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Advantages and disadvantages of micro units
The diversity of informal sector is always linked with the degree of informality. The heterogeneous nature of the sector makes it more difficult to make general statements about it and formulate a public policy.

THERE IS no denying the fact that informal sector is highly diverse and heterogeneous within its own framework. In fact, diversity is directly linked with the degree of informality. More is the informality, higher will be the degree of diversity and vice versa. For example, micro and small segments of the informal sector are more diverse than the medium and large segments. Because of this diversity it becomes rather difficult to make general statements both about the sector and its various segments. This leads to a dilemma in the context of public policy formulation. On the one hand, the public policy has to be differentiated in order to meet diversity, and on the other, such differentiation raises the level of complexity of institutions and conditions that is already a problem for the various segments of the informal sector, like micro and small, in view of the limited awareness capacity of many such firms. In order to overcome this dilemma, it is always better to look for general statements about such firms, which are highly desirable for an effective public policy despite their diversity and heterogeneity.

In the context of micro and small firms, some of these general statements refer to their unrealised potential advantages and disadvantages, as compared to medium and large firms. Their advantages are behavioural in nature and relate essentially to human resources, whereas their disadvantages lie in material resources. The potential behavioural advantages have been summed up below:

  • Entrepreneurial drive and risk taking;
  • Motivation and perseverance;
  • Motivated labour due to lack of bureaucracy and specialisation;
  • Flexibility; and
  • Proximity of management to the shop floor.

But it must be remembered that these behavioural advantages are not automatically available. They have to be realised and this greatly depends on the motivation and orientation of the entrepreneur. No policy package and training programmes can ever assure the extent to which these potential advantages can be realised, especially in the context of developing countries. Entrepreneurship in the context of micro and small firms has many dimensions. For example, it may refer to

  • the primary goal of the firms in terms of profit, growth, stability, job satisfaction etc; 
  • orientation of all kinds such as, technical, commercial and social;
  • the framework of internal and external communication; and
  • work conditions.

We must know that some small firm owners are motivated towards true Schumpeterian entrepreneurship, others towards maintaining established, traditional ways of doing things, maintaining independence, staying small, having a quiet life. They can afford to entertain unorthodox objectives (unorthodox in the view of economic science) to the extent that they own the firm, which they often do.

Apart from potential advantages, small firms also have disadvantages that lie in material resources with respect to costs. In costs, there are effects of scale (in terms of producing small volumes), scope (in terms of few products), experience (of being in business and benefiting from the economics of experience), and learning (in terms of acquisition of knowledge). Effects of scale, scope, experience, and learning play a role in the decision where to produce an input that one requires, or to buy it from an outside producer. This is called ‘make or buy’ decision. In real practice, the diversity of these effects tends to be underestimated. Apart from these effects, there are also effects of firm size on transaction costs in the stages of contact, contract and control. These are due to ‘threshold costs’ in setting up contacts, contracts and control and also due to differences with respect to the factors that cause transaction costs.

In the context of developing countries one of the basic advantages of micro and small firms lies in their being more labour intensive, more geographically dispersed and more accessible to indigenous entrepreneurs. As such, their promotion not only meets the policy goal of employment creation but also of improved regional and vertical distribution of income. But this crucial advantage of micro and small enterprises loses force when they become both labour and capital using perhaps to make up for their technical inefficiency as reflected by their low levels of labour productivity. In such a case, their promotion will surely involve employment creation but at high cost of a sacrifice in the growth of output. Beyond that, the composition of micro and small enterprise output may limit the scope for promotion of these firms.

There is another disadvantage that stems from the fact that the output of these firms is essentially confined to inferior consumer goods and as such, the demand for their products will decline as income increases and this will, therefore, have an adverse impact on the support programmes aimed to encourage these firms.

The relations linking and dividing micro and small firms and state institutions, and the various components of each group, do sometimes offer problems, some of which are given below:

  • Peri-legal (legitimate but illegal) activities like, illegal street hawking;
  • Underground/shadow economy;
  • Moonlighting and clandestine employment;
  • Criminal activities, like smuggling and patent rights violation;
  • Encroachments through semi-permanent structures;
  • Market relocation issues;
  • Resistance to relocation by shopkeepers;
  • Economic crisis and the threat to marketers;
  • Violation of patents;
  • Pilferage of public utilities;
  • Ghetto and squatter settlements;
  • Employment of child labour;
  • Violation of basic labour laws, if any;
  • Adding to environmental pollution, especially in congested urban areas;
  • Evasion of taxes.

There have also been arguments that the informal sector is an extremely fuzzy concept and as such the conventional dichotomy between informal and formal sectors does not serve as a useful description of welfare and income. An alternative is suggested in terms of a taxonomic system, which, in fact, supplements the informal/formal system. Quite a number of studies now focus on labour force units rather than firms, and this perspective provides an analytical category in the shape of working poor, both in rural and urban areas. The study of this segment of the labour force has significant advantages for the study of issues like income-distribution, poverty and rural-urban migration.

It has also been argued that

  • the would be entrepreneurs of micro and small enterprises are invariably peasants prior to entering the urban setting and hence they are normally guided not by profit maximisation, but by effective utilisation of household labour and that they are also risk averse; 
  • the small size limits the scope for specialisation and realising economies of scale;
  • the activities of micro and small enterprises, no matter what they are, focus more on non-tradable than tradable and, hence, they only take advantage of the existing demands but do not serve as the source of expanding new demands. This implies that increased output invariably means a lower price in the sense that there is a downward shift along the market’s demand curve; and
  • there is likely a threshold involved in the high costs of shifting to formal work arrangements and to the protection required for an expanding formal activity.

These in-built disadvantages can perhaps be overcome by initiating and implementing an effective support strategy.

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