CHAPTER -1

INTRODUCTION

An entrepreneur is an economic agent who plays a vital role in the economic

development of a country. The economic development of a country refers to steady

growth in the income levels. This growth mainly depends on its entrepreneurs. An

entrepreneur is an individual endowed with knowledge, skills, initiative; drive a

spirit of innovation, and firm determination to realize his objectives. An

entrepreneur identifies opportunities and seizes them for economic benefits1. It is

interesting to learn the evolution of the meaning of ‘entrepreneur’.

The word ‘entrepreneur’ is taken from French language and the term

originally referred to an organizer of music or other entertainments. The Oxford

English Dictionary (1897) defines the entrepreneur as “the director or manager of a

public musical institution, one who ‘gets-up’ entertainment, especially musical

performance.” In the early 16th century, it was applied to those who were engaged in

military expeditions. Its meaning was extended to include civil engineering activities

such as construction and fortification, in the 17th century. It was only in the

beginning of the 18th century that the word was used in an economic context2. Thus

the evolution of the meaning of the word ‘entrepreneur’ has had a long history.

Since then, it has taken on various shades of meaning in the course of its semantic

evolution. The most predominant of these meanings refer to risk bearer, organizer

and innovator. J.B Say, the French economist, as early as 1800, said that “the

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entrepreneur shifts economic resources out of an area of lower productivity into an

area of higher productivity and greater yield.”

1.1 The Concept of Entrepreneurship

Like other economic concepts, entrepreneurship has been a subject of much

debate and discussion. It is defined differently by different authors. While some

evaluate entrepreneurship as ‘risk bearing’, others look upon it as innovation and yet

others consider it thrill-seeking. Some important definitions of entrepreneurship are

the following:-

In a conference on entrepreneurship, held in the United States, the term

‘entrepreneurship’ was defined as follows:

“Entrepreneurship is the attempt to create value through recognition of

business opportunity, the management of risk-taking appropriate to the opportunity,

and through the communicative and management skills to mobilize human, financial

and material resources necessary to bring a project to fruition.”3

According to Arthur H. Cole, “entrepreneurship is the purposeful activity of

an individual or a group of associated individuals, undertaken to initiate, maintain or

aggrandize profit by production or distribution of economic goods and services.”4

In all the above definitions, entrepreneurship refers to the functions

performed by an entrepreneur in establishing an enterprise. Just as management is

regarded as what managers do, entrepreneurship may be regarded as what

entrepreneurs do. Entrepreneurship is a process involving various actions to be

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undertaken to establish an enterprise. It is, thus, a process of giving birth to a new

enterprise.

1.1.1 Entrepreneurship and Small-Scale Industries/ Enterprises

More recently, enhancing small-scale industries has been viewed as an

effective way of fostering the private sector’s contribution to the economic

development of a nation. Small-scale industries play a key role in the

industrialization of a developing country. This is because they provide immediate

large-scale employment and have a comparatively higher labour capital ratio; they

have a shorter gestation period; they need lower investments, they offer a method of

ensuring a more equitable distribution of national income and facilitate an effective

mobilization of resources of capital and skill which might otherwise remained

unutilized; and they stimulate the growth of industrial entrepreneurship and promote

more diffused pattern of ownership location.5 Small-scale industries have been

given an important place in the framework of Indian planning since beginning, for

both economic and ideological reasons.

Small-scale industries were subject to policy reforms in the year 2006

through the passing of the Micro Small and Medium Enterprises Development Act,

2006. From this year, micro small and medium enterprises were brought under one

head. Before proceeding with the study, there is a need to understand the history of

industrialization in India and Kerala.

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1.1.2. Small-Scale Industries in India –An Overview

Before 1943, the Indian business scene was completely dominated by British

companies. Apart from a few Parsi families, notably the Tatas in steel and the

Wadias in shipbuilding, and scattered Gujarati and Bohri Muslim businessmen,

Indians had to be content with the crumbs. Manufacturing was almost closed to all.

Trading was the only viable option. In such a bleak scenario, the Birla Jute Mill,

which was started in 1919, marked the entry of the Birla family, essentially traders,

into industrial manufacturing6.

In small-scale industries, India has a glorious tradition. The fine textile

fabrics of India, like Dacca muslin and Kashmir shawls, were known to the outside

world as far back as 2000 BC. Handicrafts of all sorts, such as metal working,

shields manufacture, enamelled jewellery, stone carving, gold and silverwork,

thread work, etc. were also done in India. Along with cotton textile, India had

attained world renown in the case of iron manufacturing. But, during the British

rule, the industrial structure of our country including small scale units was in a sick

stage7 . But, during the freedom struggle, Mahatma Gandhi’s views gave a facelift to

the village and cottage industries. But only with the introduction of India’s five year

plans, the real significance of small- scale industries emerged. Small-scale

industries constitute the back-bone of a developing country like India.

1.1.3. Views of Mahatma Gandhi on Village Industries

Gandhiji always advocated small-scale industries for the development and

growth of Indian economy. He was of the opinion that, when the limited resources

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of the country are utilized for starting a number of small units instead of limited

larger ones, more people could get chances to improve their standard of living. He

firmly believed that a balanced development of India depended on the development

of the rural sector. Gandhi argued that large industries with modern technology do

not cater to the needs of the unemployed millions of India, but only gratify the profit

motive of a few. Gandhi said that the problem of unemployment and poverty in our

country can be solved only if our villages prosper with village and small-scale

industries8.

1.2. Brief History of Industrialization in Kerala

Kerala is a highly literate and thickly populated State in India. But the

growth of industrialization is quite unsatisfactory when compared with the other

leading States of our country. Centuries ago, traditional industries such as coir,

cashew, handloom, mat weaving, making bamboo products, etc. were very popular

in the State. Kerala was formed on 1st November 1956 with the unification of

Travancore, Cochin and Malabar which were three distinct political units.

Travancore and Cochin were under princely rule and Malabar was under British

rule. For understanding the history of industrial development in Kerala, the

industrial development in Travancore, Cochin and Malabar should be studied

separately.

1.2.1. Industrial Development in Travancore

Industries in Travancore were classified into two : (1) Factory industries and

(2) Cottage industries. Handloom weaving was the most important cottage industry.

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The manufacture of silver and gold threads, lace and embroidery, bell metal

industries, iron industries, mat-weaving, palm – leaf umbrella making, preparing

coconut jiggery, etc., were the other cottage industries.

The first industry in the State of Travancore was a textile mill at Quilon,

established by an American in 1881. Then a coir factory at Alleppey and the Indigo

factory at Kulachal were established. Salt manufacturing industries were established

in Trivandrum, Karunagappally and Karthikappally. In the year 1884, The Quilon

Spinning Mill was started by a European management. The Punalur Paper Mill in

Quilon District was started in 18879

In the year 1918, a separate department for industries was started by the

Travancore State Government. By this time, the industrial climate had changed.

While studying the industrial history of Travancore,the contribution of Sir C.P.

Ramaswamy Iyer deserves special mention. Sir C.P. took keen interest in the

industrialization of the State. He invited outsiders to start industries in the land, as

there was shortage of capital and skilled workers within the State. Many important

industries were started during 1947-48 in Travancore – Cochin. It was during this

period that the FACT was commissioned. The construction work of Travancore

Titanium Products Ltd. at Trivandrum, Electro Chemical Industries at

Chingavananm and the Electrical and Allied industry at Kundara was started during

this time10.

1.2.2. Industrial Development in Cochin

Like Travancore, Cochin also was famous for traditional industries like coir,

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timber, coconut oil extraction, tile making and handloom. In the year 1920, an

economic survey was conducted, and then an industrial Advisory Board was

established. The resources of the State being limited, the Cochin Government could

not follow the pattern of Industrial development adopted by Travancore. So

traditional industries were considerably expanded. The Alagappa Textiles, the

Cochin Potteries and the Tata Oil Mills were established.11

1.2.3. Industrialization in Malabar

Industrial development in Malabar owes much to the Basel Missionaries (a

Christian missionary group organized in Switzerland) and their economic activities.

Since 1834, the Missionary activities have flourished in Malabar region. This

process lasted till the beginning of the First World War in 191412. The Basel

Mission gave new dimensions to the existing traditional industries such as cloth

weaving and tile making by introducing machinery and thus providing a modern

factory outlook. The Basel Mission factories were the first to manufacture banyans.

The other activities were mechanical repairing, printing and book binding. Tile

industry also thrived in this period.

Comparing the industrial contributions of the three regions, it is evident that

Travancore occupies the principal position.

1.2.4. Small-Scale Industries / Small Enterprises in Kerala

The Industrial sector plays a vital role in a State’s economy. Kerala is a

densely populated and highly literate State. Moreover, the land is gifted with plenty

of natural and manpower resources. However, it has not secured satisfactory growth

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in industrialization so as to solve its large scale unemployment. The industrial

sector of Kerala consists of a few large and medium-sized industries and a large

number of small-scale and traditional industries. Traditional industries are

Handloom, Cashew, Coir and Handicrafts. Other important industries are rubber,

tea, ceramics, electric and electronic appliances, telephone cables, bricks and tiles,

drugs and chemicals, general engineering, plywood splints, beedi and cigar, soaps

and oils, fertilizers, and khadi and village industry products. Since the formation of

Kerala State, the small-scale industrial sector has grown considerably. The total

number of small-scale industries in Kerala in 1958 was 221 and it increased to

195960 working registered units as on 31st March 200813.

1.3. Definition of Small-Scale Industry/ Enterprises

What is small-scale industry? The definition of small-scale industry varies

from country to country and from time to time, depending upon the pattern and

phases of development, government policy and administrative set up of the

particular country. As a result, there are at least 50 different definitions of SSIs

reached and realized in 75 countries. We trace here the evolution of the legal

concept of small-scale industry in India.

The Fiscal Commission, 1950, for the first time, defined a small-scale

industry as one which is operated mainly with hired labour, usually with 10 to 50

hands. In order to promote small-scale industries in the country, the Government of

India set up the Central Small Industries Organization and the Small Industries

Board in 1954 – 55. The SSI Board, at its first meeting held on January 5th and 6th,

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1955, defined small-scale industry as a unit employing less than 50 employees if

using power, and less than 100 employees without the use of power and with a

capital asset not exceeding Rs. 5 lakh.14.

Broadly, the term ‘Small-Scale Industries’ has been defined in three ways-

the conventional definition, the operational definition and the definition in relation

to national income.

The conventional definition includes cottage and handicraft industries which

employ traditional labour and adopts intensive methods to produce traditional

products, largely in village households. They employ hardly any or only a few hired

hands. The handloom textile industry is an example. Though once famous, this

sector has been steadily declining.

The operational definition of the SSI unit relates to the investment in fixed

assets. The third definition relates to national income accounting. This includes all

manufacturing and processing activities, including the maintenance and repair

services undertaken by both household and non-household small- scale

manufacturing units, which are not registered under the Factories Act, 194815.

The definitional change of Small Scale Industry over the period in India is

presented in the Table 1.1

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Table 1.1

Definition of Small-Scale Industry: An Overview

Investment CriterionYear

SSI Unit Ancillary UnitEmployment

Criterion

Up to 1958

Fixed Capital investment up to Rs. 5 lakh Same as SSI units

Employment up to 50 workers if using power or up to 100 if not using power

1959

The value of machine was taken as the original price paid irrespective of new or old machinery

Same as SSI units

Employment up to 50 workers if using power or up to 100 if not using power

1960 Gross value of fixed asset up to Rs. 5 lakh

Gross value of fixed asset up to 10 lakh

Employment criterion dropped

1966 Plant and Machinery worth up to Rs. 7.5 lakh

Plant & Machinery worth upto Rs 10 lakh

Employment criterion dropped

1975 “ Rs. 10 lakh “ Rs. 15 lakh “

1980 “ Rs. 20 lakh “ Rs. 25 lakh “

1985 “ Rs. 35 lakh “ Rs. 45 lakh “

1991 “ Rs. 60 lakh “ Rs. 75 lakh “Source: SS Khanka, Entrepreneurial Development, S. Chand & Co. New Delhi,

Edition and reprint 2010, P. 72.

As per Abid Hussain Committee’s recommendations on small-scale

industries, the Govt. of India, in March 1997, further raised the investment ceiling

to Rs. 3 crore for Small-Scale Industries and to Rs. 50 lakh for tiny units. Then,

during 1999-2000 the investment limit for small-scale and ancillary undertakings

was reduced from existing Rs. 3 crore to Rs. 1 crore16 . An important definitional

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change in respect of small-scale industries occurred with the enactment of

MSMED Act 2006.

1.3.1. Micro, Small and Medium Enterprises Development Act 2006

(MSMED Act)

The MSMED Act was passed by Parliament of India, on 16.06.2006 and it

came into force on 2nd October 2006.

It provides the first ever legal framework for the recognition of the concept

of enterprise (the earlier concept was industry) comprising manufacturing and

services and the integration of the three tiers of these enterprises, viz, micro, small

and medium. With the enactment of the MSMED Act 2006, the practice of SSI

registration was done away with and the new system of filing of Entrepreneurs

Memorandum (EM – Part I & Part II) introduced.

Under the Act, enterprises have been categorized broadly into those engaged

in (i) manufacturing and (ii)those providing/ rendering services. Both the

categories have been further classified into Micro, Small and Medium enterprises,

based on their investment in plant and machinery (for manufacturing enterprises) or

in equipment (in the case of enterprises providing or rendering services)17 The

definitions given by the Act are indicated in the Table 1.2

1.3.2. Filing of Entrepreneurs Memorandum

The rules relating to filing of memorandum Part I & II by the enterprises as

per the MSMED Act 2006 are given below;

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Ø Filing of memorandum is optional for all micro and small enterprises and

also for service sector medium enterprises.

Ø Filing of memorandum is mandatory for manufacturing sector medium

enterprises.

Ø The form of memorandum is in two parts- EM Part I & EM Part II. Any

person who intends to establish a micro or small enterprise or medium

service enterprise may file or those who want to establish medium enterprise

engaged in the production or manufacture of products shall file Part I of the

EM to the District Industries Centre.

Ø Once the above enterprises start production or start providing or rendering

services, they shall file part II of the EM to DIC.

Table 1.2

Classification of Enterprises

Type of Enterprises

Manufacturing Enterprises (in terms of gross investment in plant and machinery)

Service Enterprises. (in terms of gross investment in equipment)

Micro Enterprises Not exceeding Rs. 2.5 mn (Rs. 25 lakh) Not exceeding Rs. 1.0mn (Rs. 10 lakh)

Small Enterprises Above Rs. 2.5 mn and up to Rs. 50 mn (RS. 25 lakh – 5 crore)

Above Rs. 1 mn and up to 20 mn (RS. 10 lakh – 2 crore)

Medium Enterprises

Above RS. 50 mn and up to Rs. 100 mn (RS. 5-10 crore)

Above 20 mn and upto Rs. 50 million ( Rs. 2-5 crore)

Source: Icfai Journal of Entrepreneurship Development Vol. V. No.1 March 2008 P.7.

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In the event of non-filing of Part II of the EM within two years of filing part

I, the memorandum Part I filed by the entrepreneur will become invalid18.

As the study is connected with the analysis of business environment in

Kerala, it is essential to understand the meaning of business environment.

1.4. Business Environment

The survival and success of any individual depends on his/her innate

capability to cope with the environment, and the extent to which the environment is

conducive to the development of the individual. Similarly, the survival and success

of a business firm depends on its innate strength,viz., the resources at its command,

physical, financial and human, skill in organization and management, adaptability

to the environment and the extent to which the environment is contributory to the

development of the organization. The survival and success of a firm, thus, depends

on two sets of factors, viz., the internal factors-the internal environment- and the

external factors- the external environment. However, the term ‘business

environment’ often refers to the external factors. The external environment consists

of two components, viz., business opportunities and threats to business19.

The term “entrepreneurial environment” refers to a combination of factors

that play a vital role in the development of entrepreneurship. There are several

studies which attempted to point out the environmental factors which affect the

growth of enterprises especially, the Micro, Small and Medium enterprises

(MSMEs) in India and across the world. Small industry has been one of the major

planks of India’s economic development strategy since Independence. Despite the

numerous protection and policy measures of the Government, the MSMEs have

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remained literally small, technologically backward and glaringly lacking in

competitiveness. The opening of Indian economy in 1991 added problems to the

MSMEs. At the beginning, the small-scale enterprises found it difficult to survive.

Presently, the MSMEs in Kerala are at a cross-roads and a lot of debate is centred

around questions like what the future of the MSMEs would be and how they could

survive in the National and International trade competition, and the like. In this

context, it is quite opportune to think seriously about the present status of the

business environment in the State of Kerala.

1.5. Statement of the Problem

It is evident from the literature that entrepreneurship is strongly linked to

economy. The entrepreneurial scenario and economy of Kerala State still remains a

puzzle for the scientific community. However, there is unanimity among all the

stakeholders that growth in any State or country is possible only by undertaking

entrepreneurial issues on regional basis. There are so many opportunities before the

entrepreneurs, for starting manufacturing enterprises, especially MSMEs in Kerala.

The State is endowed with so many natural resources and has also a long coastline.

The production of agricultural crops like rubber, cashew, coco, cardamom, pepper,

coconut etc. will attract agro- based industries in Kerala.

A study was conducted by ‘Confederation of Indian Industries’ (CII) in 2002

among 20 States in India in order to find out the potential of the States in attracting

investment. According to the study, Kerala was in the 13th place in the case of

investment climate. However, in the overall rating of different parameters, she had

the 3rd place.20

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A similar study was conducted by ‘ India Today’ among 20 States in India

in 2007, by taking 8 parameters, such as law and order, agriculture, primary

education, primary health, infrastructure, consumer market, prosperity and

investment environment. Kerala was ranked first in terms of law and order, primary

health, and primary education, and she was the third in infrastructure. In the area of

consumer market and prosperity, Kerala’s position was the fifth. But in the

investment scenario, Kerala was in the 16th position. As per the overall values of the

8 parameters, she stood in the second place among the 20 States in India. Table No.

1.3 shows this ranking position.

The State of Kerala has a very high HDI and excellent standard of living, but

we are incompetent to convert the same in terms of industrial and economic

outcomes. It is a fact that Kerala’s industrial sector, especially the micro and small

scale sector, has not been performing well for quite a long period .If Keralites can be

more entrepreneurial in the other States or countries than in Kerala, the reason

should be attributed to the prevailing business environment in Kerala and not to the

competencies or lack of them among Keralites. There seems to be an agreement

among researchers that the more conducive the business environment, the more

likely new business will emerge and grow. It is in this context that there is a need to

examine the present impact of different business environmental factors (Micro and

Macro Factors) upon entrepreneurship in the Micro and Small Manufacturing

Enterprises in Kerala. Environmental impact based on operational problems of the

entrepreneurs is attempted in the study.

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Table : 1.3 - Score and Rank of Various Indicators in Human Development of Big States in India

Sl. No Name of State Agriculture Infra-

structurePrimary

EducationPrimary Health

Consumer Market

Budget and

Prosperity

Investment Scenario

Law and Order

Overall Score and

Rank1 Kerala 0.91 (13) 3.14 (3) 4.19 (1) 2.44 (1) 2.12 (5) 2.07 (5) 1.14 (16) 4.15 (1) 2.52(2)

2 Tamil Nadu 3 (2) 2.68 (7) 2.98 (6) 2.05 (3) 1.97 (6) 1.96 (8) 2.08 (7) 2.18 (2) 2.36(4)

3 Rajasthan 1.02 (12) 2.06 (13) 1.67 (17) 0.89 (12) 1.04 (13) 1.59 (14) 1.35 (13) 1.38 (7) 1.38(12)

4 Karnataka 1.89 (8) 2.67 (8) 2.77 (9) 1.81 (4) 1.50 (10) 1.86 (10) 2.12 (6) 1.53 (3) 2.02(7)

5 Madhya Pradesh 1.11 (11) 2.08 (12) 1.72 (18) 0.72 (14) 0.91 (15) 1.39 (16) 1.32 (15) 1.41 (5) 1.33(13)6 Himachal

Pradesh 0.78 (15) 3.40 (2) 4.09 (2) 2.05 (2) 2.24 (2) 2.83 (2) 2.25 (3) 1.43 (4) 2.38(3)

7 Gujarat 1.90 (5) 2.65 (9) 2.45 (10) 1.53 (8) 1.94 (7) 2.33 (3) 2.68 (1) 1.41 (6) 2.11(5)

8 Andhra Pradesh 2.06 (3) 2.58 (10) 2.29 (12) 1.41 (9) 1.33 (11) 1.94 (9) 1.51 (10) 1.05 (8) 1.77(10)

9 Maharashra 1.44 (7) 2.69 (6) 3.17 (4) 1.74 (6) 2.14 (4) 2.05 (6) 2.27 (2) 1.01 (9) 2.07(6)

10 Chhattisgarh 0.42 (18) 1.79 (14) 1.84 (14) 0.42 (19) 0.85 (17) 1.69(12) 1.60 (9) 0.80 (11) 1.17(16)

11 Haryana 1.94 (4) 2.76 (4) 2.34 (11) 0.64 (16) 2.20 (3) 2.18 (4) 2.24 (4) 0.85 (10) 1.89(8)

12 Punjab 5.62 (1) 3.40 (1) 2.91 (7) 1.80 (5) 2.75 (1) 2.88 (1) 1.88 (8) 0.54 (12) 2.72(1)

13 Orissa 0.52 (17) 1.77 (16) 1.81 (15) 0.68 (15) 0.67 (19) 1.06 (18) 0.85 (17) 0.52 (13) 0.98(18)

14 West Bengal 1.25 (9) 1.77 (15) 2.27 (13) 1.19 (11) 1.14 (12) 1.48 (15) 0.80 (19) 0.40 (16) 1.29(15)

15 Uttaranchal 1.17 (10) 2.69 (5) 3.70 (3) 1.36 (10) 1.61 (9) 1.68 (13) 2.15 (13) 0.35 (17) 1.84(9)

16 Jharkhand 0.24 (19) 1.52 (19) 1.27 (19) 0.30 (20) 0.87 (16) 1.10 (17) 1.42 (12) 0.35 (18) 0.88(19)17 Jammu &

Kashmir 0.71 (16) 2.44 (11) 2.89 (8) 1.60 (7) 1.77 (8) 2.05 (7) 1.35 (14) 0.44 (15) 1.66(11)

18 Assam 0.21 (20) 1.71 (17) 3.11 (5) 0.80 (13) 0.91 (14) 1.72 (11) 1.45 (11) 0.44 (14) 1.29(14)

19 Bihar 0.82 (14) 1.29 (20) 0.72 (20) 0.43 (18) 0.21 (20) 0.53 (20) 0.50 (20) 0.30 (19) 0.60(20)

20 Uttar Pradesh 1.38 (8) 1.68 (18) 1.35 (18) 0.51 (17) 0.77 (18) 1.04 (19) 0.85 (18) 0.30 (20) 0.98(17)Note: Col.3 to 10 - Score and numbers in bracket is rank ( Figures are as on 2007)Source: India Today Special Issue, September 2007.

1.6. Significance of the Study

Most of the discussions at various levels on the economy of the State, boil

down to the lack of entrepreneurship in the State and certain perceived problems in

the small-scale sector. Generally, the identification of threats and opportunities in

the business environment and the strength and weakness of the enterprise is the

cornerstone of business policy formation. As per the literature background, so

many studies were conducted in the different areas of small- scale industries in

Kerala. However, it is an accepted fact that no serious efforts were undertaken to

understand the threats and opportunities in the business environment of Kerala. It is

also doubtful whether proper environmental scanning is done by the micro and small

entrepreneurs while starting their ventures. Though there is consensus among the

different stakeholders of the industrial sector that Kerala requires an

entrepreneurship movement to lift the State from its current state of industrial

backwardness, no serious research has been undertaken to understand the impact of

different business environmental factors upon the functioning of the micro and small

enterprises in the State of Kerala.

As per the different survey results, Kerala’s position in the investment

climate is far behind than that of some leading States in India. But the State enjoys

excellent social infrastructure in terms of literate manpower and high standard of

living. There have been numerous instances of Keralite entrepreneurs who have

excelled outside the State. Therefore, the impact of different business

environmental factors, whether they are favourable or unfavourable, upon the

enterprises in Kerala needs assessment. The study also attempts to identify the main

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problems of the manufacturing enterprises in the functional areas of production,

marketing, finance and human resource management. The present study, “Business

Environment Analysis and Growth of Small Enterprises in Kerala” relating to the

business environment would be useful to all stakeholders in the industrial field.

1.7. Scope of the Study

The scope of the study is limited to the State of Kerala. It is confined to the

micro and small scale manufacturing enterprises that have filed Memorandum Part II

with the District Industries Centres (DICs) up to the 31st of March 2011. Facilitators

for the above enterprises also have been considered. They include Bank Managers,

Industries Extension Officers and Members from Local Bodies. The number of

medium-scale enterprises in Kerala is only 0.06 per cent of the total number of

MSMEs in Kerala, as per the quick results of the Fourth All India Census of MSME

sector; hence the medium-scale enterprises have been excluded from the study21.

Different types of micro and small manufacturing units, irrespective of their nature

of activities are included in the scope of the study. The responses of the

Entrepreneurs were taken for analyzing the impact of Business Environmental

factors (both Micro and Macro factors) upon manufacturing enterprises and also for

identifying the serious problems which affect the enterprises in the functional areas

of production, marketing, finance and human resource management. Along with the

responses of the entrepreneurs, those of the facilitators were also taken into

consideration for analyzing the impact of macro business environmental factors. The

role of the Government and the different financial institutions for promoting the

MSMEs in the State is also examined in the study.

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1.8. Objectives of the Study

The study focuses on the following objectives:

1. To identify the major problems faced by the manufacturing enterprises in the

functional areas of Production, Marketing, Human Resource Management

and Finance.

2. To assess whether there is any significant difference in the problems in the

functional areas faced by the manufacturing enterprises in the Micro-Sector

and the Small-Scale Sector.

3 To identify the impact of the dominant micro business environmental factors

(favourable or unfavourable) connected with the Suppliers, Customers,

Competitors, Marketing intermediaries, Financiers, the Public and the

Regulatory Agencies in the functioning of manufacturing enterprises in

Kerala .

4 To assess whether there is significant difference in the impact of the micro

business environmental factors affecting the manufacturing enterprises in the

Micro-Sector and the Small-Scale Sector in Kerala.

5 To ascertain the impact of the dominant macro business environmental

factors (favourable or unfavourable) in terms of the Economic,

Technological, Natural, Governmental , Political, Demographic, Socio-

Cultural and Global components in the functioning of manufacturing

enterprises in Kerala.

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6 To analyze the difference in perception, if any, between the stakeholders-

entrepreneurs and facilitators, relating to the impact of the macro business

environmental factors in the functioning of manufacturing enterprises.

7 To examine the trend in the growth of Small-Scale Industries/Micro, Small

and Medium Enterprises in the State of Kerala, in terms of the number of

units, the employment created and the investment made.

8 To suggest policy measures for the promotion of the Micro and Small

Manufacturing Enterprises in the State of Kerala

1.9. Hypotheses

1) There is no significant difference in the impact of the micro business

environmental factors on the manufacturing enterprises in the micro- sector

and the small-scale sector. The identified factors mainly are those related to

the Suppliers, Customers, Competitors, Marketing Intermediaries,

Financiers, Public and Regulatory Agencies.

2) There is no significant perceptional difference between the entrepreneurs and

the facilitators on the impact of the macro business environmental factors in

the functioning of the manufacturing enterprises in Kerala. The identified

factors are associated with the Economic, Technological, Natural,

Governmental, Political, Demographic, Socio-Cultural and Global

components.

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1.10. Methodology

The present study, “Business Environment Analysis and Growth of Small

Enterprises in Kerala” has been designed as an analytical and descriptive one based

on primary and secondary data.

1.10.1. Source of Data

The Primary data constituted the main source of information for analyzing

the impact of business environmental factors upon the enterprises in Kerala. Such

data were collected from the entrepreneurs of the micro and small manufacturing

enterprises in Kerala and also from the facilitators of the enterprises.

Secondary data are used for analyzing the growth and performance of the

SSIs/MSMEs and also for establishing the role of the Government and other

agencies in the entrepreneurial development in the State. For this purpose,

information was collected from the Directorate of Industries and Commerce,

Trivandrum, State Planning Board, Trivandrum, the District Industries Centres, and

also from the annual reports of the various financial institutions like KFC, KSIDC,

the SIDCO, India Today’s survey report and various other periodicals.

1.10.2. Sample Design and Sampling Techniques

The population for the study consisted of the micro manufacturing

enterprises, small scale manufacturing enterprises and the facilitators. The

facilitators include the Bank mangers from private and nationalized banks, Industries

Extension Officers and members of the local self-governing bodies. (Panchayath

members and councilors from municipalities and corporations).

22

Information from the entrepreneurs was sought in order to analyze the

problems in the functional areas as well as to assess the impact of the business

environment consisting of the micro and macro environment. The responses of the

Facilitators were taken for analyzing the impact of the Macro Business

Environmental Factors upon enterprises. That is, the impact of the Macro Business

Environmental Factors were analysed, taking into consideration the responses of

both the Entrepreneurs and the Facilitators.

Random sampling technique was used to identify the enterprises for the

sample. Considering the sampling variability, an arbitrary number of 100 micro-

enterprises and 50 small-scale enterprises were fixed. Three districts were selected

for the study. For this purpose, the State was divided into three regions- the

southern, the central and the northern. The southern region comprises the districts of

Thiruvananthapuram, Kollam, Pathanamthitta and Alappuzha; the central region

consists of six districts- Idukki , Kottayam, Ernakulam, Thrissur, Malappuram and

Palakkad. The remaining four districts, Kozhikode, Wayanad, Kannur and

Kasargod constitute the northern region. Three districts were selected on a random

basis from the three regions- Thiruvananthapuram from the southern region,

Ernakulam from the central region and Kannur from the northern region.

From the official list of micro and small manufacturing enterprises (newly

started units and units started before 2006 ) which have filed memorandum Part – II

up to March 2011, maintained in Trivandrum DIC, Ernakulam DIC and Kannur

DICs, a sample of 100 micro-enterprises and 50 small-scale enterprises were

selected on random basis. From the list of the MSEs, those started before April 1,

23

2008, were selected as sample. While selecting the units on a random basis, some

units which started operations after April 1, 2008, figured in the sample, but they

were diligently excluded.

The number of enterprises in the sample representing each district were

identified on the basis of the ratio they maintained in the population. Thus the

sample frame is as given in Table No1.4.

Table 1.4

Sample Design – Enterprises

Micro Enterprises (Manufacturing)

Small Enterprises (Manufacturing

DistrictsPopulation

(No) Sample (No) Population (No)

Sample (No)

Trivandrum 3561 24 147 5Ernakulam 8723 58 1196 38Kannur 2633 18 202 7Total 14917 100 1545 50

Source: Research Design.

The facilitators, consisting of Bank Managers, Industries Extension Officers

and the Members of the Local Bodies, were selected from the identified districts, by

using purposive sampling technique. A sample of 90 Facilitators was found to be

adequate, considering the variability in the population. Of the 90 facilitators, 30

each were selected from each category. The researcher identified the above

facilitators on the basis of their direct enterprises – environmental linkage. The

Bank Managers were primarily involved in the financial support, and the people

from the local governments influenced the operating environment of industries.

Industries Extension officers (IEOs) were involved in government policies

24

supporting the enterprises. Equal representation was given in each district for bank

managers and people from the local governments. With regard to the Industries

Extension Officers (IEOs), Kannur had just 10 IEOs, while Trivandrum and

Ernakulam had larger numbers. Thus the sample included a larger number from the

latter two districts. Table 1.5 shows the sample design relating to facilitators.

Table 1.5

Sample Design – Facilitators

Facilitators

Districts Bank Managers

Industries Extension Officers

Members from local

bodies

Total

Trivandrum 10 12 10 32

Ernakulam 10 12 10 32

Kannur 10 6 10 26

Total 30 30 30 90Source: Research Design.

1.10.3. Collection of Data

Well-structured interview schedules were used for collecting primary data

from the respondents. The variables for the interview schedules were identified

based on the research design and through literature review. A pilot survey covering

15 entrepreneurs, 3 bank managers, 3 Industries Extension Officers and 3 members

from the local Governments was undertaken. The opinions of the DIC Managers,

the officials of the Directorate of Industries and Commerce and the officials of the

MSME Institute, Trichur were collected and used for the modification of the

interview schedule. The draft schedules were again tested with 8 entrepreneurs and

25

6 Facilitators and some minor changes were made before finalizing the interview

schedule.

The primary data were collected from 150 manufacturing entrepreneurs (100

from the micro-sector and 50 from small-scale sector) and 90 Facilitators. The

researcher personally contacted all the respondents for collecting primary data.

Some of the bank managers and Industries Extension Officers were too busy and

hence they sent in the filled up interview schedules later by post. Secondary data

were collected from the different sources as mentioned earlier.

1.10.4. Tools for Data Analysis

The collected data were processed and analysed using statistical tools like

percentages, mean, standard deviation, combined mean, ‘t’ test, Ranking Tables

based on weighted average scores of the Ranks, and Spearman’s rank correlation co-

efficient .

For measuring the impact of business environmental factors upon micro and

small-scale enterprises, a 5-point Likert Scale was used for quantifying the response

statements. The impact of the different factors, whether favourable or unfavourable

to the enterprises, were assessed based on the agreement or otherwise of the

respondents to certain positive statements connected with business environment.

Five alternatives were given for indicating their perception regarding the statements

in the interview schedule. For each response scores of 5, 4, 3, 2, and 1 were

assigned to stand for Strongly Agree, Agree, Neither agree Nor disagree, Disagree

and Strongly Disagree respectively. Then mean value of each factor was identified.

26

When the mean value was above 3 (Mid value on the scale), the factor was

considered favourable and when it was below 3, unfavourable. The‘t’ test was used

for testing hypotheses connected with the business environment.

The ranking tables based on weighted average score of the ranks were used

for showing the gravity of the different problems in the functional areas. Spearman’s

rank correlation co-efficient was applied for testing the closeness of ranks assigned

by the two groups, the micro and small entrepreneurs. All the analysis was done

using SPSS (statistical Packages for Social sciences).

1.11. Variables Used for the Study

Variables connected with problems in functional areas and Growth of

SSIs/MSMEs in Kerala.

Variables Connected with Functional Problems and Growth of

Enterprises

a Production

Power supply, cost of raw-materials, availability of skilled

labour force, availability of water, technical support for

machinery utilization, warehousing facilities, production

according to demand, cost of production, obsolete machinery

and drainage facilities

b Marketing

Possibility of increasing sales price, distribution network,

publicity, familiarity with export activities, awareness about

potential markets, demand of the products, collection of dues,

regularity of orders, sales promotion support from Government

agencies, commission or margin to middlemen and research for

knowing consumers’ demand.

27

c Finance

Additional charges levied by banks, legal formalities, demand

for security and margin money, repayment schedule, penal

interest charged by banks and ability to provide project

proposals.

d

Human

Resource

Management

Availability of competent professionals, availability of labour

force, training facilities, labour turnover, identifying source of

recruitment, demand for higher monetary and non-monetary

benefits and labour absenteeism.

To examine the

trend in the

growth of

SSIs/MSMEs in

Kerala.

Registration of units, employment created, investment made in

the units and value of goods and services produced

Variables Connected with the Impact of Micro Environmental Factors

a Suppliers

Timely availability of raw materials, availability of raw

materials on credit basis, source of suppliers, loading and

unloading costs, fluctuations in raw materials prices, local

availability of raw materials and transportation cost of raw

materials.

b Customers

Different customers for the product, buying power of the

customers, attitude of customers and availability of substitute

products for customers.

c CompetitorsBrand competition, competition from foreign firms, pricing of

competitors and packaging of competitors.

dMarketing

Intermediaries

Services of middlemen, availability of advertising agencies and

advertising costs.

28

e Financiers

Banks’ willingness to give loans, rate of interest on bank loans,

margin money loan from DICs, interest on margin money loans,

general banking services, and finance from private individuals.

f PublicAttitude of the media, environmental awareness of the public

and attitude of NGOs.

gRegulatory

Agencies

Attitude of DICs, attitude of industrial departments, attitude of

Tax authorities, attitude of Quality Standard Boards, services of

training agencies

Variables Connected with the Impact of

Macro Business Environmental Factors

Factors Variables

aEconomic

Factors

Conditions of roads, railway facilities, supply of electricity, cost

of electricity and water, waste disposal facilities, telephone and

internet facilities, rural electrification, traffic management in the

State, availability of land, economic growth of the nation,

present price level changes, monetary policy of RBI, better

prices of agricultural produces and fund flows from NRIs.

b

Technology-

related

Factors

Cost of technology, the State Government’s subsidy, technology

in product design, the use of foreign technology, fast change in

technological know-how, and effectiveness of the use of

computers.

c

Natural

environmental

factors

The climatic conditions in the State, the location of the State,

coastline facilities and the depletion of natural resources.

29

dGovernmental

Factors

Central government’s industrial policy, State government’s

industrial policy, support of local governments, support of

various line departments, Govt.’s support for innovative

enterprises, rates of different taxes, single window system

under DICs, Govt. attitude to prevent foreign competition, law

and order of the States, facilities in the industrial parks and F.D.I

policy of the Central Government.

ePolitical

Factors

Attitude of political parties, harthals and bandhs and political

stability in the State.

fDemographic

factors

Population growth, high age and life expectancy of the people in

the State, small-size family, and high literacy rate in the State.

gSocio-cultural

Factors

Different religious compositions in the State, Keralites’

affection for white-collar jobs, influence of religious festivals

upon sale of industrial products, efficiency of entrepreneurs

hailing from entrepreneurial families, support of social

reformers, risk aversion of Keralites, business education at

college or university level in the State, effectiveness of technical

education system, business education at school level, status of

entrepreneurs in the society and culture of Keralites to invest in

Gold or real estates.

h GlobalFactorsInfluence of Globalization and liberalization, hike in crude oil

prices, influence of international depression.

1.12. Period of the Study

The Secondary data required for the analysis of growth of small enterprises

were collected during the period 1996-97 to 2010-11. This period is covered in two

30

phases, phase-1-1996-97 to2005-06, prior to the passing of the MSMED Act,2006

and phase-2, 2006-07 to 2010-11. For describing the institutional support and

various schemes and incentives to MSMEs, in chapter 4, secondary data from 2006-

07 to 2010-11 were alone used, as the Act was passed in 2006.

The field survey was conducted from July 2011 to November 2011 for

collecting the primary data.

1.13. Operational Definitions of the Terms Used in the Study

The present study is conducted with the main objective of identifying the

impact of different business environmental factors upon the small enterprises in

Kerala.

1.13.1. Small Enterprises

As per the MSMED Act of 2006, the micro, small and medium enterprises

come under one umbrella. According to the 4th All India Census of the MSMEs, the

proportion of medium-scale enterprises comes to only 0.06per cent of the total

MSMEs in Kerala. Hence, in the study, they are not included in the sample. In the

title of the present study the phrase ‘Small Enterprises’ has been used. Here the

expression ‘Small Enterprises’ mean micro and small enterprises.

1.13.2. Facilitators

Facilitators mean all the persons and institutions providing support for

industrial development. In the present study, Facilitators include the bank managers,

the Industries Extension Officers and the member of local governments (Panchayath

members, municipal and corporation councillors).

31

1.13.3. Line Departments

Line departments for the purpose of this study would mean all departments

and agencies that support micro and small-scale enterprises, mainly Pollution

Control Board, Electricity Board, Fire and Rescue Departments, Town Planning

Department, Mining and Geology and Forest Department

1.14. Limitations of the Study

The population of the study consists of the Enterprises and the Facilitators.

Enterprises are selected from the official list of micro and small enterprises which

have filed Memorandum Part II with the DICs. As the submission of Memorandum

is optional, many enterprises have not submitted Memorandum Part II in the DICs,

especially, the units started before 2006. Hence, in the population of enterprises,

such units could not be included. Another limitation is that enterprises are selected

on a random basis, as a result of which the inherent drawbacks of sample selection

on random basis will be reflected in the study. Since the statements in the interview

schedule are of the qualitative type, some difficulties were faced while collecting

information from the respondents. Some respondents from the local bodies were

reluctant to answer questions which were directly connected with them. Hence, a

real attempt was made to elicit information from them on a genuine basis.

1.15. Presentation of the Report

The study is presented in 9 Chapters. The introductory chapter includes the

statement of problems, the significance of the study, the scope of the study, the

objectives of the study, hypotheses, source of data, sample design and sampling

32

techniques, collection of data, tools for data analysis, variables used for the study,

the period of the study, operational definitions and the limitations of the study. The

second chapter presents the review of literature. The third chapter deals business

environmental factors- A conceptual frame work. The fourth chapter examines the

institutional support and the various schemes and incentives of the MSMEs in

Kerala. Chapter five recounts the Functional problems of entrepreneurs. Chapter six

deals with the analysis of the Micro business environmental factors. Chapter seven

demonstrates the analysis of the Macro business environmental factors. Chapter 8

elucidates the growth and performance of small scale-industries / enterprises in

Kerala and the last chapter shows summary, findings and recommendations.

33

References

1. Anilkumar, S., Poornima, S.C., Abraham, Mini K. and Jayasree, K. (2006), Entrepreneurship Development, New Delhi: New Age International Publishers, p. 1.

2. Khanka, S.S. (2007), Entrepreneurial Development, New Delhi: S. Chand and Co. Ltd, p.1.

3. Ibid., p.8.4. Cole, Arthur H. (1959), Business Enterprise in its Social Settings,

Cambridge: Harward University Press, p.44.5. Desai, Vasant (2006), Small Scale Industries and Entrepreneurship,

Mumbai: Himalaya Publishing House, p.56. Ibid., p.394.7. Ambilikumar, V. (1989), Working of Small Scale Industries in Kerala with

Special Reference to Thiruvanathapuram District, Unpublished Ph.D. Thesis: Thiruvanathapuram: University of Kerala, pp. 16-17.

8. Thomas, P.C. (1991), Problems and Prospects of Village Industries in Kerala, Unpublished Ph.D. Thesis, Thiruvanathapuram: University of Kerala, pp. 36-37.

9. Sreekala, K. (1995), Problems and Prospects of Industrialization and their Impact on Environment with Special Reference to Kerala: A Gandhian Critique, Unpublished Ph. D. Thesis, Kottayam: M.G. University, pp. 32-34

10. Ibid ., p.37.11. Ibid., pp. 37-38.12. Ibid., p.41.13. Government of Kerala (2009), Statistics for Planning, Thiruvanathapuram:

Department of Economics and Statistics, p. 237.14. Khanka, S.S. op.cit . pp. 71-72.15. Aswathappa, K. (2010), Essentials of Business Environment, Mumbai:

Himalaya Publishing House Ltd, p.280. 16. Khanka, S.S. loc. cit.17. Krishnamurthi, S. (2008), Guide to Micro, Small & Medium Enterprises,

New Delhi: Oriental Publishing Co, P.60.18. Government of Kerala (2007), Economic Review, Trivandrum; State

Planning Board, Chapter 8.19. Cherunilam, Francis (2007), Business Environment Text & Cases, Mumbai:

Himalaya Publishing House, p.3.20. Government of Kerala (2003), Economic Review, Trivandrum; State

Planning Board, Chapter 6, p.152. 21. Government of India, Quick Results of Fourth All India Census of MSMEs

2006-2007, New Delhi., Development Commissioner (MSME).-p.84.