THE DIFFERENT PROFILES OF URBAN AND RURAL ENTERPRISES

Transcription

1 CHAPTER TWO THE DIFFERENT PROFILES OF URBAN AND RURAL ENTERPRISES The urban and rural enterprises surveyed in Sri Lanka have sharply different profiles, and the differences are accentuated by the coverage of the urban manufacturing survey, limited to formal firms. 1 Urban enterprises tend to be older and much larger than their rural counterparts. Large-scale manufacturing is concentrated around Colombo-though geographic distribution differs markedly across sectors-and is oriented toward exporting. Rural enterprises are likely to be a sole proprietorship headed by a male, based outside the home, and established using household savings. Their managers have education levels suggesting great potential for improving productivity and introducing new technologies in Sri Lanka s rural areas. Rural enterprises in North Eastern Province have very different characteristics than those elsewhere in the country, largely because of the conflict. TABLE 2.1 A Snapshot of Urban Enterprises in Key Manufacturing Sectors, Sri Lanka (percent, except where otherwise indicated) Indicator Value 2.1 Great Diversity in the Enterprise Landscape What makes up the diverse landscape of enterprises in Sri Lanka? A large part of it consists of an estimated 16,405 manufacturing enterprises operating in urban areas, and another 620,000 enterprises in rural areas. Rural enterprises employ some 1.5 million workers, about 20 percent of the country s labor force. Contrary to popular opinion, the majority (59 percent) of rural businesses are stand-alone enterprises-that is, have a place of business other than the home. Because the survey excluded informal firms operating in urban areas, all comparisons of urban and rural firms refer to formal firms in urban manufacturing and both formal and informal enterprises in rural areas. What Firms Do-and Where In urban areas the five most important manufacturing activities-accounting for nearly 50 percent of all urban manufacturing enterprises- Share of firms with export orientation a Garments 94 Rubber products 75 Food and beverages 62 Industrial equipment 41 Textiles 35 Share of firms with foreign direct investment Garments 23 Rubber products 31 Food and beverages 9 Industrial equipment 27 Textiles 16 Share of firms in Western Province 56 Median number of workers 105 Male managers as a share of total 88 Share of managers with university degree 45 Average age (years) 30 Annual value added per worker (Sri Lankan rupees) 411,257 a. Firms exporting more than 10 percent of sales. Source: Asian Development Bank and World Bank, Sri Lanka Investment Climate Survey,

2 THE DIFFERENT PROFILES OF URBAN AND RURAL ENTERPRISES are ready-made garments, textiles, industrial equipment, food and beverages, and rubber. Urban manufacturing activity is largely export oriented, especially in garments (where 93.5 percent of the firms surveyed export more than 10 percent of sales), rubber (75.4 percent), and food and beverages (62.2 percent; table 2.1)). Manufacturing is heavily concentrated in the Colombo metropolitan area, though geographic distribution varies across sectors. While garment and industrial equipment firms are limited largely to the Colombo area, nearly threequarters of food and beverage firms operate outside Colombo, probably to be closer to supplies. Textile enterprises are divided almost equally between Colombo and other urban centers. Most rural nonfarm enterprises are involved in production (41 percent) or trading (38 percent), with a far smaller share in services (21 percent; table 2.2). Around 10 percent are engaged in the manufacture and sale of processed agricultural goods. Nonagricultural production focuses mainly on manufacturing such goods as garments, nonmetallic mineral products, furniture, and wood products. Most rural trading establishments are engaged in selling processed (65 percent) and unprocessed agricultural products (57 percent). As would be expected, there is much variation among service-related enterprises, with the largest share engaged in repair services (24 percent), followed by personal services (17 percent) and hotels (14 percent). Rural nonfarm enterprises are scattered throughout the country. Western Province has the greatest concentration, with more than 20 percent, followed by North Eastern and Southern Provinces FIGURE 2.1 Sri Lanka's Rural Enterprises are Scattered Across Provinces Percent Western North Eastern Southern North Western Nonfarm enterprises Rural population Source: Asian Development Bank and World Bank, Sri Lanka Investment Climate Survey, 2004; Sri Lanka Department of Census and Statistics data. Sabaragamuwa Central North Central Uva TABLE 2.2 A Snapshot of Rural Enterprises in Sri Lanka (percent, except where otherwise indicated) Indicator Value Number of enterprises 620,000 Number of workers 1,500,000 Share of firms producing for domestic market 99 Sole proprietorships as a share of total 98 Share of firms headed by a male 75 Stand-alone businesses as a share of total 59 Firms by sector Production 41 Trade 38 Services 21 Share of firms in Western Province 20 Average number of workers 2.4 Family members as a share of workforce 50 Share of managers with university degree 2 Average age (years) 9 Share of firms registered 53 Annual value added per worker (Sri Lankan rupees) 93,763 Source: Asian Development Bank and World Bank, Sri Lanka Investment Climate Survey, (figure 2.1). The large share of nonfarm enterprises in North Eastern Province relative to its share of the rural population may reflect the conflict in the region. Many households appear to have forgone agricultural activities and started small businesses operating in their home as a response to the uncertainty and the potential for loss. Firms Workers and Their Skills The split between urban and rural enterprises is not simply one of location but also one of size: on average, urban enterprises are significantly larger than their 9

3 SRI LANKA: IMPROVING THE RURAL AND URBAN INVESTMENT CLIMATE rural counterparts. The median number of workers employed by urban manufacturing enterprises is roughly 105, including 15 temporary workers. By contrast, rural enterprises employ 2.4 workers on average, including family members. Family members account for almost half the workforce in rural nonfarm enterprises, with the largest share in trading enterprises (60 percent) and the smallest in production (42 percent). Production enterprises also tend to be larger, with 3 workers on average. The largest rural enterprise in the survey has 181 workers. Only 6 percent of rural enterprises have more than 5 workers. 2 In urban manufacturing about 45 percent of senior managers have a university degree, and more than half of these also have a professional qualification. Less than 6 percent had failed to complete secondary school. In rural firms almost half the managers have completed 10 or more years of education and nearly all are literate, indicating great potential to improve productivity and introduce new technologies in the country s rural areas. Only 1 percent had no schooling at all. In Bangladesh, by contrast, a similar survey of the rural nonfarm sector found that 34 percent of owners or majority partners had no formal education. Although women represent half the unskilled labor force in urban manufacturing, they account for only 12 percent of senior management. Their participation differs markedly across sectors and is highest in the textile sector. In the rural nonfarm sector, by contrast, women run almost a quarter of all enterprises. In urban manufacturing, exportoriented firms are the most dynamic in terms of employment growth. Rural enterprises appear to experience little flux in employment, with more than 90 percent making no change in the FIGURE 2.2 Urban Firms Generally Older Than Rural Ones in Sri Lanka Firms by age (Percent) Less than 2 years Urban Rural 2-5 years 5-10 years More than 10 years number of employees during the previous year. The smallest rural firms (with less than five employees) are the most stable, while larger firms tend to be growing or shrinking in response to market demand or seasonal fluctuations. 2.2 Greater Stability and Longevity among Urban Enterprises Urban manufacturing enterprises tend to be older and more stable than rural enterprises (figure 2.2). The average age of urban manufacturing firms is 30 years, while for rural enterprises it is slightly more than 9 years. Among urban enterprises, those in the garment sector are the youngest (16 years old on average), while those in the rubber and food and beverage sectors are the oldest (45 and 35 years old). In rural areas trading enterprises tend to be younger than others-as would be expected, since they require less start-up capital. More than 85 percent of rural enterprises have always operated in the same location. Of the few that have relocated, the vast majority have stayed in the same grama niladhari (community). 10

4 THE DIFFERENT PROFILES OF URBAN AND RURAL ENTERPRISES 2.3 More Assets and Higher Productivity in Urban Enterprises Sri Lanka s urban firms are generally more capital intensive and more productive than their rural counterparts. Annual value added per worker in urban manufacturing is almost eight times that in rural manufacturing (figure 2.3). The lower labor costs for rural enterprises do not fully compensate for the difference in productivity. Productivity tends to be particularly low-and duration short-livedamong rural nonfarm enterprises started as part of a household survival strategy to supplement agricultural income or tide a family through the lean season. FIGURE 2.3 Productivity Far Higher in Urban Manufacturing Firms in Sri Lanka Thousands of Sri Lankan Rupees Annual value Added per worker Fixed assets Per worker Urban Rural Annual labor Costs per worker In the urban sector the industrial equipment and rubber products industries appear to be the most productive (table 2.3). The more labor-intensive textile and garment industries trail far behind. Indeed, rural service enterprises have value added per worker close to that of the urban textile sector, which appears to be in decline. TABLE 2.3 Productivity, Capital Intensity, and Labor Costs in Urban and Rural Firms, Sri Lanka (Sri Lankan Rupees) Sector Annual value added per worker Fixed assets per worker Annual labor costs per worker Urban enterprises 411, ,487 94,919 Industrial equipment 913, ,496 97,657 Rubber products 649, ,993 96,745 Food and beverages 495, ,764 90,836 Garments 275, ,974 97,898 Textiles 177, ,217 96,068 Rural enterprises 93, ,460 33,333 Production 54, ,862 27,000 Services 162, ,832 36,000 Trade 97, ,099 30,000 The productivity of rural firms varies markedly across regions and sectors. Rural enterprises in Western and Central Provinces are almost 3.5 times as productive as similar enterprises in North Eastern Province. Among all rural enterprises, service firms have the highest productivity. Despite urban-rural differences in productivity, rural nonfarm enterprises contribute significantly to GDP. The survey findings suggest that the total value added by all rural nonfarm enterprises in 2003 was SL Rs 185 billionequivalent to 12 percent of GDP or 78 percent of agricultural GDP in Registration among Rural Firms Surprisingly High While rural enterprises are commonly perceived as operating in the informal sector and thus avoiding registration and taxation, the survey findings indicate that a surprising 53 percent of those in Sri 11

5 SRI LANKA: IMPROVING THE RURAL AND URBAN INVESTMENT CLIMATE Lanka are registered. The rural enterprises most likely to be registered are larger and older, pay taxes, and operate as a stand-alone establishment. Trade and service enterprises are more likely than production enterprises to be registered, perhaps because these types of enterprise tend to operate as stand-alone businesses and are therefore far more visible. Among rural enterprises that have registered, the majority did so with the pradeshiya sabha, though almost half are registered with the divisional secretary (there is much overlap between these two groups). 3 Most firms that have not registered explained that they had not done so because it was not required, and less than 2 percent because the process was too costly or time consuming or to avoid high taxes. As box 2.1 shows, the cost of registering a business in Sri Lanka has been declining. BOX 2.1 The Ease of Entry Starting a business in Sri Lanka involves relatively little red tape. Nearly 74 percent of urban manufacturing firms reported that obtaining a business license or operating permit was not a problem, compared with 37 percent in India, 41 percent in China, and 51 percent in the Philippines. Less than 8 percent of urban manufacturing firms, and 4 percent of rural nonfarm enterprises, cited the procedure as a major or severe obstacle. The administrative burden for start-ups in Sri Lanka has only become lighter in recent years. In 2002 entrepreneurs wishing to register a limited liability company had to undertake 8 procedures taking at least 73 days and costing $127, equivalent to 15 percent of per capita gross national income (GNI). Recently, the process was simplified reducing the number of procedures to 8, the average time to 50 days, and the cost to just under 11 percent of GNI. Even so, Sri Lanka still trails behind more dynamic East Asian economies in the time it takes to open a business (table 1). Further efficiency gains are likely, however, with the government planning to automate the company registry. TABLE 1 Administrative Burden of Starting a Business, Selected Countries (2004) Country Number of procedures Duration (days) Cost (percentage of GNI per capita) Minimum capital (percentage of GNI per capita) Chile China ,855.9 India Malaysia Philippines Sri Lanka Thailand Vietnam Source: World Bank, Doing Business Indicators, TABLE 2 Administrative Burden of Registering a Rural Enterprise, Sri Lanka (2004) Time spent on the registration process (days) 3.62 Time spent on obtaining or renewing permits or licenses (days) 2.20 Number of government agencies visited for registration 1.26 Number of government agencies visited for licensing 1.02 Official fees paid for registering or renewing registration (Sri Lankan Rupees) Official fees paid for obtaining or renewing license or permit (Sri Lankan Rupees) Source: Asian Development Bank and World Bank, Sri Lanka Investment Climate Survey, 2004 In rural areas registration appears to be a relatively manageable process for most enterprises (table 2), with some 94 percent reporting that it was not a problem. Yet a significant share (47 percent) continues to operate informally. Three-quarters of these enterprises reported that they had not registered because it was not required. Almost all rural businesses are sole proprietorships, whose owners are simply required to register the name of their business under the Business Name Ordinance of Since responsibility for business registration passed to the provincial councils in 1998, each province has established slightly different registration procedures, and registration fees range from a low of SL Rs 250 in North Western Province to SL Rs 500 in Western Province. Once a business is registered, the owners may still have to obtain a business license, required to operate in such areas as hotels, banking, bakeries, pharmacies, meat outlets, and motor vehicles. The licensing body varies. For example, the Central Bank grants banking licenses, while the Ceylon Tourist Board issues licenses to operate hotels. Trade licenses must be renewed annually. The license fees, set each year by the responsible institution (under Pradeshiya Sabha Act 15 of 1987), range from SL Rs 50 to SL Rs 1,

6 THE DIFFERENT PROFILES OF URBAN AND RURAL ENTERPRISES 2.5 Weak Links between Rural and Urban Firms Links between rural nonfarm enterprises and urban firms in Sri Lanka are relatively weak. Evidence from the survey of rural enterprises shows that few sell their products to multinationals, parent companies, or larger urban firms (table 2.4). The vast majority reported selling their goods and services directly to consumers or traders in their own district. The data may understate the links between rural and urban firms, however, since rural enterprises could sell their products to intermediaries that then resell them to firms in other parts of the country. Larger rural nonfarm enterprises (those with more than five workers)- particularly larger production and trading enterprises-are more likely to have links with larger firms and to sell in markets outside their province. One way for small rural firms to tap into wider markets is through subcontracting (Lanjouw and Lanjouw 2001). In Sri Lanka it is primarily larger rural firms (with more than five workers) that take advantage of such arrangements. TABLE 2.4 Rural Firms Links with Buyers and Suppliers by Sector, Sri Lanka (percent) Indicator Production Services Trade Share of firms selling their output To multinationals To parent company or affiliated subsidiaries To large domestic firms Share of firms selling their output Outside their grama niladhari Outside their district Outside their province Share of firms selling under subcontracting arrangements Share of firms purchasing inputs under subcontracting arrangements N/A 15 N/A: Not available. 2.6 Strong Links with Agriculture Agriculture is intricately linked with both the urban manufacturing and the rural nonfarm sector in Sri Lanka. Agricultural products serve as inputs to key urban manufacturing sectors. The food, beverage, and tobacco industries, for example, accounted for almost 33 percent of total value added in 2000-the single largest share of industrial value added. The processing of tea and coconuts, big export earners for Sri Lanka, has long been an important industry. The rubber industry has also been prominent, though its value has declined sharply with the drop in world rubber prices. The strong production links run backward as well as forward: agriculture not only supplies inputs, but also demands equipment and chemicals produced by industry. Agriculture, urban manufacturing, and rural nonfarm activities are also related through labor and capital markets and through strong consumption links. Sales in all three rural nonfarm sectors peak during April (the festival season) following the main (maha) harvest and hit their lows in the middle of the slack (yala) season, when 13

7 SRI LANKA: IMPROVING THE RURAL AND URBAN INVESTMENT CLIMATE demand for agricultural labor is low and rural household incomes decline, reducing the demand for goods and services (figure 2.4). 4 FIGURE 2.4 Strong Links between Agriculture and Rural Nonfarm Enterprises in Sri Lanka Volume of sales of nonfarm enterprises and demand for male labor in agriculture Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sales and demand range from low (1) to high (3) Agriculture Production Services Trade Source: Asian Development Bank and World Bank, Sri Lanka Investment Climate Survey, 2004 Notes 1. In accordance with the sampling techniques for the Investment Climate Survey, urban firms are formal firms located in urban areas, while rural firms are formal and informal firms located in rural areas. The designations urban and rural are as defined by the Sri Lanka Department of Census and Statistics. 2. As would be expected, the majority of managers of urban manufacturing businesses (70 percent) and rural enterprises (77 percent) are Sinhalese. In urban manufacturing 7 percent of managers are Tamils, 11 percent are Sri Lankan Moors, and the rest are from various ethnic groups, including Malay and Burgher. In rural firms 10 percent of managers are Sri Lankan Tamils, and 13 percent Indian Tamils. 3. The divisional secretary is the local administrative division below the district level. The grama niladhari is the administrative division below the divisional secretary. 4. The maha season, the main growing season under rain-fed conditions for paddy (rice) and most other annual crops, stretches from October through March. The yala season, the secondary growing season for paddy, extends from April through September. 14