3. MSMEs in developing countries 29
3.1. Basic definitions and key features 29
3.1.3. MSEs and the informal sector 41
As already noted in 1972 by the ILO, a basic characteristic of the informal economy is the predominant small scale of the enterprises operating in it. However, an informal activity cannot be equated with a micro- or small-scale enterprise (MSE). As can be seen from the issues discussed above in relation to the informal sector, whether an MSE belongs to the formal or the informal sector depends on various aspects. In fact, most MSEs can be considered to be situated at different points in between the continuum of illegality (which can be seen as the most extreme form of informality) and complete formality, as well as along the continuum of subsistence and survivalist businesses on the one end and growth-oriented, innovative and dynamic businesses on the other end.
Basic qualitative characteristics of MSEs include the following:
o an MSE is a socio-economic unit producing goods and/or services;
o the goods and/or services produced by an MSE are done so in a market-oriented manner;
o the activities are undertaken with a minimal grade of regularity and permanence;
o the method of production is rather labour-intensive;
o the degree of organisation is relatively low.
It is noted that especially the labour-intensive mode of production, as well as the low degree of organisation have been considered basic characteristics of the informal sector since its “discovery” in the 1970s.
When the analysis is focused on economic units, it is widely advocated to replace the term “informal sector” for micro-enterprises, small-scale enterprises or MSEs. This way, the misconception that the informal economy is a separate sector can be avoided. Also, the idea that businesses of smaller sizes can range from formal to informal is better conveyed. In fact, the enterprise-based definition of the informal sector does not include all non-standard workers, whether they work for informal or formal enterprises, which is why the wider employment-based definition is recommended by most scholars and practitioners. Apart from this, the challenges faced by businesses of smaller sizes are more a function of their small size and rather independent
of their degree of formality/informality.44 It can be summarised that MSEs can be anything
between formal and informal and that the informal economy is a concept that is much wider than the number of MSEs active in it.45
44 Challenges faced by MSEs in developing countries are discussed in more detail under section 2.3.2 and, more
specifically in the Ugandan context, under section 5.3, as well as in chapter 7.
45 This is also the approach adopted in this study, using the term micro-enterprises and MSEs largely as synonyms
42 A broad spectrum of enterprises is subsumed under the term MSEs. To give an idea of the diversity, a differentiation is attempted based on several dimensions:
o formal vs. informal
The concept of informality has been discussed in the previous section. It has been illustrated that the transition from an informal to a formal status is gradual and that most MSEs can be considered to be unofficial enterprises in the sense that they rarely comply with all the rules regulating their trade. Formal MSEs are more likely to be found in urban areas.
o according to the number of employees
As mentioned at the beginning of this chapter, there is no universal definition of enterprise sizes based on the number of employees. On the contrary, there seem to be as many definitions as researchers and studies.
o according to the sector in which they are active
Apart from the distinction based on the number of people employed, this seems to be the most obvious one. MSEs can be classified according to their sectoral specialisation. The common perception is that MSEs are primarily active in the services sector (commerce and trading). However, in almost all developing countries, small-scale manufacturing and industrial activities also play an important part in the MSE sector. Three types of activities have consistently been identified as the most important categories among micro- and small- scale manufacturing firms: textiles and wearing apparel, food and beverages, as well as wood and forest products (Mead/Liedholm 1998: 64).
o rural vs. urban
Overall, MSEs constitute a substantially higher share of enterprises than in urban areas. The informal sector has been seen as a predominantly urban phenomenon when it first came up. However, especially in rural areas, economic activities take place in small-scale businesses which are often not registered. Especially in the small and intermediate urban centres, growth is likely to be based on MSEs.
o according to degree of accumulation
The degree of accumulation is likely to correlate with the degree of enterprise growth: dynamic, growth-oriented MSEs are more likely to be run by entrepreneurs with the capacity to generate profits and retain or re-invest them. These enterprises are more likely to serve markets beyond the very localised markets in their surroundings.
o according to gender of owner
In most countries, the majority of MSEs are owned and operated by women. Also, the majority of workers employed by MSEs are women. MSEs headed by women are more likely to be of the subsistence or survivalist type, operated mainly with the aim of fulfilling the basic needs of the family on a daily basis, and are more likely to be operated from home (see Lubell 1991:
43 99-101). It is because of these characteristics that women owners of MSEs are likely to be “invisible entrepreneurs” (Mead/Liedholm 1998: 64).
o operation on a regular or sideline basis
Part-time MSE owners are more likely to be operating subsistence or survivalist types of enterprises. They are also more likely to be linked to seasonal agricultural inputs and/or activities.