This document discusses pre-investment studies for small industrial business projects. It describes the key components of pre-investment studies, including opportunity studies to identify potential business ideas, pre-feasibility studies to further develop project concepts, feasibility studies providing critical analysis of technical, financial, economic and other factors, and support studies examining specific aspects like markets, raw materials and environmental impacts. The goal of pre-investment studies is optimal allocation of resources, reducing business failure rates, and providing information to support investment decisions.

1. Chapter 1
Pre-investment studies in the small
industrial business sector

2. Main characteristics of small industrial
business
1. Decentralized production and local markets
2. Products and services for different demand
3. The central role of the entrepreneur
4. Entrepreneur owner and manger of the business
5. Collective entrepreneurship and family business
1. Strengths of family business
2. Weakness of family business
6. Cooperation strategies
7. Subcontracting

3. Decentralized production and local markets
 Small industrial business are characterized by their decentralized manufacturing
operations and their reliance on local markets
 The small industrial business that benefited from decentralized operations are those
that process agricultural products and bulky or heavy raw materials or small catering
business
 Small industrial business are located close to their sources of supply and seller markets
 They usually have a good knowledge of the markets
 Their transportation costs are lower than those of their large scale competitors.
 Small firms, unlike large scale enterprises are not burned with complex and costly
marketing research and marketing operations

4. Products and services for different demand
 Important characteristic and potential strength of small industrial business is their ability
to cater to high differentiated, individual demand by offering custom made products e.g.
built-in furniture or handmade shoes.
 Catering to individual demand is an essential function of the small business sector in both
developing and industrialized countries e.g. handicrafts
 Small business has high degree of flexibility
 Free from bureaucratic procedures
 Catering for individual demand entail developing innovative products

5. The central role of the entrepreneur
 The most important function of entrepreneurship are bearing the business risk (capital risk)
and coordinating (managing ) the business i.e. making things happen
 Small industrial business remain dominated by labour intensive and personal elements
 Entrepreneur comprises a number of managerial tasks:
 Determining the main business objectives
 Setting priorities
 Identifying basic strengths and weakness
 Procuring and coordinating the required resources

6. Entrepreneur owner and manger of the
business
 In small industrial business required management and capital risk is bared by one
person
 One person become the center of activity
 In small business it is important that owner entrepreneur should possess
managerial skills
 For successful business the personal management and leadership aspects are more
important than the financing and liability aspects

7. Collective entrepreneurship and family business
 The sharing of entrepreneurship and managerial functions, particularly in so called family
business is common in the small business sector probably because it offers various
advantages over individual entrepreneurship
 The partners in a family business have no legally binding agreements or contracts

8. Cont.
 Strengths of family business
 Good position to cope with social change and challenges
 Owing to their flexibility
 Ability to combine entrepreneurial drive and efficiency
 Highly motivated
 good Ethical standards
 Weakness of family business
 Overwhelming amount of work
 Long working hours as compared to enterprise
 Workload causes other important spheres of life e.g. cultural, social, personal and spiritual
 Overcome these weakness
 Clearly defines and appropriate public policies and actions
 Emphasis on indirect economic and fiscal policies
 Greater attention should be given to inter and intra firm cooperation

9. Cooperation strategies
 Cooperation with other firms may also offer some opportunities to small business
that have grown so rapidly that the entrepreneur can no longer take on all the
professional tasks
 Traditional examples of cooperation strategies are export, purchasing and storage
cooperatives; production cooperatives
 Joint ventures are another form of cooperation and ecpectations for this strategy
are high especially for joint ventures between small industrial enterprises.

10. Subcontracting
 Subcontracting may be strategic for ensuring the survival of an enterprises
 Goods or services might be produced e.g. for a customer who would be responsible for selling
them
 Reasons for the growing role of subcontracting are:
 Better capacity utilization in those parts of the production process that are irregular or not not
standardized
 Fewer labour conflicts in times of recession
 Avoidance of high labour costs in those categories where wages are subject to government regulation
or influenced by pressure groups
 Wages are significantly lower in small firms than in large firms in developing countries

11. Definition of small industrial business projects
Small enterprise is defined as: if the entrepreneur is involved in the production process as
well as in administrative and commercial task, which is frequently carried out by family
members
 Distinction by value of assets and number of employees
Worldwide statisticians and economists refer to criteria that are easy to measure e.g.
number of employees, sales and capital investment.
 If firm has fewer than 500 employees it is considered small enterprise
 If company has investment between $50,.000 - $500,000 it is considered small enterprise

12. Formal and informal sector
There are often no statistics to register activities in the manufacturing, trade and service sector that is
known as the informal sector
 These activities are specially important in many developing countries.
 The informal sector in developing countries can be compared to the “shadow economy”
 60 percent of the entire estimated domestic production is manufactured by the informal
sector
The formal sector consists of the businesses, enterprises and economic activities that are monitored,
protected and taxed by the government
 Even small business which have fewer then 10 – 20 employees may be registered and
operate legally these industry is called cottage industry

13. Definition is adopted for this manual
An investment in a small to medium scale manufacturing enterprise is considered to be small industrial
business project if the following are true:
 The entrepreneur and his or her family or partner play a central role by making things happen
 Production is mainly for local markets and differentiated demand
 The value of assets or of total initial investment in the case of a new enterprise is less than $2
million but more than $50,000
 The number of employees, unless defined otherwise in a country is in the range of 20 – 100 or it
part timers or apprentices are employed 20 – 100 full time equivalents
The manual does not, there, take into account the following categories of business
 Very small or so- called small small business with fewer than 10 employees
 Medium sized enterprises(firms with 100-500 employees)
 Large corporations (firms with more than 500 employees)

14. The environment of small business investment
projects
1. Impact of sociocultural environment
2. Impact of sectoral and regional development policies
3. Competition and cooperation
4. Small business dependence on institutional infrastructure
5. Resource requirement
6. Market potential for small industrial businesses
7. Strategic orientation of small industrial businesses

15. Impact of sociocultural environment
1. Sociocultural climate and entrepreneurship
 The central and vital role of the entrepreneur is one of the main characteristics of small business
and there is no doubt that entrepreneurial potential of a country or place is one of the key success
factor for small business investment
2. Entrepreneurial culture and image
 Tradition is in many ways an important factor particular for the development of small enterprises.
 The success of entrepreneurship activities is strongly linked with the image of entrepreneurship.
 Ethical principals for entrepreneurial behavior which in some countries are explicitly formulated
and laid down in subsector specific codes
3. Sociocultural environment and investment projects
 In small business tribal allegiance, customs, religion, art, law, know-how and ethics have a
significant impact on the success of an investment.
 Traditional values, norms and attitudes also impact on the success of small business

16. Impact of sectoral and regional development
policies
Promotional polices have been adopted for the small business sector to offset the weakness and strengths that
are typical for this sector of the economy:
 The equal vestment of small and large enterprises in administrative matters often leads to discrimination against
the former particularly in bureaucratic procedures such as tax and customs regulations, in access to public
utilities and in access to financing and factory inputs
 Development of the small business sector depends to a considerable extent on the appropriateness of the socio-
economic infrastructure
 There is a strong case that the small industrial business sector has a greater employment generation effect than
the large scale sector
 The more successful small firms are likely to grow larger and in the process they serve as incubators,
contributing to economic development
 Small industrial business use and development predominantly domestic technologies and skills

17. Promotional measures
Typical measures for promoting industrial investment projects are long-term tax and tariff
reductions, generous subsidies and free sites or premises.
The most important administrative measures in business policy and promotion at this
intermediate level of the economy are as follows:
 Providing incentives for investment, such as accelerated depreciation of assets, financing
guarantees, grants and subsidized interest
 Promoting innovation, including research and development of new or improved products
and/or procedures, by, for instance, transforming, loans into grants in case of failure
 Creating and subsidizing socio-economic and natural science research institutions
 Creating decentralized industrial and technological advisory boards and institutions
 Creating and supporting cooperative ventures, in particular financing, marketing and
purchasing cooperatives

18. Competition and cooperation
 For small business generally, cutthroat competition is not necessarily
the most desirable environment.
 The promotion of cooperative elements and related institutionalization
within a basically competitive setting has been shown to lead to an
environment that is favorable for small business.
 Competition to be economy beneficial equitable starting conditions
must prevail and must be guaranteed and regulated by appropriate
rules.

19. Small business dependence on institutional
infrastructure
1. Decentralized institutional support
 Most measures to promote the development of a decentralized small industrial business would
never reach their target without a decentralized institutional infrastructure.
 The so-called corps intermediaries, represented by various forms of professional associations,
including chambers of industry and commerce
 The entrepreneur in a small firm is frequently his own designer, finance manger, engineer,
Forman, quality controller, assembler and service man
2. Consulting services
 Due to limited ability of an entrepreneur to solve all the economic and technical problems of the
business, he or she must frequently turn to outside experts, for instance, when typing to improve
training, production processes, organizational patterns and quality control

20. Resource requirement
Small industrial business in most cases draw on indigenous resources for materials input, human
resources and finance. The volume of resources required by individual small firms is, in general,
considerably lower than that required by large industrial operations
1. Human resource requirements:
 For small enterprises, human capital is more essential for business than other forms of capital
 The smaller an enterprise, the less emphasis there is on physical capital e.g. investment in
professional education and training
 The assessment of something as complex as human capital requires the analysis of factor such
as the values and behavior of key persons are the forms of organization
2. Financial resource requirements:
 Access to financing is one of the more serious constraints to the development of small
business.
 While it is generally accepted that specialized small business credit facilities and appropriate
credit guarantee systems are needed to cope with the problems of lending to small firms.

21. Market potential for small industrial businesses
 Small enterprises do not need large markets to be successful
 They can operate in markets with only limited potentials
 To achieve their marketing objectives despite limited marketing capabilities,
small enterprises need competitive advantages, such advantages will be
easier to come by in home markets.
 Easier access to other than local markets may in some cases open up new
business opportunities

22. Strategic orientation of small industrial
businesses
 Strategic orientation means thinking in terms of long- range
objectives and then planning measures to achieve these objectives,
while taking into account internal strengths and weakness as well as
external opportunities, in particular markets opportunities and threats.
 Often mangers and planners think that in small business strategic
orientation is not desirable, assuming it diminishes flexibility.
 One of the strongest arguments against formalized strategic planning
in small business is that its costs greater than its benefits.

23. Project identification, preparation and
promotion
The principal arguments for pre-investment studies for small
industrial business are as follows
 Optimal allocation of resources
 Reduction in the failure rates of young enterprises
 Avoidance of unbalanced growth
 Project promotion with information for potential investor and
financiers

24. Identification of business opportunities
 The identification of business opportunities starts with the exploration of markets to determine
potentials
 Import substitution as a means of developing domestic capacities also has its limitations:
1. Consumer be4haviour e.g. traditional product preferences and demand patterns, is hard to change
2. Trading patterns may be entrenched
3. The necessary resources (raw materials, energy, skills) may not be available
4. Trade liberalization, regional integration and exposure to larger markets increase competitive pressures
 Additional opportunities and market potentials for small industrial businesses can be identified by
taking stock of the following:
1. Unsatisfied local demand (local supply concept)
2. Entrepreneurial potentials (personal capabilities)
3. Possibilities for the introduction or adaption of new technologies (technologies transfer)
4. Chances of exploiting personal contacts
5. Benefits of business agglomerations or sector- specific industry clusters

25. Project preparation and analysis at the subsector
level
 Once an idea for small business investment project has been born by
analyzing external trade with a view to possible import substitution
by monitoring technical journals or by identifying customer demand
 The next step in preparation the project are usually taken at the
sectorial level or a limited geographical area

26. Pre-investment studies consist of the following
components
Opportunity studies
Pre-feasibility studies
Feasibility studies
Support studies

27. Opportunity Studies
 The main instrument used to quantify the parameters, information and data
required to develop a project idea into a proposal is the opportunity
study. Depending on the prevailing conditions under investigation, either a
general opportunity study (sector approach) or specific project opportunity study
(enterprise approach), or both, have to be undertaken.
 General opportunity studies may be divided into the following three categories
 Area studies designed to identify opportunities in a given area
 Industry studies designed to identify opportunities in a delimited industrial branch
 Resource-based studies designed to reveal opportunities based on utilization of natural,
agricultural or industrial products

28. Pre-feasibility Studies
After an opportunity study, a project idea must be elaborated in a more detailed study,
 All possible project alternatives have been examined;
 The project concept justifies a detailed analysis by a feasibility study;
 Any aspects for the project are critical to its feasibility and necessitate in-depth
investigation through functional or support studies such as market studies,
laboratory or pilot-plants tests;
 The project idea, on the basis of the available information, should be considered
either non-viable or attractive enough for a particular investor or investor group;
 The environmental situation at the planned site and the potential impact of the
projected production process are in line with national standards.

29. Feasibility studies
 A feasibility study should provide all data necessary for an
investment decision. The commercial, technical, financial,
economic, legal and regulatory and environmental pre-requisites for
an investment project should be defined and critically examined on
the basis of alternative solutions already reviewed in the pre-
feasibility study. The depth of investigation in all areas provides
information adequate for potential investors, financiers, guarantors,
and licensing agencies to decide whether to go ahead with a project

30. Support (functional) studies
 Support or functional studies cover specific aspects of an investment project, and
are required as pre-requisites for, or in support of, pre-feasibility and feasibility
studies, particularly large-scale investment proposals.
 Examples of such studies include the following:
 Market studies
 Raw material and factory supply studies
 Laboratory and pilot-plant tests
 Location studies
 Environment impact assessment
 Economies-of-scale studies
 Equipment selection studies