Unit 2 - LOCATION OF INDUSTRY

Meaning

Plant location refers to the choice of region and the selection of a particular site for setting up a
business or factory. But the choice is made only after considering cost and benefits of different
alternative sites. It is a strategic decision that cannot be changed once taken.
The geographical location of the final plant can have strong influence on the success of the industrial
venture. Considerable care must be exercised in selecting the plant site, and many different factors
must be considered. Primarily the plant must be located where the minimum cost of production and
distribution can be obtained but, other factors such as room for expansion and safe living conditions
for plant operation as well as the surrounding community are also important. The location of the
plant can also have a crucial effect on the profitability of a project.
The choice of the final site should first be based on a complete survey of the advantages and
disadvantages of various geographical areas and ultimately, on the advantages and disadvantages of
the available real estate.
Need for Enterprise Location
 
The need for location or site is generally government by the following circumstances:
 
 To promote the establishment of a new enterprise.
 To undertake expansion, decentralisation and diversification necessary for meeting
 To manage the situations arising due to non-renewal of existing lease of an
establishment demand of products.
 To develop new location if existing location has been declared as undesirable or
unsuitable.
 To arrange a new location by shifting from existing location due to change in market
pattern, depletion of raw materials, change in production processes and transport
facilities, etc.
 To open new branch or production facility at new places for increasing the volume of
production and distribution activities.
 
Importance of Enterprise Location
 
Selection of plant location or site is quite important due to the following reasons:
 
 It enables the enterprise to operate smoothly, efficiently and with the minimum cost.
 It controls wastages in efforts and talents at the entrepreneurs.
 It reduces uncertainty in results.
 It encourages effective mobilization of raw-materials, labour and potential customers.
 It develops the area by attracting other potential entrepreneurs and endowments like physical,
economic and social variables.
 
Steps in Enterprise Location 
Following steps are important in selecting a particular location or site for the plant:
 Selection of the region.
 Selection of the locality or community.
 Selection of the exact site and
 Selection of an optimum site.

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Factors influencing location
The factors to be considered are:
1. Raw material availability.
2. Location (with respect to the marketing area.)
3. Availability of suitable land.
4. Transport facilities.
5. Availability of labors.
6. Availability of utilities (Water, Electricity).
7. Environmental impact and effluent disposal.
8. Local community considerations.
9. Climate.
10. Political strategic considerations.
11. Taxations and legal restrictions

RAW MATERIALS AVAILABILITY:The source of raw materials is one of the most important
factors influencing the selection of a plant site. This is particularly true for the sulfuric acid plant
because large volumes of sulfur are consumed in the process which will result in the reduction of the
transportation and storage charges. Attention should be given to the purchased price of the raw
materials, distance from the source of supply, freight and transportation expenses, availability and
reliability of supply, purity of raw materials and storage requirements.
LOCATION:The location of markets or intermediate distribution centers affects the cost of product
distribution and time required for shipping. Proximity to the major markets is an important
consideration in the selection of the plant site, because the buyer usually finds advantageous to
purchase from near-by sources. In case of sulfuric acid plant, the major consumers are fertilizer
industries and hence the plant should be erected in close proximity to those units.
AVAILABILITY OF SUITABLE LAND:The characteristics of the land at the proposed plant site
should be examined carefully. The topography of the tract of land structure must be considered, since
either or both may have a pronounced effect on the construction costs. The cost of the land is
important, as well as local building costs and living conditions. Future changes may make it
desirable or necessary to expand the plant facilities. The land should be ideally flat, well drained and
have load-bearing characteristics. A full site evaluation should be made to determine the need for
piling or other special foundations
TRANSPORT:The transport of materials and products to and from plant will be an overriding
consideration in site selection. If practicable, a site should be selected so that it is close to at least two
major forms of transport: road, rail, waterway or a seaport. Road transport is being increasingly used,
and is suitable for local distribution from a central warehouse.
Rail transport will be cheaper for the long-distance transport. If possible the plant site should have
access to all three types of transportation. There is usually need for convenient rail and air
transportation facilities between the plant and the main company headquarters, and the effective
transportation facilities for the plant personnel are necessary.
AVAILABILITY OF LABORS:Labors will be needed for construction of the plant and its
operation. Skilled construction workers will usually be brought in from outside the site, but there
should be an adequate pool of unskilled labors available locally; and labors suitable for training to
operate the plant. Skilled tradesmen will be needed for plant maintenance. Local trade union customs

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and restrictive practices will have to be considered when assessing the availability and suitability of
the labors for recruitment and training.
AVAILABILITY OF UTILITIES:The word “utilities” is generally used for the ancillary services
needed in the operation of any production process. These services will normally be supplied from a
central facility and includes Water, Fuel and Electricity which are briefly described as follows:
Water: The water is required for large industrial as well as general purposes, starting with water for
cooling, washing, steam generation and as a raw material in the production of sulfuric acid. The plant
therefore must be located where a dependable water supply is available namely lakes, rivers, wells,
seas. If the water supply shows seasonal fluctuations, it’s desirable to construct a reservoir or to drill
several standby wells. The temperature, mineral content, slit and sand content, bacteriological
content, and cost for supply and purification treatment must also be considered when choosing a
water supply. Demineralized water, from which all the minerals have been removed is used where
pure water is needed for the process use, in boiler feed. Natural and forced draft cooling towers are
generally used to provide the cooling water required on site.
Electricity: Power and steam requirements are high in most industrial plants and fuel is ordinarily
required to supply these utilities. Power, fuel and steam are required for running the various
equipments like generators, motors, turbines, plant lightings and general use and thus be considered
as one major factor is choice of plant site.
ENVIRONMENTAL IMPACT AND EFFLUENT DISPOSAL:Facilities must be provided for
the effective disposal of the effluent without any public nuisance. In choosing a plant site, the
permissible tolerance levels for various effluents should be considered and attention should be given
to potential requirements for additional waste treatment facilities. As all industrial processes produce
waste products, full consideration must be given to the difficulties and coat of their disposal. The
disposal of toxic and harmful effluents will be covered by local regulations, and the appropriate
authorities must be consulted during the initial site survey to determine the standards that must be
met.
LOCAL COMMUNITY CONSIDERATIONS:The proposed plant must fit in with and be
acceptable to the local community. Full consideration must be given to the safe location of the plant
so that it does not impose a significant additional risk to the community.
CLIMATE:Adverse climatic conditions at site will increase costs. Extremes of low temperatures
will require the provision of additional insulation and special heating for equipment and piping.
Similarly, excessive humidity and hot temperatures pose serious problems and must be considered
for selecting a site for the plant. Stronger structures will be needed at locations subject to high wind
loads or earthquakes.
POLITICAL AND STRATEGIC CONSIDERATIONS:Capital grants, tax concessions, and other
inducements are often given by governments to direct new investment to preferred locations; such as
areas of high unemployment. The availability of such grants can be the overriding consideration in
site selection.
TAXATION AND LEGAL RESTRICTIONS:State and local tax rates on property income,
unemployment insurance and similar items vary from one location to another. Similarly, local
regulations on zoning, building codes, nuisance aspects and others facilities can have a major
influence on the final choice of the plant site.
Size and scale of operation

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Factors determining size of a firm

There are various economic as well as non-economic factors that influence the size of a business
unit. The relative importance of the factors varies with the products manufactured, industry in which
the firm operates etc. Size is primarily determined by the goals and objectives of the organization
and influences the efficiency of operations. The following factors determine the size of the firm.

1. Resource availability: The extent of resources that are available and that can be arranged by the
entrepreneur determines the size of the firm. In case the entrepreneur is able to raise more resources,
he can opt for a larger sized firm. Conversely if the resources that are available and arranged are less,
the organizations has to settle for a smaller sized firm.
For e.g. though both CavinKare and HUL are both in the FMCG industry, HUL’s size is larger when
compared to CavinKare. One reason being that HUL has more resources available when compared to
CavinKare.
2. Requirement of capital: Certain businesses require huge investments and therefore have to be set
up as large scale units. For e.g. Iron and Steel mills require huge investments in machinery, similar is
the case with cement plants, power generation etc. Therefore in such cases, firms have to be set up as
large scale units.
3. Nature of industry: In case the final product produced is complex, or machinery required for
manufacturing is of a large size e.g. aircraft manufacturing, iron and steel mills, boiler
manufacturing, power generation plants, manufacture of ships, rail engines etc, only large size firms
are suitable.
4. Nature of product: If the product manufactured is large, the size of the firm will be of a higher
size e.g. heavy machinery. Smaller size is preferred in case of less durable, less standardized and
fashionable products (e.g. handicrafts).
5. Nature of demand: If the demand for the product is high and expected to grow further in the
future, the size of the firm would increase. For e.g. to meet the increased demand for its cars,
Hyundai has set up a second car manufacturing plant, Nokia is planning to increase the number of
cell phones manufactured in India to meet the high demand for handsets. In case demand for a
product is showing a declining trend, the size of the firm would not be increased e.g. scooters,
floppies, typewriters etc.
6. Market size: In case the size of the market is large, then a large sized firm would be preferred.
Firms which are marketing their products not only in their home country but also internationally
would prefer large size e.g. Pepsi, Coke, Nike, Intel, RayBan, Hewlett Packard etc. Those firms
which market their products only in the local market have limited market size and therefore would
prefer to operate with a smaller size.
7. Ability of entrepreneur: If the entrepreneur is intelligent, motivated and innovative he would tap
emerging opportunities and the firm would grow. For e.g. Azim Premji inherited a company which
was producing vegetable oil. But today Wipro is in the vegetable oil business, consumer care
products, lighting, hardware, software (among the top 3 companies), BPO etc. The reason for the
phenomenal growth is the vision, ability and enterprising spirit of Azim Premji.
8. Economic environment: Economic environment plays a significant role in influencing the value
of the firm. In case the economy is in a boom condition, and purchasing power is increasing, the
entrepreneurs would be induced to increase the scale of operations. Whereas in case the economy is
passing through a recession or depression, the size of operations would remain small. In India, the
FMCD companies (LG, Samsung, Onida, Videocon etc.), are planning to increase their sales. They
are confident of increased sales because of growing middle class and better purchasing power.
9. Availability of inputs of production: In case of productive factors such as raw materials, labour,
power, land are available in abundance, entrepreneurs can choose large scale operations. In case
inputs are not available in required quantities then the size of the operation would be small. For e.g.

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because of the abundant availability of English speaking skilled manpower, IT, BPO and KPO
businesses are expanding in India. Due to abundant availability of iron ore mines in Orissa, many
companies such as POSCO, Tata Iron and Steel Co., etc are planning to set up their plants in that
state.
10. Government policy: The government has reserved certain items for manufacture by the small
scale industry (SSI). Therefore the size of such firms would be small in order to enjoy protection and
government privileges.
11. Estimates of future: If an industry is expected to perform well in the future, then entrepreneurs
would be ready to set up large sized businesses to meet future demand. For e.g. with the increase in
employment and purchasing power the demand for automobiles, housing, consumer durable are
expected to increase. Therefore business units engaged in these businesses are encouraged to
increase their size.
12. Market availability: If the market for the product is restricted to a particular locality or State,
the size of the firm would be small. But if the market is national or international, a large size firm
would be set up.
13. Profitability: If increase in production is expected to yield only low returns, the firm size would
remain small. In case increase in firm size, is expected to yield higher profits, the firm size would be
increased to a large sized firm.

Small Scale Industries

Small scale industries (SSIs) also known as MSMEs are defined & categorized by the Micro, Small
& Medium Enterprises Development Act, 2006. The act categorizes different scale of industries on
the basis of investment in plant & machinery in case of manufacturing industries and on the basis of
investment in equipment in case of service sector industries.
1. Micro Scale Enterprise: Manufacturing enterprises in which investment in plant & machineries
does not exceed Rs 25.00 lakhs and service sector industries in which investment in equipment does
not exceed Rs 10.00 lakhs are termed as micro scale enterprises.
2. Small Scale Enterprise: Manufacturing enterprises in which investment in plant & machineries is
more than Rs 25.00 lakhs but does not exceed Rs 5.00 crores and service sector industries in which
investment in equipment is more than Rs 10.00 lakhs but does not exceed Rs 2.00 crores are termed
as small-scale enterprises.
3. Medium Scale Enterprise: Manufacturing enterprises in which investment in plant & machineries
is more than Rs 5.00 crores but does not exceed Rs 10.00 crores and service sector industries in
which investment in equipment is more than Rs 2.00 crores but does not exceed Rs 5.00 crores are
termed as medium scale enterprises.

Small scale industries are small businesses that do not have a large output. They may be contrasted
to large corporations that use huge factories to create thousands of products a day.
An example of a small scale industry is a family run workshop creating hand made products like
clothing or carved toys. With few employees and a small production space, this is definitely a small
scale industry.
Small scale industries are sometimes called cottage industries, referring to the traditional locations in
which they were housed. The advantages and disadvantages of small scale industries are detailed
below.

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Definition:
The official definitions of a small scale unit are as follows:

(i) Small-Scale Industries:

These are the industrial undertakings having fixed investment in plant and machinery, whether held
on ownership basis or lease basis or hire purchase basis not exceeding Rs. 1 crore.

(ii) Ancillary Industries:

These are industrial undertakings having fixed investment in plant and machinery not exceeding Rs.
1 crore engaged in or proposed to engage in,

(a) The manufacture of parts, components, sub-assemblies, tooling or intermediaries, or

(b) The rendering of services supplying 30 percent of their production or services as the case may be,
to other units for production of other articles.

(iii) Tiny Units:

These refer to undertakings having fixed investment in plant and machinery not exceeding Rs. 23
lakhs. These also include undertakings providing services such as laundry, Xeroxing, repairs and
maintenance of customer equipment and machinery, hatching and poultry etc. Located m towns with
population less than 50,000.

(iv) Small-Scale Service Establishments:

These mean enterprises engaged in personal or household services in rural areas and town with
population not exceeding 50000 and having fixed investment in plant and machinery not exceeding
Rs. 25 lakhs.

(v) Household Industries:

These cover artisans skilled craftsman and technicians who can work in their own houses if their
work requires less than 300 square feet space, less than 1 Kw power, less than 5 workers and no
pollution is caused. Handicrafts, toys, dolls, small plastic and paper products electronic and electrical
gadgets are some examples of these industries.

Characteristics of Small-Scale Industries

(i) Ownership:
Ownership of small scale unit is with one individual in sole-proprietorship or it can be with a few
individuals in partnership.

(ii) Management and control:

A small-scale unit is normally a one man show and even in case of partnership the activities are
mainly carried out by the active partner and the rest are generally sleeping partners. These units are
managed in a personalised fashion. The owner is activity involved in all the decisions concerning
business.

(iii) Area of operation:

The area of operation of small units is generally localised catering to the local or regional demand.
The overall resources at the disposal of small scale units are limited and as a result of this, it is forced
to confine its activities to the local level.

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(iv) Technology:
Small industries are fairly labour intensive with comparatively smaller capital investment than the
larger units. Therefore, these units are more suited for economics where capital is scarce and there is
abundant supply of labour.

(v) Gestation period:

Gestation period is that period after which teething problems are over and return on investment
starts. Gestation period of small scale unit is less as compared to large scale unit.

(vi) Flexibility:
Small scale units as compared to large scale units are more change susceptible and highly reactive
and responsive to socio-economic conditions.

They are more flexible to adopt changes like new method of production, introduction of new
products etc.

(vii) Resources:
Small scale units use local or indigenous resources and as such can be located anywhere subject to
the availability of these resources like labour and raw materials.

(viii) Dispersal of units:

Small scale units use local resources and can be dispersed over a wide territory. The development of
small scale units in rural and backward areas promotes more balanced regional development and can
prevent the influx of job seekers from rural areas to cities.

Objectives of Small Scale Industries

The objectives of small scale industries are:

1. To create more employment opportunities with less investment.
2. To remove economic backwardness of rural and less developed regions of the economy.
3. To reduce regional imbalances.
4. To mobilise and ensure optimum utilisation of unexploited resources of the country.
5. To improve standard of living of people.
6. To ensure equitable distribution of income and wealth.
7. To solve unemployment problem.
8. To attain self-reliance.
9. To adopt latest technology aimed at producing better quality products at lower costs.
Importance of Small Scale Industries:

SSIs are the backbone of the world economy and this is the main reason why even governments are
providing various sops and financial benefits for encouraging more and more MSMEs to flourish.
Existence of small-scale industries is must as:

1. Partner in nation building: Education, good health, etc. are most important for a country to
flourish exponentially. As SSIs provide numerous job opportunities to various classes of people, they
are not only paying them their salaries but also enabling them to improve their lifestyle, sending their
children to schools to gain education who will become partners in the nation building in time to
come and providing them with good and hygienic food.

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2. Customized Products: Instead of generic products already present in the market, you want to
provide some sort of customized products to your customers, then small players can come to your
rescue. Conglomerates and MNCs usually do not disturb their already continuing chain of products
for any order, unless it is big enough to form part of company’s sizeable revenue. However, smaller
players are always ready to surprise you with their latest products which can be customized at your
will.

3. Employment to local people: MNCs and big corporates usually recruit highly effective and
skilled manpower from all over the world as they want to achieve greater numbers. However, SSIs
recruit more and more local people as they want to build relations instead of just generating numbers.
If the relations are good, the employee remains loyal to the company and treats the company’s
property, company’ profits & losses as his own. Employing local people instils confidence among
the workers which ultimately increases their productivity in the long-term.

4. Creation of jobs: In the modern era where larger corporates and MNCs are moving more and
more towards automation and mechanization, SSIs which still cannot afford such high-end
technologies, seek to recruit more and more people into their labour intensive industries. Recently, a
large IT company laid off 3000 employees due to increased level of automation and robots replacing
humans. Whereas, even today myriads of SSIs are labour intensive and provide earning to many
skilled, semi-skilled & unskilled workers.

5. Discipline into the industry: Nowadays there has been increased trend of big corporates taking
care of their customers. Some big players have even setup an altogether different department just for
the customer care. Even conglomerates are aware that if they start ignoring customers and merely
focus on maximising profits, then those customers will ultimately shift to smaller players present in
the industry. Due to existence of smaller players into the market, bigger companies conduct their
businesses with required discipline.

Advantages of small scale industries

1. Niche charm: Something made by a small scale producer feels much more special and unique
than something that has been churned out along with thousands of identical items in a large factory.
2. Local flavor: Products made by small scale industries often have a recognizable – and often
quirky – local feel to them that is characteristic of the area in which they were produced.
3. A humanizing element: small scale industries often have a very human face as customers can get
to know the producers personally.
4. Traditional skill: Rather than using heavy duty machinery, items produced by small scale
industries are often produced using traditional skills such as weaving, carving or hand painting.
These skills are valuable and make the products more precious.
5. An alternative economy: For people who do not like to hand over their money to large
corporations (perhaps because they disagree with that corporation’s values or their way of acting in
the world), small scale industries provide an alternative source of goods and services.

Disadvantages of small scale industries

1. Difficulty with meeting demand: When products are in high demand, small scale industries can
often struggle to increase their output sufficiently to meet that demand.

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2. Geographically restricted: Small scale industries may be concentrated in a particular town or
even in one single building. This can limit their ability to become household names across the globe.
3. Less financial power: Small scale industries usually deal with less money (both in terms of
ingoings and outgoings) than larger factories and so have less financial weight.
4. Access to machinery: Small scale industries usually do not have the space or the money to use
large scale machinery. However, they may have access to expensive, specialized equipment.
5. A niche business: What makes the products of small scale industries attractive to some – i.e. their
nicheness and uniqueness – may make them less attractive to others. Small scale industries often do
not have the capacity to please all tastes.

Medium Scale Industry

Medium-scale businesses typically result from the slow and steady growth that results from a
successful small business. As a company earns more revenue, it sets aside the capital needed for
buildings, equipment and more employees, eventually bridging the gap between small business and
large corporations. The Small Business Administration can audit the size of your company and
provide a definitive answer concerning its status as a medium-sized business.
Large Scale Industry
Large-scale and small-scale industry refers to the size of a company in terms of the number of
employees and sometimes the annual turnover. Depending on the country and the industry, a small-
scale company employs between 250 and 1,500 people. Anything above that is a large-scale
company.
Role of Medium and large scale industries
1. Development of medium and large scale industries help to remove the problem of
unemployment by creating wide range of unemployment by creating wide range of
employment opportunities to unskilled, semi-skilled and skilled human resource.
2. Proper utilization of resources
Medium and large scale industries are necessary for the scientific utilization of available
natural resources such as forest resources, mineral resources, human resources and water
resources.
3. Sources of Government Revenue

These industries produce huge amount of goods, generally expensive one. They are exported
to foreign land and Government earns tax, VAT, Sales tax, etc. which increases Government
Revenue.
4. Development of basic infrastructure
Medium and large scale industries cannot be operated without proper infrastructure. So, along
with the development of industries, infrastructure of development also increases
simultaneously.
5. Development in agricultural sector
Modem tools and equipments are produced by medium and large scale industries.
Implementation of modern tools in agricultural sector can be done. Finally, there will be
development in the sector of agriculture.
Advantages of Large Scale Production
The following are the merits of large scale production:

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1. Internal Economies:
Internal economies arise within the firm because of the expansion of the size of a particular firm.
They are called the economies of scale.

2. External Economies:
External economies arise with the expansion of the industry. These are generally the result of large
scale production and are associated with the advantages of localisation.

3. Division of Labour:
The large scale production is always associated with more and more division of labour. With the
division of labour per worker output increases. Hence, per unit labour cost is reduced in large scale
production.

4. Use of machines:
The large scale production always makes use of machines. So, all the advantages of the use of
machinery are available.

5. More Production:
The large scale industries can produce more goods. For instance, a big sugar factory can use
molasses to make spirits and thus can reduce the cost of production of sugar.

6. Economies of Organisation:
With an increase in the size of the firm, the cost of management is reduced.

7. Low Cost of Production:

The large scale production gives many types of economies. Suppose, there are two different
factories, each producing 500 units of a commodity. For these two factories, there must be two
managers. But if the scale of production is enlarged and in one factory we start producing 1000 units
of the same commodity, the work can be supervised by one manager. In this way, in the large scale
production, the salary of one manager is saved. So, the cost of production is reduced.

8. Cheap and Easy Loans:

A large business can secure credit facilities at cheaper rates, because these firms enjoy credit and
reputation in the market due to their fixed assets. Banks and other financial institutions willingly
advance loans to these enterprises at a very low rate of interest.

9. Ancillary Industries:
With the development of large scale production, there arise many small industries which use its by-
products or supply inputs to it. Suppose, when the production of steel is increased, many other
auxiliary industries develop. The development of auxiliary industries contributes to the
industrialisation of the area and the industry itself.

10. Standard Goods:

The production of standardised goods is possible on account of the large-scale production. Only a big
motor company can produce standardised motor parts. Besides, it is possible to sell and transport
these goods to distant places only by big business houses.

11. Advertisement and Salesmanship:

A big concern can afford to spend large amounts of money on advertisement and salesmanship.
Ultimately, they do bear fruit. The amount of money spent on advertisement per unit comes to a low

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figure when production is undertaken on a very large scale. The salesmen can make a careful study
of the individual markets and thus acquire a hold on new markets or strengthen it on the old ones.
Thus, a large scale producer has a greater competitive strength.

12. Research:
The large scale production is conducive for the development of technology also. With larger amount
of capital and financial resources, the large scale firms can afford to spend more on research and
experiments which ultimately lead to the discovery of new machines and cheaper techniques of
production.

13. Economy of Buying and Selling:

A large concern usually buys things in large quantities and therefore, at low rates. It also sells things
in large quantities and can secure better terms.

14. Economies of Indivisibility:

Many factors of production are not perfectly divisible. For instance, assume that one machine can
produce 100 units of a commodity, but we are producing only 50 units by that machine. The machine
is indivisible. If the scale of production is increased and we start producing 100 units, per unit cost
will be reduced. This is the economy of the indivisible machines.

Disadvantages of Large Scale Production

The following are the demerits of large scale production:

1. Evils of Factory System:

The large scale production is accompanied by all the evils of the factory system like over-crowding,
density, pollution, bad morals, etc. Dirty habits of drinking and gambling spread very easily.

2. Danger of Over-Production:
The large scale organisation results in over production at times, so demand cannot be properly
estimated. At last, prices fall and depression sets in.

3. Less Supervision:
A large scale producer cannot pay full attention to every detail in various departments. Costs often
rise on account of the dishonesty of workers. Thus, due to inefficient and inadequate supervision, the
cost of production goes up.

4. Monopoly:
The large scale production results in the localisation of industries. As a result, the bigger fish
swallows the smaller ones, and cut-throat competition and monopolies result.

5. Class Struggle:
The large scale production gives rise to class struggle, the struggle between the labourers and the
capitalists. Their interests cannot go together, as they are very different from each other. As a result,
there is a struggle between the two groups.

6. Dependence on Foreign Markets:

A large producer has generally to depend on the foreign markets. The foreign markets may be cut off
by wars, etc. This makes the business risky.

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7. Possibility of War:
The large scale production increases the possibilities of wars. Big producers make attempts to sell
their goods in the foreign markets and try to capture them by fair and foul means, thereby exposing
the world to wars and struggles.

8. Lack of Adaptability:
As huge capital is invested in the large scale production, it is very difficult to bring about a change in
the scale of production according to the circumstances.

9. Individual Tastes Ignored:

The individual tastes and interests stand completely ignored in large scale production. Goods of
uniform quality are turned out irrespective of the requirements of the individual customers.
Individual tastes are not, therefore, satisfied. This results in the loss of customers to other
competitors.

10. Unequal Distribution of Wealth:

All wealth and incomes of the country get concentrated in the pockets of big producers due to large
scale production. There is unequal distribution of wealth and resources on account of the large scale
production. The rich become richer and the poor become poorer.

Differences between a small and medium enterprise and large entities

There are many differences between a small and medium enterprise and large entities, namely: speed
of decision-making, attitude towards risk, allocation of resources, understanding of business models
and management of business models, and differing definitions of innovation.
 Decision-Making Process
Large enterprises, in view of the different bureaucratic levels, will often require longer time to make
decisions. This can be very frustrating especially when a decision needs to made immediately. Delay
in decision-making may hinder the progress of the company. In this way, SMEs are better-off as
more often than not, decisions can be made at the point of urgency. This helps the SMEs top grow
more rapidly compared to a large-scaled enterprise.
 Attitude towards Risk
Large-scale enterprises can afford to take a bigger risk in running the operations of their businesses.
This is mainly due to the fact that their capital is larger and there is buffer to absorb any
uncertainties. Large size firm, such as Sime Darby and Petronas can afford to invest in foreign
countries and earn much more profits compared to other SMEs. However, SMEs need to be wary of
the negative consequences should their investments does not bring back the desired returns which
may affect their operations in totality.
 Allocation of Resources
In small businesses, every ringgit counts. Resources can be scarce and are allotted based almost
solely on whether they will boost the bottom line. This bottom line focus may not be so distinct in a
larger corporation. With more abundant resources - at least in comparison to smaller companies -
people in large enterprises may be relatively free spenders.
 Understanding of Business Models
A large enterprise understands the business models in a wider perspective as compared to SMEs.
Large enterprises have the resources to conduct in-house trainings or sent their employees (especially
management executives) to overseas countries to attend training programme. Such programmes
would provide a bigger horizon to its employees who are then able to strategies their activities
towards achieving the company's goals and missions. This normally lacks in SMEs.
 Innovation

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Competition in the business environment is getting more "violent" with more and more business
entering the market due to a more relax rules and regulations in setting up business entities. In order
for a company to remain competitive and relevant in the industry, huge investments need to be made
on the product or services. Consumers have the choice of choosing the goods in the market. Large
enterprises have the capacity to investment in such innovations compared to SMEs. For example,
recently Malaysian Airlines Systems (MAS) purchased new planes (A380 series) to remain relevant
in the airline industries. SMEs will have limitation due its limited financial resources.
Optimum Firm
Definition and Explanation:
Optimum firm is that firm which fully utilizes its scale of operation and produces optimum output
with the minimum cost per unit production.
In the short-run, a firm would build the scale of plant and operate it at a point where the average
cost is at its minimum. This is regarded as the optimum level of production for the firm concerned,
if the demand for the product increases from this least cost output; it cannot change the amount of
land, buildings, machinery and other input in short period of time. It has to move along the same
scale or type of plant. The average total cost, therefore, begins to rise due to the diseconomies of the
scale.
In the long run, all inputs are variable. The firm can build larger plant sizes or revert to smaller
plants to deal with the changed demand for the product. If the size of plant increases to cope with the
increased demand, the average cost per unit begins to fall due to the economies of scale such as
increased specialization of labor, better and greater specialization of management, efficient
utilization of productive equipment, etc., etc. So long as the resources are successfully utilized, the
average cost of production continues declining.
Eventually a stage comes when the firm is not able to use the least cost combination of
inputs. The building of a still larger plant cause the average cost of production to go up. The point at
which the per unit cost is the lowest is the optimum level of production for the firm. The firm of the
most efficient size.
 
Diagram/Figure:
 
The concept of the optimum firm can be explained with the help of the following figure:

In the above diagram units of output are measured along OX axis and units of cost along OY axis. In
this figure, there are four alternative scales of plant. SAC1, SAC2, SAC3 and SCA4.
 
If the anticipated output rate is OK, the firm should choose the smallest plant, SAC 1. This is due to
the fact that the cost per unit for OK output is lowest at point A on plant SAC 1. If the anticipated
output rate is OL plant SAC2 yields lowest cost per unit at point B. This is the optimum plant of the

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firm and is of the most efficient size. If a larger plant of the SAC 3 size is constructed to meet the
rising demand for the product, then the economies of the scale mainly of managerial nature arise.
The per unit cost of production begins to arise. Thus the scale SAC 2 represents the optimum plant
and BL is the least cost output of this plant.

5 Factors for Determining the Optimum Size of a Business Unit

Professor Robinson has grouped the factors determining the optimum size of a business unit into five
classes. They are: 1. Technical factors, 2. Financial factors, 3. Managerial factors, 4. Risk factors and
5. Marketing factors:
Each class of factors decides the optimum size of unit. The optimum depending upon the group of
factors is known as the optimum technical unit, optimum financial unit, optimum managerial unit,
together may give the optimum size.

1. Optimum technical unit:

Technical factors are concerned with methods of production. They may include specialization,
division of labor, mechanization and the like. Production methods become economical when these
steps are taken. Technical forces decide the minimum and the maximum limits to size.
2. Optimum Financial unit:
Generally, the size of a unit depends upon the volume or size of capital and, in turn, the volume of
capital depends on its size. Larger the size of a unit, larger the volume of capital required and easier
to obtain capital because large volume of production and operational efficiency insure adequate
return on capital. The optimum financial unit is governed by the volume of funds.
3. Optimum managerial unit:
Management expenses may vary with size. If the size is small it may be relatively costly to manage
its affairs whereas with the growth of size there is an economy in such expenses. The growth of size
may bring in complexities of organization and management. But in a larger unit the advantages of
specialization and division of labor may be obtained and managerial efficiency improved.
4. Optimum survival unit:
The production of a commodity depends upon its demand in the market. Since demand may fluctuate
from time to time, there is risk and uncertainty before the firm. Therefore, conditions of demand may
influence the size of a unit because the risk or uncertainty is influenced by such conditions.
The changes in demand may be permanent cyclical and seasonal. Changes in demand due to the
development of a substitute or a change in the taste and habits of the consumers may be taken as a
permanent change.
The firm should reorganize its activities to adjust to the changed conditions. Cyclical variations are
those which are concerned with depressions and booms. The firm has to meet both these situations
and make adjustments. Seasonal variations are governed by change situations the firm has to adjust
its size to keep it optimum in a particular situation, in seasons and the subsequent change in the
demand for a commodity. In all these, however, changes in the size of a unit are difficult to make.
5. Optimum marketing unit:
Marketing optimum has to seek a balance between large scale marketing operations with a view to
having some economies in selling and buying and better quality of commodities and services by
limiting the size to a manageable limit. Demand estimates are to be prepared to decide the size of
marketing operations.

Factors influencing Optimum Size of Business Unit

The following are the factors that influence the optimum size of a firm:

a. Technical forces

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 b. Managerial forces
c. Financial forces
d. Marketing forces
e. Forces of risk and fluctuations

1. Technical forces influence size of a firm

Technical forces which influence the optimum size of firm are degree of specialization (division of
labour), mechanization and integration of work processes.

In the case of division of labor, a job is split into small functions and each function is assigned to a
specific workman. When a workman performs a specific operation over a long period of time, the
skill of the workman, speed of performance, quality of work etc improve.

Division of labor facilitates mechanization. A firm has to be fairly large enough to go in for

mechanization. A large firm producing standardized products can go for assembly line
manufacturing which increases output and results in lower cost of output.
Another advantage is a large scale firm can go in for integration of processes. Manual labor can be
replaced by machines. Technical factors favor expansion of an organization. The size of the optimum
firm will be large if

1. the product or machinery used for manufacturing is large in size (e.g. ship building, aircraft
manufacturing, iron and steel plants, heavy machinery etc)
2. the industry is a public utility (power generation and distribution, railways etc.)
3. the industry produces intricate, complex products (computer chips, semi conductors, watches
etc).
In case then industry produces products of a small size or the machinery used in Manufacturing is
small in size, the optimum size would be small (e.g. small machine tools etc).

2. Managerial forces influence size of business units

Managing an organization today is a complex task. The services of qualified, experienced,
professionals are required to run the organization in an efficient manner. Therefore businesses which
desire to maximize their sales and profitability need to appoint a competent management team.

To appoint such personnel, high amounts of remuneration and benefits have to be paid. Only large
organizations would be able to offer such high remuneration levels. The expert managers using their
ability and skills can ensure the growth of the business in various spheres. But there is a limit to
which expert management can grow the organization.

3. Financial forces influence size of a business unit

Investors have more confidence in large and established firms. They prefer to invest their money in
large firms because of the possibility of earning high returns. Investors generally do not prefer to
invest in new or small firms because they feel that such investment is risky and the possibility of
earning high returns is also less. Therefore large firms are able to raise required financial resources
easily. Banks also come forward to lend loans at cheaper rates of interest and therefore cost of funds
is also less for large firms.

In case of financial difficulties they can transfer funds from one division to another. Though a large
firm is able to raise resources from outside resources, there is also a limitation. There may be
interference in the management of the firm by outsiders. The Board of directors are answerable to

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shareholders, and financial institution such as IFCI, ICICI or IDBI which advance loans might
require that their representative should be in the Board of directors. This sort of interference will
result in management losing its independence, delayed decisions, disharmony and loss of efficiency.

4. Marketing forces influence size of business

A large firm can enjoy economies of buying and selling. Since it buys raw materials in bulk
quantities it can enjoy the benefits of quantity discounts. It can employ experts for purchase. They
would be able to source quality raw materials at cheaper prices. Similarly experts can be employed
for marketing their products. In case a large firm has multiple products the sales force can market the
entire range of products.

Advertisement time in media can be bought in bulk at cheaper rates. The organization can employ
reputed market research agencies to know the changing needs and preference of consumers and
produce products accordingly. But the large firm cannot have close contact with the customers and
understand their requirements whereas a small firm can do so. Any mistake done by a large firm
would result in huge losses.

Suppose a large firm buys raw material and later find is unsuitable, it would find it very difficult to
dispose it because of the bulk quantity.

5. Forces of risks and fluctuations influence size of business

Business enterprises face risks from different sources. Risks may arise due to the following reasons:

 changes in customers preferences (textiles to ready-made, typewriters to computers etc.)

 changes in fashions (jeans to cotton casuals etc.)
 increased competition (in all industries)
 changes in government policies (reservation to De-reservation in SSI’s, ban on lottery sales in
Tamil Nadu, from protection to local industry to liberalization, globalization and privatization
etc.)
 fluctuations in currency rates (1$ = Rs.30 in 1980’s to 1$ = 68 in 2016)
 difficulty in getting production inputs (power shortages in many states etc)
 loss of key employees.
 development in technology (pagers to mobile phones, floppies to CD’s)
 theft, pilferage and embezzlement of organizations resources natural calamities (earthquakes,
tsunami, floods, etc)
In case of risks, a small firm would be able to adjust its operations and business much faster when
compared to a large firm. A large firm would find it difficult to change its business and way of
working in a quick manner. Sometimes large firms may combine with other firms to adjust itself to
the new changes.

Industrial Estates and District Industries Centre

Industrial Estates

To promote industrial development, the Government of India has initiated several measures and
provided various incentives. Setting up of industrial estates is one such measure. The government
launched the programme of setting up Industrial Estates in 1955. The State government is
responsible for planning, developing and maintaining the industrial estates. The Central government
provides the required financial assistance for the setting up of industrial estates. Financial assistance

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of the Central government in the form of loans, grants and subsidies are provided to the State
government.
What is an Industrial Estate?
An industrial estate is a place where necessary infrastructural facilities are made available to
entrepreneurs. Industrial parks, industrial zone, industrial area, industrial township are some of the
other terms used to denote industrial estates.

Features of Industrial Estates

The following are the salient features of industrial estates:

1. Separate plots and sheds: The entire land area allocated to the estate is divided into different
plots and sheds. These plots and sheds are then allocated to the entrepreneurs at economical costs.
2. Cluster: An industrial estate is a planned cluster of units. For e.g. Tirupur is a planned cluster of
knitwear and hosiery, Ludhiana is a planned cluster for machine tools, Surat for diamonds etc.
3. Regional development: Industrial estates promote regional development. They have been
instrumental in developing backward areas in the country. They provide employment opportunities
to many of the unemployed youth in the regions in which they are located. For e.g. Ambattur
Industrial Estate in sub-urban Chennai has ensured
development of areas in and around Ambattur.
4. Common infrastructure: Infrastructure such as roads, electricity, water, telecommunications,
postal facilities, banks etc. are provided in the industrial estate. All enterprises located in the
industrial estate can access the infrastructural facilities located in the area.
5. Promote industrialization: Industrial estates promote industrialization and economic
development. They provide the necessary facilities for setting up of industries. Since the required
infrastructure is made available, entrepreneurs feel encouraged to set up industrial enterprises.
6. Different sizes: Industrial estates can be promoted in different sizes based on the land availability,
requirements and potential for development.
7. Developed in all areas: Industrial estates can be developed in all areas such as urban, suburban
and rural areas. They can be developed in developed as well as in under developed areas.
8. Promotion through any agency: Industrial estates can be set up by the government, co-operatives
or by the private agencies. It can also be set up by public-private partnership.

Objectives of Industrial Estates

The following are the objectives of setting up industrial estates:
1. Ensuring well planned and structured industrial development.
2. To provide the necessary infrastructure.
3. To provide common facilities to a number of industries.
4. To promote development of clusters.
5. To enable small units to source products from one another.
6. To enable dispersal of industries.
7. To promote balanced regional development.
8. To ensure development of backward areas.
9. To provide a climate for smooth functioning of industrial enterprises.

Types of industrial estates

The following are the types of industrial estates:

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 1. Composite industrial estates: They comprise of a wide variety of industries. Most of the
industrial estates are of this type. For e.g. in Ambattur Industrial Estate and Guindy Industrial
Estate, Chennai, enterprises manufacturing different types of products are located.
2. Special purpose: They comprise of enterprises engaged in a specific industry such as hosiery
and knitwear (Tiruppur), machine tools (Ludhiana), handicrafts, etc.

3. Ancillary industrial estates: Ancillary industrial estates comprise of firms which

manufacture ancillary products. They are found in industries such as automobiles, electronics,
leather goods etc.
4. Flatted industrial estates: They comprise multi-storeyed building where light weight goods
are produced with the help of machine tools.
District Industries Centre
When and why were District Industries Centres initiated?
The industrial Policy 1977 contained the concept of District Industries Centres (DIC). DIC program
was initiated on 1st May 1978 as a centrally sponsored scheme. It was a landmark measure in
development of cottage and small industries in smaller towns in India. DIC’s were started with a
view to provide integrated administrative framework at the district level for industrial promotion.

It is aimed at providing all assistance and support to entrepreneurs in various states. These centres
are responsible for effective promotion of cottage and small scale industries at district level. These
centres also to provide support facilities, concessions and services to develop tiny, cottage and
district industries centres small scale units.

Objective of District Industries Centres

The basic purpose of these DIC’s is to generate more employment opportunities for rural people. It
was intended to make the Centre as a central location for-
1. granting financial and other facilities to small units
2. developing close links with development blocks and specialized institutions providing help to set
up industries in rural areas
3. identifying and helping new entrepreneurs

Resource for District Industries Centres

Financial assistance is provided by the Government of India for District Industries Centre in the
following manner:

1. A non-recurring grant up to Rs.2 lakh for construction of an office building.

2. A non-recurring grant up to Rs.3 lakh for meeting the expenditure on furniture and fixtures, office
equipment and vehicles.
3. Recurring establishment expenditure to the extent of 75 percent of the actual expenditure, limited
up to Rs.3.75 lakhs.

Structure of District Industries Centres

DIC’s comprise of:
1. One General Manager
2. Four functional managers, of whom three would be in the areas of economic investigation, credit
and village industries. The fourth functional manager may be entrusted with responsibility in any of
the areas like raw materials marketing, training etc., depending on the specific requirements of each
district.

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3. Three Project managers to provide technical service in the area relevant to needs of the district
concerned. Their role is to facilitate modernization and upgradation of technology in the small sector.

The 'District Industries Centre' (DICs) programme was started by the central government in 1978
with the objective of providing a focal point for promoting small, tiny, cottage and village industries
in a particular area and to make available to them all necessary services and facilities at one place.
The finances for setting up DICs in a state are contributed equally by the particular state government
and the central government. To facilitate the process of small enterprise development, DICs have
been entrusted with most of the administrative and financial powers. For purpose of allotment of
land, work sheds, raw materials etc., DICs functions under the 'Directorate of Industries'. Each DIC
is headed by a General Manager who is assisted by four functional managers and three project
managers to look after the following activities :

Activities of District Industries Centres

1. Registration of SSI units (Permanent/ Provisional).
2. Registration of Handicrafts/Cottage industries.
3. Implementation of Prime Minister’s Rozgar Yojana.
4. Granting of Subsidies to SSI units.
5. Distribution of Project profiles among entrepreneurs.
6. Training for Entrepreneur Development Programme.
7. Organisation of Industrial Cooperative Societies.
8. Raw Material 
9. Allotment of sheds in Electrical & Electronic Industrial Estates.
10. Marketing assistance through SIDCO.
11. Conducting Motivation Campaigns.
12. Clearance of licences etc. through Single Window Meeting.
13. Rehabilitation of sick SSI units.
14. Recommendation of Awards to SSI units.
15. Recommendation of loan applications to banks under KVIC Scheme.

Objectives of District Industries Centre (DIC):

The important objectives of DICs are as follow :
i. Accelerate the overall efforts for industrialisation of the district.
ii. Rural industrialisation and development of rural industries and handicrafts.
iii. Attainment of economic equality in various regions of the district.
iv. Providing the benefit of the government schemes to the new entrepreneurs.
v. Centralisation of procedures required to start a new industrial unit and minimisation- of the efforts
and time required to obtain various permissions, licenses, registrations, subsidies etc.

Functions of District Industries Centre (DIC):

The DICs arte funded by the State concerned and the Centre jointly. The Government has provided
substantial assistance to the DICs which can be spent by DICs on construction of an office building,
expenditure on furniture, fixtures, equipment, vehicles and other recurring expenses.

With this basis facility, DICs in the district level undertakes various promotional measures with a
view to bring all out development of SSI in the district. In starts from exploration of potential
entrepreneurs to marketing the products produced by the SSIs.

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The DICs provide and arrange a package of assistance and facilities for credit guidance, raw
materials, training, marketing etc. including the necessary help to unemployed educated young
entrepreneurs in general.
Thus it may be said that DIC extends promotional, technical, physical, financial, marketing and all
other type of services, required for growth and development of SSI.

The important functions of DIC are discussed as follow:

1. Identification of entrepreneurs:
DICs develop new entrepreneurs by conducting entrepreneurial motivation programmes throughout
the district particularly under SEEUY scheme. DICs also take association of SIS’s and TCOs for
conducting EDPs.
2. Provisional registration:
Entrepreneurs can get provisional registration with DICs which enable them to take all necessary
steps to bring the unit into existence.
The entrepreneur can get assistance from term lending institutions only after getting provisional
registration. The provisional registration is awarded for two years initially and can be renewed every
year but only for two times.
3. Permanent registration:
When the entrepreneur completes all formalities required to commence the production like selection
of site, power connection, installing machinery etc he can apply to DIC for permanent registration.

It is only after getting the permanent registration that the entrepreneur can apply for supply of raw
materials on concessional rates. Permanent registration is essential to avail all types of benefits
extended by the government from time to time.
4. Purchases of fixed assets:
The DICs recommend loan applications of the prospective entrepreneur to various concerned
financial and developmental institutions e.g. NSIC, SISI etc. for the purchase of fixed assets. It also
recommend to the commercial banks for meeting the working capital requirement of SSI to run day
to day operations.
5. Clearances from various departments:
DIC takes the initiative to get clearances from various departments which is essential to start a unit.
It even takes follow up measures to get speedy power connection.
6. Assistance to Village Artisans and Handicrafts:
In spite of inherent talent and ability village artisans are not better up because they lack financial
strength to strive in the competitive market. DIC in support with different lead banks and
nationalized banks extends financial support to those artisans.
7. Incentives and subsidies:
DIC helps SSI units and rural artisans to subsidies granted by government under various schemes.
This boost up the moral as well as the financial capacity of the units to take further developmental
activities.
The different types of subsidies are power subsidy, interest subsidy for engineers and subsidy under
IRDP etc. from various institutions.

8. Interest free sales tax loan:

SIDCO provides interest free sales tax loan up to a maximum limit of 8% of the total fixed assets for
SSI units set up in rural areas. But the sanction order for the same is to be issued by DIC.
The DIC recommends the case of SSI units to National Small Industries Corporation Limited for
registration for Government purchase programme.

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9. Assistance of import and export:
Government is providing various types of incentives for import and export of specific goods and
services. These benefits can avail by any importer or exporter provided the same is routed through
the concerned DIC.
Export and import license is also issued to the importer or exporter only on the basis of
recommendation of DIC.
10. Fairs and exhibitions:
The DICs inspires and facilities the SSI units to participate in various fairs and exhibitions which are
organized by the Government of India and other organizations to give publicity to industrial
products.
DICs provide free space to SSIs for the display of their products and attitudes financial assistance for
the purpose.
11. Training programmes:
DIC organizes training programs to rural entrepreneurs and also assists other institutions or
organization imparting training to train the small entrepreneurs.
12. Self-employment for unemployed educated youth:
The DICs have launched a scheme to assist the educated unemployed youth by providing them
facilities for self-employment. The youth should be in the age group of 18 to 35 years with minimum
qualification of Metric or Middle with I.T.I. in engineering or Technical Trade. Technocrats and
women are given preference.

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