CS Foundation Scales of Business Notes
→ As per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2005 ‘Enterprises’ is an industrial undertaking or a business concern that is engaged in the manufacture or production, processing or preservation of goods as specified in the first schedule of the IRDA Act 1951. Worldwide, micro small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. The major advantage of the sector is its employment potential at low capital cost. The labour intensity of the MSME sector is much higher than that of large enterprises.
On the basis of scales of business, the enterprises are classified as:
(a) Micro-enterprises
(b) Small Scale enterprises
(c) Public enterprise
(d) Large scale enterprises
(e) Micro Enterprise
→ Micro enterprises
This sector has been recognised as an engine of growth all over the world. The sector is characterised by low investment requirement, operational flexibility, location wise mobility and import substitution.
In accordance with the Act, these enterprises are classified in two categories:
(i) Manufacturing enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951. These are defined in terms of investment in plant and machinery.
For Enterprises engaged in the manufacture or production, processing or preservation of goods, an enterprise to be called a micro enterprise the investment in plant and machinery should not exceed Rs. 25 lakh.
(ii) Service enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. Micro enterprise is defined as a unit in which investment in equipment does not exceed Rs 10 lakh when the Enterprise is engaged in providing or rendering of services equipment.
Micro enterprises do not have much access to commercial banking sector thus they mainly rely on micro finance or micro credit.
→ Small Scale enterprises
Small enterprise sector that plays an important role in sustaining the economic growth. It is the second largest employer of human resources after agriculture. Their significance in terms of fostering new entrepreneurship is well- recognized. This is because, most entrepreneurs start their business from a small unit which provides them an opportunity to harness their skills and talents, to experiment, to innovate and transform their ideas into goods and services and finally nurture it into a larger unit.
Small scale industries are the industries which are organized on a small scale and produce goods with the help of small machines, hired labour and power.
- Small Scale Industry is defined as a unit in which investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore when the Enterprise is engaged in the manufacture or production, processing or preservation of goods.
- Registration of small scale industries is voluntary
- Small Scale Industry is defined as a unit in which investment in equipment is more than Rs.10 Lakh but does not exceed Rs. 2 Crore when the Enterprise is engaged in providing or rendering of services
- Out of the total SSI 44% of the units belonged to service sector
- Nearly 10.11% of the units are owned by women in SSI.
- As per the definition given by RBI (given by Kohli committee), a unit may be identified as sick unit in terms of continuous decline in gross output.
- The three yardsticks used for determining the sickness are delay in repayment of loan over a year, decline in networth by 50% and decline in output in last three years.
- Most of the sick units were located in West Bengal, Karnataka, Kerala, Maharashtra and Andhra Pradesh.
Small scale industries can be classified as traditional small scale industry and modem small scale industry.
- Traditional include khadi, village industries, handicrafts, etc.
- Modem small scale industries produce sophisticated products like television, various engineering products. Over the years, the small scale sector in India has progressed from the production of simple consumer goods to the manufacture of many sophisticated and precision products like electronics control systems, micro wave components, electro medical equipments, etc. The process of economic liberalisation and market reforms has further exposed these enterprises to increasing levels of domestic and global competition. The total size of the SSI is estimated to be over 1 crore.
→ Role of small scale industries
There has been an immense role of small scale industry in India. Some of them are—
1. Production:
The small scale industries sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs. of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten percentage points.
2. Employment generation:
Small scale industries employ labour intensive technology and hence generate more employment opportunities. A given amount of capital invested in a small scale industry provide more employment than the same amount of capital invested in a large scale industry. In a country like India confronted with the twin problems of unemployment and scarcity of capital, it is only the small scale industry which can solve these problems.
3. Optimum use of capital:
Small scale enterprises require relatively lesser amount of capital as compared with large scale enterprises. In the context of India economy where capital is scarce, small scale sector can act as a stabilizing force by providing high output capital ratio as well as high employment capital ratio
4. Self Employment:
Small scale sector provides numerous opportunities for self employment. He instead of seeking job for himself, provides employment to others.
5. Optimum use of capital:
Small scale enterprises require relatively lesser amount of capital as compared with large scale enterprises. Due to shorter gestation period small scale units provide early returns.
6. Use of local resources:
Small scale enterprises employ local resources like raw material, saving, entrepreneurial skill more effectively.
7. Equitable spread of income and wealth:
Small scale industries help in the development of socialistic pattern of society by ensuring equitable distribution of income and wealth. Large scale industries result in concentration of income and wealth in a few hands and that too at selected places whereas small scale industries ensure equitable spread of income and wealth amongst all and that too at all places
8. Export promotion and import substitution:
The process of economic liberalisation and market reforms has further exposed these enterprises to increasing levels of domestic and global competition. Small scale industries are thus producing goods that can catch up with this competition.
This sector is helping in export promotion by acting as ancillary units and import substitution. The small scale sector thus play a very important role in the economic development of our country.
→ Large Scale Enterprises
In India, industries with a fixed asset of more than one hundred million rupees are called large scale industries. These could be manufacturing units or others which use both indigenous and imported technologies. They cater to both the local and foreign markets. Examples of large scale industries include fertilizer, cement, natural gas, coal, metal extraction, metal processing, petroleum, natural gas.
→ Public Sector Enterprises
The government-owned corporations are termed as Public Sector Undertakings (PSUs) in India. In a PSU majority (51% or more) of the paid up share capital is held by central government or by any state government or partly by the central governments and partly by one or more state governments.
Post Independence, India was grappling with grave socio-economic problems, such as inequalities in income, regional imbalances in economic development and lack of trained manpower etc. Hence, to overcome these problems, Public Sectors were developed as an instrument for self-reliant economic growth. The country adopted the planned economic development policies, which envisaged the development of PSUs.
Some of the Public Sector Enterprises are BHEL: Bharat Heavy Electricals Limited, CIL: Coal India Limited, GAIL: Gas Authority of India Limited. Etc.
→ Characteristic features of PSU:
- Public enterprises are autonomous or semi-autonomous corporations and companies established, owned and controlled by the state and engaged in industrial and commercial undertakings.
- Primary objective of Public Sector Enterprises is to serve the public at large.
- In some areas Public Sector Enterprises have monopoly that is no other private company can work in that area of operation like railways, Post and telegraph, etc.
The Comptroller and Auditor General of India (CAG) audits government companies. In respect of government companies, CAG has the power to appoint the Auditor and to direct the manner in which the Auditor shall audit the company’s accounts.
Sometimes the government receive foreign assistance from industrially advanced countries for the development of industries. These advances received are spent through public enterprises.
→ Structure of PSEs in India:
The PSEs in India are basically categorised under four broad types based on their ownership structure. These include departmental undertakings, statutory corporations, government-owned companies and autonomous bodies set up as registered societies.
Departmental undertakings:
Departmental undertakings are primarily meant to provide essential services such as railways. They function under the control of the respective ministries of Government of India.
Statutory corporations:
Statutory corporations are public enterprises that came into existence by a Special Act of the Parliament. The Act defines the powers and functions, rules and regulations governing the employees and the relationship of the corporation with government departments.
Government-owned companies:
Government-owned or controlled companies refer to companies in which 51% or more of the paid up capital is held by the central or any state government (partly or wholly by both). It is registered under the Indian Companies Act and is fully governed by the provisions of this Act.
Autonomous bodies:
Autonomous bodies are set up whenever it is felt that certain functions need to be discharged outside the governmental set up with some amount of independence and flexibility without day-to-day interference from the governmental machinery.
Initially, the public sector was confined to core and strategic industries. The second phase witnessed nationalization of industries, takeover of sick units from the private sector and entry of the public sector into new fields like manufacturing consumer goods, consultancy, contracting and transportation, etc.
The Industrial Policy Resolution 1948 outlined the importance of the economy and its continuous growth in production and equitable distribution. In this process, the policy envisaged active engagement of the State in development of industries.
→ Multinational Corporations
A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation that is registered in more than one country or that has operations in more than one country. It is a large corporation which both produces and sells goods or services in various countries.
Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management
According to Franklin Root (1994), an MNC is a parent company that engages in foreign production through its affiliates located in several countries, exercises direct control over the policies of its affiliates, implements business strategies in production, marketing, finance and staffing that transcend national boundaries.
The two characteristic features of MNC are its large size and their worldwide activities are centrally controlled by parent company. Some of the examples of MNC are Toyata, Coco Cola, Me Donalds etc.
Some of the reasons why companies wish to become multinationals are
- To secure cheaper premises and labour – cost of land and labour will be cheaper in developing countries.
- To increase market share- companies may find they are at saturation point in the domestic market and need a new outlet. They may start by exporting to other countries but eventually they will want to being production overseas. Coca Cola started this way following US soldiers around the world after WWW.
- To avoid tax or trade barriers- different nations have different levels of corporation tax and may have different barriers to entry.
- Government grants – Sometimes the policy of some country are more favourable for business like some special tax concessions etc.
Advantages of MNC’s to Host Countries
- The companies bring much needed money into the country.
- The companies help the development of the country by bringing in technology and knowledge that the host country does not possess.
- Multinationals create jobs which boosts the local economy and more workers to tax.
- Multinationals are in position to benefit from economies of scale. This means the cost per unit can be lowered through specialisation – with a large workforce work can be divided up and people can do their limited job expertly.
- The new companies often help to improve transport links around the area.
- The new multi-national companies act as growth poles for other similar companies. They could encourage more companies to locate in that country once they see the benefits that it brings.
- The host country’s business also gets management expertise from MNC’s.
- The domestic traders and market intermediaries of the host country gets increased business from the operation of MNC’s.
- The host country can reduce imports and increase exports due to goods produced by MNC’s in the host country. This helps to improve balance of payment.
- Their size and scale of operation enables them to benefit from economies of scale enabling lower average costs and prices for consumers. This is particularly important in industries with very high fixed costs, such as car manufacture and airlines.
Advantages of MNC’s to home country
- MNC’s create opportunities for marketing the products produced in the home country throughout the world.
- It helps in the inflow of foreign exchange.
- They create employment opportunities to the people of home country both at home and abroad.
- MNC’s help to maintain favourable balance of payment of the home country in the long run.
- They ensure optimum utilization of resources present in home country.
Disadvantages of MNC’s:
- Multinationals’ profits are not usually kept in the host country.
- Multinationals will want to produce in ways that are as efficient and as cheap as possible and this may not always be the best for environment.
- A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.
- Their market dominance makes it difficult for local small firms to thrive.
- In developing economies, big multinationals can use their economies of scale to push local firms out of business.
- Multinationals have been accused of cutting comers on health and safety in countries where regulation and laws are not as rigorous. For example the Bhopal gas disaster in 1984 killed hundreds of people in India.
- In order to make profit, MNC’s may use natural resources of the home country indiscriminately and cause depletion of the resources.
- Companies are often interested in profit at the expense of the consumer.
- Multinational companies often have monopoly power which enables them to make excess profit.
- Social responsibility may be overlooked by MNC’s.
- They may exert political muscle.
- The multinational may threaten to pull out of a country if they don’t get favourable policies from Government.