Survival of Small-Scale Units in the Economy

In this article we will discuss about the survival of small-scale units in the economy.

There are various economies to be gained from large-scale produc­tion. However, many of these arguments are opened to criticism. The economies to be gained from large-scale production. Many of these argu­ments are open to criticism.

In the first place, in many industries there may be either no economies of scale, or those may be of negligible importance. This is the case in many service industries where personal attention is needed. That is why there are so numerous hairdressing shops employing hundreds of assistants.

Simi­larly, there are few economies of scale in other jobs that require individual attention, such as roof repairs, plumbing, or painting and decorating. In all these cases firms tend to be small; indeed, they are often owned and operated by only one person.

Even in manufacturing, economies of scale are often small. In industries as diverse as the production of shoes, bricks, bread, beer, cotton spinning and weaving, and book printing, it is possible to produce economically on a small scale. Put another way, the minimum efficient size of plant is relatively small and once this is reached there are few economies to be obtained by growing bigger.

Similarly, arguments can be used to suggest that there are few economies accruing to large-scale firms. Profits are one possible measure of efficiency. We often find an inverse relationship, rates of return being far higher in small market segments than in large ones.

Even where firms do benefit from being large, this may not be in the interest of the consumer. In some cases, large firms may use their large size to dominate the market and reap monopoly profits by exploiting the consumers.

Similarly, where there are economies in size these may not benefit the consumer. Advertising may protect the positions of established firms and reduce competition. Firms which borrow money more cheaply may not pass the benefits on to the consumer and, if the supply of funds is scarce large firms may suffer losses at the expense of small ones, who may be unable to borrow.

Small firms, although they are declining, still predominate in India’s economy. This is the case despite the economies of scale which large firms can enjoy. What then are the reasons why small firms still exist?

Small firms have certain advantages over big firms.

These are known as the economies of small-scale production:

(i) Better service:

Better service is provided for both employees and customers: small firms are small enough to deal quickly and efficiently with customer enquiries. A personal interest can also be taken in the welfare of individual workers.

(ii) Self-interest:

Workers and managers have a self-interest and profit motive and develop a sense of involvement. Workers and managers will probably all know each other and develop a team spirit. They will feel that they are directly benefitting from the success of the firm and that their efforts will be recognised and rewarded.

(iii) Quick decision making:

Decisions can be made effectively in re­sponse to any change in market conditions. Decisions are probably made by one person or only a few people act quickly at that.

These economies of small-scale production are basically the disecono­mies of large-scale production. What is a disadvantage of a large firm is an advantage of a small firm. Similarly, what is the advantage of a large firm can be interpreted as a disadvantage of a small firm. Therefore, the disecono­mies of small-scale production refer to the economies of large-scale production.

There are certain other reasons why small firms still exist.

These are the following:

(i) Desire for independence:

The small entrepreneur may prefer contin­ued independence to expansion and perhaps losing some control over decision-making.

(ii) Geographical limitations:

If a commodity like brick or coal has heavy weight in relation to value, transport costs will be a high proportion of both production cost and market price. In such case the size of market for the product is likely to be limited. Such products are likely to be sold largely in local rather than in national markets.

(iii) Luxury items:

The demand for the firm’s product may be so small as not to permit expansion. This applies especially to luxury or prestige items like high quality jewellery and garments. Sometimes a firm has to remain small because it is restricted by its local market, e.g., small village shops will not find it worthwhile to expand because of lack of demand, i.e., market is limited by income and wealth.

(iv) A demand for variety:

In some industries consumers demand a personal service. Thus, firms remain small to be flexible and willing to adapt to any changes it demand. This applies to the fashion industry.

(v) Personal service:

In some industries consumers demand a personal service. This applies to solicitors, doctors, accountants, hairdressers, etc. Consumers require a personal touch which large firms could not provide. In other words, industries which provide services other than commodities are usually characterised by the existence of a large number of small firms.

(vi) Need for flexibility:

Flexibility and quick decision-making is re­quired in certain industries. For instance, many firms remain small because of the vagaries of climate and the need to adapt quickly to any change in business environment — internal and external.

(vii) Joint ventures:

Co-operation among firms may lead to the setting up of jointly owned enterprises which enable them to enjoy many of the economies of scale obtained by large firms. The formation of cooperatives, for instance, has allowed many small firms to remain small (e.g., Samavayika) but still imitate the large firms. Also, in agricultural, farmers may form co-operatives to finance the purchase of expensive machines for the com­mon good.

(viii) Government policy:

The government of a country may encourage small firms with subsidies and tax allowances (especially in the backward regions of the country, such as Purulia) because they provide jobs, are the source of many new ideas and inventions and contribute to the economy s national output and level of exports.

Conclusion:

In the ultimate analysis it seems that small firms tend to survive due to market limitations of mass production. The ultimate limit to large-scale production is set by the extent (size) of the market. Where the market is small it is not possible to derive significant economies of scale, most of which are dependent upon the existence of a large market for a standardised product. The size of the market is restricted by most of the factors listed above.