally need a sound internal organization whose
personnel should be trained by the external agency to take over the support
responsibilities to solve and handle members' common matters and give assistance on
technical and administrative matters to each enterprise. International cooperation would
be needed in many cases in order to finance necessary investments and operational costs
and transfer technical, administrative and marketing know-how to national staff, local
specialist teams, enterprise owners and employees.

Promoting communal small-scale forest-

based processing enterprises: lessons
from a project in Peru.
by T. Oksanen and W. Rijssenbeek1/
1/
Project GCP/PER/030/SWE - “Apoyo al aprovechamiento de plantaciones forestales de
una comunidad campesina del Cusco”, is executed by FAO under Sweden/FAO Trust
Fund arrangements. It is associated with a much larger INFOR/FAO/Netherlands project
on fuelwood and local community development.

Background

In the past 25 years the rural communities in the Peruvian Sierra have been establishing
plantations of Eucalyptus globulus with the aid of the state and various projects
sponsored from abroad. There are now some 150 000 hectares of these forests of which
20-30 000 ha are ready for harvesting. However, it has been noticed that the communities
have benefitted very little from the existence of these forests. The benefits have mainly
accrued to a small group of middlemen, who have bought the standing timber from the
communities for a whistle. In some cases the earnings from the sale of a full-grown
eucalypt have not been enough to buy a bottle of beer; hardly an incentive to go on with
the reforestation. Yet the growth of the population and the economic stagnation in the
Sierra are forcing a growing number of people to join the misery-belts around the big
coastal cities.
It was for these reasons that the Project FAO/Holanda/INFOR started looking for ways of
promoting the creation of small communal forest-based enterprises (SCFE), to increase
benefits reaching the people - and so give a real incentive for reforestation and strenghten
the economic base of the rural communities. The work is still very much in a pilot stage.
The project is still seeking for optimum products and technologies for the SCFE, and
looking at alternative organizational arrangements to strike a balance between community
participation and efficiency. It is strongly felt that as the forest resource has been
established through massive community participation and belongs to the whole
community, the benefits should also be shared and not go to just a few people.

Market and Enterprise characteristics Products and Markets

According to the market studies that were made, the main products demanded at regional
level are mineprops and mine sleepers; sawn timber for mines; treated poles for electric
power-lines; charcoal; and rustic chairs. At the local level (nearby towns etc.), demand is
for posts, beams and sawn timber for housebuilding; charcoal and firewood; rustic
wooden chairs and tables; and artisanal household utensils.

At the community level, the main markets are for firewood; posts and beams for
housebuilding; and simple furniture, such as chairs, benches, tables and beds. Of these
products rustic wooden chairs, charcoal, firewood, treated posts and sawn-timber have
been produced in the SCFEs up to date.

In the evaluation of markets for SCFE products two limiting factors were taken into
account: firstly, that finer woods from the Selva (which are available throughout the
Sierra) are strongly preferred for fine carpentry and joinery; and secondly, that products
which require expensive machinery or very special skills for their manufacture could not
be considered feasible for the SCFEs. For the products selected, most of the technologies
employed have already been tested in small family enterprises, only one SCFE has major
imported components.

Turning a chair leg at a rural community workshop

Markets and technology by product

Chairs

Chair manufacture is the most common type of SCFE that has been introduced in the
communities. There are now a total of eight workshops which generally have a locally
built wooden lathe powered by a water wheel driven from small creeks or irrigation
canals, with a fall of about five metres. They need little raw-material, about 2-3 trees a
week depending on size, produce up to 40 chairs in six working days, and employ
normally five persons. The net value of the production varies with productivity and
whether the chairs are sold within the community for a lower price, or outside for a
higher one. In Huaraz the net value has been calculated at US $ 12/m3 roundwood. Taking
into account the low opportunity cost of the workers, the real value of the production is
much higher.

The materials and tools needed for the workshop cost less than US$ 500, and even
including the costs of training and working capital, the total costs are not more than US $
1000.

The chairs have a well developed market on the local level in some parts of the country
(Huaraz, Huancayo), both for local use and for resale in the big cities of the coast. In
other parts (Cusco) they are recently being introduced with some success. Demand exists
also on the community level but, unfortunately, at a very low price-level.

Charcoal

The main buyers of the charcoal produced in the communities are the local restaurants,
mainly those specializing in fried chicken. In some cases it has been possible to agree on
deliveries directly from the community on a regular basis. Other group of buyers of lesser
importance are the local blacksmiths.

Charcoal is being produced in one community in Huaraz with a transportable metal kiln,
type Mark 5. In Cusco there are two communities producing charcoal with a locally
designed method, a hybrid between a metal kiln and a simple earth pit. The latter has a
somewhat lower yield than the mark 5 (16-18% compared with 25%), but due to its much
lower initial cost (US$ 150 compared with US$ 800) it is a more feasible alternative for
many communities.

The productivity of the Mark 5 has been about 250 kgs of charcoal in 3-4 days, with a
two-man team operating the kiln. This has made possible a profit of US $ 14/m3
roundwood. In Cusco the profits have been slightly lower due to the differences in yield
and a longer cooling time for the pit (5-6 day cycle). Compared to firewood production
the profits have been about 1.5 times higher.

Rural forest industries greatly increase the value of trees for the local people

Preservation of poles and posts

The preservation of posts was first started in Huaraz as a communal industry with the
idea of selling the posts to Electroperu (the state-owned electricity-company). Pretty soon
it was noticed that because of the high profitability of the treated-posts' business and the
monopsonistic condition of the market (even the communities buy their posts through
Electroperu), there are arrangements between the buyer and the existing producers which
close the market to new producers.

The “Boucherie” process is used to treat electricity poles. A solution of water and CCB
(copper-chrome-borax) is forced by the pressure of a five metres' fall to enter one end of
an inclined fresh pole which it penetrates for the whole 8-11 meters in two days. The
portable Boucherie-plants used in the project produce six posts in two days, with a four-
man team operating the plant. They can be easily modified to produce up to 12 posts in
two days. The profits are about US $ 23/m3 roundwood for low-voltage posts (used in the
communities), and US $ 28/m3 roundwood for high-voltage posts (used in the main lines
between the communities). The cost of the plant, and the auxiliary equipment needed for
its operation (tools for manual logging etc.), is about US$ 1000.

Under a new scheme the CENFORs (departmental-level administrative body of the

INFOR)2/ of Huaraz, Huancayo and Cusco now operate one plant each, which they lend
with the necessary technical assistance to the communities participating in electrification
projects to treat poles from communal or individual plantations. The communities can
save about 10% on the costs of an electrification project by treating their posts under this
scheme instead of buying them through Electroperu. Hopefully, in the long run, they can
also establish themselves as reliable direct suppliers of treated posts, and so gain access
to the markets.
2/
INFOR = Instituto Nacional Forestal y de Fauna
CENFOR = Centro Forestal

Sawmilling and Carpentry

A very special case of the SCFE in Peru is that of the Project FAO/SIDA/INFOR in the
community of Juan Velasco Alvarado in Cusco. This is the only industrial-scale project
which has been attempted in the communities; it consists of a small sawmill, a carpentry-
shop and the production of charcoal, firewood and other by-products. It was created
through an US $ 150 000 donation from the Swedish International Development Agency,
with the intention to show to the communities of the Sierra the benefits of small-scale
communal wood industries. The mill is still in installation stage, and therefore there is no
information on its productivity and profitability.

Enterprise Ownership and management

The enterprises are invariably owned by the whole community, but the management
forms vary depending on communal decisions. The alternative forms of managing the
enterprises are:

(a) The enterprise is managed by a committee, (as for any traditional communal activity
like irrigation etc.). The committee is supervised by the Administrative Council of the
community, which in turn depends on the General Assembly for any major decisions. The
community receives all the income and pays the workers.

(b) The enterprise is managed by a Committee (as at (a) above) but the work is done as a
communal obligation instead of for wages. The participants are in turn free from other
work-obligations as compensation.
(c) The General Assembly designates a group to run the enterprise. The group receives 70
percent of the income with the other 30 percent going to the community. The Community
provides the roundwood in communal work.

(d) The SCFE is rented out to a carpenter by the community. The carpenter hires workers
and buys the wood from the community in what is an extreme case of privatization of the
SCFE.

(e) In the case of the Project FAO/SIDA/INFOR a legally constituted enterprise has been
formed within the community to manage the small industry. The paid workers (who earn
wages) have to be community-members, and their hiring and level of wages is approved
by the General Assembly.

The environment for SCFE development Linkages to Agriculture

The Peruvian Sierra is an extremely harsh environment in which people are preoccupied
not with development but survival and continuation of the family. They achieve this by a
combination of activities, such as agriculture, livestock-raising, handicrafts and paid
work within and outside of the community. This unspecialised economy may seem
primitive, but it is well adapted to the environment. It is extremely complicated in its use
of the different components and well integrated to the markets outside of the community.
It is estimated by peruvian economists that about 50% of production is for subsistence
consumption, and the balance is sold or bartered.

The economic and social situation of the community farmer has three specific
caracteristics which influence the SCFE. Firstly, although he lives in a community, the
economic decision-making takes place in the family. It is the family, not the community,
which is responsible for the well-being of its members. Secondly, almost all production is
done by the family, the community only allots the lands to the families and maintains the
infrastructure. Thirdly, due to his precarious economic situation the community farmer
has a very high aversion to risks. He simply cannot afford to fail in his economic
undertakings.

Sorting handles for agricultural and workshop use

For these reasons, the SCFEs have to form another complement of the economic
activities of the community farmer who is willing and would be able to participate in the
SCFE when the alternative would be to look for seasonal work outside of the community
but not participate at the expense of his agriculture. This is because agriculture remains
the backbone of the Sierra economy and the only source of social-security its inhabitants
have. It is therefore essential to adjust the scale of SCFE operations to this reality, and to
promote alternatives which require specialized full-time workers only if there are landless
and unemployed people facing forced migration.

Opportunities for and constraints to SCFE development

The key opportunities seem to be in the development of SCFEs that require a low
investment and make products with high local demand preferably from end-users who
can be reached directly by the producer. The low level of investment allows the
entrepreneurs to suspend production and resume it easily depending on the pressures of
other, more important, economic activities. It also implies simple technology in which all
workers can carry out all production functions if necessary except very few key tasks.
The high demand allows each producer to easily find a buyer at the going price whenever
he has got a product to sell. The products should preferably be sold directly to the users in
order to bypass middlemen.

Some SCFEs which meet these criteria include production of rustic wooden chairs and
other furniture; production of charcoal (in some regions only since in many others
firewood is still the main fuel); production of simple construction materials, such as
posts, beams and (pit) sawn-timber. Also there seems to exist a good opportunity for
community participation in low-cost preservation of poles for village power-lines.

For these small-size enterprises there remain several constraints to taking up

opportunities. With regard to administration, one constraint is that in many cases a lot of
work is required before the communal organization can manage even the smallest SCFE.
Secondly, there are often conflicts between the SCFE enployees and the community as to
the level of wages and the distribution of profits. In more than one case the community
has kept the wage level so low that the workers have left. Thirdly, there is a tendency
within the group directly involved in the SCFE to try to privatizise the enterprise as soon
as profits are shown which creates conflicts with the rest of the community, and
undermines the ideas behind the SCFE.

The persons directly involved with the SCFE inadvertently form a new power group
which is resented and not easily accepted by traditional community leaders. The new
groups can threaten the privileges they have enjoyed (such as the uncontrolled use of
community funds, and profits from acting as middlemen in the sales of the forests).

The SCFEs also face considerable market problems when they attempt to take up
opportunities. They often have problems in maintaining the necessary business contacts
particularly for the wider regional market as this requires visits to the buyers. This often
forces them to use costly middlemen. In addition some profitable markets are closed to
competition by deals between buyers and existing producers. Sometimes bribes are also
necessary to cut down transportation costs. All this is difficult for the SCFE to handle.

Administrative/organisational and market aspects are the largest problems facing small
enterprises in the Sierra. The creation of larger scale communal enterprises by the
FAO/SIDA/INFOR project was intended to avoid these constraints. However, it appears
that the larger project also faces important constraints such as the weak administrative
capacity of the traditional communal organization to manage activities that move money.
Such projects also demand a high level of institutional support which the public
administration does not have the capacity to give. Even for these larger projects, it is
difficult to achieve full-time operation and specialization of workers.
Finally, it is clear that due to the limited resource-base of the communities, it is necessary
for several communities to cooperate even to run a small sawmill, which in turn
multiplies the administrative problems and the need for institutional support.

The main operational problems relate to shortages of raw materials, finance, and skills.
The more general problems of markets and organisation were already covered under
“constraints”. With regard to raw materials, problems in obtaining a sufficient flow of
wood until now have been experienced only in the FAO/SIDA/INFOR project, where
they were clearly a result of an incomplete evaluation of the forest resource before the
project was started. They have now been resolved by buying logs from outside the
project.

Loading on the timber-rack in the Peruvian Sierra

In the past, almost all SCFE equipment has been donated to the community which for its
part has provided the local construction materials and construction labour. Training of the
workers has also been without cost to the community. This arrangement has worked well
due to the small amounts of money involved in most projects. It is obvious, however, that
to expand the activity it will be necessary to obtain other forms of financing. There is
already one chair-workshop in operation which has been established with a soft loan from
an NGO.

Experience shows that although technical skills to operate these simple industries are
acquired by workers after only a few weeks of on-the-job training, managerial skills
require much more time. Even simple management training requires an ability to read
with comprehension, write and make simple calculations - skills which can be hard to
find. Yet they form the basis for any administrative training: adequate managerial skills
(such as accounting) are not only needed to run the SCFE, but also for community control
of the SCFE which can help establish confidence between the SCFE and the rest of the
community.

Lessons of experience

The products and types of enterprises introduced to the communities seem to be about
right, considering the opportunities and constraints already mentioned such as the
constraints imposed by the linkages of the SCFE with agriculture; the weak
administrative capacity of the communal organizations; and the low level of institutional
support available.

Although it seems that the SCFEs have to be oriented towards the markets outside the
community to guarantee their economic feasibility, care has to be taken to provide by-
products (firewood etc.) to satisfy the needs of the community members. This is a
concrete benefit to the community, it shows immediately and acts as an incentive to the
community not to abandon the SCFE.
It has become obvious that although the SCFE are communal, the incentives to the
community members participating in the enterprise have to be personal, and strong
enough to justify their participation from the point of view of the family economy.

A lot of experimenting and investigation is still needed to determine whether the

communal management of these small enterprises is feasible and in tune with the natural
development trends in the communities. An alternative could be to combine communal
ownership of the SCFE with family management, as is already the case with agriculture.

The selection of communities and identification of the type of SCFE to be started has to
be based on a much more careful analysis of the organizational capacity of the
community than has been done previously. To achieve the level of community
participation needed for a successful SCFE, more emphasis should be given to extension
and training, and the community must participate in the formulation of the SCFE-project
from the beginning. The existing SCFEs have been too much concepts from the outside,
that have been planted in the communities, mainly on the basis of often superficial
technical evaluation.

A long period of structured follow-up (probably several years) is needed for each SCFE-
project to guarantee its continuation.

To carry out identification of SCFEs, selection of communities and to provide full

support immediately as well as in the long-term requires a lot from the CENFORs both in
terms of abilities and money. In their present state, the CENFORs cannot cope; therefore
to carry out the work, an adequate support system must be created to strenghten the
CENFORs. There seems to be every justification for an internationally financed SCFE-
project for the Peruvian Sierra.

Extension services to small-scale

industries: the Tanzania experience.
by
H.M. Mwang'ombola Consultant
Small-Scale Industries Development Organisation/SICATA
Tanzania
The setting

A common system for providing a wide range of assistance to small-scale enterprises is

through extension services. These help entrepreneurs in identifying opportunities,
diagnosing problems, assessing their own capabilities and weaknesses, and providing
timely advice in all matters. The emphasis of extension services, their organisation, and
degree to which they are associated with follow-up technical or financial assistance vary
widely. This paper outlines the format adopted in Tanzania which emphasizes
consultancy, training, and problem-oriented applied research.

Introduction

The socio-economic structure of the Republic of Tanzania favours the establishment of

small-scale industries to help the country to achieve self-reliance, rural development and
long term socialist transformation. Small-scale Industries (SSIs) require less capital
Investment and shorter gestation periods, and provide employment to a larger number of
people for a given cost. They help in taking industries closer to the resources in rural
areas and thus favour balanced regional development and high level of community or
cooperative control over the means of production. They also help in reducing income and
other economic disparities. In recognition of these advantages the promotion of SSIs is a
major element of Tanzania's development policy.

In the Tanzania context, a small industry is defined as any unit whose control is within
the capability of its people individually or collectively in terms of capital required and
know-how. This includes handicrafts and cottage industries. The definition has
deliberately avoided the use of internationally recognised criteria such as size of capital
or number of employees, etc., in order to provide for more flexibility.

SSI promotional efforts were started by the creation in 1966 of the National Small-Scale
Industries Corporation (NSCIC) under the National Development Corporation (NDC).
Due to operational inefficiency, poor planning and lack of an extension network, NSIC
provided little constructive support of small-scale industrial development and was
subsequently replaced by the Small-Scale Industries Development Organisation (SIDO)
in 1973.

Initial steps to establish a decentralised industrial extension service involved posting an

SSI promotion officer (SIPO) to each region or province. This extension officer is
supported by economists and industrial engineers in each region.

On average, SSI entrepreneurs are persons with elementary education, artisans, skilled
tradesmen and successful small merchants. Few people with a secondary or higher
education are found in small industries. This implies that the management of such an
industry is often based on common sense, intuition and personal values of the local
community. Modern management principles are rarely explicitly followed. Thus the
businessmen deal differently with time, rationality, achievement, traditions, beliefs and
other values than expected in modern industry. The Western idea that “time is money” has
hardly caught on: this is apparent not only in the lack of punctuality and the amount of
time spent on things like meeting friends during working hours, but also in the general
absence of planning, which by its very nature, is time-based. Rational decision-making
has a different meaning as well: decisions are generally not based primarily on production
goals but on ties with the extended family, friendship and tribal affiliations.

The so-called “drive to achieve” - expressed in the obsession with growth, in seeing hard
work as a virtue in itself, and in strongly competitive attitudes - is yet to be adopted by
many small entrepreneurs for whom other norms and values are equally or more
important. Short-term successes are often enjoyed at the expense of long-term
achievements. The entrepreneur often values above all else gaining social status and
respect and he retains many traditions of an agricultural society. These include sometimes
frequent extended absences to meet family obligations, or to attend lengthy meetings.
They also lead to employment of relatives who may not necessarily have the required
skills for a given SSI job.

Main SSI problems

Small industries have not been spared from the effects of Tanzania's severe economic
problems. Almost all inputs present a problem: skilled manpower, finance, raw materials,
machinery/spare parts, and sometimes information. The long distances involved in
distribution, prohibitive transport costs (due to extremely high prices for fuel and spare
parts, and the very poor state of main roads), and difficult communications have led to
ever-higher black-market prices. As the cost of living has sky-rocketed, the purchasing
power of the people has declined, so creating market problems for all industry including
SSI. To some extent the many rules and regulations imposed upon private entrepreneurs
have also kept the SSI from reaching their full potential during the last decade. But the
cautious liberalisation which is underway at present will most likely contribute to
betterment of the SSI situation.

Some problems that face the small industrialists have to do with the industrialists
themselves, most of whom are very inert to change. Firstly, the small-scale of activities
itself results in poor competitiveness in the sense that, for instance, bulk buying of
required raw materials at appropriate prices is not possible. Secondly, labour skills are
often centred on only one person, the owner, instead of a number of workers specializing
in certain steps of production.

Furthermore, production methods and techniques are often obsolete and result in higher
costs and lower quality products. Finally, the entrepreneur appears indifferent to market
dictates, being more strongly influenced by culture and environment. SSIs are noted for
making products according to the entrepreneurs' wishes, skill and standards rather than in
response to market wishes.

Wood-based SSIs in Kilimanjaro Region: main problems

The Kilimanjaro region of Tanzania (on which this paper is focussed) is known for its
high intensity of commercial business. Of the small industries found in the area, metal
working takes a lion's share followed by wood working industries, especially carpentry;
though charcoaling cannot be overlooked. A rough physical count of wood based
industries in the region revealed about 270 units in operation. The range was from those
employing one person to those which have about 5 employees (both permanent and
trainees). Randomly, a total of 49 units were visited by the author of which 42 were
carpentry units, and the rest sawmills. Thirty-four of the enterprises were rural.

A number of problems were mentioned most frequently by entrepreneurs. Most of the

units visited lacked modern tools that could help improve efficiency. Where they used
machinery, the equipment was often old and needed replacement or was often out of
order for lack of spare parts. Since most spares must be imported and foreign exchange is
practically unavailable, this problem can play serious havoc with production. It is
worsened by lack of proper maintenance which is an important reason for breakdowns.

Another important problem is that the main raw material (wood) is not readily available
in this region, though Tanzania has an abundance of forests. In this particular area of
study, forests are scarce, and the few that can be found, do not produce the good type of
wood needed for, e.g. carpentry; timber has to be brought in from very distant places, a
factor that leads to very high prices of finished goods. Because of the rapid depletion of
forests in Tanzania, the government has instituted very strong measures against tree
felling all over the country. This has brought about a very low supply of timber in the
market. Rough estimates have put the present supply of timber at a quarter of the
previous decade. Naturally, this has contributed a great deal to the high prices of finished
goods and a big lay off of labour in the wood industry. Thus while these 49 units together
used to employ about 245 people (average of 5 per unit), they now have only 147 men
working (average of 3 per unit).

Also due to lack of foreign exchange, supply of components like nails, screws, glue,
varnish, locks, hinges, upholstery, etc. is poor. These have to be imported. The few
available can be bought in the black market where prices are exorbitant. Lack of
industrial specialisation and standardisation among SSI means that each one has to stock
a wide array of costly inputs in order to meet all orders.

A common difficulty arises with regard to markets and marketing: most of the
industrialists interviewed were found to be the traditional type of craftsmen who are inert
to change. They see fashion as foreign among them and do not respond to changing
market tastes. This is reinforced by nearly total lack of a market information acquisition
system; it is a matter of “make what you can”. No product differentiation is done to evade
competition. The geographical market reach is also very limited and most are convinced
that furniture cannot be exported due to its bulk.

Finance problems relate to both liquidity and investment funds. Firstly, liquidity is often
very low, because turnover is also low; and secondly, much money is tied up in stocks of
raw materials that are often bought in unnecessarily large quantities due to their uncertain
availability. The liquidity problem also prevails amongst some of these units because the
enterprises are just supplementary sources of income to agriculture and so receive only
limited attention. Long-term investment finance is also not readily available. Yet most
small industrialists cannot secure loans from financial institutions because they lack
proper financial records from which assessment can be made to demonstrate their
viability to lending institutions. SSI entrepreneurs also have problems in convincing
banks of their managerial competence which is an important consideration for
institutional lenders.

It is also reported that SSI inability to give security in the form of real estate, i.e. land or
buildings is a problem in securing loan assistance. In Tanzania land has never been a
major form of security, partly because the marketability of land is very limited owing to
traditional restrictions on its transferability. Therefore, banks ask borrowers for
guarantees by third parties, including public institutions like SIDO, which are not always
able to stand for entrepreneurs they do not know. Expansion of guarantee facilities may
help to resolve the problem.

Financing problems also partly arise from weaknesses on the part of bankers. In general,
banks lack accessibility to potential borrowers not only in terms of lending but also in
project identification, project formulation, and technical and management guidance,
which can be even more crucial problems than lending itself. Another problem is that of
capability and efficiency of bank staff, worsened by inadequacy of qualified manpower.

Where the industry owns modern equipment it is frequently faced by electric power cuts
or voltage instability. For many places electricity is not available at all. Furthermore, few
SSIs employ competent electricians to correctly wire and service equipment so that
breakdowns or damage are common.

Shortage of skilled labour is a common feature of small industries. Many workers are self
trained artisans whose skills are normally low. Family affiliations of the owner often
dictate selection of workers, regardless of their skills. Also due to low wages, labour
turnover is very high, especially in the urban areas. The more skilled workers often move
from small industries to larger ones, in search of better pay and employment security.
SSIs are therefore often forced to rely on cheap casual workers or less qualified personnel
and as a result their productivity is poor, and workmanship is irregular and unreliable.

Official assistance to SSI development

Government has attempted to provide assistance to the small-industry sector in solving

the problems outlined above. Some improvement has been ensured through policy
changes intended to improve the environment for SSI operation but more emphasis has
been on providing extension services to improve SSI performance. Supply of key inputs
(finance, raw materials, equipment, etc.) often accompanies the extension support.

Extension services

The provision of efficient industrial extension services is one of the most important forms
of assistance offered by SIDO and by some financial institutions like commercial banks.
This type of assistance is primarily oriented towards servicing existing production
capacity. It is concerned with improving the organisation of production and the
technologies of both product and production processes. The overall objective is to
improve efficiency and increase production, quality and product design.

For the already established small industrialist SIDO has instituted a project under the
name of “Small Industries Consultancy And Training Assistance (SICATA)”: this is a
semi-autonomous project to cary out consultancy, training, and problem oriented applied
research. The project team conducts for entrepreneurs detailed studies of plant layout,
production processes, product designs, plant maintenance. From these studies, SICATA is
able to tailor-make training programmes for upgrading entrepreneur skills. No two
programmes are identical since target groups dictate the type of course content required.

Special attention is given to markets and marketing for which the SICATA project gives
tailor-made training to develop skills in market research, target setting, product design,
pricing and selection of optimal marketing channels.

SIDO also runs a “Transfer of Technology” programme which involves linking one firm
from a developed country to one in Tanzania. An example of the methods adopted in
technology transfer is the SIDA-financed “sister industry programme” with Sweden
whereby Swedish Small and Medium Scale Industries enter into specific technology
transfer agreements with SIDO for establishment of various small-scale industries in
Tanzania. The Swedish partner firm provides machinery, know-how, and start-up raw
materials. Over a short period, Tanzanian workers are trained in the Swedish Sister
Industry which also sends its technicians to install the unit in Tanzania and provides
additional on-site training for workers at all levels. This programme has proved to be
advantageous in that it minimizes entrepreneur's expenses on research and product
development and has a short gestation period. 1/
1/
For an evaluation of the merits and problems with “sister-industry” and other technology
transfer methods, see the article by El-Namaki (In this publication). El-Namaki also
discusses the SICATA system.

Assistance accompanying extension services

Assistance in raw material procurement is an important activity. SIDO endeavours to

ensure adequate and suitable procurement of raw materials for the SSI sector. It has
formulated suitable policies and procedures for distribution of various raw materials to
industries which command higher priority in the national economy. Specific assistance is
rendered to existing enterprises in switching over from imported to indigenous raw
materials wherever technically and economically feasible. An example has been
successful substitution of local for imported wood for manufacturing pencils and kitchen
knife handles. SIDO purchases raw materials and stores them at established centres,
usually at the head and regional offices, for distribution to entreprises served by them.
Where scarcity of raw materials is due to foreign exchange problems, the ability of SIDO
to procure essential materials for SSIs is particularly valuable but it is not able to meet all
equirements.

With regard to finance, SIDO provides credit to SSIs to supplement the very limited
assistance from banks which have so far proved reluctant to finance the sector. For this
credit system, SIDO depends on annual government budgetary allocations in order to
promote the growth of small industries in the country. The allocations finance among
other things the SIDO's hire purchase scheme which has come to be the main source of
financing for small-scale industries. Under this scheme SIDO sells the machines to small
entrepreneurs on hire purchase basis on moderate terms. This assistance has had a “snow
ball” effect, in that the National Bank of Commerce and other financial institutions have
now come forward to help such entrepreneurs with working capital and long term capital,
hereby increasing the total investment in SSIs. Such hire purchase benefits have
unfortunately so far been mostly accessible to urban entrepreneurs.
SIDO also helps small industries in applying for bank loans. SIDO guides them in
preparing all necessary financial reports required by banks and may sometimes also act as
loan guarantor to able entrepreneurs who have no security or collateral. In spite of SIDO
help, SSIs continue to face severe problems with the many rules, regulations and
procedures associated with bank lending.

In the field of marketing, the Government, through SIDO undertakes promotion of

products from small-scale industries by way of trade fairs, both in local and foreign
markets. SIDO displays SSI products at its pavilion at the Dar-es-Salaam International
trade fair grounds. In cooperation with the Board of External Trade, SIDO represents
SSIs with export potential at various trade fairs. Recognising that marketing functions
start from conception of the idea to produce, SIDO also advises entrepreneurs on product
design, quality of raw materials required, and quality of product itself. SIDO has also
established retail shops for small industry products which serve as “taste centres” and
points from which to disseminate market information to small-scale industrialists.

In order to develop technology and management, SIDO emphasizes improvement of

personnel skills rather than equipment or facilities. Special courses are conducted for
supervisors and managerial personnel in order to expose them to new skills such as
financial management, planning and cost accounting. Entrepreneurs are trained in
business management as wee as in production techniques.

SIDO has 15 Training-Cum-Production centres where entrepreneurs are trained in

specific production fields such as fruit and vegetable preservation/canning, hand-made
paper, or soap making. These centres also offer training in basic industrial skills such as
machine shop, electrical or foundry practice; or in trades like carpentry, fitting/turning or
sheet-metal work.
Roadside tree plantation

Decentralising institutional support for

small-scale enterprises.
by
Dr. Enyinna Chuta
Modibbo Adama College
University of Maiduguri, Nigeria

Introduction

In its broad sense, the word institution consists of, inter alia various policies in the form
of official government statements or measures, programmes and projects, and
organisational arrangements which are meant for promoting socio-economic development
in any given country. Most often the policies and measures are economic and include
industrial, agricultural, financial, technological and marketing instruments. There are also
legal dimensions which ensure that the various institutional arrangements are
implemented. However, to the extent that the various arrangements do not have impact at
the grassroots, rural industries and forest-based small enterprises would be greatly
handicapped. A major reason for the ineffectiveness of existing policies and measures is
inadequate or total lack of decentralisation of institutional facilities.

The purpose of this paper is to review the existing state of knowledge on decentralisation
as a strategy of rural development and examine empirical evidence on decentralisation
efforts with particular reference to rural industries. An attempt will be made to identify
factors which are crucial for decentralising facilities for forest-based industries. Finally,
some conclusions will be drawn on possible lines of action.

Objectives of and progress in decentralisation

Any decentralisation strategy must identify factors or objectives which give rise to such
efforts, examine various forms of decentralisation and in what context it can take place.
In countries where a decentralised development strategy has been adopted, a combination
of factors has been responsible. Rondinelli (1983) has identified at least five of such
factors, namely, deficiency of central planning and management, a shift of emphasis from
growth to an equity-maximisation objective in the promotion of the heterogeneous and
extensive informal sector, need for expeditious action, and emphasis on principles of
mass mobilisation and self-reliance.
In spite of the expressed desire of many countries to decentralise government services in
general, and small-scale industry support facilities in particular, little progress has been
made so far. The preliminary results of a study in progress on eighteen institutions in
developing countries show the extent of decentralisation of essential services for rural
industries. Our survey results show that none of the eighteen institutions have
decentralised their facilities to divisional or district levels. Twelve out of eighteen
institutions operate at state, regional or provincial levels without further decentralisation
to rural areas. Only three of our responding institutions use some form of village level
organisations (rural cooperatives, youth brigades, village councils, etc.) to promote rural
industry. Not only may such organisations have a potential for facilitating a participatory
role of rural enterpreneurs in the development process, they may also lead to a reduction
in the cost of delivering essential services to large numbers of small rural producers.

Processes of decentralisation

Four major forms of decentralisation process have also been identified (Rondinelli,
1983). The first process, namely deconcentration involves shifting of workloads within
the central government hierarchy to field projects. In Thailand deconcentration was
achieved through the provision of special financial grants for certain projects, in Pakistan
through local co-ordination of various ministerial efforts at the grassroots, in Sri Lanka
through district administration and in Indonesia through provincial development
planning. Delegation is the second process: it attempts to transfer functions to semi-
autonomous field units like the 1970 Small Farmers' Development Agency in Malaysia. A
third process of decentralisation known as devolution attempts to transfer functions to
government agencies at state, provincial, district or local government level. The 1980
District Development Councils in Sri Lanka constitute an example. Finally, private non-
government agencies have been used as avenues for decentralisation.

Experience from Asia shows that decentralisation has, in most cases, taken the form of
deconcentration and delegation. The District Development Council (DDC) is probably
the only example of devolution as a form of decentralisation in the region. However, by
denying rural producers important decision-making roles, the DDC's in Sri-Lanka faced
numerous problems. The use of non-governmental agencies is poorly documented and
perhaps not well understood. Thus the achievement of mass mobilisation and self-
reliance as a key factor in any decentralisation process is far from being realised.

Village-level organisations have been studied by Brown (1982) with regard to their role
in rural industries. Two major types of village-level organisations which have the
potential for promoting rural industry in developing countries, are community-based and
group-based organisations. A central feature of community-based organisations is the fact
that they address more fully the need for grassroots participation in order to bring about
real change at the village level. Integrated community-based organisations are the most
successful at achieving integration and participation at the grassroots. There is emphasis
on programmes which integrate various projects, different levels of ministerial inputs and
services of various organisation. Other forms of community-based-industries, Chinese
brigades, and Israeli Kibbutzim; all three share the positive quality of being highly
efficient, and integrated with agriculture.

Another type of community-based organisation, namely village cooperatives, have been

reasonably successful in promoting rural industry. A major accomplishment of such
cooperatives has been their ability to reduce dependence on the exploitative tendency of
middlemen. The key to their success also seems to rest on strong leadership, and high
income level of the villagers to foster the purchase of shares and other activities. The
ability of low income villagers to participate and benefit has not yet been demonstrated.

Group-based organisations have achieved varying degrees of success in promoting rural

industry. Organisations such as cooperatives can more effectively promote rural
industries if they serve as an effective two-way channel of communication between the
people and the government, and if they receive the needed raw materials, have access to
efficient marketing channels, and members are trained in pertinent skills. As an example,
the youth brigades in Botswana have a genuine concern for financial viability. However,
most brigades in Botswana (with the exception of the builder's brigade), have problems in
securing a market for their products as well as defining their relationship with
government. What appears crucial is to determine how village-level organisations fit into
a country's development plan and how this relationship can be best utilised.

Hauling logs - a mixture of old and new

Approaches in rural industrialisation and decentralising services for it

In addition to the question of form of decentralisation process, a major issue that has to
be addressed is the context in which services for small enterprises have to be
decentralised. In many countries several approaches have been utilised for the promotion
of rural industries (Chuta and Sethuraman, 1984). The problem-oriented approach tends
to focus on constraints and so we have credit loan schemes, raw material banks, industrial
areas, etc. The sectoral approach covers the broad spectrum of problems for small
enterprises without distinguishing between specific activity types in the sector. Most
small enterprise or rural industry programmes include agro-based or forest-based
enterprises. A third alternative approach has been to develop rural industry within the
frame-work of Community Development Programmes. An example of this approach is
the Integrated Rural Development Programme. The unique characteristics of forest-based
small enterprises and the relative merits of alternative processes and approaches will have
to be understood before determining their appropriate mix in any decentralised and
integrated efforts.

Although the Chinese model of rural industrialisation may not be transferable in its
entirety to other developing countries, there are a few insights. First, maximum use of
local resources is crucial. Second, promotional strategy considers important sectoral
linkages which constitute a basis for future growth of the enterprise. Third, the role of the
subsector (in our case, forest-based enterprises) in overall industrial development strategy
should be clearly understood.
Despite the relative importance of rural industries in the development process, there are
only a handful of developing countries where specialised rural industry institutions have
been established. Notwithstanding their paucity in developing countries, rural industry
institutions continue to face a unique and difficult task of inducing change in a rural
milieu. Since the development of rural industry is part and parcel of the entire process of
rural development (including agricultural development), rural industry institutions have
to consider issues relating to the linkages between farm and rural non-farm activities
(especifically, food processing, agricultural tools and implements, etc.) while at the same
time cater to the promotional needs of other non-farm rural small-scale enterprises (such
as artistic and utilitarian handicrafts) which constitute productive employment in rural
areas.

Since rural industrial production units have to depend on some nearby towns for
marketing and other special services (such as banking, etc.), rural industry institutions
have to consider problems related to the accessibility of essential services to their clients
(Chuta, 1985). Decentralisation of services is essential for this. The general poverty of
rural people and the presence of sectoral (farm, rural non-farm) and locational (village-
town) linkages characteristic of rural industry promotion, present difficult problems
which cannot be solved without the cooperation, coordination and collaboration of
government ministries or departments at all levels of administration (national, provincial,
district and village).

Strepping bark from grewia mollis - used for tying house rafters

In some countries, rural industry institutions exist alongside parallel organisations which
are specifically designated to promote cottage industries, handicrafts and small
enterprises. The lack of existence of rural industry institutions in most developing
countries and their coexistence with parallel institutions in a few others raise questions
which need to be addressed. One major issue is whether existing institutions and the
services which they provide are decentralised enough at the grassroots to have the desired
impact on the numerous and heterogeneous small enterprises which exist in rural areas.
Furthermore, it would be important to ascertain the nature of constraints which hamper
the capacity of institutions to service the needs of rural industry.

From the survey of eighteen institutions referred to earlier, responses show that the range
of services needed by rural enterprises is wide. Our survey results show that technology
training and management services seem to be the major areas of need. The need for
credit, raw material and marketing services are also important. However, almost all the
responding institutions are unanimous on the greatest obstacles encountered while
delivering services to rural enterprises. Such obstacles include lack of adequate
infrastructure, namely roads, electricity, transportation or vehicle and communication
facilities. In two countries, Malaysia and Ecuador, a major obstacle identified is the poor
receptivity of rural producers to new ideas. Gabon is the only country which points out
that the lack of a well-defined rural development policy is a major obstacle in the
promotion of rural industry.
In terms of suggested remedies, most institutions emphasize the need for greater
decentralisation of promotional efforts at the grassroots, and general infrastructural
development. But it is also clear that in some developing countries promotional efforts
will have to focus on the development of innovative attitudes and profit motivation. For
example, in Malaysia the adoption of innovative schemes which include training in the
proper use of idle time and increased awareness of monetary values has been emphasized.
These training components seem also to be crucial for Malagasy where the existence of
an extreme subsistency economy is mentioned as a major obstacle in promoting rural
enterprises.

Notwithstanding all this, the lack of adequate finance continues to be one of the major
constraints. However, the Indian experience points to the fact that organisational and
administrative problems, if not solved, can become a major obstacle in delivering
services to rural enterprises.

An important question to ask is how rural industry institutions can have an impact on
rural enterprises without their being located in villages. Our survey shows that all the
institutions which returned completed questionnaires relied on extension mechanisms for
delivering services to rural enterprises. The extension methods which proved the most
effective are, first, on-the-spot individualised interaction with production units, and
second, group demonstrations at the premises of institutions. Other outreach avenues
mentioned include radio, workshops, trade fairs, television and handouts, and their use
varied between countries. In India for example, all such means of outreach are utilised.

Both the individualised and group-oriented extension approaches have inherent problems.
While the former has been shown to be too costly and insufficient to have the desired
impact on large numbers of rural enterprise, the success of the later depends on how
convenient it is for rural enterpreneurs to assemble in urban-based facilities for group
demonstrations.

Implementation factors

Rondinelli (1983) has suggested four factors which can make for a successful
implementation of any decentralisation process. First, there has to be political and
administrative support. The promotion of forest-based industries should be an integral
part of forestry development policy of governments. Administrative machinery should
also be provided for practical implementation of policy. Lack of administrative support
and coordination was a major weakness of Integrated Rural Development Programmes in
Pakistan. The second important factor deals with attitudinal and cultural variables.
Without mutual trust and confidence, it is inconceivable that village cooperatives and
associations can succeed. The right leadership for village level organisation is a pre-
requisite for successful decentralisation. Training in this regard is vital.

Third, there are organisational factors which impinge on the linkage of decentralised units
with higher level authorites. This linkage is important for the effectiveness of
implementing agencies at the grassroots. The nature of the linkage will of course depend
on the form of the decentralisation process. The Integrated Rural Development
Programme would be the link in a case of deconcentration process. Finally, there are
resource factors. Without the necessary finance, skill of trainers and raw materials,
decentralisation effort will be constrained. No matter how efficient field officers might
be, if they cannot receive their salaries regularly, mobilise local raw materials and have
access to important tools and equipment at the grassroots, the success of any process of
decentralisation will be very limited.

Conclusions

Table 28 summarises issues related to decentralisation and lists the main forms
decentralisation can take. The need for decentralised support for forest-based small
industry stems from the need to ensure distributional equity and promote self-reliant
development. The pursuit of these objectives need not however, exclude goals of
achieving the growth of the subsector.

Services to be decentralized should focus on technology and skill development in the

context of either the problem-oriented, sectoral or community development strategies. In
fact, there is no reason why forest-based industries cannot be promoted within existing
sectoral programmes.

The exact pattern of decentralisation deserves careful consideration. At the provincial

level the methods of deconcentration and/or delegation can be effective. Entrepreneurs in
these locations will have the requisite education, finance, and management capacity to fit
into the bureaucratic system of government agencies. Thus industrial estates or common
services facilities located at the district level could effectively be utilized by furniture and
wood-processing enterprises. However, at the grassroots, channels of decentralisation
should include community-based organisations, village cooperatives and trade
associations which allow for democratic identification of problems and solutions in the
most informal manner. Thus, participation can be engendered by clear perception of
benefits to be derived (Holcroft, 1984). Afforestation campaign programmes could
become more effective if such efforts are tied into the activities of village-level forest-
based enterprise cooperatives who can now produce their own inputs.

Table 28: Summary of issues and approaches to decentralisation

OBJECTIVE: - Should be mass mobilisation & participation at grass-roots level;

self-reliance.
RATIONALE: - Deficiency of central planning and management to achieve set
objectives.
- Lack of acquaintance with problems at grass-roots.
- poor transportation and communications in rural areas.
FORMS: Type Description Remarks
Deconcentration Central control through - economic
district/provincial administration - but ineffective form of
remote control
- unduly beaurocratic
Delegation Semi-autonomous field units - beaurocratic bottlenecks
(integrated rural development - takes over decision-making
project) role of small producers
Devolution Transfer of functions to government - beaurocratic bottlenecks
at local level (e.g. District - Takes over decision-making
Development Council) role of small producers
Non-Governmental Includes village-level group - and - the only form aimed at
Organisations (NGOs) community-based organisations achieving objectives of
(cooperatives, associations) decentralisation
- cost-effective
SUITABILITY OF FORMS OF DECENTRALISATION:
- The NGO forms are most suitable for promoting rural-based
cottage & handicraft activities
- Delegation forms are suitable for promoting small
workshop/factory types of enterprises via autonomous units such as
rural technology centres, industrial development centres, etc.
- The effectiveness of deconcentration and devolution forms is
questionable
ISSUES:
1. How to decentralise without caking away the decision-making
role of small manufacturers.
2. What criteria to use for determining the superiority and
appropriateness of any decentralisation process.
3. What costs and benefits are associated with centralised
promotional effects versus decentralised ones.
 4. Whether FB-SSEs can be effectively promoted within existing
framework of rural industrialisation/small industry programmes.

It is conceivable that processes of deconcentration and delegation could incorporate the

use of government agencies in delivering the needed service at the grassroots. This can be
achieved through the medium of efficient on-the-spot extension mechanisms.

No decentralisation process which ignores infrastructural development can succeed (Lele,

1975). Since products of rural sawmills must reach secondary forest-based industries
located in small and large towns, provision of necessary access roads is important.
Infrastructural development will also reduce input prices and therefore prices of finished
products. Other factors, administrative, organisational, cultural and resource-wise, which
affect the implementation of any decentralisation programmes should also be addressed.

The need to establish regional centres for economical production of equipment and
execution of training programmes needed at the grassroots should be given serious
consideration.

Institutional support for small-scale rural

processing enterprises: the case of India.
by
Dr. K.P. Parameshwaran
Retired Commissioner for Small-scale Industries
Government of India, New Delhi

Introduction

In India, the latest definition of a small-scale industry (SSI) is any unit with an upper
limit on investment (in plant and machinery) of from Rs. 0.20 million to Rs. 0.35 million
in the case of SSI and Rs. 0.45 million in the case of ancillary units. What is called the
village and small industries (VSI) sector comprises both traditional and modern small
industries; it is constituted by eight specific groups viz. Handloom, Handicrafts, Coir,
Sericulture, Khadi, Village Industries, Small-Scale Industries and Powerlooms. The last
two items constitute the modern group of industries, the others being traditional.

In the economic development of India, a strategic position has been given to the
development of village and small industries (VSI) which constitute an important segment
of the overall economy. Next to agriculture, the VSI sector provides the greatest
employment opportunities, a considerable portion of which is in rural and semi-rural
areas. It contributes about fifty percent of the value added in manufacturing.
India's overall policy on all industrial development is contained in the Industrial Policy
Resolution of 1956, as amended from time to time. New priorities have been developed
as and when required including some designed to reduce the basic handicaps of small-
scale industries. The latest of these is the Industrial Policy of July 1980 which alms to
harmonise growth in the small-scale sector with that in the large and medium sectors and
to remove the dichotomies between the two sectors.

During the sixth plan period (1979-80 to 1984-85) production in this sector increased
from Rs. 335380 million to Rs. 657300 million at current prices and employment from
23.37 million to 31.50 million persons. The latter figure represents nearly 80 percent of
the entire industrial employment. Of this total, modern small-scale industries employ 9
million people; next in importance is the handloom subsector which employs about 7.5
million people. During the seventh plan period (1985-90) the total value of production of
the VSI sector is expected to increase by about 52.4 percent and employment by 27
percent to 40.0 million. The seventh plan also lays emphasis on the necessity of providing
a new thrust for tiny units having fixed investment of less than Rs. 0.2 million. They form
nearly 90 percent of the total number of small-scale industrial enterprises. A modified
strategy will provide adequate facilities in rural and semi-urban areas which will increase
dispersion of these industries.

Table 24: Growth of Village Industries (VIS)

Table 24 shows the changes in value of production and employment in village and small
industries during the period 1973-1985. In terms of value of production, the traditional
industry share has declined from 16 to 12 percent; that of modern small industries has
risen from 68 to 87 percent. In terms of employment, similar direction of change has
occured but traditional industries still account for an important 57 percent of total VSI
employment and modern industries 40 percent.

Key Problems

The impressive recent growth of village and small industries recorded above suggests a
healthy sector. This is in general true but a number of problems continue to face the
sector. An important one is that the interdependence of the different strata of industry
(large, medium and small) has not been fully realised. Thus, for example, schemes for
making VSI ancillaries of large industries have not spread as widely as had been hoped
for. The second problem is that many VSI are technologically obsolete and this has
restrained their growth. They are also undercapitalised, use outmoded equipment and
exhibit low productivity and high production costs.

Furthermore, many small units are sickly and significant numbers of them are going out
of business. Some of these should never have been started as they are in activities where
prospects are too poor to justify further encouragement of VSI development. Another
important problem is that in the name of backward area development, industries have
been set up in inaccessible areas where there are no distinct advantages of raw materials
or market. This has resulted in considerable increase in production costs.
Marketing arrangements continue to be a hurdle in spite of official schemes to favour
VSI. Reservation of some official markets for VSI has been abused: it is noted for
example that many small units tend to overprice their goods due to the absence of
competition from larger scale industries. With regard to raw materials, small-scale
enterprises still have to purchase these in small lots and through middlemen, which
results in high costs. By contrast, large industries are offered raw materials at lower cost
under long-term agreements.

Finally, there is no unified law so far to protect or regulate small-scale industries. Instead,
a wide array of laws and ad hoc regulations apply to the sector, some on a local basis.
There is accordingly much room for misinterpretation and for inadvertment infringement
of regulations. This leads to less than orderly development of the small-scale sector.

Institutional framework

Official Assistance Institutions

For developmental purposes, the entire field of village and small industries has been
grouped broadly under six different areas.

Each area comes under the overview of one of the following organizations set up by the
Central Government:

a) The Small-Scale Industries Board

b) The Khadi and Village Industries Commission
c) The All India Handicrafts Board
d) The Central Silk Board
e) The Central Coir Board
f) The All India Handloom Board

The last three have specialist responsibilities reflected in their names. They will not be
discussed further in this paper.

The Small-Scale Industries Board is chaired by the Union Minister of Industry with the
Development Commissioner for Small-Scale Industries (DCSSI) as its Member
Secretary. Other union ministries, state governments, SSI associations, financial
institutions, eminent industrialists etc. are represented on the board. As the Secretariat of
this board the office of the DCSSI (also known as Small Industries Development
Organisation (SIDO)) is the nodal agency for formulating, coordinating and monitoring
the policies and programmes for promotion and development of small-scale industries in
the country.

Facilities are provided by SIDO through a network of 26 small industries service

institutes (SISIs), 20 branch institutes, 40 extension centres, product and process
development centres, production centres, field testing stations etc. in areas where specific
types of industries are concentrated.
A range of specialised institutions have been set up for providing assistance to SSIs.
These are the National Small Industries Corporation, the National Institute for
Entrepreneurship and Small Business Development, the Small Industries Extension
Training Institute, Integrated Training Centre, and several centres or institutes on tools
design and training.

Operating in parallel to SIDO is the Khadi and Village Industries Commission (KVIC)
which is a government-financed statutory body responsible for selected types of village
industries including Khadi.1/ The national KVIC formulates the broad pattern of
development needs of the village industries many of which are in the “tiny” category and
are traditional. Similar action is taken by the state level KVI Boards which are jointly
funded by the respective State Governments. The KVIC also operates through registered
institutions and Cooperative Societies which are directly financed by the KVIC or partly
through respective State Governments depending on whether they serve more than one
state.
1/
Khadi is traditional Indian cloth which is fully handmade.

An essential form of transport in country districts

All-India Handicraft Boards are a third set of national institutions which oversee
implementation of small industry programmes. Some states have also set up Handicrafts
Development Boards to supplement the activities of the All India Organisations. In areas
of concentration of particular handicraft items, Research and Development Centres,
Design Centres etc. are established.

Small Enterprises' Organisations

The large number of official assistance institutions at national, state, and lower levels still
have problems in reaching their dispersed clientele. Small industries have attempted to
facilitate access by grouping themselves into associations. Such associations also provide
direct assistance to their members but their most important role is probably that of
lobbying for small-industry interests in dealings with the authorities. The most prominent
VSI organisations are outlined below.

At the top is the Federation of Associations of Small Industries of India (FASII),

established in 1959, whose main aim is to promote the development of small-scale
industries. The Federation has set up functional and industry-wise panels at national and
regional levels which are consulted by the central and state governments in framing
policies and providing assistance to SSI units. Recognised as the national apex body,
FASII has been given representation on all committees of the Central Ministries as well
as State Governments. The federation has played an important role in changing the
definition of small industry, seeking reservation of items for exclusive SSI production
and supply and negotiating a host of other concessions to small industries. Membership
includes associations at all levels, prominent individual units, and industry-specific
associations.
Small-Scale Industry Cooperatives have been organised in almost all fields of village and
small industries. In the case of many subsectors the progress has not been significant so
that there are still under 0.1 million cooperatives. At the national level, a National
Federation of Industrial Co-operatives (NFIC) exists which assists in local and overseas
promotion and marketing of cooperative products and imports scarce raw materials,
components and goods for its members. Societies at state and regional or district levels
and large primary societies are members of the NFIC while the Government of India and
the State Trading Corporation are shareholders. The Federation concentrates marketing
attention on a few priority products (wood carvings among them).

There is also a National Alliance of Young Entrepreneurs (NAYE) which works to

safeguard the interests of young entrepreneurs; it has a special wing for women
entrepreneurs. The Alliance is represented in the metropolitan cities and in all states.

Assistance to small industries development

India provides a wide array of assistance programmes to promote small industry

development. They can perhaps be conveniently grouped under four headings as follows:

- Assistance in expanding markets (including preference in purchasing by government;

support in joint tendering for government purchase contracts; price preference; and
reservation of certain product lines or industries for only small-scale manufacturers).

- Supply of essential raw materials.

- Provision (and subsidy on cost) of finance for investment and working capital.

- Provision of technical assistance and other advisory services.

Policy and implementation bodies along all these lines exist at national and state levels
and sometimes also lower down. Many forms of assistance are given from the large
variety of institutions but an attempt has been made to provide “one window” bassistance
through District Industries Centres which directly provide all assistance or at least
coordinate it.

Assistance in expanding markets

Reservation for small industries of certain items is a policy whereby the central
government and many national organizations buy exclusively from the SSI sector in order
to solve the market difficulties of the SSI units. As at the end of March 1984, 404 items
were included in the list for exclusive SSI supply. Table 26 gives the list of forest-based
products which fall into this group. In addition, there were 12 items to be preferentially
procured from SSI units up to 75 percent and 25 items up to 50 percent of total
requirements. Central government also offers 15 percent price preference to tenders by
SSI; many states offer the same.
Government has also recognised that since individual SSI units are scattered throughout
the country and their resources are limited, they find it difficult to participate in
government stores purchase programmes even if certain items are reserved for them to
supply. It accordingly allows state SSI corporations to tender on behalf of the small-scale
units.

Government also reserves certain industries or product lines for exclusive manufacture by
the small-scale sector provided that such articles/goods can be produced economically by
small enterprises. The total number of items so reserved stood at 126 in 1968 but had
reached 872 in 1984. Table 27 gives the list of forest-based products which fall into this
group. In the case of other items reserved for production in the SSI sector but not
included in the list of items for exclusive or preferential purchase, a 15 percent price
preference is given.

The combined effect of the above favourable discrimination in marketing and market
opportunities has been to increase the small industry share in government's total
indigenous purchases from about 7 percent in 1973/74 to 12 percent by 1983/4.

A facility which mostly aims at expanding small industry markets but also helps in
promoting their technological improvement is “ancillarisation”. Under this scheme, a
small industry is deliberately created to be or is transformed into being an ancillary of a
larger industry on a formal sub-contract basis. The incentives for the large industry
include access to cheaper loans, assured raw material supply etc. The programme is run
by state level ancillary advisory committees which also plan and provide infrastructural
facilities. The Committees include representatives of large industrial units, public sector
undertakings, private sector associations of industries, development agencies, financial
institutions, and ancillaries themselves. Plant level committees on ancillary development
also exist in public sector undertakings and large industrial houses.

Table 26: List of forest-based items which can only be purchased by government
from the SSI sector.

Wooden items

- Crates
- Tool handles
- Hand drawn carts
- Teak Blocks
- Tent poles
- Shelving
- Wood wool
- Plugs
- Ammunition boxes
- Chairs
- Mallets
- Flush doors
- Wooden Pins
- Veneers

Other

- Cane baskets
- Bamboo cool handles
- Brooms

Mats and matting (which includes items made from forest materials) can only be purchased
from the handicraft: sector.

Table 27: List of forest-based products reserved for exclusive production by the SSI
sector

Seats for buses and trucks Wooden storage cupboards

Wooden truck bodies Shelves and racks
Wooden crates Wood-wool
Tea chest plywood Hockey stocks
Seasoned wood Wooden flooring tiles
Wooden sewing machine Wooden boats
covers Natural oils of cashew shell, sandal wood, pine,
Cable drums eucalyptus
Tent poles
Wooden plugs Turpentine
Wooden or bamboo handles Wooden furniture and fixtures
Teak blocks

Supply of essential but scarce raw materials

Policy favours imports where they give further impetus to exports and support the growth
of indigenous industries. During the period 1982-84, the share of SSI in total value of
industrial-input imports averaged 26-28 percent, the rest having gone to larger industries.
Out of the licenses issued for the SSI sector in 1983/84, those for raw
materials/components accounted for 59 percent by value.

Scarce indigenous raw materials are allocated to State Small Industries Corporations
(SSICs) at the beginning of each year for distribution to SSIs as needed. This
arrangement enables the SSI units to obtain their requirements on an as and when
required basis. The assured supply of scarce raw materials enables SSI units to plan their
production programme well in advance.

Provision of subsidized finance

Financial outlays by central and state governments to VSI grew from Rs. 52 million in
1951/56 to Rs. 6161 million in the 1980/85 development plan. The proposed figure for
1985/90 is Rs. 11205 millions. These government financial outlays form a minor portion
of the total flow of funds to the SSI sector. Much larger resources are provided by the
network of Commercial Banks, Cooperative Banks and Regional Rural Banks, State
Financial Corporations, State Industrial Development Corporations, and the National
Small Industries Corporation.

There has been consistent growth in the availability of credit facilities extended by
Commercial Banks. During the 5-year period of 1979/83 the annual disbursement had
nearly doubled in volume to Rs. 50506 million lent to 1.23 million enterprises. Such
loans are covered by the Industrial Development Bank of India (IDBI) under its refinance
scheme. All loans up to Rs. 0.5 million are covered by the automatic refinance scheme at
the concessional rate of interest.

State Finance Corporations also lend to the VSI sector (also eligible for refinance by
IDBI at concessional rate of interest). The IDBI itself lends heavily to SSI: the total
assistance provided by it to the VSI sector up to March, 1986 was Rs. 52850 million. Its
annual financing has doubled between 1979/80 and to 1982/83 when it reached Rs. 2902
millions, which included refinancing of advances made by other institutions.

The interest rate charged by IDBI for refinance differs for various purposes. It is as low
as 6 percent in specified backward areas but range between 8.25 and 9.58 percent in non-
backward areas.

The IBDI is the apex financial institution providing assistance to industries of all types
and sizes. The SSI sector's share in IBDI disbursements has increased from nearly 16
percent during 1970/75 to about 31 percent in 1980/85 and IDBI has now established a
separate Rs. 25 billion fund called “Small Industries Fund” to take over the bank's own
existing and future assistance to SSIs. This new fund is expected to pay particular
attention to “micro” industries.

In order to ensure that financial institutions do lend to small-scale industries, the Reserve
Bank of India requires all Commercial Banks and other financing institutions to ensure
that at least 12.5 percent of the total credit advances is reserved for weaker sections like
rural artisans, village craftsmen, or cottage industries.

Some specialization exists in types of lending: the commercial banks provide the bulk of
short-term advances to SSI units and the state finance corporations provide long-term
loans. Both types of finance are made available at relatively low rates of interest for the
SSI sector, the present schedule being as under:

Type of loan (%) Rate of interest

Composite loans up to Rs. 25,000
 i) Backward areas 10.0
ii) Other areas 12.0
Short-term advances
i) Up to Rs. 0.2 million 14.0
ii) Over Rs. 0.2 million to Rs. 2.5 million 16.5
iii) Above Rs. 2.5 million 18.0
Term loans
i) Backward areas 12.5
ii) Other areas 13.5

The financing referred to so far is available for a wide range of purposes. Additional
specific modes of financing are adopted to cover purchase of machinery and to encourage
growth of VSI into the medium-scale sector: these include a bills rediscounting scheme;
provision of seed capital; interest-free sales tax loans; national small industries
corporation hire-purchase; and state investment subsidies.

The bills rediscount scheme is operated by the Industrial Development Bank of India
which covers bills/promisory notes arising out of sales of indigenous machinery on a
deferred payment basis. Bills/Promisory notes drawn in favour of or by the machinery
manufacturers are in the first instance discounted by them with their banks which in turn
rediscount these bills with the IDBI at concessional interest rates of from 9 to 10.25
percent.

In India, tree planting close to SSE's also receives official support

Seed capital is provided by the government for technically or professionally qualified or

skilled SSI entrepreneurs who want to expand to medium scale. The seed capital is an
interest-free equity loan carrying a service charge of one percent p.a. and an initial
moratorium of up to 5 years.

Small enterprises expanding into medium scale units are also eligible to get an interest-
free sales tax loan equivalent to the sales tax paid by them for a period of 3 years prior to
proposed expansion. This loan is repayable in three equal annual instalments after a
moratorium of six years.

The National Small Industries Corporation enables the SSI sector to obtain local or
imported machinery and equipment through its long-term hire purchase scheme. The SSI
generally deposits 10 percent of the value of the machinery and this outlay is eligible for
refinance from IDBI at concessional rates of interest.

Finally, the government encourages rural fixed investment by paying a 15 percent

subsidy or Rs. 1.5 million (whichever is less) for SSI units set up in notified backward
areas and new industrial complexes in selected places. Some State Governments also pay
subsidies of varying generosity to selected priority categories of industries set up in areas
not covered by Central or State level subsidy schemes.

It is clear from the foregoing information on finance that many incentives are provided.
In order to control the direction of industrialization, the incentives are sometimes made
selective in nature when the government feels that (a) a subsector is overcrowded (b) the
activities are not essential and socially beneficial in nature or (c) attraction of private
initiative is high even without incentives due to the industry's potential profit earning
capacity. Precaution is also taken to ensure that the enterpreneur has sustained and
continued stake and interest in the project. The entrepreneur is therefore required to make
a minimum contribution which ranges from 15 percent for “technocrat entrepreneurs”
and for all backward areas, to 20 percent in other cases.

To reduce waste of resources, government also insists that the financing institution make
a detailed technical and financial appraisal of the project before sanctioning assistance. In
order to ensure prompt repayment, a penalty of 5 percent per annum is levied on the
defaulted portion of loans. There is also a commitment charge of one percent payable by
the enterpreneur (0.5 percent in backward areas). Banks retain first claim on fixed assets
created from their loans.

Provision of technical assistance and general advisory services

A systematic review undertaken during the mid-seventies revealed that the benefits of the
SSI programme were, by and large, limited to those situated in urban and semi-urban
areas and were used mainly by modern mechanised SSI units. It was therefore decided to
create District Industries Centres as focal points for industrial development in every
district of the country. The functions of these District Centres (whose costs are shared
equally by central and state governments) are: to coordinate promotion of small, tiny,
village and cottage industries; to provide all services and support at pre-investment,
investment and post-investment stages to the decentralised industries sector under a
single roof; to provide incentives for industrial units to be set up in rural areas which will
mainly supply local markets and use local raw materials and skills.

Each district centre can have functional managers for Economic Investigation, Credit,
Village Industries, Raw Materials, Marketing, Training Information, Infrastructure etc.
depending on the local need. Technical assistance in each field is obtained from the
nearest Small Industries Service Institute. The vital aspect of this programme is the
“single window concept” and delegation of powers to the local level in respect of
administrative, financial, and external trade matters.

It is now reported that the District Industries Centres (which are spread over the entire
country), have not fulfilled all their tasks. It appears that they need to be strengthened and
given adequate inputs for establishing small units in rural areas.
A second thrust of assistance is entrepreneurial development. This started in the 1960s
with training of unemployed but technically qualified engineers. Subsequently the
scheme was expanded to cover different types of entrepreneurs such as (a) agriculturists
who had sufficient capital but did not know investment channels, and (b) merchants who
desired to also manufacture their own goods.

Funding for entrepreneurial development training is given to small industries service

institutes, the National Small Industries Corporation, State Directorates of Industries and
technical colleges. A National Institute for Entrepreneurship and Small Business
Development was established in 1983 with responsibility for training programmes for
motivators, trainers and entrepreneurs themselves and for research and development in
entrepreneurship and small business management. In due course, regional and state level
training institutes are to be established.

A new scheme for unemployed rural youths to be converted into entrepreneurs has now
been started. It is implemented by District Industry Centres. Once they “graduate,”
youths obtain a bank loan which attracts a capital subsidy of 25 percent payable by the
Government to the lending bank at between 10-12 percent p.a. interest. Tiny and artisanal
units will form the bulk of the clientele.

Industrial estates are a third line of assistance. By grouping SSI units, the programme
enables development authorities to establish common service centres and facilitates the
dissemination of modern production techniques. In several industrial estates, economies
have been achieved through collective purchase of raw materials and other collaboration.
Within the industrial estates occupants of factory sheds are helped to own them through
easy hire-purchase terms. There are also concessional charges for transport, water and
power; temporary exemption is authorised from sales-tax and duties on specified goods
and services for certain categories of industries.

Special assistance is provided to encourage location of industry in backward areas. The

special loan interest rates have been mentioned earlier but other incentives include
preferential treatment in the grant of industrial licences and outright subsidy on fixed
capital investment. More than half the districts in the country are considered backward
and therefore eligible for concessional finance of which 101 are entitled to even greater
subsides than the rest.

To differentiate by degree of backwardness, the industrially backward areas have now

been categorised into three strata which attract subsidies ranging from 10 to 25 percent.
The new format has been so successful that in certain areas some of the concessions have
had to be withdrawn so as to avoid overcrowding of industrial units.

Some remote areas need this method of logging

Forest-based small-scale manufacturing

Among the village industries scheduled for development by KVIC are the following
forest based industries: collection of forest plants and herbs for (mostly medicinal
purposes); cane and bamboo processing; gums and resins; khattha manufacturing; and
shellac industry. These industries utilise minor forest produce which are under the control
of State Forest Departments.

The Khadi and Village Industries Commission (KVIC) helps individual entrepreneurs
directly or through State Departments/agencies. However, in the absence of assured and
sustained raw material supply and a regular and profitable market for the collectors, these
industries may have created much employment but have generated little additional
income. The technologies required to make these industries more successful are still to be
propagated extensively amongst the tribals who are the main beneficiaries.

With regard to collection of forest plants and herbs a very large proportion of the plants is
found in temperate regions and at high altitudes in the Himalayan and sub-Himalayan
ranges and scattered in other hilly tracts in Assam, Kerala etc. The traditional established
pattern of collection by tribesmen continues; produce reaches the dealers in towns and
villages through middlemen who have regular dealings with the tribal people, lend them
money, purchase their forest produce and supply them with other goods, often by barter.

There has been indiscriminate exploitation of both the resources and the tribesmen in the
past. Sparce distribution, difficulty of access to and high cost of transport to reach the
natural habitat of the plants, extermination of the rare plants, incorrect identification of
the genuine plants are among difficulties faced in this industry. It is in this context that
the Khadi and Village Industry Commission and other agencies moved to organise the
tribals into cooperatives which can obtain benefits directly for their members instead of
through middlemen.

The cane and bamboo industry is widespread in India since the raw materials occur
everywhere and are associated with many aspects of rural activity. The availability of
canes in India is meager compared to its requirements. The chief uses are for making
furniture, baskets, handles for umbrellas, and mats. Industries based on gums and resins,
and khattha (a medicinal extract of Khair tree heartwood) are relatively minor relative to
cane/bamboo and collection of herbs. Shellac, which employs over a million people, is
more prominent.

With regard to wood processing, there are nearly 8 000 units producing wood products in
the small-scale sector employing 0.29 million persons or about 1 percent of the SSI
employment total. The average employment per unit works out to 4.2 persons compared
to the SSI sector average of 6 persons. The average investment in plant and machinery for
a woodworking unit is Rs. 19 184 which is only 40 percent of the average for the whole
SSI sector. The much smaller size of enterprises in the forest-based sector suggests that of
the existing assistance programmes, the most relevant in many cases will be those
designed for “tiny” units.
The location of many residual forest resources in relatively isolated localities also
suggests that many forest-based SSI may have “backward area” status and so attract the
additional support this status entitles them to.

It is interesting to note the position occupied by the sub-group “wood products” in SSI
sector. Table 25 shows the all-India proportions in terms of number of units, employment
and investment for 1983; it shows that wood products accounted for 9 percent of SSI
enterprises, 6.7 percent of the labour force and 5.7 percent of investment.

Many forest-based SSI enterprises would be entitled to the extra privileges and assistance
to “tiny” units since they tend to have only up to Rs. 0.2 million investment in machinery
and equipment. They are generally artisan oriented, use relatively little machinery and
equipment, much of which is locally made. Such units have access to all the facilities and
concessions available to small-scale units generally. In addition, they receive priority
assistance in getting organized and in allocation of sheds in industrial estates.
Government also gives some priority to “tiny” units in allocating scarce raw materials.
Bank loans are given to them without security (whether collateral or otherwise). On their
part “tiny” units have affiliated themselves with large SSI enterprises in district and state
level associations which are ultimately represented in the national federation of SSI
associations.

In spite of the special efforts to assist them, however, the “tiny” units continue to face
serious problems, the most important being small rural markets, low productivity, high
costs and poor or stagnant technology. Modernization is proving difficult due to the very
small capital base of these enterprises.

Table 25: Wood products in the Indian SSI sector in 1983.

Percentage of
Industry Group
Number of Units Employment Investment
Wood Products 9.0 6.7 5.7
Leather and Leather Products 9.9 4.1 2.3
Metal Products 9.7 9.0 7.6
Food Products 17.9 18.6 21.7
Source: Small-Scale Industries in India - Book of Statistics

Improving management and the

managerial skills of small-scale
entrepreneurs.
A Guatemala forest worker uses a chain saw

A cooperative sawmill in Guatemala

by
Ake Sahlin
Management Development Branch
International Labour Organisation (ILO) Geneva

Introduction

Despite many favourable attributes, the average small enterprise is often struggling for
survival in a hostile environment. Lessons learnt in Africa show that the policy
framework many times is to the disadvantage of the small entrepreneur. For example, in
the case of Nigeria, recent studies disclose that import tariffs applied favour larger
companies and the use of advanced technologies. In one case, large companies paid
duties of between 0-10 per cent on the import value while small-scale competitors had to
pay 30-65 per cent although they were producing identical or similar goods.

A result of the policy framework is that many entrepreneurs are tempted to use an
inappropriate technology. They soon find themselves trapped in a situation they cannot
manage. Limited technical skills mean that maintenance will be poorly done and the
machinery will deteriorate. Lack of spareparts and in some cases raw material for the
production process due to foreign currency restrictions might halt the operation
altogether.

Many businessmen running a small venture are also facing capital restrictions although
not for investments in machinery and equipment. On the contrary, funds for investment in
fixed assets are often easily accessible and in fact many small enterprises have a large
unused capacity. The commonly encountered capital constraint is instead to get working
capital. Indeed, very few sources are available to supply the small entrepreneur with
money to buy raw material and intermediates, to pay workers wages, etc.

Small-scale enterprises in the forest sector rarely exist with business as the single
dominating activity of the owner/manager: the small business operation is carried out on
part-time basis, often as a complement to agricultural activities. In many cases, assets are
also used for several ventures. It is therefore very difficult to measure the real importance
and productivity of the sector or to assist the forest-based activity in isolation. It is also
noted that forest-based small enterprises often are located where raw material is
available. Compared with other lines of business they tend to be more spread out and
consequently more difficult to reach with traditional approaches and assistance such as
management training and extension service.

Most forest-based small scale enterprises apply unsophisticated production methods and
equipment. It seems that most work on an order basis rather than producing for stock to
supply a distant market. Although such a system reduces the working capital tied up in
production or stock, it also limits the scope for productivity improvements.

It is of interest to note that early findings from an ILO-study presently being executed
shows that the above-mentioned characteristics apply not only to the formal sector but
also to forest-based businesses of the informal sector. A conclusion that might be drawn
from this is that when discussing needs for management improvements and assistance,
there are few reasons for separating the analysis of small enterprises in the formal sector
from that of the informal sector.

Management of small-scale enterprises

To avoid academic discussion, management is here simply defined as the way a

commercial/business activity is organized. Before looking at the forest-based sector,
discussed below are some general issues relating to small enterprise management. While
it is realised that management in small enterprises normally is personalised rather than
being institutionalised, still the management of small enterprises can improve their
position vis-a-vis competitors by introducing management practices that give consistency
and viability to the administration of the entire business.

The very ownership of a business tends to create elitist attitudes and self-orientation. It
imposes a monocular vision which limits the company's capacity to respond positively
and aggressively to business opportunities and changing business conditions. A person
who stands head and shoulders over his colleagues in perceived authority can create
benefits as well as disadvantages for the business. In cases where he is a poor manager
even though a good entrepreneur, his domination might prevent the enterprise from
obtaining the skills and methods which are needed for further growth. A gap is thus
created between the manager/owner's perception of the situation and his own abilities on
the one hand and of the actual needs of the business on the other.

Small enterprises often apply a minimum of formalisation. They achieve the output
without much of differentiation in job content. The built-in informality facilitates a
smooth response to minor disruptions but it renders at the same time excuses for not
establishing and enforcing proper performance standards. Due to the informality of the
business and to the fact that most small enterprises are operating with short product
cycles, the managers/entrepreneurs do not conceptualise their situation in terms of
opportunities, expertise or strength. The enterprise might as a consequence implement
decisions on the basis of unvalid assumptions or a misperception of the situation.

Discipline at workplace is affected in cases where a small enterprise is filled with

relatives of the owner or manager, especially if there are elderly relatives since in many
cultures it is difficult or even impossible to govern or reprimand such an older
relative/employee. The extended family system, where it operates, requires that in the
recruitment of employees for such a family business, relations of the owner/manager
have to be considered irrespective of other employment criteria.
Since many entrepreneurs of small enterprises lack managerial experience when they
start their business career, there is often a tendency of basing decisions and actions on
hope and dreams rather than solid data. There are for example numerous cases of small
enterprises going into bankruptcy because of the simple fact that they did not know how
to price their goods or services. In such cases, even the introduction of the most basic
management principles could improve the performance of the enterprises.

In short, the following characterises organisation and management of small enterprises:

- the entrepreneur succeeds in business due to his technical skills, not because of his
ability to conceptualise market opportunities or plan ahead in strategic terms;

- in contrast to large companies, which can usually afford specialist staff, the small
enterprise manager is a relatively isolated individual trying to deal with long-term policy
issues and day-to-day operational problems simultaneously;

- small enterprise managers often operate without adequate quantitative data or other
information, rather following the strategy of other successful entrepreneurs;

- due to low wages, limited job security and a low status from working in a small-scale
enterprise, the manager cannot easily recruit and keep qualified employees.

Due to these shortcomings, many small enterprises fail to adjust in response to

environmental changes, introduction of new technology or similar developments. When
the skills and experience of the owner/manager become outdated, the enterprise slips into
stagnation.

Given the characteristics of small enterprises in the forest-sector, with many tiny units on
the border between formal and informal sector supplementing the income of the
entrepreneur's family, the need for management improvement are more basic or different
from those of many other lines of business. Due to the informal and irregular manner in
which operations are carried out, often as a complement to agricultural work, the
financial flows of the enterprise are not separated from the economy of the family. Proper
books and records are rarely maintained and the assets of the enterprise not insured.

Making baskets - a family business

Many entrepreneurs in the forest sector also depend on limited market opportunities and
produce few or a single product of a relatively low quality which excludes them from
operating on export markets. The often poor quality of products is basically an effect of
rudimentary tools and equipment being utilized. The use of relatives or poorly trained
employees with low payment reinforces the quality problem. Especially in rural areas,
qualified workers are not easily found.

Finally, in addition to low salaries, many small enterprises such as those in the forest
sector offer poor working conditions and lack even the most basic safety-measures. This
tends to increase the problem of experienced workers moving to larger enterprises in
urban areas.

Entrepreneurship and management development issues related to the small

enterprise sector

Management support to the small enterprise sector covers the whole range of issues from
identification/selection of entrepreneurs, initial management training, support through
extension services and functional support to strengthening of small enterprise
development agencies and development of national policies on promotion of small
enterprises.

Many countries have training programmes for the small enterprise sector but lack a
specific education and training policy for small enterprises development. A number of
issues need to be resolved before policies can be implemented at the national level. In the
first place, potential entrepreneurs have to be identified. Even when selection procedures
are used, only a relatively small percentage of graduates actually start and succeed in
business. Some experts believe that wasted effort and financial loss can best be avoided
by a self-selection process whereby rigorous exercises completed before attending a
formal training programme allow participants to judge their own entrepreneurial
potential.

Another issue is to determine the appropriate level of training. Assuming that

entrepreneurship can be induced, should the starting point for entrepreneurship
development be the primary, secondary, post-secondary or post-tertiary education level?
The answer to this question will depend to a certain extent on the type and level of
training of the personnel involved in small enterprises development assistance. It is
sometimes argued that including entrepreneurship training in the primary or secondary
curriculum would mean devoting less attention to basic skills such as languages,
mathematics and science. This is countered by those who maintain that entrepreneureal
attitudes take a long time to develop and should therefore be taught as early as possible.
One reason for introducing self-employment concepts to children at the primary level in
developing countries is that many of them do not pursue their formal education at the
secondary level. The cost of doing so would be minimal yet it would enable young people
to be informed of the possibilities of self-employment as a career. An issue of interest is
also whether early entrepreneurship training should be sector oriented in order to gear
potential entrepreneurs towards expanding lines of business or if the training should be
kept general.

In some industrialised countries, post-secondary educational institutions provide special

training programmes for potential entrepreneurs. In the developing countries, too,
university-level business programmes sometimes cater to the specific needs of small
enterprises. Governments are now having to decide whether to introduce basic changes in
the educational system so as to offer business education and training for various age-
groups.
Financing entrepreneurship development programmes is also an important issue. In some
countries, the entire cost is borne by the government, in others by the participants. The
decision in this matter will depend to a large extent on the type of small enterprises being
aimed at (modern small enterprises, craftworkers, informal sector entrepreneurs, self-
employed women, etc.). As to whether the government or the private sector should be
responsible for such programmes, opinions differ, some arguing that overall government
control is essential to coordinate the programme and others that the government should
not be involved in any part of the programme that can he carried out by the private sector.
In some instances entrepreneurship development programmes are offered jointly by
government and private sector organisations. There is considerable controversy, too, over
whether the programme should stop at business creation and the participants be left
entirely to their own ventures once they have received their initial training or whether, on
the contrary, follow-up counselling and even other types of assistance such as credit
should be available for the first year or two of operation of a new small enterprise as part
of the programme.

Given the particular characteristics of the forest-based small enterprise sector with small,
family based units distributed in rural areas, successful assistance programmes will
probably differ considerably from most existing approaches. One key issue is whether to
concentrate on those with the largest potential for entrepreneurship and assume that the
local community will benefit eventually rather than using scarce resources to support
income supplementing activities with little scope for improvement. Although very small
income generating business ventures are important from the individual's point of view
and contribute to employment and national production output, it can still be argued that
due to the irregular nature of activities the productivity of assistance to such tiny units is
less than that of support to somewhat larger and more permanent enterprises.

In the field of social science, during the past 50 years, extensive research has been carried
out regarding the issue how human beings learn and acquire skills. Although much is
known today about the learning process, relatively few research projects have focussed
on how successful businessmen obtained their entrepreneurial and managerial skills.
Available evidence indicates that the development of entrepreneurial and managerial
skills is a process different from most other learning. The importance of the childhood,
early experience from working life as well as an environment favourable to business
ventures are all ingredients necessary for the development of entrepreneurial attitudes and
talents. Although the issue whether entrepreneurship can be taught or is inherited is still
debated, there is today fairly strong support for the assumption that such traits can be
developed through well designed training programmes as will be further discussed below.

When it comes to development of managerial skills, the issue is not whether they can be
transfered by training but rather to what extent the quality of training programmes can be
improved to the level where they attract the attention of hardworking entrepreneurs. A
vast number of small business training institutions throughout the world are offering
more or less comprehensive training programmes geared towards the local business
community. Many of these efforts fail, often because the programme design is poor. Too
many programmes are containing over-sophisticated components and abstract training
materials far from the reality of the entrepreneur. In many cases, the programmes are also
over-ambitious in terms of the commitment expected from the entrepreneurs. Few
successful, or moderately successful entrepreneurs can manage to stay away from their
businesses for long periods, something which is unfortunately often not taken into
account among training officers designing the programmes.

Practical youth training in a local business community

The key factor explaining why management training programmes for small businesses
are so poorly received by many entrepreneurs seems to be the fact that they are usually
designed by people in ministries, public small enterprise promotion agencies, forest
departments or similar institutions. Often these officials have little or no experience
themselves from the small business sector. ILO experience shows that only if the training
is planned and conducted by trainers familiar with the conditions of small enterprise
management will it become practical-oriented and well received by the entrepreneurs.
Once the programme is perceived as practical and useful by the local business
community, the institution offering the training gets a solid response from the
entrepreneurs.

There is also the issue of the cost-effectiveness of training. Which group training methods
have given good results? What successful methodologies exist that are learner-based?
Questions such as these stem from a general desire to apply the wealth of knowledge in
the fields of social psychology and cultural anthropology to the design and execution of
small-enterprise training programmes.

Extension services in one form or another exist in almost every country, where they are
generally looked upon as one of the most important components of any serious small
enterprise development programme. Yet they invariably seem to suffer from a number of
unexplained shortcomings. It is therefore important to identify specific action that could
be taken to improve the way they are designed and operated.

ILO activities in entrepreneurship and management development

Traditionally, most ILO activities in the field of small enterprises promotion start in
response to a member State's need for assistance in training and extension services. A
considerable number of field projects have been carried out over the years and their
volume continues to grow.

This is not to say that the countries concerned have necessarily made notable progress in
training or advisory services for small enterprises. Two critical problems prevail in the
field of training. First, many countries have no comprehensive training policy and any
training programme for small enterprises in these circumstances is almost bound to be
wanting in quality and quantity. Therefore, the ILO's employment and training
programmes seek increasingly to develop a strategy based on sound training policies. The
second problem is that many approaches and methodologies for small enterprises
development in developing countries have proven to be conceptually weak. These two
problems have been tackled in several ways.

Texts, manuals, handbooks, workbooks and trainers' guides for small enterprises have
been devised as part of the ILO's Training Programme in order to provide more practical,
simple, down-to-earth training materials and to improve the cost-effectiveness of training;
too often in the past entrepreneurs have had difficulty coping with over-sophisticated
techniques.

The ILO has, with the support of the Swedish International Development Agency
(SIDA), launched and integrated small enterprise management training programme
“Improve Your Business”, which is being introduced in a number of countries in Africa,
Asia and the Caribbean, following the successful promotion of a similar scheme in
Sweden and other European countries during the 1970s by the Swedish Employers
Confederations. Essentially, the package consists of a handbook and a workbook. The
material can be used without an instructor as an analytical and counselling tool as well as
for group learning. The basic aim of the material is not, as most training materials, to
passively transfer knowledge to trainees but rather to motivate them to ask themselves
how they are performing as managers of their businesses. By triggering off a process
whereby the entrepreneurs frequently assess their respective business much more is
achieved than through traditional training. In order to facilitate this self-assessment, the
workbook offers an number of a checklists and exercises which are designed in such a
way that the entrepreneur has to review his own situation. In areas where the entrepreneur
feels that he can improve his managerial performance, the handbook offers practical
advice. Supporting training activities, seminars, workshops and individual counselling are
carried out with the same aim, no to tell the entrepreneurs what to do but rather to
stimulate them to look at their own way of doing things in business.

The success of this programme so far has been tremendous. Numerous country
adaptations have already been published and drafts of translations into French, Arabic,
Swahili and Bahasa are at present available. Additional training materials using the same
basic approach are also currently being produced. A trainers' guide and a business
counselling guide, both belonging to the “Improve Your Business” family, are also
presently being finalised. An evaluation of the Improve Your Business programme in
Kenya shows that a significant number of the entrepreneurs participating in the
programme did actually improve their managerial behaviour during the course of it or
immediately afterwards. For example, many of the participants started using simple
bookkeeping systems and basic principles for costing and pricing as a result of the
programme.

Film strips - one of the mass media training material

The ILO has also developed mass-media training material for small enterprises. The
material was first developed in Latin America, where experiments are being undertaken
in Colombia (radio), Mexico (television), Peru (video), Brazil (photostrips), Costa Rica
(audio-slides) and Argentina (radio-programmed instruction for rural producers). A
similar training scheme for small enterprises by radio, classes and correspondence has
also been designed for island economies in the South Pacific.

There is a contradiction in designing entrepreneurship development and management

training programmes which has to be handled in order to achieve maximum cost-
effectiveness in training. On the one hand, training of individuals or small groups,
especially on the job training, tend to have more impact than traditional training of larger
groups of entrepreneurs. At the same time, the cost per participant increases drastically
when the number of persons participating in the programme is reduced.

One approach in training which has been applied by the ILO is action learning. This
approach has both proven to be cost-effective and generated a lot of positive spin-off
effects apart from improving management performance. Since 1981 the ILO is
implementing programmes based on action-learning for small enterprises in several Latin
American countries. The approach is based on the premise that people learn by doing, not
simply by attending classes. Accordingly, an action-learning programme consists of
setting up groups of entrepreneurs, each of whom identifies problems in his enterprise
and works to reduce or cure these problems, meeting together periodically to discuss
progress and plan further action. The group dynamic concept is important as it motivates
or puts pressure on the participants to actually carry out their plans and makes the
experience and skills of all participants available to each other. Initially, group-activities
are coordinated by a facilitator who triggers off the early interaction in the group.

An evaluation of the Latin American project shows that action learning is a very
appropriate methodology for training entrepreneurs to think about their enterprises, make
thorough analysis of difficulties encountered and develop realistic action plans. By
participating in a group, the entrepreneurs are able to extend their commercial network
and later “joint ventures” are sometimes born in the groups. At the same time, the
approach has to be used with caution. For a successful implementation, the following
requirements must be met:

- a well planned and implemented promotion of the programme and very careful group
selection, so that the future participants will form as homogenous a group as possible;

- some highly-participative, fully-relaxed work sessions that will make the entrepreneurs
feel “at home”, and accept helping others so that the others will help them.

Although it is difficult to make a cost-effectiveness evaluation of the method, and as the

outcome would depend largely on the geographical distribution of the group, available
experience shows that the approach is more cost-effective than traditional training
programmes. Action learning can prove appropriate for training of small, rural based
businesses in the forest-sector.

Making wooden toys in Costa Rica

An additional finding of an ILO project in Costa Rica was that action-learning works as
well with peasant farmers as with urban entrepreneurs. In a later project in Honduras,
work with farmers was included in a project which also aimed at urban entrepreneurs.
The results obtained in the course of only six months are quite remarkable. The urban
entrepreneurs identified various management areas in which their technical knowledge
was deficient, and formed working groups to address other problems such as raw
materials quality. The farmers identified problems as soil diseases and insect pests and
made contact with public health agencies. The farmers also identified various community
level problems which were later dealt with as result of their initiative.

Finally, action-learning by participating in groups of entrepreneurs might eventually end

in the small business community organising itself, something which clearly has a number
of advantages but is hard to achieve since entrepreneurs are individualists and might
object to such an attempt, especially if it comes from outside their own business
community. In the future, working through action-learning groups might also prove to be
a feasible way of introducing sound business practices among otherwise conservative
entrepreneurs. If the informal leaders in such groups can be identified and influenced to
adapt more efficient management principles, others might follow since we know that
entrepreneurs tend to copy the successful entrepreneurs rather than training officers or
other so-called experts.

Presently, the ILO is also working on a special training programme for female
entrepreneurs. Research on the topic recently carried out indicated that there are specific
training needs among women entrepreneurs and that there is a large demand for training
efforts geared towards this group.

With regard to the training of consultants and advisers for the small enterprise sector, an
ILO book “Management consulting: A guide to the profession”, includes a special section
providing practical guidelines on consulting for small enterprises at various stages of
development. This publication has been used extensively to train consultants and
extension officers in both industrialised and developing countries.

Entrepreneurship development is receiving attention at various levels. Firstly, to

introduce conceptual and practical awareness of self-employment as a career option for
young people, a teachers' guide has been pilot-tested in several countries and its
adaptation is in progress. To assist the self-employed, a guide entitled “The practice of
entrepreneurship” was published in 1982.

Secondly, a comprehensive research study taking into account recent conceptual

developments and practical applications has been undertaken by the ILO to assess the
training components of entrepreneurship development programmes for business creation.
The study includes pre-selection techniques for identifying entrepreneurs with potential
for success. The results of the study are to be published soon. A spin-off from this
exercise has been the creation of a bibliographical data-base with cross-references on this
subject.
Thirdly, a number of field projects have been initiated to introduce entrepreneurship
training into vocational training. Instances of this novel approach include projects in
Malawi and Uganda where combined vocational, managerial and entrepreneurial
development schemes linked to financial support to young entrepreneurs are being tested.
In Morocco a managerial component is being introduced into the vocational training
offered at 60 rural training centres. These projects are seen as pilot activies for potentially
important innovations in vocational training.

Lessons of experience and new ideas

Finally, through its long history of executing field-projects, the ILO has gained
considerable experience in designing and implementing business creation projects. The
following are the main lessons learned in this area:

- a business creation or entrepreneurship development programme should start with the

human-being and his business idea rather than with general plans for industrial
development in the particular area or with market opportunities identified by experts.
Identifying persons with the entrepreneurial qualities and who believe in what they are
doing/want to do is more important than the line of business as such;

- efforts should be made to select those people most likely to succeed in business. A
properly designed and implemented promotion for the business creation programme
guarantees that a sufficient number of applications are received to cater for a reasonable
number of potential entrepreneurs;

- the subsequent selection process should reveal the applicant's background, age, earlier
working experience, the realism of his business idea, motivation, entrepreneurial attitudes
and other relevant information. The necessary information can often be best obtained by
the use of a battery of forms, tests and a structured interview;

- the aim of the training is to let those selected develop their usually infantile business
ideas into feasible and viable proposals. The training component should cover all major
areas of management, introduced one at a time as the business idea grows more mature.
When, for example, the entrepreneur is gathering information about his potential market,
he is also given a theoretical content in terms of sessions on marketing. In such a way, a
group of entrepreneurs develops their respective business ideas, step-by-step getting
familiar with new management topics.

Since the training is practical-oriented and the entrepreneurs/trainees expected to be quite

active, they are given a number of specific tasks to carry out as part of the learning
process. The task could be for each to compile a list of suppliers of raw materials for their
potential business, something which might become useful once their enterprises are
started. It is then up to the individual entrepreneur to use available means to carry out the
assignments and prove that he has entrepreneurial talents.
The built-in difficulties in these training tasks are also functioning as selection
mechanisms, if the entrepreneurs do not accomplish the tasks they drop out of the
programme. Only those with a good commercial spirit and perseverance survive the
training phase;

- the outcome of the training should for each entrepreneur be a well conceived business-
plan, and a full-fleshed loan application which can be submitted to a commercial bank;

- usually, commercial banks are preferred to soft loan schemes. Firstly, an independent
bank will make its own assessment of the proposal and thereby add views on the viability
of the proposed business. Secondly, by interacting with an independent, commercial
institution, the entrepreneur will immediately gain a realistic perception of how to deal
with banks and of the real cost of capital. Finally, by approaching a commercial
institution at an early stage, the entrepreneurs are given the opportunity to build up a
relation of mutual trust with the bank, something they can benefit from later on.

Depending on the conditions in each case, this basic model for business creation is then
followed up with other elements of management training and extension services.

Recent requests to the ILO for technical assistance have also concerned ways - and means
of redeploying redundant employees from overstaffed public sector enterprises, it is
expected that a recent training package, “Working for Yourself”, which aims at helping
people with some working experience and skills to start a business, will provide a useful
contribution to solving these problems. The package is based on a material earlier
produced and successfully used in the United Kingdom. The first field testing of the ILO
version for developing countries will take place in Nigeria during 1987.

“Working for Yourself” is a programme aimed at taking participants successfully through

the stages of starting a business before they actually do it. The programme caters
particulary for those who are starting on a very small-scale, usually based on their
personal skills. It is suitable for those who are unemployed but have some basic skill or
technical qualifications and for those who recently left school or a college/training
institution. The programme is in 8 modules, each logically linked with the stages of
development of a business. Participants are therefore supported individually or by
participation in group interaction to develop their business idea through each stage
alongside the programme.

The teaching style needed when introducing working for yourself is highly participative.
Learning starts from where the participants are. Trainers do not teach “subject” but
facilitate knowledge as it becomes relevant and only in digestible amounts and in
appropriate language. The trainers must be highly flexible with a wide range of reference
and business knowledge. Working for yourself is perceived as an appropriate programme
for small, rural based enterprises in the forest sector. The characteristics of the
programme also make it suitable for the action learning methodology.

On the job training

In the field of handicrafts and cottage industries, the ILO favours on-the-job rather than
formal training or, exceptionally, short training courses when the subject-matter cannot be
conveniently taught at the workplace. Training to use improved technologies or introduce
new products is a reasonably straightforward exercise but business and management
training poses great difficulties because of the trainees' low levels of literacy and
numeracy.

The ILO has been assisting numerous countries in establishing extension services.
Generally speaking, all ILO field projects for small enterprises have an extension services
component in one form or another. This may focus on technical issues, as in Egypt in the
early 1980s; on promotion aspects, as in Paraguay; or on rural artisan association
building, as in the Gambia. The field work is linked to on-going ILO research into ways
and means of improving the performance and cost-effectiveness of extension services. In
a similar vein, a study has been made of methods of improving the management of
institutions promoting small enterprises development in developing countries.

With respect to cooperatives, the ILO has introduced a successful global exercise in
training known as “Materials and techniques for cooperative management training”
(MATCOM). This inter-regional project, commenced in 1978 and funded jointly by
SIDA, NORAD and FINNIDA, focusses on preparing and disseminating training
manuals and materials adapted to local conditions. Seminars are organised in which the
training of trainers is a key feature.
Delivering logs to a saw-mill
Developing and promoting technology
and technical skills in small-scale rural
manufacturing enterprises.
by
Dr. M. S. S. El-Namaki
Director, RVB Delft
(Research Institute for Management Science)
The Netherlands

The problem

There exists a common belief, supported by developing country case histories, that small
industry could be a prime mode of economic growth if it overcomes some structural
problems and assumes a proper industrial policy role. The World Bank, UNIDO, ILO and
a multiple of research forums have explored some of these problems and come away with
the conclusion that the sector suffers from a shortage of managerial skill and a scarcity of
technological input. This lack of managerial skill as well as the fragile technological base
have demonstrated themselves in a tangible enterprise mortality rate in invariably all
developing countries encountered in the course of this and other research efforts.

The following paper addresses, therefore, four specific issues:

(a) Technological characteristics of small industry in a number of developing countries

especially in Africa and Asia.

(b) Commonly identified technology problems of the sector in these countries.

(c) Different approaches applied to the problem of technology development and transfer
as well as managerial skill creation within the sector.

(d) An evaluation of the situation and an assessment of the needs for additional efforts in
this regard.

The approach is observation oriented with the results of contemporary research on small
industry in general and technology development and transfer in particular, being the
major input. The author's own individual and institutional exposure to these problems
have, obviously, supplemented this analyses.

A few limitations are, however, worth noting. Small industry is difficult to define
precisely and there is always the danger of getting off focus. The paper therefore covered
a relatively wide span starting with the limited, near informal sector units up to the well
structured and relatively mature units.
Writings on management and technology within the sector are, on the otherhand,
abundant but center around worn out themes i.e. bad management, weak entrepreneurial
pulse, hostile environment, etc. and the treatment of the problems of technology in the
sector is more implicit than explicit. This paper has therefore made an explicit attempt at
separating the two issues and dealing with each as a recognizable problem within one
broad frame.

The scarcity of data on forest based industries in general and those of developing
countries in particular has added to the difficulty of providing a clear focus. So reference
has been made to a broader set of small industries in general and to forest-based
industries whenever the data was rich enough and reliable enough to be included.

Technological characteristics of small scale industry in developing countries

The technological characteristics of small scale industry in developing countries could, in

the author's view, be measured in terms of six specific variables: (a) economies of scale;
(b) the technological base; (c) technological disparity; (d) infrastructural base; (e)
learning; (f) industry differentials; (g) labour intensity; and (h) linkage pattern. The list is
by no means exhaustive but it provides as complete a view as can be, of the different
factors at play in the determination of the technological characteristics of the sector. We
now examine each of those variables closely.

Economies of scale

Small industrial units are, by assumption, limited scale manufacturing operations that do
only selectively, demonstrate the typical impact of scale on productivity and output. They
emerge and persist in industries where scale economies are either relatively unimportant
or are associated with limited levels of employment and investment. They also decline
whenever scale economies become significant. Breaking the size barrier is, in fact, a
measure of success of the small industry entrepreneur.

The experience of Korea and Taiwan (Ho, 1980) could probably be of assistance in
thowing some light on what could be considered, for various industries, the minimum
efficient plant size and in what industries could small scale manufacturing units be
considered efficient.

Korea and Taiwan have experienced a shift from small low technology content industries
in the late fifties and early sixties to large high technology content industries in the
seventies and eighties. Both countries had a strong small industry sector in the sixties that
declined - in terms of total employment - gradually but measurably, over the last two
decades. The share of Korean small enterprises (5-49 employees) declined from 54% in
1958 to 17% in 1975. The identical share of Taiwan small industrial units demonstrated a
parallel decline from 45% 1954 to 26% in 1961 (Ibid).

A walking tractor hauling poles on a trailer

In Korea, in particular, an estimation of efficient plant size according to the “survivor
technique” (calculating for two points in time the share of an industry's output by size of
establishment and consider those sizes that experience increases in their shares as
efficient sizes), suggests that the efficient plant size in most industries is above 100
workers (Ibid). It also suggests that the incidence of efficiency in the small industry is
most observed in two industrial branches: food and textiles.

Summing up, not every small industry is, from a size-technology point of view,
appropriate. Certain technologies and industrial branches, lend themselves to small scale
application without jeopardizing productivity and efficiency. Those are most common in
the wood, furniture, garment, leather and timber industries. The smaller the industry,
moreover, the more difficult is the question of size-technology fit. Cottage industries and
handicraft should find their justification not because of the level of productivity achieved
but because of the level of employment generated.1/
1/
In both Korea and Taiwan three industries accounted for three quarters of the net
increase in factory employment in manufacturing, (a) textiles and apparels, (b) products
of chemicals, petroleum, coal, rubber and plastic and (c) metal products, machinery and
equipment. Within these three groups, strong growth was experienced by such industries
as man-made fibres, fabrics, petrochemicals, chemical fertilizers and electrical machinery
and apparatus, where the average size of establishment is quite large and where scale
economies are known to be important (Ho, 1980). It may be interesting here to refer also
to another survey that has been carried out in 1981 of the size of manufacturing plants
within thirty three major industries in Britain, Germany and the United States over the
period 1970-1973 (Paris, 1981) that supports the notion that certain industries are more
likely candidates for small scale operations than others. From the thirty three industrial
groups surveyed six; leather, clothing, furniture, timber, cement products and beverages,
had a median plant size of 100 employees or less in Germany. Britain demonstrated a
higher plant size for clothing, furniture and cement. The United States, on the other hand,
demonstrated an even higher plant size that those of Germany and Britain. Other
industries demonstrated a larger size of employment, across the board, and little
significant country differentials. Median plant size in selected industrial groups 1970-
1973 (number of workers):
Britain Germany USA Germany/Britain
Leather etc 90 70 160 .81
Clothing 120 100 180 .78
Furniture 130 70 200 .56
Cement etc 140 70 80 .45
Timber 60 20 110 .27

There's need to increase efficiency and reduce drudgery

Technological base
Small industries are dependent for their equipment and process technology on a limited
number of resources that start with (a) the entrepreneurs' own technical expertise
probably gained during earlier stages of paid employment (Schmitz, 1982); (b) large
firms that provide the technology as a component within a sub-contracting arrangement
(Ibid); (c) government institutions desirous to support a measure of indigenous
technology. And although the level of technology associated with any small industry
initiative is a function of all three variables, there is sufficient evidence to suggest that the
first is the prime source of technology in small industry in a significant number of
developing countries.

Case studies from Brazil (Schmitz, 1980) indicate that thorough knowledge of the
production process tends to be the small producers' strong point. “The most important
source of skill and know how found was previous wage employment. The training and
experience gained in this way varied with the job previously held, but generally it
provided a sufficient basis to pick up the missing technical aspects through a process of
learning by doing, which was an integral part of the small producers' struggle for survival
or expansion”. Similar conclusions were reached in Eastern Africa (King, 1974, 1975,
1979). This fairly narrow base of technological input does result in a strong measure of
technological “retardness” that expresses itself in, among other things, a comparatively
low level of labour productivity in the respective plant or plants. “Many small scale
operators are engaged in a process of production and technological development but their
ability to develop cumulatively over extended periods is limited” (Bienefeld, 1975).

Technological disparity

The generic term small-scale industry conceals, in fact, three levels of technological
sophistication each related to a specific type of activity: craft production, cottage
industries and small manufacturing. Each of those three is, in fact, a distinct mode of
production with different scale and level of technology parameters. The simplest and least
problematic level of technology is that of crafts. Carpentry, furniture etc demand
relatively limited technological input. Cottage industry demands a relatively higher level
while small-scale industry could demand again comparatively, the highest level of
technological input in the sector. The five levels of technological input identified in the
case of a sample of seventy small scale carpenters in Dakar (Van Dijk, 1982) could
provide an illustration.

These conclusions are also supported by an FAO study exploring the level of
mechanization of a number of small forest based industries in Jamaica, Thailand,
Honduras, Egypt, Sierra Leone and Bangladesh (FAO, 1985). The study revealed that a
large number of small (up to 10 workers) forest based industries do not use any machines,
whether powered or non powered (69% in Jamaica and Honduras and 93% and 99% in
Egypt and Bangladesh).

An examination of the level and availability of equipment and process technology in yet
another sample of 465 small enterprises in the Senegal (van Dijk, 1982) could provide an
additional illustration. The study distinguishes between two levels of technology, simple
and more sophisticated and measures the percentage of each in the respective ample.

Table 20: Technology level among a sample of carpenters in Dakar, 1977.

Share
Technology
Number %
Simple tools, no machines. 57 81
One machine, relatively simple (e.g. boring machine) 5 8
One combination machine 3 4
Several machines including a combination machine 5 7
An appropriate technology (e.g. circular saw) 0 0
Total 70 100
Source: Van Dijk, 1982.

Table 21: Segmentation of technology by level among a sample of smaller industrial

units in the Senegal, 1977

Activity Tool or machine required % using higher level

technology (by No.)
Blacksmiths Welding equipment 40.3
Brickmakers A blockmaking machine 0
Carpenters A measuring instrument 21.9
Electrical repair A measuring instrument 53.3
Furniture A sawing machine 88.0
making
Mechanical A measuring instrument 51.1
repair
Watch repair A measuring instrument 11.4
Others A piece of equipment worth more than 27.8
10000 F CFA
Total sample 39.1
Source: Van Dijk, 1982.

Factors influencing the choice of a specific level of technology for this group were found
to include investment level, scale, knowledge about and accessibility of specific types of
technologies, human prejudice against or for a specific technology, cultural factors and
the existence of a technology gap i.e. non-conformity of the available technology with the
level desired by the entrepreneur or recommended by the feasibility makers.

Infrastructural base
Experience of a large number of countries in both Africa and Asia has shown that small
industry usually needs a strong infrastructural base, although this need may vary
according to the size and nature of industry. The smaller the unit and the less formal is its
frame, the less the need for this infrastructure. The larger the unit and the more complex
the product or the process, the greater the need for this infra structural base. Very small
and artisanal establishments provide their own power (mechanical, hand or generator)
and can adapt to different types of physical location and shelter (Page and Steel, 1984).

The larger small industries are very much dependent on the existence of the facilities
usually contained within an industrial estate. Those could be technically oriented services
as central repair workshops, facilities for the bulk purchase of raw material and
warehousing facilities or common facilities as foundries, electroplating shops, tool and
die shops, heat treatment shops, woodworking shops, a quality control laboratory and a
special machine shops. Although industrial estates are usually the focus of all these
facilities, a UNIDO exploration of the relevance and effectiveness of industrial estates for
small industry development has revealed, however, that industrial estates had little
success in attracting industry to rural areas (UNIDO, 1978).

Industry differentials

The term forest-based industries conceals, in fact, a number of different industries with
different characteristics. They differ in terms of labour input, proximity to the raw
material base (the forest), nature of raw materials used and their utilization pattern,
sensitivity to scale, resort to technology, marketability of output etc.

Coconut sawmilling in Jamaica

The most important of those, in terms of employment in a number of surveyed countries

are those based on wood such as carpentry, furniture, upholstery and wood carving but
others as bamboo works, mat making, basket making, hat making, agricultural tools,
canning, medical and aromatic herbs etc can also be locally important. Assuming that
since all these industries are forest based they are equal in technological and managerial
paramaters could be dangerous. The very difference between these industries could spell
out their susceptibility to stimulation and lead to a direct differentiation in the applied
methods and approaches.

Learning

Contemporary and not that distant research has revealed the existence of a measure of
correlation between average total or partial cost of production of a product and the
cumulative volume of production. Average total cost declines with increase in volume not
only as a result of economies of scale but also as a response to four other factors that have
proved instrumental in causing a cost decline. Technology is prime among these factors
while dexterity, learning and quality of management follow by not too far a distance. This
so called learning or experience impact was traced in large manufacturing operations
producing a wide variety of products from integrated circuits to baby food.
The author strongly feels, although admittedly has yet to accumulate empirical evidence,
that small industries in most developing countries are not susceptible to the learning or
experience impact just described. The reasons for that are the following: first is the fact
that many small scale industries, also in the forest sector, do not lend themselves to large
scale operations. Second is the frequently observed low level of technological input and
technological adaptation in many of those industries. Third is the long established high
labour intensity and low labour dexterity, in many of those industries.

Fourth is the often cited constrained managerial performance of the great majority of
these units. And fifth, and last, is the limited scope for learning given the environmental
constraints of the industries. As said earlier, precious little empirical evidence is there to
support the suggested relationship between learning and the small scale industry sector in
developing countries. Suggestive evidence is, however, there.

Labour intensity

Aggregate data consistently show that increasing size is associated with decreasing
numbers of workers relative to capital. This labour intensity of small industry is a
favourite argument in favour of the industry and a frequently cited rationale for its
stimulation. Several determinants could actually lead to this labour intensity. One of these
could be the degree of “sophistication” of utilized technology. Differences in labour
intensity may simply reflect the impact of differences in the wage/rental ratios facing
small and large firms on their choice of both technique and industry. Another determinant
may be the degree of informality of the enterprise, with informal sector enterprises more
inclined towards substituting capital with labour and employing low-skill, minimum
wage-tied labour.

And a third possible determinant of this labour intensity could he the economies of scale
that we have mentioned earlier and the fact that certain industries and industrial branches
require considerable capital outlay within a wider span of scale than that reachable by a
small industry.

Linkage pattern

The probability is high that the forward linkage of small-scale forest based industries to
large scale industries is lower than their backward linkage. This is due to the non-forest-
based raw material purchase by SSI manufacturers. The extent of the linkage may depend
on the level of subcontracting that exists between small and large scale manufacturers
although links through the open market could also be important (FAO, 1985).

Simple powered tools are essential for higher productivity

Commonly identified management and technology problems within the Forest-

based small industry sector

An ever elusive technology

Technology is a scarce commodity in small industry in most developing countries.
Barriers, and there are many of them, restrain the flow and inhibit the access of the
entrepreneur to this technology. There are source-related barriers, investment-related
barriers, market-related barriers, development-related barriers and access-related barriers.
A source related barrier is that resulting from a reluctance of the large industry to provide
essential production technologies to the small firm out of a restrictive attitude towards
technology dissemination or fear of outright competition or rivalry. Some of these source-
related barriers are institutionalized and have deep roots in developed country technology
export restriction regulations (Barton, 1984). Investment related barriers arise from the
existence of a prohibitive price for the technological input, a price that is beyond the
financial capabilities of the small enterprise.

Market structure barriers reflect a high measure of concentration that converts the small
industrial unit into a marginal player with no virtual impact on technology transfer or
development. Development related barriers arise from market information imperfections
or ignorance. The small entrepreneurs' knowledge of new technologies is scarce and
distant (Schmitz 1982; Choi, 1986). “For small enterprises the adoption of the latest
technology means a discontinuous leap from their previous technology” (Bienefeld,
1975). New technology enters into the country, moreover, through foreign subsidiaries or
is developed through local firms larger in size and potential than the small industrial unit.

Access-related barriers refer primarily to the efficiency of the institutional infra-structure

created to support the process of technology development for the small industry owner.
Although this point will be explored at length later, it is necessary to draw attention here
to the still rather limited reach of much of the existing technological support institutions
and existence of an invisible barrier between the small industrial units and these
institutions.

Reliance on the infrastructural support

Small rural industries depend, sometimes to an excessive extent, on infrastructural

support and their productivity and opportunities for survival do, as a result, display a
dependence on the accessibility and validity of that support. Attitude towards that support
is, however, not uniform. Some governments favour a self reliance approach to the whole
issue. “In the Philippines ...while conditions are made congenial, the measures are largely
to promote self help. The Philippines five year plan (1983-87) indicates “the promotion
of individual self reliance and self esteem will be pursued in the context of broad
community participation and involvement” (Rau, 1986).

Pool manufacturing practices and working conditions

Small plants, in a sizeable number of developing countries, do demonstrate stark

deficiences related to basic production management techniques as plant layout, material
flow, production planning, physical distribution, quality control, product and process
design etc. The observation applies to small industrial plants observed in countries as
varied as Kenya and the Philippines.
The same plants do also harbour adverse working conditions that undermine productivity
and safety. Inferior technology, deficient raw material, incomplete infrastructure, irregular
supply of energy, inappropriate equipment all contribute to these adverse conditions.
Many entrepreneurs had their first exposure to manufacturing in similarly ill-fit
environments and do not have a sound comparative base to guide them. Information on
safety and the working environment rarely reaches the small enterprise. Knowledge of
what may be considered proper working conditions is scarce, limited and little
professional advice is sought in this regard. The result is high accident rate, poor work
attitudes and, ultimately, lower productivity. (Louzine, 1982).

Limited technological skills

Technological skills available in small industries, especially the rural ones, is mostly
limited to the owner and a very few, if any, individuals around him. The owner's skill is
mostly earned at an earlier stage in his career and seldom developed to match the
dynamic nature of most industries. The technological skills of the other individuals
within the enterprise is mostly limited and seldom developed. Limited funds, operational
pressures and poor basic education account for that.

The labour market, moreover, and in the majority of cases, seldom provides a direct and
sufficient coverage of the technological skill gap that emerges from this situation. The
result is a tangible level of technological stagnation reflected in poor to very poor product
specifications, outmoded product designs, limited product range, inefficient
manufacturing processes, loss in touch with the market etc. The most casual observation
of small and cottage industry in countries as varied as Nepal and Sri Lanka would
confirm this observation.

Empty pockets and limited resources for technological development

Finance, or rather lack of it is one of the most commonly cited small industry problems
almost everywhere. The problem takes, however, a different shape depending on the
source and the angle from which it is viewed. The small industry owner expresses it,
more often than not, in terms of limited access to sources of funds and restrictive
practices by these sources. Sources of funds view it in terms of deficient managerial skills
and the inability of the entrepreneur to exercise control. The truth lies somewhere
between the two extreme positions depending on the country in question and the situation
at hand. What is certain is that the scarcity of financial resources does impact upon the
technological capability of the enterprises as equipment become difficult to modernize,
training programmes become difficult to pursue, basic applied product and process
adjustment become difficult to allocate time to etc.

Private sector financial institutions in the Philippines, for example, make few loans and
even fewer term loans to small enterprises. The government's programmes have shown
that the risks and arrears of lending to SSE are far higher than commercial banks would
normally accept. One of the most important reasons for this high risk element is the
shortage of information on small enterprises and the absence of a formal record keeping
system on credit worthiness which is, in many cases, due to the broad distribution of the
qualities of the owner and the difficulty that he encounters into distinguishing between
sound and unsound loan requests. (Anderson, 1981). Philippino cottage industry, where
loans are granted on basis of collateral and a personal knowledge of the local enterprise,
provide, however, a better record than that for larger small firms.

The experience of the Philippines is not that much different from that of many other
developing countries. Government programmes do provide an increasing number of
small enterprises with access to institutional credit. The volume of lending is mostly,
however, small compared to demand. And with structural constraints preventing the
private finance sector from filling the gap, technology assumes a remote and untangible
role.

Scarce technological software

Small industry in a large number of observed developing countries demonstrate a

multiple of specific and in many ways non-conventional managerial traits that one
seldom encounters in medium or larger firms. First is the very small management team
that brings along with it a lack of specialization, a predominance of multi-functional
roles, a shortage of promotable manpower, a pronounced domination by a leader and a
large measure of informal control. Second there is the limited control of the environment
and the limited resources available to scan it, anticipate potential changes and adapt
capacity accordingly. Third there is the informal pattern of operation, with conflicts
resolved more easily and loyalties assuming a high magnitude. Fourth there is the general
unawareness or indifference to the structured approach to the managerial function and the
need for a longer term vision of the enterprise and its environment. (Gibb, 1983).

Chinese girl working in the family business

These and other related problems lead to the emergence of performance bottlenecks.
Owners concentrate on tasks that they value rather than adopt a rational approach to task
identification and pursual. Planning develops as response to events instead of a rational
choice of a course of action that promises most returns. Manpower practices deviate from
the structured and managerially acceptable and demonstrate a bias toward the social and
paternalistic. This is reinforced by considerable use of family labour. Control becomes ad
hoc and seldom based on proper information flows.

Many small industries start, moreover, with far too limited insight into the real market
potential of their products and proper channel or channels to pursue. Some of their
problems arise from their technical orientation, and their preoccupation with product
specifications more than market requisites. Yet another cause of their problem is the little
emphasis placed on the marketing function in their appraisal and feasibility plans. The
problem could also have roots in the tense competition from other small enterprises or
even medium industries sensing the entry of the small industry as a longer term threat or
an unnecessary pressure on costs and margins. And last but not least is the very simple
and sheer lack of skill on how to identify a market opportunity, choose channels of
distribution and approach those channels and maintain a presence.

Initiative demonstrated by the small industry entrepreneur is also not always and
undisputedly welcomed by his environment. In fact there is sufficient evidence that
environmental forces ranging from purely cultural and social currents to ingrained
government bureaucracy go quite a long way towards restraining the driving force behind
small industry in many developing countries.

A case in point is China's emerging economic policy guidelines stimulating individual

initiative and encouraging entrepreneurship. Yet an article in the China Daily (April
16,1985) entitled “losing out in the love business” demonstrates the extent of the cultural
resistance to the principle and practice of free enterprise. This article started with the
following statement “Shanghai's private entrepreneurs some of whom earn more than
people employed by the state find difficulties in the love affairs”. It went on to underline
the failure of the emerging class of Chinese entrepreneurs to find marriage partners
because “people think that self employment is too risky, they still consider entrepreneurs
of low social status and some self employed Chinese entrepreneurs seem to be poorly
educated and rustic in their language and behaviour” (El-Namaki et al, 1985).

Small industry in Peru provides another example. An investigation has revealed that it
takes a starting entrepreneur 289 days in order to get a permission to establish a small
clothing factory. And that a licence to start a business in a more politically sensitive
industry takes three to eight years (The Economist, July 19, 1986).

Technological skill, know-how development, and their promotion in developing

countries

Technology, for the small entrepreneur, is simply knowledge essential for the conduct of
a productive function. It includes: (a) Industry specific knowledge; (b) Product-system-
related knowledge; (c) Firm-specific knowledge; and, finally, (d) On-going problem-
solving capability or skill essential for solving management problems.

Technology viewed within this context has a “soft” as well as a “hard” component. The
soft component relates to the human capability generation process linked to the
absorbtion and management of the technology. The hard components focuses on the
essential technological processes and equipment utilized in the manufacturing process.
Both components are of equal significance. They could be either transferred or generated
domestically. Transfer has provided the answer for decades. Development and generation
receive contemporary attention. The following discussion treats technological skill as a
function of both the transfer as well as the domestic development process.

The transfer of technological know how and skill

Some experience exists in transfer of technology. However, small industries, despite their
prevelance and omni-presence, are rather difficult to track and account for when it comes
to the transfer of technology. A few surveys quoted in a UNIDO study confirm the
contention that small industrial units in both Germany and France have been quite active
in the transfer of technology to business partners elsewhere. The survey conducted in the
Republic of Germany indicates that nearly one fourth of the 415 enterprises studied had
taken part in technology transfers by 1973. The various studies available on France are
perhaps more relevant. One survey shows that nearly half of the 100 or so small sized
enterprises studied had taken part in technology transfers by 1976 and that the other half
had been unable or had not wished to do so. There is also a statistic given in yet another
UNIDO study that suggests that small sized enterprises account for 15 to 30% of the total
number of subsidiaries of parent companies of European origin operating in Brazil,
Mexico, Peru and Venezuela, as well as of the total number of licensing agreements
concluded by European firms in these countries (UNIDO, 1982).

It is worth noting here that technological skill development has only recently become an
explicit element of the transfer process. This does not mean, however, that it is given its
due attention today. Transfer programmes as the sister industry programme of Sweden
and the pilot plant programme of the Netherlands have demonstrated strong bias towards
equipment transfer at the expense of human skill transfer.

One can also add that reasons vary for the interest of small industry in Western Europe in
the process of transfer of technology. Continued access to markets threatened by tariff or
non tariff barriers is one reason. Extention of traditional export relationship is yet another.
Some of them also see it as a part of a policy of gradual “sharing” of specific
manufacturing processes with developing countries as a dimension of an overall
international policy of redistribution of labour.

With regard to the transfer process itself, a few approaches exist, of which prime
examples include “sister industries”, “transfer agents”, “South-South cooperation” and
use of “pilot plants”. These methods are reviewed below.

(a) The sister industry relationship, a Swedish approach

The essense of the sister industry relationship is a long term technology transfer
relationship between two small industries one in a developed country and the other in a
developing country.

The senior sister is not necessarily a manufacturer of production equipment, nor a

consultant, but rather a company that is using the technology itself. The junior sister is
typically a newly established small enterprise within a national small industry creation
scheme. And the basic assumption is that assistance is rendered and most needed in the
short term and that the longer term should bring about a measure of self reliance. The
relationship could entail one or all of the following components:

On the senior sister's side: (i) preliminary project proposal; (ii) detailed specification and
costing of the entire project; (iii) purchase of necessary machinery, equipment and
starting material; (iv) technological training of selected entrepreneur; (v) supporting
expertise for the installation and running of the machinery and equipment; (vi) supportive
advisory service (vii) continued purchase and delivery of spares, materials etc. On the
junior sister's side: (i) providing an equity input; (ii) managerial and technical
responsibility for the operations of the firm; (iii) desire and readiness to continue the
development of the product, the market and the firm.
The framework of cooperation is set out in an agreement between the Swedish
organization and a home country counterpart. The senior sister and the supervisory
counterpart agree on the type of technology to transferred, the products to be
manufactured, the capacity of the plant, the extent of training required and scope of the
support in installation and running of the plant.

The local supervisory agency enters, in its turn, into a hire purchase agreement with the
junior sister specifying the extent of financial input from the entrepreneur and the
supervisory agency.

The local supervisory counterpart harbours a responsibility to: (i) identify products and
technologies with high priority; (ii) identify and select the entrepreneurs; (iii) carry out
feasibility studies; (iv) provide plant infrastructure (buildings etc.); (v) provide the
common facilities required within the industrial estate. SIDA (the Swedish aid agency) is,
on the other hand, held responsible for the identification and selection of the senior sister,
financing and monitoring of the programme.

(b) The transfer agent, an Asian approach

“Technonet Asia” is a typical example for another approach to technology transfer, and
adaptation. National member organizations have a strong small and medium scale
industry function and a national industrial policy role. They cooperate in the transfer of
indigenous technology through:

- Making available to one another industrial and technical information on products and
processes developed and available in their respective countries.

- Identifying technology seeds and technology needs for eventual facilitation of transfer
or sharing of results.

- Developing effective coordination and liaison with local institutions concerned with the
development of small and medium sized industries as well as with local sources of
technical information and expertise.

Technonet has been fulfilling a significant function as technological broker and an agent
for South-South cooperation. The limited geographical coverage of the organization and
the limited scale of the operations may be considered its most significant drawback.

(c) South-South cooperation, an Indian approach

Cooperation among governments and organizations from developing countries in the
transfer of technology is a commonly advocated channel. Several government agencies
and corporations in India, for example, have been playing a pioneering role in this
respect. The government owned Central Machine Tools has helped to set up a metal-
working research institute in Iran. The National Industrial Development Corporation has
been setting up industrial estates in Guyana and equipping a technical training institute in
Malaysia. Hindustan Machine Tools has been establishing an advanced training centre in
Iraq etc.

The Indian government's small industry programme in Tanzania is possibly, a typical

example for a South-South technological approach with all it opportunities and problems.
A credit line was established, in 1977, in order to be utilized for import of machinery and
training of Tanzanians in India. Fourty-eight small independent industrial projects were
selected and 31 quasi-independent district development corporations were also, until
1985, identified for a transfer of technology, a credit arrangement or both. The
implementation of the programme was faced with serious problems both at the
despatching and the receiving end. Some shipments were not containerized, some cases
of machinery were incomplete, some factory buildings were behind schedule and some
contemplated training has never taken place. All in all however the attempt provides what
could be considered positive results worth imitating elsewhere.

(d) The Pilot Plant, a Dutch approach

Transfer of technology through Multinational Corporations is a familiar and controversial

issue. It is laden with the by now common and familiar arguments against multi nationals
in general and their involvement in the industrialization process in developing countries
in particular. The case of the pilot plant initiated in the Netherlands by a multinational is
worth referring to because it represents the potential role of a multi national in the
transfer and adaptation of technology to the small industry in developing countries.

The origin of the plant is without any doubt the self interest of the multinational itself.
The corporation was faced with the problem of creating assembly and manufacturing
units in countries with less than optimum industrial infrastructure. The decision was
therefore taken in the fifties to simulate the process by building in the Netherlands a
limited scale plant that could embody the difficulties and constraints encountered in
developing countries. The experience meant compromising on a number of variables
including the equipment, which had to be largely local, comparatively simple and adapted
to the environmental conditions in the host country as well as the scale which had to be
adjusted to the limited batch production.

The transfer of technology process was seen by the multi-national as the ultimate product
of three components. The first is the so called general industrial know how. This is more
operations management-related type of information that could be transferred through
training and on the job exercise. The second is product related technology (product
specifications, product operation, product quality standards). And the third is process-
related technology (tooling, line planning and balancing, production flow etc).
Making trunks in China

An evaluation of the different approaches to technology transfer

It is necessary to ask whether the various approaches to technology transfer just reviewed
are appropriate and efficient.

(a) Could the South really teach the other South? South-South transfer of technology is
very attractive and sounds very valid within the ideological and political commitments of
developing countries. Experience has however shown us that there are many problems
involved in the process:
- Is the technology transferable? Some specific cases of technology transferred from
Asian to African environments disclosed a non-compatibility almost equal to that of that
imported from the North.

- Does the recipient have the capability to absorb the transferred technology? The gap
between some developing countries could be just as wide as that between developed and
developing countries.

- Is there enough skill at transferring technology? Experience indicates that skill is

needed in the management of the transfer process. Elementary errors related to the
process of transfer itself create dramatic consequences.

(b) Is it a sister or a mother relationship? Experience has taught those involved in the
creation of sister-industry relationships between small industries in developing and
developed countries that the process, contrary to the appealing impression it gives, is
complex and cumbersome. The Tanzanian experience has revealed many points of
weakness and the following are just a few of them:
- Greater emphasis on the technological transfer process than the economic viability of
the project.

- Technological bias has lead to a near total omission of the managerial training and skill
creation dimension.

- Identifying “elder” sister in the developed country seemed difficult and guiding them
throughout the process seemed even more difficult.

- Specific environmental constraints common to developing countries as shortage of

foreign exchange or lack of local raw material could cause unsurmountable obstacles to
the desired technology transfer process.

Taken together one can state that the essence of the concept is sound once managerial and
economic constraints are given due attention and the transferred technology is sufficiently
adapted to domestic and typically local conditions.
(c) Who protects us against the self interest of the multinationals? Multinationals' self-
denial might not last as long and be as durable as to provide a genuine support to small
industry. The following specific problems have emerged in a number of observed cases:

- Tied technology. Tied to the equipment and processes provided by the multi-national are
usually specific raw material and component inputs that vary from those locally available
and can only be supplied by the multi-national itself.

- Tied outlets. Multinationals impose, in many cases, specific marketing conditions to

their technology transfer. Those amount to the a near confinement of all marketing
efforts, especially in export markets, to that very multinational.

- Limited opportunities for skill transfer. Technological skill transfer is a second priority
in multinational operations, as evidenced almost everywhere. Their cooperation with
rural small industries almost excludes this transfer altogether.

The development of indigenous technological skill and know-how

Developing technological competence has long been identified as one of the most
complicated issues facing developing countries today2. Global R&D is seriously biased
towards developed countries. Secondary and higher education in developing countries,
the main bastion of technological infrastructure, on the other hand, demonstrate
considerable insufficiency. Student composition within developing country universities
and technical institutions demonstrate, generally, a strong bias towards law, social science
and other arts subjects. Some of the indicators of technological competence as the
percentage of expenditure on research and development as a percentage of GDP, the
number of technicians per 10000 inhabitants and the number of scientists and engineers
also per 10000 reflect alarming disparity between the developed and the developing
countries (See Table 22).
2/
Just six countries, (the USA, Britain, France, Japan, USSR and West Germany)
accounted in 1979 for nearly 85% of all R&D spending and 70% of R&D manpower
resources (The Economist, August 25, 1979), some of the research in pioneering areas as
microelectronics and biotechnology for example is almost exclusively concentrated in
industrialized countries.

New roads - a step towards the development of both small and large-scale industries

Table 22: Some indicators of technological competence in developed and developing

countries.
 Indicator Japan Argentina Bangladesh Egypt
1976 1976 1973 1973
Spending on R&D as % of GDP 2.0 1.8 0.2 0.8
Technicians (per 10000 population) 8.0 4.3 0.1 -
Scientists and engineers (per 10000 population) 35.4 3.1 0.2 3.0
Source: The Economist, August 25, 1979.

Having said this, it should be stressed, however, that the experience of a significant
number of developing countries indicate that the development and diffusion of domestic
or improved technologies within the small scale industry sector offers a lot in terms of
enterprise productivity, employment generation and import substitution. It is, moreover,
usually associated with a tempering in rural-urban migration, and a boosting in the use of
local raw material, local tools and equipment and local intermediate inputs. Many
government programmes have been developed, therefore, with the objective of
developing adjusted or adapted technologies especially in rural areas and encouraging the
use of those.

Manufacturing technologies of interest to rural producers have been developed for a large
number of consumer and small capital goods, including processed food, agricultural tools
and implements and wood products. Several approaches are also being tried to improve
the dissemination of technological information among rural producers, including the
establishment of specialized technological institutions and extension agencies (ILO,
1986).

Approaches to indigenous technology development

It must be obvious, however, that domestic technology development in developing

countries is a difficult process especially when we are dealing with a small industry. What
is going on right now is the result of multiple efforts. Some of the initiative emerges from
individuals, some from enterprises and some from specialized institutions created for this
specific purpose.
(a) The individual approach. Individual initiative of an entrepreneur with some technical
ability and the business insight to identify a product or a process and tie that to a market
opportunity, is still the most common pattern in many developing countries. Many of the
small and rural industries one comes across in countries as varied as India and Nigeria
have been created in this way. And many of them do demonstrate the technological
limitations of this individual Initiative too.

(b) The enterprise approach. Technological innovation here is the product of a goal that
has been set by the enterprise as a result of a market signal or simply technical bias of the
entrepreneur himself. Though not very common among small and rural industry, it does
frequently emerge as an extension of the private initiative referred to above.

(c) The institutional approach. The Institutional approach is fairly novel to many
developing countries but seems to be the favourite solution of the majority. The frame in
itself assumes different dimensions and diverse forms and maintains a wide variety of
linkages and roots.

One could in fact distinguish between four varieties of these technological development
institutions as outlined below. Case profiles of technology development institutions in
various countries are given in the “boxes” - the first giving examples from Asia, the
second from Africa.

- The extension-cum-technical development institution: This is an institution that has

been created in order to develop small industry in the broadest sense and technology
enhancement is seen as part and parcel of the function. The technology development
function is either conducted within the broad frame of the organization or delegated to a
specialized institution created within that frame. A typical example for this are the small
industry organizations of Tanzania, Zambia and more recently Zimbabwe. In all three
cases, technology is seen as part of a broader formula that includes entrepreneurial
development, consultancy and technical support.

- The product, process and equipment design institution: This is an institution created
with the prime objective of designing new products, adjusting the specifications of
existing ones, creating or reformulating processes and developing new equipments and
tools. The target group could be primarily small industry, like Thailand's Industrial
Service Institutions. A few institutions, however, cater for the needs of both small and
medium scale industry as Egypt's Engineering and Industrial Design Development
Centre.

- The research institution: Emphasis here is placed on applied research in the first place
and the technological diffusion of the results of this research in the second. A few of this
type of institutions exist in South Korea and Taiwan. They maintain, in many cases,
strong link with universities and technical institutions and identify themselves, more
frequently than not, with the academic and educational systems.
- The training institution: Many of the small industry promotion and technological
training institutions one comes across in the Philippines, India, Thailand, Sri Lanka,
Tanzania, Kenya etc fall under this category. Their prime objective is the training of
cadres for the cottage and small industries in the country. They differ considerably in
approach and level. Some conduct what is tantamount to vocational training while others
approximate the polytechnic approach.

(d) The training approach. As the reader must have observed by now, training plays a
central role in the process of development of basic technical skill, product related
technology and process related technology. Almost each of the organizations referred to
in the case profiles (see “boxes”) has its own programme for either conceptual
preparation or skill generation.

One can in fact talk of three types of training; training aiming at the technical skills and
industry or branch knowledge of the entrepreneur (ISC training in Thailand for example);
training directed at the managerial skills of the entrepreneur (SIDO's extension training in
Tanzania for example); and training provided in order to keep the entrepreneur informed
of recent mainly technological developments within his field (training provided by the
SMIPC of Korea for example).

Training conducted by the Small Industry Extension Training Institute of India, for
example, covers a wide range of topics that range from entrepreneurial development in
the classic sense to specific aspects of technology. Training conducted by Small Industry
Consultancy and Training Institute of Tanzania (SICATA) includes basic consultancy
skills (for extension officers), functional management (for the existing entrepreneur),
entrepreneurial development (for the emerging entrepreneur), small industry development
policy (for the policy formulating and support agencies) and, last but not least technical
drawing, technical maintenance and metal working (for practicing entrepreneurs) (See
Figure 3).

Figure 3: The consultancy-cum-training model

Some of this training is organized on a national basis while a considerable segment is

carried out in collaboration with other developing or developed countries. SIDO
Tanzania's SSI training programmes for example, are carried out in collaboration with a
Dutch counterpart. There are training centres that are created as a by-product of some
form of technological collaboration e.g. the collaboration between India and the
governments of Guyana, Iraq and Malaysia.

(e) The programme approach. Technology development could follow a programme

approach i.e. a cluster of efforts developed by the government or the private sector in
order to stimulate technical education or skill development among a specific group of
individuals. These programmes are usually confined to a specific target group, run along
non conventional lines and have a variable life cycle. They are also financed, in a large
number of cases, out of special allocations beyond the traditional budget outlays of the
respective agency. Some examples, which refer to India, Kenya, and Egypt are given in
the boxes”.

Village carpenters learn to build carts

PROFILES OF LOCAL TECHNOLOGY DEVELOPMENT INSTITUTIONS:

ASIAN EXAMPLES

CASE ONE: The industrial service institutions of Thailand.

There are several of industrial service institutions in Thailand and they have all been
created with the objective of providing technical information, extension, advice as well as
training within the light engineering branch. Services available cover industrial
engineering, industrial design, packaging, furniture and woodworking, heat treatment,
electroplating, machine shop practice, tool and die design and making, foundry technology
and low cost automation. The institutions develop, also, appropriate machinery and
equipment as low cost import-substitutes. The institutions also undertake techno-economic
surveys to appraise the availability of technical and economic resources within certain
branches of industry.

CASE TWO: The Indian Council for Advancement of Rural Technology

The Council has been established by the government of India in order to fulfill several
functions centering around the collection of information, the conduct of technology
oriented training programmes and the acting as a focal point for rural technology related
issues. The most important objective from our point of view is probably that of acting as “a
catalyst for development of technology appropriate for the rural areas by identifying the
crucial problems encountered by the rural people and funding research and development
efforts by different organizations”. This function is supplemented by that of disseminating
knowledge on rural technology to manufacturers of machinery, tools, equipment and spare
parts and of sponsoring training programmes, supporting research and strengthening
existing research and development institutions.

CASE THREE: The Small and Medium Industry Promotion Corporation of the Republic
of Korea (SMIPC).

SMIPC is a fairly recent creation of the Korean government in order to support the
technological and managerial development of SSIs in the country. The resource base is
strong and the function includes extension services of technological, managerial and
promotional nature. Specific handicrafts manufacturers with the market or capability for
export of quality products are given generous assistance. Applied technology and
management training programmes are provided at regular pace and with the minimum of
cost. Specific diagnostic services are also extended to the enterprises and they are also
helped in the process of adjustment and response.
 PROFILES OF LOCAL TECHNOLOGY DEVELOPMENT INSTITUTIONS:
EXAMPLES FROM AFRICA

CASE ONE: The Small Industries Development Organization (SIDO) of Tanzania.

SIDO was established in the early seventies in order to promote and coordinate small-scale
industry development in the country. Small industry included, according to the
Parliamentary Act, craft production, cottage industries and small-scale manufacturing.
Activities cover a wide span and include extension, credit, technology transfer, technology
development, industrial estate creation and training. In the process, SIDO has undertaken a
number of programmes with outspoken vision and policy behind them as the sister industry
programme (in cooperation with the Swedish industry) and the Indo-Tanzanian programme
(in cooperation with the Indian industry) and the Small Industry Consultancy and Training
Programme (SICATA) (in cooperation with the Netherlands government - see Figure 3).

CASE TWO: The Egyptian Engineering and Industrial Design Centre.

The Engineering and Industrial Design Centre of Egypt (EIDC) was established in the late
sixties with the specific purpose of developing a design capability for industrial products in
the country and enhance the technological development of the industrial sector of Egypt.
The tasks included: industrial product design and development, capital goods equipment
design, production technology and tool design, process design, and prototype and tool
manufacturing.

The institution has been quite active along a broad front. In the agricultural sector, mobile
threshers with electric and diesel drives, small trailers, irrigation pumps and sprayers were
locally designed or redesigned in order to suit local conditions and transferred to industry
for manufacturing. Among the agricultural implements a small woodworking lathe was
also developed in order to be manufactured in small shops and sold to woodworking and
small furniture industry.

TECHNOLOGY DEVELOPMENT IN A GENERAL SSI ASSISTANCE

PROGRAMME CONTEXT EXAMPLES FROM INDIA AND KENYA

CASE ONE: The Birla Institute of Technology. - India

Selected engineering students are invited in the last year of their degree course to carry out
a research project to develop a practical solution to a technical problem which can form the
basis of a small-scale engineering enterprise. Their answer to the problem is presented in
writing (and in laboratory prototypes where applicable), as part of their material for the
final examination. Many of them proceed with the developed product or process and create
their own small industry.
CASE TWO: The village polytechnic programme in Kenya.

The programme provides unemployed primary school leavers with six month training in
one or several simple skills for which there is a market in the villages. They also receive
some basic management training. It is made clear from the beginning that the objective is
to enable the trainees to create their own jobs by operating independently within their own
community. Their technological skills are developed under very constrained conditions as
they have to work with the minimum of equipment, and they therefore develop the ability
to improvise and make the best use of limited resources (Harper, 1984).

INTEGRATED ASSISTANCE TO FOREST-BASED ENTERPRISES THE CASE OF

THE EGYPTIAN FURNITURE INDUSTRY

Egyptian industry has a prominent artisanal sector which produces mostly a wide range of
household goods for local markets. The top four enterprise types in terms of employment
and number of establishments can be ranked as: ready made garments, woodworking and
furniture, food processing, and engineering and metallurgy. Major problems adversely
affecting productivity, quality and, by extension, constraining the growth of small scale
industry are: obsolete machinery; deficiencies in production and management (in product
design and development, production planning and work methods, material selection,
quality control, preventive maintenance etc.); poor working conditions and housekeeping
(Ikram, 1980).

Comparative advantage has led to concentration of the woodworking and furniture industry
in Damietta province. Serious problems facing the industry are primarily technological
such as poor finishing, workmanship, bad product designs, scarce machinery. Egypt is
tackling these problems of technological retardness as follows:

Product design. The creation of a provincial centre for product design and prototype
production. Compelling units with more than fourty workers to create their own design
centre. Encouraging the manufacturing of standardized semi-finished goods for assembly
at urban centres. Encourage a measure of substitution between wood and synthetic
substitutes.

Training. Creating a department for interior design in Damietta as an extension of the

Faculty of Creative Arts (Cairo). Introducing the following specializations within the
curriculum of vocational training at secondary school level in the country: upholstery,
carving, shaping etc. Confining the practical training of those attending vocational training
classes to specified factories selected carefully by a group of specialists in the field.
Organizing practical and focussed training programmes for construction workers involved
in wood installation.
Marketing. Improving the availability and quality of inputs. Excluding furniture exports
from all fiscal levies and duties and introducing a tax rebate system. Developing a
marketing-oriented brochure reviewing the potential of the industry in Egypt. Including
furniture in trade agreements.

Cooperative effort. Reviewing the definition of small industry and craftsman, from a credit
and finance point of view. Reviewing the potential for a cross-country furniture
cooperative marketing organization. Creating a small industry/craft cooperative finance
institution.

Technology development - an evaluation of the experience and approaches

The applied effectiveness of the institutional structure

Appraisal of the effectiveness of the institutional structures with regards to the issue of
technology development is complex and could carry strong subjective elements into it.
The observations which follow are the results of evaluations that have been done by some
international organizations which we shall have to put our faith in. There is a general
feeling that the institutional approach does suffer from a number of weaknesses, as
follows:

- A widely spread effort. Many of the organizations created for the development of the
small industry sector are given multiple functions and wide scope of activities. The result
is a variable degree of attention given to technology development with, on occasions, a
strong diversion of efforts away from technological development and into administrative
and regulatory issues.

- Non-selectivity of crafts and industrial branches. Undiscriminate attention is given to a

wide variety of crafts and industrial branches without giving due regard to the relative
significance and comparative advantage of some of those to specific rural communities or
to the country as a whole.

- Low level of technological training. Technology provided in many of the technology-

cum-extension or basic technology institutions is outmoded and, at times, outright
outdated. Equipment associated with this type of training is often cumbersome and
inefficient.

- Industrial estate focus. The concentration of efforts on industrial estate entrepreneurs,

which is commonly observed, does limit the ability of other non-industrial estate dwellers
to develop their products and processes technologically.

- The factory vs non-factory segmentation. The preference given in some cases, to factory
type small industry could lead, on the longer term, to a stagnation of specific traditional
crafts and appropriate technologies that might provide a perfect alternative to imported or
transferred technologies.

- Training bias. Many of the training programmes offered within some institutions
demonstrate a bias towards the upper levels of technical education. The consequence is a
heavier concentration of training on already “developed” individuals and a disregard of
the lower levels of the production skills.

The relevance and effectiveness of the training function

There are variable degrees of success of the training approach as a whole and many
serious problems encountered there. First, is the ability of the entrepreneur to follow the
training and absorb the contents. In Tanzania, a significant number of the entrants or
existing entrepreneurs, especially in the village industry programmes, have basic reading
and comprehension difficulties. The classic approach to training have failed there almost
dramatically. Second, the high measure of differentiation required for technology training
to be effective. Put differently, training has to focus on the specific problem areas of the
rural industry. Much training does not fulfil this criterion. Third, is the lack of appropriate
training material that relates to the entrepreneurs' realities and touches upon his day to
day problems. Much if not the majority of the material is developed elsewhere and the
relevance leaves, sometimes, a lot to be desired. Language of training could become an
unsurmountable barrier (Oude Vrielink, 1983). Fourth, is the scarcity of equipped and
motivated individuals that could perform the training cum extension function. This is a
special problem in some countries of Eastern and Western Africa and the Pacific.

The problem of commercialization of indigenous technology

The development of indigenous technology is by no means a guarantee that this

technology is going to be integrated in main stream of industry and business in the
respective developing country. Experience of a number of developing countries from
India to Korea reflect a variable degree of utilization of results of national research and
development (R&D) efforts within the business sector in general and within small
industry in particular.

Factors identified as crucial in the process of commercialization of indigenous

technology include the R&D capabilities and the management of the R&D function, how
multi disciplinary is the approach, the strength of the link between R&D efforts and
applied industry problems, the expertise of the R&D personnel, the orientation of the
R&D function towards the educational system and needs of the country concerned etc.
Some less encouraging factors could, however, restrain the process considerably.
Consider for example the commonly observed absence of demand for technological
innovation, the preoccupation with technical excellence at the cost of commercial reality,
conflict between the interest of industry and that of R&D institutions, technological gaps
between R&D institutions and industry, the observed time lag in technology transfer, and
lack of substantial follow up.
A note on micro enterprises in the FB sector

The analysis so far although addressing “small-scale industries” has covered approaches
or insights which are more relevant to the larger small enterprises. As we said earlier, FB-
SSIs demonstrate a strong bias towards particular smallness. Put differently, a large
number of these enterprises display the typical characteristics of “micro” enterprises i.e.
limited number of employees, small investment and strong dependence on one or two
individuals for their very existence. The technological problems that an enterprise of this
size and magnitude faces are, obviously, of a different magnitude from those confronted
by larger and more structured small industries. Their technological needs are simple and
mundane (mostly limited to basic manual or power assisted tools and the most
elementary of management processes). Their perception of technology is very basic and
tangible. Their investment in technology is limited. And their accessibility to technology
is constrained. Table 23 summarises some prime indicators of FB-SSI smallness.

The problem of technological enhancement here is more that of making basic and
essential tools available to the small entrepreneur, assisting him in adopting low cost
automation techniques, encouraging him to use more power assisted tools and equipment,
and, finally, stimulating him to adopt a managed approach to operations within the micro
unit. The ultimate objective is, obviously, reaching greater productivity and, possibly,
lower cost of production.

Several approaches could contribute to this enhancement process. First is encouraging

village level associations of manufacturers. These could cooperate in machinery and
equipment acquisition and utilization, exchange technical advice and complement each
others' processes. Second is the provision of mobile technical support units i.e.
technically-oriented and equipped extension officers who visit the villages with the
purpose of assisting in specific technical problems i.e. machine maintenance, efficient
raw material utilization, substitution of scarce inputs etc. Third are the village industry
“common facilities”, where specific production equipment for industrial processes are
accessible to the small entrepreneur. Fourth is the stimulation of specific village level
extension with emphasis on low cost automation and basic power assisted production
processes.

Summing up, a degree of decentralization of support services and facilities to rural areas
is essential for an improved access of “micro” FB-SSIs to basic technology an increase in
the and effectiveness of these services.

Table 23: A few characteristics of forest-based enterprises.

 Characteristic Jamaica Thailand Honduras Egypt Sierra Bangladesh
Leone
Have 5 or fewer workers 96 79 96 97 - 96
(%)
Firms with no 69 - 69 93 - 99
machines(%)
% of Employment in 79 - 100 65 96 -
rural areas
Source: FAO, 1985.

A few recommendations

It is obvious that the problem of developing a technological capability for forest-based

small industry in developing countries is complex and involved. To pretend that a few
recommendations will provide all the answers is misleading. The following therefore, are
a few thoughts that may help directing attention towards some of the most urgent
problems. The measures suggested hereafter can best be grouped as either policy level
recommendations or enterprise level recommendations.

Policy level recommendations

(a) A regional approach to South-South technological cooperation.

In order for the South-South technology transfer to materialize clear and approachable
regional channels should be created. “Technonet Asia”, though with a few significant
adjustments could serve as a model. Its span of activities should actually be as broad as to
include the following:

- the identification and formulation of the need for a specific technology type within a
country, a group of countries or a region.

- The identification of alternative suppliers or supply sources of that technology within

the country, the area or the region.

- Have an insight into the alternative techniques available within a branch or industry.

- Preliminary evaluation and selection of the most appropriate technology for a small
industry.

- Provision of assistance in the acquisition, assimilation, adaptation and adoption of the

transferred technology.

(b) Better integration of technological skill generation in the transfer process.

There is plenty of room for the improvement of the transfer of technology process as we
know it now. The sister industry programme could be adjusted and made more
penetrative by linking it to existing technology development and technology training
resources within the developing country itself. This would convert it into a continuous
system instead of an ad-hoc one. Yet another approach is that of the “micro-centre”
linkage between developed and developing countries.

Microcentres are a network of small industries operating within a specific industrial

sector in a developed country. The purpose of the networking is essentially solving
technical and managerial problems that do hamper the development of the units and
providing an expanded opportunity for each member.

For example, in the Netherlands, micro centres are currently providing a linkage
relationship with a similar setup that was created in Indonesia with essentially identical
purposes. The element of interest here is that the Indonesian unit will be able to benefit
from the Netherlands base and have free access to its resources. Specific training efforts
are provided as part of the resource transfer package.

(c) Reconsidering vocational training. One of the important gaps in technical and
technological knowledge is that of the middle line in production and manufacturing
organizations. Many of the existing systems of development of middle level technicians
suffer from their weak linkage with industry, on one hand, and their limited response to
the actual national technological needs, on the other. An improvement of the system is
urgently needed and some borrowing from a foreign system might not be that unusual.

The system one has in mind here is the German system of vocational training. It has three
distinctive features. The first is the clustering effect it has on small scale industry in the
country. Every small industry plant is required by law to belong to a handicraft guild, that
regulates their behaviour and, more importantly, organizes the technical training of the
following generation. This type of vocational training in Germany is treated as the natural
sequel to schooling. It is legally obligatory for three years for all 15 to 18 years olds not
otherwise in full time education. They must be released from work one day a week to
attend an approved course at a vocational training school. Secondly, youngsters in that
age group may be employed only by firms having approved training facilities. And
finally, the school course must be complementary with the youngster's employment.

A system of this nature once adapted to the realities of small and rural industries in
developing countries, would compensate for the deficient supply of basic technological
know how to the sector. The training could, for example, take place at industrial estate
factories, the technology cum-training centers etc.
(d) Encouraging the commercialization of indigenous technology. There exists a feeling
that the commercialization of indigenous technology within the small industry sector
could be greatly facilitated if:

- Development banks assume an active role in the allocation of funds to projects aiming
at the exploitation of novel approaches to identified technological problems. This active
role could take many forms ranging from preferential interest rates to extended grace
periods and longer repayment schedules.
- Investment guarantee agencies for R&D are created in order to cater for the limited-
resource entrepreneur with the business potential but not the resource base.
- Commercial banks extending their credit services in order to include technical and
managerial support to the small enterprise.
- Venture capital is stimulated and encouraged to enter the small industry investment
market and deal specifically with the problems of product and process development there.
- Governments should also encourage the flow of technology-related information
(industry structure, new product development, new process development, competitive
initiative, international market opportunities etc.) and boost a free flow of that
information within the respective relevant sectors.
Enterprise level recommendations

(e) Stimulating technologically oriented cooperation among SSI entrepreneurs

It is the author's contention that the self interest of the small entrepreneur should provide
the driving force behind the problem of technological development within the SSI sector.
This cooperation could aim at identification of areas of common technological
insufficiency, the collaboration in identifying sources of external assistance (if needed),
the mobilization of funds for concentrated research and the dissemination of the results of
the technological effort.

One of the good examples for this collaboration are the “branch cooperatives” known
within the Korean system. Branch-related small industry there is organized, within the
framework of the Korean Federation of Small Business, in cooperatives that perform,
jointly, many functions. It is a broader and innovative application of cooperative
principles. This cooperative pattern could prove crucial in solving as tricky problems as
process related technological development or product related adaptation and adjustment.

The bottleneck within an approach of this nature is naturally the encouragement of

branch-based cooperation and how to keep any coordinatory organ lean and effective.
The Korean model provides a simple straight forward structure where the entrepreneur is
the prime focus and driving force and the Small Industry Federation is merely the
coordinator.
(f) Focussed technological exposure

Bringing technology to the small rural entrepreneur requires pragmatic action. Venues
have to be created that combine practicality and accessibility. A typical example is the
technology shop. This is a display of practical approaches to the manufacturing of
specific products, of improved tools and equipment, of substitutes to outmoded products
and of possible sources of information on new developments. They could be static,
located in a rural capital or dynamic, moving from one manufacturing location to the
other.

(g) Continuous consultancy first and training second

Technological training should relate in the most direct of ways to the SSI technological
problems and should provide, in the same direct way an answer to these problems. The
only way to achieve that is to add to training two other significant elements, diagnosis
and continuous consultancy.

A period of diagnosis or exploration of the specific problems of an enterprise should

preceed any attempt at technical training. This period should allow an examination of the
technical and product-related issues of the enterprise, and supplement that with a view of
the managerial dimension. The results of this diagnosis should lead to a clustering of the
small industries according to their problem focus and, more importantly, an adaptation of
the training message to these problems.

Specific, problem-based training programmes could then be developed, implemented and

followed up. The participating entrepreneurs have a lot in common and are inclined to
share experiences and, probably collaborate even after the training is over.

Continuous consultancy is tantamount to the creation of a permanent relationship with the

entrepreneur, a relationship that extends beyond the training programme. It, in fact, starts
with the diagnosis phase and goes through the training and extends in the future as much
as enterprise needs dictate.

(h) Encouraging village level technical extension services

One of the prime issues constraining the development of technological skills among small
entrepreneurs is their accessibility. This problem could be solved by using existing
channels as agricultural or forestry extention officers, to provide the technological
support function as part of their total support package. They have the access and the
intimate knowledge of the clientele that would allow an effective service. They maintain,
also, the added advantage that their advice could be directly related to forest-based
industries and the very specific problems that those face.
(i) Introducing a village level industrial estate programmes

Mini industrial estates containing basic common facilities and a skeleton of extention
services and located at convenient locations within the rural areas would go a long way
towards covering the immediate technological needs of forest-based village industries.
These estates should avoid the common errors of those larger ones which have been
created in or around urban areas and whose state of technology sophistication proved to
be out of reach of the micro entrepreneurs. They should contain very basic tools and
equipment, charge little or nothing for their services, provide relevant advice on low cost
automation, support the limited scale manufacturing of production tools and supply
relevant managerial and technological advice.