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AIR FORCE INSTITUTE OF TECHNOLOGY

NIGERIAN AIR FORCE
KADUNA

SCHOOL OF AIR ENGINEERING

AIRCRAFT ENGINEERING DEPARTMENT
AIRCRAFT ENG TECHNOLOGY
(AVIONICS)

A
TERM PAPER ON
ENTREPRENEURSHIP DEVELOPMENT
(SDV 210)

TOPIC: EXAMINE PRIVATE ENTERPRISE AND

APPRAISE
THE EFFECT OF PRIVATE CONTROL OF
BUSINESS

BY
LCPL MADUGBA IC
REG. NO: AFIT/0004520/AMD
HND 1

JANUARY 2010.

ABSTRACT

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This paper work on examine private enterprise and appraise the effect of

private control of business. Investigated the private enterprise, history, types,

features, merit and demerit of private control business and some keywords

like capitalism, free enterprise, privatization and public enterprise was

discuss.

AIM

The aim of this paper is to acquaint the reader with what private enterprise is

all about and to appraise the effect of private control of business.

INTRODUCTION

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Private Enterprise is an economic system in which citizen are allowed to

own capital and property and to run their own businesses with a minimum of

state interference. These system of enterprise encourages entrepreneur and

making of profit. In recent years, private equity investments on public

capital markets have gained importance which is partly due to an increasing

number of public to private transactions. According to the Centre for

Management Buyout Research, there has been a significant increase in

public to private transactions in the US, UK and continental Europe since the

early 1980s. The first peak occurred in the mid-to-late 1980s with the second

one coming around the year 2000 with another upward trend from 2003,

CMBOR (2007). A number of explanations have been proposed for this

increase including, for example, the gaining of the support of existing

shareholders through irrevocable commitments, Wright, Weir and Burrows

(2007) and the feeling that smaller quoted companies tend to be ignored by

institutional investors. A further important factor has been the presence of

private equity investors that have been willing to finance deals. For example,

in a US study, Cotter and Peck (2001) found that 62.5% of their sample of

buyouts involved private equity investors.

HISTORY OF PRIVATE ENTERPRISE

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The best way to understand a demand for freedom is to consider what it is

directed against. The private enterprise movement began in the 18th century

as a protest against various restrictions on business enterprise imposed by

governments and by corporations sanctioned by government. Corporations

had existed since Roman times, ostensibly to guarantee their member's good

behaviour and especially good service to the public. But they served their

members' interests also at the expense of the public by restricting

competition. Non-members were excluded from the trade; to become a

member one had to serve a long and low-paid apprenticeship to an

established member, and to pay various sums of money. Government

sanctioned these practices, and imposed restrictions of its own, ostensibly in

the public interest, but also to raise revenue and to provide fees and bribes

for officials: the guild had to pay for its monopoly. Viewed cynically,

government was an ancient and successful branch of organized crime, a

respectable protection racket.

Not only domestic but also foreign trade was subject to such interference.

Guilds such as the East India Company monopolized various branches of

foreign trade, backed by the navy and the customs service. Colonists were

restricted in many ways in the interest of industry in the home country.

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Government justified its policies as means of fostering the nation's industries

and thereby increasing national power. The aim was self-sufficiency, to

import little and export much. The unacknowledged by-product was

violence and corruption: members of the East India Company by

questionable means made great fortunes with which they bought political

influence; positions in the customs service were treated as 'spoils' in a

system of political patronage.

THE THEORY OF PRIVATE/FREE ENTERPRISE

Free enterprise was the slogan of outsiders disadvantaged by these

restrictions. They demanded:

That anyone should be free to set up a business enterprise of any sort,

without having to serve an apprenticeship or become a member of a guild or

get anyone's permission.

That people should be free to run their businesses in their own way,

unhampered by guild or government regulations about treatment of

employees, hours of work, location and type of premises etc...

That anyone should be free to trade with anyone else anywhere in the world

on whatever terms the parties concerned agree upon, without price or quality

controls.

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These points can be summed up as freedom of contract: people should be

free to make and carry out contracts with anyone they please on whatever

terms the parties concerned find mutually acceptable: if the agreement is

voluntary (no force or deception), then no-one else should interfere; people

should not be compelled to part with what is theirs for less than they think it

is worth, others should not be prevented from offering as much as they think

it is worth.

In Nigeria, the participation of the state in enterprises is dates back to the

colonial era. The task of providing infrastructural facilities such as railway,

road, bridges, water supply, and electricity fell on the colonial government

due to the absence of indigenous companies with the required capital as well

as the inability or unwillingness of foreign trading companies to embark on

these capital-intensive projects.

For a large part of the twentieth century, there were countries in the world

(Eastern bloc) that promoted state ownership of the means of production

while others (western bloc) promoted private ownership of the means of

production. A good number of countries practiced what was termed a mixed

economy i.e. a combination of public and private ownership of the means of

production. However, at the end of the twentieth century with the end of

cold war between the eastern and western blocs, private ownership of means

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of production took ascendancy. Today, the received wisdom is that the state

should recede and that private ownership of the means of production is the

only viable approach to efficient production of goods and services, economic

growth and development. Consequently, there is a move all over the world

to privatize erstwhile public enterprises. In this paper, we examine the

practice of privatization meant to promote private ownership of means of

production in Nigeria.

PRIVATIZATION

Iheme defines privatizations as:

……………any of a variety of measurers adopted by

government to expose a public enterprise to competition or to

bring in private ownership or control or management into a

public enterprise and accordingly to reduce the usual weight

of public ownership or control or management. However, in a

strict sense, privatization means the transfer of the ownership

(and all the incidence of ownership, including management)

of a public enterprise to private investors. The later meaning

has the advantage of helping one to draw a line between

privatization and other varieties of public enterprise reform. It

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is also the sense in which the term has been statutorily

defined in Nigeria.

In a similar vein, Starr defines privatization as a shift from the public to the

private sector, not shifts within sectors.  According to him, the conversion

of a state agency into an autonomous public authority or state owned

enterprise is not privatization nether is conversion of a private non-profit

organization into a profit making form.

The Privatization and Commercialization Act of 1988 and the Bureau of

Public Enterprises Act of 1993 of the Federal Republic of Nigeria defined

privatization as the relinquishment of part or all of the equity and other

interests held by the Federal Government or any of its agencies in

enterprises whether wholly or partly owned by the Federal Government.

Although privatization is not defined in the Public Enterprises (Privatization

and Commercialization) Act of 1999, we can assume that it is deemed to

have the same meaning.

From the definitions above, three things are clear. First, for privatization to

take place there must be in existence public enterprises, which need to

convert into private enterprises. Secondly, there is the reasoning that private

ownership or control or management would be better than public ownership.

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Finally, privatization is premised on the fact that there are problems with

public ownership of enterprises and privatization is part and parcel of a

reform agenda to turn around these enterprises so that they can deliver goods

and services more efficiently and effectively.

CAPITALISM

This is the type of economy in which each individual in his capacity is

engaged in economic activity with a large measure of economic freedom.

Also Oxford dictionary define capitalism as “an economic and political

system in which a country's trade and industry are controlled by private

owner for profit, rather than by the state".

PUBLIC ENTERPRISE

Public ownership (also called state ownership, government ownership or

public property) refers to state ownership or control of any asset, industry, or

enterprise at any level, national, regional or local (municipal); or to common

(full-community) non-state ownership. The process of bringing an asset into

public ownership is called nationalization. This operates in the principle of

socialism.

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PRIVATE ENTERPRISE

This is an economic system in which citizen are allowed to own capital and

property and to run their own businesses with a minimum of state

interference. These system of enterprise encourages entrepreneur and

making of profit.

A privately-owned enterprise refers to a business that is owned by private

investors, shareholders or owners (usually jointly, but they can be owned by

a single individual), and is in contrast to state institutions, such as publicly-

owned enterprises and government agencies. Private enterprises comprise

the private sector of an economy. An economic system that contains a large

private sector where privately-run businesses are the backbone of the

economy is referred to as capitalism. This contrasts with socialism, where

industry is owned by the state or by all of the community in common. The

act of taking assets into the private sector is referred to as privatization. The

goal of private enterprise differs from other institutions, the major difference

being private businesses exist solely to generate profit for the owners or

shareholders.

FEATURES OF PRIVATE ENTERPRISE

The principal features of private enterprise are briefly explain below

1. Private property. This, like capitalism thrives on

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the institution of private property. The institution of private property induces

its owner to work hard, to organize his business and to produce more.

2. Profit motive. The main aim of this enterprise is

profit motive. The farmer, producer, businessmen etc is of the desire to make

profit.

3. Price mechanism. In private enterprise, the price

mechanism operates automatically without any direction and control by

central authority. It is profit motive that determine production.

4. Role of the state. In the 19th century, the role of

state was confines on the maintenance of law and order, protection from

external aggression, education and health. With no interventions in

economic affairs by the state. This role is well defined in this system.

5. Competition. This is one of the major features of this enterprise. This is due

to the existence of large numbers of buyer and seller who are motivated by

self-interest but cannot influence market by their individual action.

6. Freedom of enterprise. This means that there is freedom of occupation for

an entrepreneur, a capitalist, and a labourer. But this freedom is subject to

their training and ability.

TYPES OF PRIVATE ENTERPRISE

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1 Sole proprietorship: A sole proprietorship is a business owned by

one person. this is to say that all factors of production is provided by him

that is land, capital, labour etc. the proprietor function as the management,

supervision and risk taking. The owner of the business has total and

unlimited personal liability of the debts incurred by the business. This form

is usually relegated to small businesses.

2 Partnership: A partnership is a form of business in which two or

more people operate for the common goal of making profit. This form of

business is much wider in scope as compared to the sole proprietorship.

Each partner has total and unlimited personal liability of the debts incurred

by the partnership.

3 Joint Stock Company: this is one of the most forms of business

organization of the modern age. There are certain large scale enterprises

which cannot be operated on the basis of the sole proprietorship or

partnership. To start such an enterprise a huge amount of capital is collected

by a joint stock company. This comprise of limited liability and public

limited liability company. It is extended form of partnership.

4. Co-operative Societies: this is another form of business organization

which few persons who are known to each other starts business on co-

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operative basis. There must a minimum number of people require to start a

co-operative society depending on the local law of a country

ADVANTAGES OF PRIVATE ENTERPRISE

1. Increase in production: Arthur Young wrote “the magic of property

turn sand to gold” this observation of Young holds good in private enterprise

a business man can hold property and use it any way he likes. He brings

improvement in production and increases productivity because the property

is his. This leads to increase in income, savings, investment etc.

2 Quality products at low costs. The twin freedoms of consumers and

producers lead to the production of quality products, and at low prices. Thus

the society as a whole stands to gain at this advantage of private enterprise.

3 Progress and prosperity. The presence of competition under private

enterprise lead to increase in efficiency encourages producer to innovate and

thereby bringing progress and prosperity in the country. As point out by

Seligman “if competition in biology leads only indirectly to progress,

competition in economics is the very secret of progress”.

4 Maximizes welfare. The automatic working of the price mechanism

free enterprise brings efficiency in the production and distribution goods and

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services without any central plan, and promotes the maximum welfare of the

community.

5 Flexible systems. A private enterprise operates automatically through

the price mechanism. If there are shortages or surpluses in the economy,

they are corrected automatically by the force of demand and supply.

6 Optimum use of resources. Under this form of enterprise, producers

undertake the production of only those goods which appear to yield

maximum profits in anticipation of demand. This leads to optimum use of

resources.

DISADVANTAGES OF PRIVATE ENTERPRISE

`Private enterprise has been criticized from many perspectives, most notably

socialist perspectives. Criticism of private enterprise is usually accompanied

by criticism of the capitalist system entirely. Socialists often argue that

within a capitalist system, economic activity is uncoordinated and serves the

interest of a small business class as opposed to society as a whole. This

results in stifled advancement and anarchy of production. Marxists criticize

private business, along with capitalism, as being a form of exploitation that

serves to extract the surplus value from the workforce and distribute it to

passive owners (the capitalist class) in the form of profit. Because of this

exploitation, the workers do not receive the full product of their labour and

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are forced, by the conditions imposed upon them by capitalism, to sell their

labour to business owners in order to make a living.

Socialists typically argue for public ownership of the means of production,

with Marxian socialists advocating more direct collective worker-ownership

of business enterprises with democratic worker management. Other critics of

private property include technocrats, some forms of economic nationalism,

anarchists and proponents of economic democracy, who believe power and

economic decision-making should be spread among as many people as

opposed to being concentrated into the hands of a few.

1. Leads to monopoly. Competition which is regarded as the very basis of

private enterprise contains within itself the tendency to destroy competition,

and lead to monopoly. It is the profit motive under private enterprise which

leads to cut-throat competition and the formation of cartels and

combinations. This leads to reduction of firms.

2 Inequalities. The institution of private property creates inequalities of

income and wealth. The price mechanism through competition brings huge

profit to big producers, entrepreneurs etc who accumulate much wealth.

While the poor live poverty.

3 Consumers right a myth. In this case consumers have to buy only

those commodities which are manufactured and supply by the producers.

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Sometime consumers are misled by the advertisement and propaganda about

the usefulness of a product.

4 Inefficient production. Producers fail to produce goods in keeping the

society’s requirement. Sometimes frivolous luxury goods and obnoxious

articles are produce to satisfy the want of few rich at the expense of the poor

.this lead to social wastage of resources.

5 Depression and unemployment. This form of enterprise is

characterized by business fluctuations and unemployment. Excessive

competition and unplanned production leads to over production and glut of

commodities in the market and ultimately depression and unemployment.

6 Non-utilization of resources. The price mechanism under private

enterprise fails to employ the country's resources fully. Free and unfettered

competition, inequalities of income distribution, over production, and

consequent depression lead to wastage of productive resources. There is also

mass unemployment and freedom of occupation has little meaning in this

enterprise.

CONCLUSION

Considering the efforts and principals of the founding fathers of economics

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like Adam Smith, Arthur Young, Schumpeter, L. S Silk and many others.

Also global considering economic situation, one will agree with me that

business is better left in the hands of private investors than the public. There

is a saying that said “government has no business in business”

ideologically, public enterprises are normally considered as no man business

which lead to privatization in many country like Nigeria. Many countries that

practice socialism are now opening their economy allowing private investor.

I their by conclude that private enterprise is the way out

RECOMMENDATION

This work is recommended for more inputs by interested person(s) and to be

used as a study guide by business and management scholars in AFIT or any

other institution of higher learning.

REFERENCES

1 Microeconomic Theory, Fifth Revised and Enlarged Edition by M.L

Jhingan. P.91-99 and 292-307

2 Benham’s Economics, Eight Edition 1967 p. 48

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3 www.supplymanagement.com

4 www.wikipedia.com

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