Small-Scale Enterprises ;- Korea and Taiwan

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Small-Scale Enterprises ;- Korea and Taiwan World Bank Staff Working Paper No. 384 April 1980 Prepared by: Sam P. S. Ho (Consultant) Development Economics Department Development Policy Staff Copyright 1980 The World Bank 1818 H Street, N.W. Washington. D.C , U.S.A. The views and interpretations this document are those of the authors and should not be attributed to the World Bank, to its affiliated organizations, to any individual acting in their behalf.

2 Note on Units of Measurement and Abbreviations SSEs = LSEs = Small-scale enterprises Large-scale enterprises VA = Value-added W = Won NT$ = New Taiwan Dollar US$ = U.S. Dollar WWII = World War II One US$ was equivalent to approximately NT$40 at official exchange rates prevailing in the 1960s and early 1970s. The prevailing official exchange rate was approximately 1 US$ = W 130 during , 1 US$ = W 214 in 1964, 1 US$ = W 270 during , 1 US$ = W 310 in 1970, 1 US$ = W 346 in 1971, 1 US$ = W 395 in , 1 US$ = W 406 in 1974, and 1 US$ = W 484 in 1975.

3 The views and interpretations in this document are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. WORLD BANK Staff Working Paper No. 384 April 1980 SMALL-SCALE ENTERPRISES IN KOREA AND TAIWAN This study reviews the existing evidence from censuses and surveys on small enterprises in Korea and Taiwan. Its purpose is descriptive in that it seeks to provide clarifications on the changing size structure of industrial and some tertiary activities as the economies developed; on the efficiency, labor intensities, product markets and other characteristics of small enterprises; and on how small scale production is influenced by growth and by changes in development policies. A summary of findings is provided in Chapter VII. The study is one of a series of "desk-reviews" as part of the World Bank's research project on small enterprise development (RPO ). Prepared by; Sam P. S. Ho (Consultant) Development Economics Department Development Policy Staff Copyright Q 1980 The World Bank 1818 H. Street, N.W. Washington, D.C , U.S.A.

4 TABLE OF CONTENTS Page No. I. INTRODUCTION I II. THE SMALL-ENTERPRISE SECTOR: SIZE AND STRUCTURE 3 III. DYNAMIC CHANGES IN SMALL-FACTORY MANUFACTURING.25 IV. RELATIVE EFFICIENCY AND CAPITAL INTENSITY IN SSEs 50 V. CAPITAL, LABOR, AND ENTREPRENEURS IN THE SMALL-ENTERPRISE SECTOR.71 VI. ECONOMIC POLICIES AND THE SMALL-ENTERPRISE SECTOR 86 VII. SUMMARY AND CONCLUSIONS.100 APPENDIX A THE SURVIVOR TECHNIQUE APPENDIX B TYPES OF SMALL-SCALE INDUSTRIES APPENDIX C CENSUS MEASUREMENTS OF CAPITAL, LABOR, AND VALUE-ADDED IN KOREA AND TAIWAN APPENDIX D SUPPORTING TABLES

5 - ii - LIST OF TABLES Page Noe 2.1 The Relative Position of SSEs in Manufacturing, Kore and Taiwan Estimated Non-Factory Manufacturing Employment, Taiwan, 1915, 1920, 1930, Year-End Employment in Selected Non-Manufacturing Industries by Size of Enterprise, Taiwan, Selected Years Small-Scale Manufacturing: Employment and Value-Added Distributed by Industry Total Sale of Small-Medium Manufacturing Enterprises Distributed by Major Outlet and by Size of Enterprise, Korea, Sources of Raw Materials and Parts Used by Small-Medium Manufacturing Enterprises by Size of Enterprise, Korea, Manufacturing Employment Distributed by Location and Type of Establishment Distribution of Factory Employment in Manufacturing by Size of Plant, Taiwan and Korea Factory Employment in Manufacturing by Industry, Korea and Taiwan Age of Small-Scale Manufacturing Enterprises by Size of Enterprise, Korea, Birth, Death and Growth of Manufacturing Enterprises, Taiwan, Efficient Plant Size According to Survivor Criterion Share of Small Enterprises in Employment and Value- Added, by Four-Digit Industries, Taiwan, Share of Small Establishments in Employment and Value- Added by Five-Digit Industries, Korea, Relative Importance of Types of Industry in Which Small Establishments Predominate, Korea, 1968 and

6 - iii - LIST OF TABLES (Continued) Page No. 3.9 Relative Importance of Types of Industry in Which Small Enterprises Predominate, Taiwan, Shift in Employment by Size of Establishment and by Small- and Large-Scale Industries Output-Capital and Capital-Labor Ratios of Major Industry Groups, Taiwan (1971) and Korea (1968) Output-Capital and Capital-Labor Ratios for Industries in Which Small Enterprises Predominate, by Type of Industry, Taiwan, Output-Capital and Capital-Labor Ratios for Industries in Which Small Establishments Predominate, by Type of Industry, Korea, Number of Cases (Industries) Where Capital-Labor Ratio is Highest in the Size Category Indicated, Korea, Number of Cases (Industries) Where Total Productivity (Capital Shadow Priced at 20%) is Greatest in the Size Category Indicated, Korea, Total Assets in Operation per Person Employed and Value-Added per Unit of Total Assets in Operation for Construction, Trade, and Selected Service Industries by Size of Enterprise, Taiwan, Relative Efficiency by Size of Enterprise, A(j)/A, for Construction, Trade, and Selected Service Industries, Taiwan, Number of Small Manufacturing Enterprises Established During Distributed by Size of Initial Investment, Size of Enterprise, and Industry, Korea Average Working Capital Required by Size of Enterprise and Industry, Number of Cases (Industries) Where Annual Average Wage per Worker is Highest in the Size Category Indicated, Korea,

7 - iv - LIST OF TABLES (Continued) Page No. 5.4 Average Wage by Two-Digit Manufacturing Industry and Establishment Size, Korea, Characteristics of Small-Scale Industrial Proprietors and Their Enterprises by Size of Enterprise, Korea, o Annual Growth of Manufacturing Employment by Size of Plant, Korea and Taiwan Net Increase in Manufacturing Employment, , by Size of Enterprise and by Industry, Taiwan... o Net Increase in Manufacturing Employment, and , by Size of Establishment and by Industry, Korea # Al BI B2 B3 B4 DI D2 D3 Survivor Estimates of Efficient Plant Size for 63 Korean Manufacturing Industries: Taiwan Industries in Which Small Enterprises Employed 50 Percent or More of the Workers in the Particular Industry in 1971, by Type of Industry Korean Industries in Which Small Establishments Employed 50 Percent or More of the Workers in the Particular Industry in 1975, by Type of Industry Korean Industries in Which Small Establishments Employed 25 to 49 Percent of the Workers in the Particular Industry in Korean Industries in Which Small Establishments Employed Less Than 25 Percent of the Workers in the Particular Industry in The Importance of Contract Sales to Small-Medium Manufacturing Enterprises by Industry, Korea, Manufacturing Employment and Value-Added by Size of Establishment and by Industry, 1973, Korea Manufacturing Employment and Value-Added by Size of Enterprise and by Industry, 1971, Taiwan

8 LIST OF TABLES (Continued) Page No. D4 D5 D6 D7 D8 D9 D10 Dll D12 D13 Number of Establishments by Location and by Size of Establishment, Taiwan, 1966 and Manufacturing Establishments and Employment by Location and by Size of Establishment, Korea, 1958 and Capital-Labor Ratios for Industries in Which Small Establishments Predominate, by Type of Industry and by Size of Establishment, Korea, Capital-Labor Ratios for Industries in Which Small Establishments Employed 25 to 49 Percent of the Workers in the Particular Industry in 1968, Korea, by Size of Establishments.134 Capital-Labor Ratios for Industries in Which Small Establishments Employed Less Than 25 Percent of the Workers in the Particular Industry in 1968, Korea, by Size of Establishments Output-Capital Ratios for Industries in Which Small Establishments Predominate, by Type of Industry and by Size of Establishment, Korea, Output-Capital Ratios for Industries in Which Small Establishments Employed 25 to 49 Percent of the Workers in the Particular Industry in 1968, Korea, by Size of Establishments.139 Output-Capital Ratios for Industries in Which Small Establishments Employed Less Than 25 Percent of the Workers in the Particular Industry in 1968, Korea, by Size of Establishments.140 Relative Efficiency of Large and Small Enterprises in Industries in Which Small Enterprises Predominate, by Types of Industry, Taiwan, Relative Efficiency of Establishments for Industries in Which Small Establishments Predominate, by Type of Industry and by Size of Establishment, Korea,

9 - vi - LIST OF TABLES (Continued) Page No. D14 D15 Relative Efficiency of Establishments in Industries in Which Small Establishments Employed 25 to 49 Percent of the Workers in the Particular Industry in 1968, Korea, by Size of Establishments Relative Efficiency of Establishments in Industries in Which Small Establishments Employed Less Than 25 Percent of the Workers in the Particular Industry in 1968, Korea, by Size of Establishments

10 I. INTRODUCTION In recent years development economists and policy makers have become increasingly troubled by two problems found commonly in less developed countries: the slow growth in industrial employment and the lag in rural development. It is often suggested that small scale enterprises (SSEs) are efficient, have potential for further development, and that their growth would help promote rural development as well as generate urban employment. It is, however, significant that remarkably little is known about SSEs, their composition, characteristics, and functions in less developed economies, and how they respond to changes in development policies. This study aims to provide some clarifications on these questions by examining the small-enterprise sectors in two rapidly growing less developed countries, South Korea and Taiwan. It is one of a series of reviews and case studies being undertaken by the Bank (RPO ). Both countries are densely populated, and since the 1960s both have also adopted outward-looking development policies that have encouraged their economies to follow their true comparative advantage and pursue a labor intensive pattern of development. A study of small-scale industry in Korea and Taiwan should therefore provide insight into the role and competitive position of SSEs in a labor-abundant economy following a labor-intensive growth path. The term "small-scale enterprise" is an ambiguous one. 1/ There are numerous ways of measuring firm size -- by the number of persons employed, the volume of output or sales, or the value of assets employed, for example. According to one of these size criteria, a firm may be classified as small, while by another it might fall into the "large" category. Presumably the justification for grouping and studying enterprises by size lies in the belief that there are significant differences -- in terms of market orientation, product quality, efficiency, the type of work organization in use, and the type of energy input employed -- between small and large enterprises. However, the characteristics of enterprises do not change abruptly and discretely but, rather, gradually and continuously with firm size (however measured). Accordingly any definition of SSE is to some extent arbitrary. This study uses the number of persons employed as a measure of the size of enterprise or establishment. Although some data on industrial size class by total assets employed and by revenue earned is available for Taiwan, most of the industrial data by size class collected in Korea and in Taiwan are in terms of the number of persons employed. And, for international comparisons particularly, the number of persons employed is probably the most 1/ For a useful discussion of the many aspects of small industry and the difficulty of defining small industry, see Eugene Staley and Richard Morse, Modern Small Industry for Developing Countries (New York: McGraw- Hill, 1965), Chapter 1.

11 practical measure of size. As far as possible, this study will treat size as a variable, in the sense that the entire spectrum of firm sizes will be examined. In other words, this paper studies "small enterprises" not in isolation but in conjunction with enterprises of all sizes. This approach is taken because SSEs form but one part of the economy so that their presence can be understood only in relationship to larger enterprises. Furthermore, the relationships between SSEs and large scale enterprises (LSEs) are likely to change in the process of economic development, and as they change, so will the position of SSEs in the economy. Consequently, by examining both SSEs and LSEs, the position and function of SSEs in the economy are better understood. In parts of this study it will be convenient to classify establishments (or enterprises) into two broad size categories; in particular I shall at times denote enterprises (establishments) with fewer than 100 workers as SSEs and those with 100+ workers as LSEs. While this division is in part made necessary by the statistical classifications employed in Taiwan, it does classify enterprises into groups (particularly for the period since 1960) with significant different characteristics. Many questions about the small-enterprise sector in Korea and Taiwan interest us. Do SSEs provide an important demand for labor? In which industries do SSEs predominate? How does the existence of a vigorous small-enterprise sector affect income distribution? Are SSEs more labor intensive than larger firms, and are they efficient users of resources? How does the relative position of SSEs change in the process of development? What is the spatial distribution of SSEs? How does the size distribution of enterprise change as the economy develops, and what forces determine these changes? Do SSEs face different economic conditions than larger enterprises? Do many SSEs survive and become medium or large firms? What has been the impact of government policies on the development of the small-enterprise sector? What are the appropriate policies for SSEs? This study does not examine all these issues but focuses on a few. While the issues selected for analysis are, to some extent, determined by data availability, they also include some of the more important questions enumerated above. The study is organized as follows: Chapter 2 presents measures of the current size and composition of the small-enterprise sectors in Korea and Taiwan and analyzes a number of their structural characteristics: industry distribution, demand structure, and spatial distribution. Chapter 3 discusses the changing relative position of small-factory manufacturing in Korea and Taiwan in the post-wwii period and identifies some of the forces that help determine the competitive bases of SSEs. Chapter 4 examines the factor intensities of SSEs, identifies the types of industries,where SSEs are most labor intensive and attempts to compare the productivity of manufacturing establishments by size. The main topic discussed in Chapter 5 is the factor markets faced by SSEs. Finally, Chapter 6 assesses the impact of economic policies on the small-enterprise sector in Korea and Taiwan. Chapter 7 concludes the study with a brief summary of the more important findings.

12 - 3 - II. THE SMALL-ENTERPRISE SECTOR: SIZE AND STRUCTURE There are many different types of small enterprises. Some SSEs are modern, others traditional; some are handicraft shops, others are small factories; some are located in rural areas, others in cities; some are operated informally with production intermingling with household activities, others are organized formally as business enterprises, and some have a permanent location while others do not. It is clearly useful to identify the different types of SSEs that make up the small-enterprise sector in a country. This chapter attempts to estimate the current size and composition of the small-enterprise sectors in Korea and Taiwan and to identify some of their main structural characteristics. Although the focus is on small-scale manufacturing there is also a brief discussion of SSEs in the non-manufacturing sectors. The Small-Enterprise Sector in Manufacturing Within manufacturing, the small-enterprise sector is composed of household production, the very small establishments (craft production), and the small factories. 1/ Because these three components differ significantly in economic characteristics, location, and economic functions, it is important that their size and relative positions in Korea and Taiwan be established. Unfortunately, this task is made difficult by the fact that manufacturing censuses and surveys generally do not include the very small establishments (those with fewer than 4 or 5 workers) and that information pertaining to household production is seldom, if ever, collected. The only way to estimate the size of the non-factory sector (household production and the very small establishments) in Korea and Taiwan is indirectly, by comparing the manufacturing employment figure as reported in the population census and that reported in the manufacturing census or survey. 1/ Household production takes place in the home of the craftsman. Frequently, particularly in rural areas, it is a part-time operation. The objective of household production is to provide the owner and his family with a livelihood or to supplement their income. By craft production, we have in mind the very small establishments (those with fewer than 5 workers), usually located adjacent to the home of the owner. It differs from household production in that in its operation one can more easily detect a distinction between entrepreneurial and managerial activities on the one hand and production on the other. It is also common in craft production to use non-family members either as apprentices or as temporary or long-term workers. In this study, we have accepted the frequently used definition of factory as establishment with 5 or more workers. It would be useful if traditional and modern small factories could be separately studied, but unfortunately our data does not permit this division.

13 The presumption is that the difference betw--en i:e two figures is a measure of those employed in the non-factory sector. However, this procedure is not without its ambiguities and problems. Because many who are engaged in household production do so only on a part-time basis, the size of household manufacturing will vary depending on how employment is defined in the population and the manufacturing censuses. Furthermore, since manufacturing in the household sector is usually intermingled with services (e.g., repairs) and trade, there is also a classification ambiguity. For these reasons, the estimates presented below must be viewed with some caution. Table 2.1 classifies manufacturing workers in Korea and Taiwan by the type of establishment that employed them. A basic distinction is that between factory and non-factory employment. In Korea, a factory is a manufacturing establishment with 5 or more workers; in Taiwan it is any manufacturing enterprise with 4 or more workers. In both countries, figures for factory employment are those reported in the manufacturing censuses or surveys. Total non-factory employment in Korea is estimated by subtracting factory employment from the total manufacturing employment figure reported in the population census. Two estimates are provided in Table 2.1: in one (1975A), total manufacturing employment includes all workers aged 14 and above who worked more than 1 hour during the survey period, and, in the other (1975B), total manufacturing employment excludes all temporary and daily workers. Non-factory employment in Korea is further divided between those employed by the very small establishments (those with 1-4 workers) and those engaged in household production. The employment figure for the very small establishments is that reported in the 1973 survey of minor establishments, and that for household production is the difference between non-factory employment and those employed in the very small establishments in Unlike the manufacturing surveys in Korea, the industrial and commercial censuses in Taiwan survey all registered manufacturing enterprises regardless of size. 1/ A comparison of the employment figure in the industrial census and that in the population census show the former to be slightly larger. 2/ Apparently, because the population census figure includes only those 12 and over who worked during the survey period for more than 3 hours per day or two days per week, it excludes from manufacturing many of the parttime workers who normally make up the bulk of the informal household sector. Thus, it is not even possible to estimate the size of Taiwan's household production by comparing employment figures from the population and the industrial censuses. Accordingly, all the figures for Taiwan in Table 2.1 are from the industrial censuses. 1/ Excluded from the censuses are enterprises belonging to the Ministry of Defence, workshops and training factories of schools and charity institutions, and establishments without a permanent location. 2/ in 1966, manufacturing employment was reported to be 589,660 in the industrial census and 527,450 in the population census.

14 Table 2.1- THE RELATIVE POSITION OF SSEs IN MANUFACTURING Korea and Taiwan Korea Taiwan2l 1975A 1975B Thousand Percent Thousand Percent Thousand Percent Thousand Percent Workers of total Workers of total Workers of total Workers of total 1. Total employment 2,211,181-/ 100% 1,699,9221/ , % 1,201, lO 2. Factory employment 1,420,144-/ 64 1,420,144-' , ,170, (size of establishment) , , , , , , , ,048, ,048, , , Non-factory employment 791,03d/ ,848-/ Very small establishment 156,783-/ 7 156,783-/ 9 23,447-' A I 1,360-/ 3 8. Household production 634,254-' ,065-/ a/ Include all workers age 14 and above who worked more than one hour during the survey period. The figure is from the 1975 Population and Hlousing Census Report Vol. 2 Five Percent Sample Survey 3-1 Economic Activity (Seoul: Economic Planning Board, 1978), table 7. b/ Include all workers (employers, unpaid family workers, self employed, and regular eimployees) age 14 and above. Excluded are temporary and daily employees. The figure is is from the 1975 Population and Housing Census Report Vol. 2 Five Percent Sample Survey 3-1 Economic Activity (Seoul: Economic Planning Board, 1978), table 7. c/ 1975 Report on Mining and Manufacturing Survey (Seoul, Economic Planning Board, 1976), table T-4. d/ Row 1 minus row 2. e/ Report on Minning and Manufacturing Census 1973, IV Minor Establishment (Seoul: Economic Planning Board, 1974), IV-1. This is the average number of workers employed by manufacturing establishments with 1-4 woriers in f/ Row 6 minus row 7..&/ The 1966 data are from General Report on The Third Industrial and Commercial Census of Taiwan The Republic of China (Taipei: Commission on Industrial and Commercial Censuses of Taiwan, 1968), Vol, TIT, table 37. The 1971 data are from The 1971 Industrial and Commercial Census of Taiwan and Fukien Area Republic of Chins (Taipei: The Committee on Induistrial and Commercial Censuses of Taiwan and Fukien Area, 19737, Vol. III, table 38, h/ Enterprises with 4-49 workers. i/ Enterprises with 1-3 workers.

15 - 6 - Because of the many definitional differences, a direct comparison of the Korean and the Taiwan data in Table 2.1 is not meaningful. Nevertheless, the data are still useful for what they reveal about the small-enterprise sector in each country. In both Korea and Taiwan, the available evidence suggests that the small-enterprise sector is still a relatively important factor in manufacturing, particularly in terms of employment. In Korea, the size of non-factory manufacturing, in terms of employment, depends crucially on which figure from the population census is used to represent total manufacturing employment. If we use the figure that includes in employment all those aged 14 and over who worked more than 1 hour during the survey period, then in 1975 the non-factory sector accounted for over one-third of Korea's manufacturing employment with the bulk engaged in household production. However, because temporary workers are included in the population census but not fully accounted for in the manufacturing survey, this measure overstates the size of the non-factory sector (particularly household production) by an unknown but probably considerable margin. Because we do not know how temporary workers are distributed between the factory and the non-factory sectors, it is believed that the relative position of the non-factory sector would be less distorted if temporary workers are excluded from total manufacturing employment. 1/ When this is done, the non-factory sector is found to account for 16 percent of Korea's manufacturing employment: 9 percent in the very small establishments and 7 percent in household production. Because all the Taiwan data in Table 2.1 are from the industrial censuses, the size of its non-factory sector is understated by a substantial margin. Earlier, it was noted that household production is not surveyed by the industrial censuses. In addition, the Taiwan data in Table 2.1 exclude certain types of establishments that are considered manufacturing in other countries (including Korea). Two of the larger excluded groups-- tailor shops and repair establishments--can be identified, and establishments with 1-3 workers belonging to these two groups employed 26,000 in 1966 and 31,000 in When these are included in manufacturing, the size of the very small establishments nearly doubles. My guess is that in 1971 the relative size of Taiwan's non-factory sector was probably not very different from that in Korea in 1975, perhaps in the range of 10 percent of manufacturing employment. If small factories are defined as manufacturing establishments with 5-49 (or 4-49) workers, then Korea's small-enterprise sector (factory and non-factory) absorbed about 31 percent of the employment in manufacturing, half of it in small factories and half in the non-factory sector. Assuming 1/ However, since the manufacturing survey may not exclude all temporary workers, this procedure tends to underestimate the size of the household sector.

16 - 7 - that, in 1971, the non-factory sector absorbed 10 percent of Taiwan's manufacturing employment, then its small-enterprise sector also accounted for about one-third of the total employment in manufacturing. However, because Korea and Taiwan are among the most advanced less developed countries, it may be appropriate to consider all establishments with 5-99 workers as small factories. In which case, the small-enterprise sector accounted for about 38 percent of the manufacturing employment in Korea in 1975, and probably a similarly large share in Taiwan in One difference that stands out clearly in Table 2.1 is that factories with fewer than 50 workers are significantly more important, in terms of employment, in Taiwan than in Korea. We shall return to discuss this difference in Chapter 3. If the non-factory sector accounts for a relatively small share of manufacturing employment, its impact on value-added is even less significant. Although we do not have a measure of value-added from household manufacturing, we do know that the value-added produced by the very small manufacturing establishments, reflecting their substantially lower labor productivity, is only a tiny fraction of the value-added produced by the factory sector. In Korea, the value-added produced by manufacturing establishments with 1-4 workers was W 45,539 million in 1973, approximately 3 percent of the value-added produced by factories. 1/ In Taiwan, the value-added produced by manufacturing enterprises with 1-3 workers was NT$725 million in 1971, or less than 2 percent of the factory value-added. 2/ Household production was probably even less important. However, it should be remembered that the output of the non-factory sector has not always been insignificant. At one time, when the economies of Korea and Taiwan were less developed, it must have produced a major share of the manufacturing output. Because of data limitations, the relative size of the non-factory sector at various stages of economic development is estimated only for Taiwan. Defining factory manufacturing as establishments with 5 or more workers or which used power, and all other manufacturing as the non-factory sector, the relative position of factory and non-factory manufacturing can be roughly estimated. 3/ The total number of persons engaged in manufacturing is reported in 5 of the 7 population censuses conducted by the Japanese colonial government in Taiwan. These included both factory workers and non-factory workers who considered their crafts to be their principal occupation. Because, after 1/ Report on Mining and Manufacturing Census (Series II), 1973 (Seoul: Economic Planning Board, 1974), Tables I-5 and IV-1. 2/ The 1971 Industrial and Commercial Census of Taiwan and Fukien Area Republic of China (Taipei: The Committee of Industrial and Commercial Censuses of Taiwan and Fukien Area, 1973), Vol. III, Table 38. 3/ The discussion in the following three paragraphs draws heavily on my Economic Development of Taiwan, , pp

17 , factory employment statistics were also collected, non-factory employment for the census years can be derived by subtracting factory employment from the total employment in manufacturing. The results of this calculation are shown in Table 2.2. Before discussing these figures, it should be noted again that, since handicraft techniques are very labor intensive, a comparison of non-factory employment and factory employment tends to exaggerate the relative importance of non-factory production in manufacturing. 1/ The estimates in Table 2.2 indicate that in 1915 more workers were engaged in non-factory than in factory production. In fact, non-factory employment was more than three times that of factory employment. Although the size of the difference may be somewhat exaggerated (because the 1915 factory employment was collected only a few years after the establishment of the factory reporting system and is likely to be understated), the prominence of the non-factory sector cannot be disputed. 2/ Apparently non-factory manufacturing was most prevalent in the apparel, textile, and wood-and-bamboo products industries. At least 50 percent of the discrepancy between the census figures and the factory employment statistics in 1920, 1930, and 1940 can be traced to discrepancies in these three industries. This is not surprising, in view of the fact that these industries are well suited for small-scale non-factory production: they can operate with little capital, consume little or no non-human power, utilize very simple technology, produce products with local markets and often high transfer costs, and they can easily be organized as part of a putting-out system. As expected, the size of the non-factory sector declined as Taiwan industrialized: new energy inputs and other modern means of production were introduced that required larger shops and a more concentrated labor force. Our estimates show that the share of non-factory workers in the total number of persons engaged in manufacturing declined from 75 percent in 1915 to 60 1/ One estimate put the gross value of non-factory manufacturing in 1937 at 21.5 million yen, or about 5.5 percent of factory manufacturing. The share of non-factory production in total manufacturing was undoubtedly higher in earlier years. See DGBAS, Taiwan's National Income and Product, 1955, p / The importance of the non-factory sector would be even greater if sideline activities were also considered. It is well known that there is less specialization in countries at an early stage of development, so that in less developed economies households often produce as a sideline a wide variety of goods for consumption as well as for sale. In the 1930 population census, besides the 124,712 persons who declared manufacturing as their principal occupation, another 53,000 reported manufacturing as a sideline, and 94 percent of them were located in the rural areas. One suspects that those who reported manufacturing as a sideline were engaged in non-factory manufacturing.

18 - 9 - Table 2.2 Estimated Non-factory Manufacturing Employment Taiwan, 1915, 1920, 1930, 1940 A B C Total persons engaged in manufacturing Factory Estimated non-factory according to employment manufacturing employment census in manufacturing (A - B) C/A ,142 29,298 89, % ,825 51,521 79, % 1930 A 124,712 60,979 63, % 1930 B 121,627 60,979 60, % , ,505 43, % Notes and Sources: Reproduced from Samuel P. S. Ho, Economic Development of Taiwan (New Haven : Yale University Press, 1978), Table 5.3. Factory employment is the sum of workers engaged by private manufacturing establishments that employed at least 5 workers or used power and workers employed by factories operated by the Monopoly Bureau. The 1915, 1920, and the 1930A census figures and the 1930B and the 1940 census figures do not represent precisely the same thing. The former group represents the distribution of occupied persons by their occupations and the latter group by the industries by which they worked. The category "manufacturing", however, remains approximately the same for all five observations, as the 1930 figures show.

19 percent in 1920, 50 percent in 1930, and 25 percent in It is interesting that the period , during which the relative size of the nonfactory sector in terms of employment declined most dramatically, is precisely the period in which the Japanese were most actively engaged in broadening Taiwan's industrial base. 1/ The relative position of non-factory manufacturing deteriorated rapidly in the 1930s, not because of an accelerated decline in household employment, but because of a rapid increase in factory employment. Between 1930 and 1940 non-factory employment decreased by about 20,000, approximately the same number by which it fell in the previous decade, but factory employment increased by more than 60,000, thus doubling its size in a decade. This pattern of growth--rapid increase in factory employment but not primarily at the expense of non-factory employment--is supported by the known pattern of industrialization in the 1930s. Factories established or expanded in the 1930s produced goods that did not compete directly with non-factory shops. Rather they supplied Japan with industrial raw materials or replaced Japanese imports. The data from Taiwan suggests that, in the process of development, the position of the non-factory sector has undergone significant changes. When Taiwan began its transition from a traditional to a modern economy at the turn of the century, the small-enterprise sector monopolized manufacturing, and within small industry, non-factory manufacturing predominated over factory manufacturing. As the economy developed, non-factory manufacturing declined, but the small-enterprise sector continued to be dominant during the early phases of transition, and in 1930 nearly three-quarters of the workers in manufacturing were still employed by establishments with fewer than 10 workers. In the post-wwii period, as Taiwan approaches the end of its transition to a modern economy, the position of the very small establishments has become insignificant. Increasingly, establishments with 1-3 workers are involved exclusively in services. In the 1960s and the 1970s, half of the workers in establishments with 1-3 workers were engaged in tailoring and various types of repair. Although we have no direct evidence of the current position of household production, it is safe to assume that it has also ceased to be an important factor in Taiwan's manufacturing. The most important component of the small-enterprise sector in Taiwan's manufacturing (and also in Korea's) is now clearly the small factories (defined either as establishments with 5-49 workers or establishments with 5-99 workers). Small-Scale Enterprises in Non-Manufacturing Industries Small enterprises are important in a wide variety of activities outside of manufacturing. They are particularly important in such areas as construction, trade, transportation, and services. In Taiwan in 1971, 1/ See Economic Development of Taiwan, , Chapter 5.

20 SSEs (enterprises with fewer than 100 workers) in non-manufacturing industries employed approximately 784,000 workers, 1/ far greater than the 475,000 employed by the SSEs in manufacturing. This section examines the position of SSEs in Taiwan's non-manufacturing industries. The relevant data, derived from the 1961 and the 1971 industrial and commercial censuses, are presented in Table / In mining and in the supply of electricity, gas and water, SSEs occupied a very minor position. In both of these industries about 90 percent of employment was in enterprises with 100 or more workers. However, in other non-manufacturing industries, SSEs played a significantly more prominent role. In 1971, 40 percent of employment in construction was in enterprises with 20 to 99 workers and another 13 percent in enterprises with fewer than 20 workers. Eighty percent of employment in trade in 1971 was in enterprises with fewer than 10 workers, and 60 percent of employment in other industries in 1971 was in enterprises with fewer than 100 workers. But for the presence of large financial institutions (banks and insurance companies) and a few large transport enterprises (the railroads and the airlines), small enterprises would have accounted for an even higher share of employment in other industries. Of the 136,000 workers employed by enterprises with 500 or more workers in other industries, over 100,000 were engaged by transport companies and financial institutions. The other enterprises included in the category of "other industries"--mostly restaurants, hotels, recreation services, and personal services--were mainly small, employing fewer than 100 workers. Indeed, 57 percent of the 56,985 workers employed by hotels and restaurants and 88 percent of the 103,321 workers in personal services were employed in enterprises with fewer than 10 workers. In addition to the small non-manufacturing establishments covered by the industrial and commercial censuses, there exists in Taiwan a sizeable informal sector composed of stalls and stands. 3/ In 1971, 43,456 stalls, employing over 77,000 people, were registered with district police departments in Taiwan. Most of these stalls operated at one location, but about one-quarter of them moved from place to place. Fewer than 4 percent of the 1/ 6,714 in mining, 2,597 in electricity, gas and water supply, 100,520 in construction, 398,471 in trade, and 276,078 in other industries. 2/ Data by size of units exist for construction and trade in Korea. Unfortunately, these data were not available to me for this study. However, I suspect that the position of SSEs in construction and trade in Korea is very similar to that in Taiwan. 3/ The statistics in this paragraph are from The Report on the Economic Survey of Stalls and Stands in Taiwan (The Department of Budget, Accounting and Statistics of the Taiwan Provincial Government, June 1972). Summary statistics from this survey are reproduced in Statistical Yearbook of the Republic of China, 1978 (Taipei: DGBAS), pp

21 Table 2.3 Yearend Employment in Selected Non-manufacturing Industries by Size of Enterprise, Taiwan, Selected Years Total Distributed by size (workers) of enterprise, percent Industry Year (000) Total Electricity, gas and water Mining Construction Trade Other Industriesa aincludes hotels, restaurants, transport and storage, banks and other financial institutions, commercial services, recreation services, personal services, and other unclassifiable industries. However, to make the 1961 and 1971 figures consistent, repair shops and tailorswere removed from personal services and placed in manufacturing. Sources: General Report, 1961 Industry and Commerce Census of Taiwan and The Report of the 1971 Industrial and Commercial Censuses of Taiwan and Fukien Area, Republic of China.

22 people who worked in stalls were paid employees, so the stalls were mainly family operations. Profits from operating stalls accounted for nearly 80 percent of the total annual income of the families involved so that these stalls should not be thought of as sideline activities. As might be expected, most of the stalls were eating stands or sold food products. Of the 77,210 people engaged in operating stalls in 1971, 31 percent worked in eating stands, 54 percent sold food products, 12 percent sold clothing and daily necessities, and the remaining 3 percent were in other activities. In recent years, compared to other forms of economic activities in Taiwan, the absolute size of this sector has not increased by very much. From 1961 to 1971, the number of stalls increased by less than 14 percent. 1/ In non-manufacturing industries, the distribution of employment by size of enterprise changed only slightly between 1961 and This stability contrasts sharply with manufacturing, where significant changes occurred. 2/ Employment in construction, trade, and other industries increased fastest in small and medium scale enterprises--those with 20 to 200 workers. In construction, employment in enterprises with 500 or more workers actually declined. Employment in enterprises with 3 or fewer workers declined relatively in all non-manufacturing industries, and in mining, construction, and electricity, gas and water supply, it declined absolutely. Many small establishments obviously perished but in the boom environment of the 1960s some small nonmanufacturing enterprises were also successful and grew into medium-scale enterprises. However, relatively few large enterprises emerged during this period, confirming the hypothesis that the advantages of large-scale operation are much less important in non-manufacturing industries than in manufacturing. Structural Characteristics of Small-Scale Manufacturing This section examines the industry distribution and the demand structure for products of small-scale manufacturing in Korea and Taiwan. We know little about the industry distribution of household production in manufacturing. Indirect evidence from population censuses suggests that, before WWII, the manufacturing of clothing and of wood and bamboo products dominated household production in Taiwan. 3/ Information about the very small establishments and the small factories is more abundant and is summarized in Table 2.4. Because of differences in coverage (Taiwan excludes establishments such as tailoring, repairs, and similar activities from manufacturing) comparison of the employment and value-added distributions in Korea with those in Taiwan must be done with considerable caution. 1/ 38,227 stalls were registered in 1961 and 43,436 in / See Chapter 3. 3/ Samuel P.S. Ho, Economic Development of Taiwan, , pp

23 Table 2.4 SMALL SCALE MANUFACTURING: EMPLOYMENT AND VALUE-ADDED DISTRIBUTED BY INDUSTRY (korea, 1973) Establishments Establishments Establishments Industry a/ bf With 1-4 Workers Witn 5-49 WorKers- With Workers Employment Value added Employment Value added Employment Value added Manufacturing 156,783 45,539-/ 236, ,368-/ 97,442 93,233S/ Percentage distribution Food, beverage, tobacco Textile, wearing apparel, and leather products Wood and wood products Paper, paper products, publishing and printing Products of chemical, petroleum, coal, rubber, plastics Non-metallic mineral products Basic Metals d/ d/ Metal products machinery, and equipments Other Manufacturing (Taiwan, 1971) Manufacturing 31, / 285, ,843 e/ 5, ,785 2,359-~ Percentage distribution Food, beverages, tobacco Textile, wearing apparel and leather products Wood and wood products Paper, paper products, publishing and printing Products of chemical, petroleum, coal, rubber, plastics Non-metallic mineral products Basic metals d/ d/ Metal products machinery and equipment Other manufacturing a/ For Taiwan, enterprises with 1-3 workers. b/ For Taiwan, enterprises with 4-49 workers. ct W million. d/ Less than.5% e/ NT$ million. Sources: Report on Mining and Manufacturing Census 1973 (Seoul: Economic Planning Board, 1974), tables 1-5 and IV-1, and The 1971 Industrial and Commercial Census of Taiwan and Fukien Area Republic of China (Taipei: The Committee on Industrial and Commercial Censuses of Taiwan and Fukien Area, 1973), Vol III, table 38.

24 In Korea and Taiwan, certain types of manufacturing industries are particularly prominent in the small-enterprise sectors. Food and clothing are the primary activities of the very small establishments. In 1973, about three-quarters of the employment and the value-added produced in establishments with 1-3 workers in Korea were produced by those engaged in the manufacture of food and textile products. The Taiwan statistics confirm the predominance of food among the very small manufacturing establishments but not of textile products. The insignificant position of textile products in Taiwan reflects the difference in coverage more than any real structural differences. Once the excluded tailor shops, with 13,070 workers in 1971, are taken into account, it is clear that food and textile products also dominated the very small establishments in Taiwan. Among small factories in Korea, food and textile products continue to be important, accounting for about 40 percent of the employment and the value-added produced in such factories. In Taiwan, food plays a somewhat smaller role, particularly among factories with workers. Although the relative position of textile products in Taiwan is consistent with that in Korea for factories with workers, it is considerably smaller in Taiwan for factories with 5-49 workers, again reflecting the exclusion of tailor shops in the Taiwan statistics. Several industries other than food and textile products are also important in the small-factory sector. In the early 1970s, metal products accounted for a sizeable share of the employment and value-added produced by small factories--about 20 percent in Korea and nearly 30 percent in Taiwan. Because of a sizeable plastic industry in Taiwan, many of its small factories also produced plastic products. Factors favoring the presence of small scale enterprise in manufacturing are examined in Chapter 3. Even in export-oriented economies such as those of Korea and Taiwan, the demand for products of small scale manufacturing comes primarily from domestic consumers. In a series of surveys, the Medium-Small Industry Bank (MSIB) in Korea surveyed the market relations of small-medium enterprises. The results from the 1975 survey are presented in Table 2.5, where the total sales of small-medium manufacturing enterprises are divided between exports and domestic sales. It should be noted that the MSIB surveys defined exports to include both direct and indirect sales abroad, and indirect exports as goods produced by small-medium enterprises but exported by other companies. Most probably "other companies" include only trading and export firms, but on this point the survey was not completely clear. As Table 2.5 shows, one-fifth of the sales made by small-medium (5-199 workers) enterprises in 1975 was exported, a rise from 13 percent in However, the data also shows that in 1975 exports as a share of total sales increased with the size of the enterprise: 29 percent for firms with workers, 26 percent for those with workers, 16 percent for those with workers, 6 percent for those with workers, and a negligible 2 percent for those with 5-9 workers. A comparison of the 1975 export participation rates shows that 43 percent of the manufacturing enterprises with workers and 62 percent of those with workers exported, but only

25 Table 2.5 Total Sale of Small-Medium Manufacturing Enterprises Distributed by Major Outlet and by Size of Enterprise, Korea, 1975, Percent of Total Sales Size of enterprise (workers) All Total Sales 100% 100% 100% 100% 100% 100%i Sold abroad Sold domestically Through regular commercial channels Directly to other mfg. enterprises contract sales processing materials and parts non-contract sales Source: The Medium-Small Industry Bank, Report on the Status of Medium-Small Industries, 1975, table 2.21.

26 percent of those with 5-19 workers sold their products abroad. The importance of exports also varied considerably with industry. Industries where small-medium enterprises exported a substantial share of their output in 1975 included textiles (54 percent of sales exported), wearing apparel and leather footwear (24 percent), leather and leather products (63 percent), rubber products (20 percent), and other manufacturing industries (63 percent). Industries where small-medium enterprises exported little of their output included beverages (3 percent), wood and its products (5 percent), paper and its products (5 percent), petroleum and coal products (.2 percent), machinery (3 percent), and transport equipment (2 percent). In all two-digit manufacturing industries, except non-metallic mineral products, export shares increased with firm sizes. Nevertheless the data are still too aggregated for us to say whether small firms exported less because they produced goods for which, because of their characteristics or quality, there was little or no demand on the world market or because their size made it more difficult for them to take advantage of the export incentives and to penetrate the world market. I suspect both factors were responsible. The bulk of the goods produced by small-scale enterprises are sold directly to the domestic consumers and retail shops. Nearly 90 percent of the output produced by enterprises with 5-9 workers are marketed in this manner. The share declines somewhat for larger enterprises but remains at about 50 percent even for enterprises with workers. The relationship between small and large factories is not always competitive. In some industries the relationship is complementary and, indeed, even cooperative. A successful modern small industry sector depends, to a large extent, on the ability of small and large enterprises to pursue activities that are complementary rather than competitive and to identify areas where greater cooperation would bring mutual benefits. One important form of complementarity--what Staley and Morse call direct complementarity--is the "relation between manufacturing firms in which one systematically uses the product of another as input into its own manufacturing operation." 1/ The MSIB surveys shed some light on this type of complementarity in Korea. The MSIB surveys identify the share of goods sold by small-medium enterprises directly to other manufacturing enterprises, This sale is further divided into contract and non-contract sales. Since contract sales involve goods produced specifically on order from other manufacturing enterprises, their size and relative importance should provide a good measure of direct complementarity. Table 2.5 presents contract sales as percentages of total sales by size of enterprises, and the figures suggest that direct complementarity hardly exists for the smallest manufacturing enterprises, those with 5-9 workers, and is fairly limited even for the larger enterprises, although the importance of contract sales increases with firm size, rising from 8 percent of total sales in enterprises with 5-9 workers to 22 percent 1/ Modern Small Industry for Developing Countries, p. 251.

27 in enterprises with workers. Interestingly, for enterprises with workers, contract sales comprised only 16 percent of the total. Industries where contract sales were particularly important include textiles, paper and paper products, rubber products, chemicals and chemical products, basic metals, metal products, machinery, electrical machinery and apparatus, and transport equipment. 1/ Finally, for small-medium manufacturing enterprises that received contract orders, such orders represented a substantial share of their total sales. 2/ In 1975, 69 percent of the small-medium manufacturing enterprises that received orders from other manufacturing enterprises reported that such orders accounted for 60 percent or more of their total sales. Not surprisingly, these orders were somewhat more important for the smaller than for the larger firms that received them. The above figures, of course, measure not simply the direct complementarity between small and large factories but also that among manufacturing enterprises of all sizes. However, there is evidence that in Korea direct complementarity between small and large enterprises exists in a limited fashion. In its 1975 survey, MSIB asked small-medium enterprises with contract sales to indicate whether they received orders from large enterprises (200+ workers). The responses were that 45 percent received orders only from other small-medium enterprises (5-199 workers), 16 percent only from large enterprises, and 40 percent from both small-medium and large enterprises. Apparently direct complementarity between small and large factories is more important in the service industries and industries where separable manufacturing operations are possible. In 1975, industries in which a high percentage of the small-medium enterprises with contract sales had orders from large companies included printing (70 percent), rubber products (80 percent), petroleum and coal products (100 percent), machinery (64 percent), and electrical machinery and apparatus (61 percent). Of the 3,978 small-medium manufacturing enterprises that received direct orders from other manufacturing firms, 41 percent provided processing services and 59 percent supplied parts and specific inputs. It is important to note that it is common in Korea for the ordering firms to supply the bulk of the raw materials needed to manufacture the ordered component or input. Besides receiving raw materials, some small-medium enterprises have also received technical and credit assistance from the ordering firms. However, the MSIB surveys found that such technical and credit support has been extremely 1/ See Appendix Table Dl. 2/ Most firms with contract sales received orders from more than one firm. In 1975, of the 3,978 small-medium manufacturing enterprises that had contract sales, 9 percent received orders from only 1 firm, 49 percent from 2-5 firms, 20 percent from 6-10 firms, and 22 percent from 10+ firms.

28 rare. 1/ It seems that the kinds of technical and credit support that large companies often given to small enterprises in Japan has yet to develop in Korea. With many small firms producing more or less similar products of relatively low quality, competition is often fierce in the small-industry sector. It is therefore not surprising to find that, in Korea, small-medium enterprises, to obtain orders, must often agree to price discounts and provide substantial trade credits. In 1975, two-thirds of those small-medium manufacturing enterprises with contract sales gave credits to their ordering firms that covered at least 30 percent of the value of the orders. In about 60 percent of the cases, the credit was for 30 days or more. The 1975 survey also learned that 61 percent of the small-medium enterprises with contract sales gave discounts to firms that ordered from them. Not surprisingly, among major complaints voiced by small-medium enterprises about contract sales were pressure to lower prices and difficulties in getting paid for their goods and services. 2/ Finally, Table 2.6 presents the distribution of raw materials used by small enterprises by source and by size of enterprise. The most striking characteristics of these distributions is that enterprises in the size categories between 20 and 199 workers imported a fairly large share of their raw materials--one-third in enterprises with workers and over 40 percent in enterprises with workers. The importance of imported raw materials is explained by the fact that in Korea many small enterprises with 20 or more workers were also prominent exporters (Table 2.5), and the import content of Korea's exports has been typically high. That some small manufacturing enterprises depended on imports for raw materials and that a substantial share of their output is also exported are of course both reflections of Korea's outward-looking pattern of development. Spatial Distribution of Manufacturing Because it affects regional employment and income distribution, the spatial distribution of manufacturing, particularly that of small-scale manufacturing, is an important characteristic that requires our attention. Table 2.7 distributes manufacturing employment in urban and rural areas in Korea and Taiwan by factory and non-factory sectors. Detailed distributions of establishments and employment in the factory sector in Korea and Taiwan by location and by size of establishment are summarized in Appendix Tables D4 and D5. Together, these tables give a rough indication of the spatial distribution of manufacturing in the two countries. 1/ See, for example, Report on the Status of Medium-Small Industries, 1968, Table 1-17, and Report on the Status of Medium-Small Industries, 1975, Table / See, for example, Report on the Status of Medium-Small Industries, 1968, Table 1-17, and Report on the Status of Medium-Small Industries, 1975, Table 2.23.

29 Table 2.6 Sources of Raw Materials and Parts Used by Small- Medium Manufacturing Enterprises by Size of Enterprise, Korea, 1969, Percent of Total Raw Material and Parts Size of enterprise (workers) All Total raw materials 100% 100% 100% 100%,/^ 100% 100, and parts Acquired from abroad Acquired domestically Through regular commercial channels Directly from other manufacturing enterprises Self provided Sources: The Medium-Small Industry Bank, Report on the Status of Medium-Small Industries, 1968, Table 1-18.

30 Table 2.7 MANUFACTURING EMPLOYNENT DISTRIBUTED BY LOCATION AND TYPE OF ESTABLISHMENT (Thousand of Workers) National Urban- a/t Rural ct Total Urban Rural Total Factory- Total Factory -/ on- Korea A 2,211-1, ,541 1, % of total Korea B 1,700-/ 1, ,204 1, % of total Taiwan S/ ' % of total Taiwan , e/ % of total a/ Urban: Korea: Seoul, Bijsan, Gyeonggi Do, and Gyeongsangnam Do. Taiwan: Taipei, Keelung, Taichung, Tainan, Kaohsiung, and Taipei Prefecture. b/ Korea: Establishments with 5 or more workers. Taiwan: Enterprises with 4 or more workers. c/ All manufacturing workers age 14 and above who worked more than one hour during the survey period. d/ All manufacturing workers age 14 and above who were employers, unpaid family workers, self employed,and;regular employees. Excluded are temporary aad daily workers. e/ Excluded household prodiction. Source: See table 2.1.

31 The location breakdowns used in the two countries require brief explanation. In both countries, factory data are available only for aggregated administrative divisions, so that refined geographical categories or meaningful indexes of dispersion by size of establishment cannot be constructed. To permit comparisons over time and between the two countries, I have arranged each country's data to isolate their most important urbanindustrial centers. In Taiwan, the urban-industrial centers comprise its five major cities (Taipei, Keelung, Taichung, Tainan, and Kaohsiung) and Taipei Hsien, the prefecture that surrounds Taipei (the capital) and Keelung (the most important port-city). In Korea, the urban-industrialized centers are Seoul, Busan, and the provinces (Gyeonggi Do and Gyeongsangnam Do) adjacent to these cities. Given this division, a high percentage of establishments or employment in the urban-industrial centers may be interpreted to mean a high degree of industrial spatial concentration. Two measures of manufacturing employment in Korea are presented in Table 2.7: one includes all persons aged 14 and over who worked more than 1 hour during the survey period (1975A), and the other excludes temporary and daily workers (1975B). Regardless which employment figure is used, the urban-rural breakdown shows 70 percent of the employment in urban areas and 30 percent in rural areas. However, as was noted earlier, the size of the non-factory sector differs significantly depending on which manufacturing employment figure is used. Consequently, the composition of urban and of rural manufacturing employment also depends on which of the manufacturing employment figures is used (compare 1975A and 1975B in Table 2.7). Using the 1975A figure, 31 percent of the manufacturing employment in urban areas and 46 percent of that in the rural areas are engaged in the non-factory sector (very small establishments and household production). However, once temporary workers are excluded, only 12 percent of the manufacturing employment in urban areas and 27 percent of that in rural areas are in the nonfactory sector. Because, for reasons mentioned earlier, the relative size of the non-factory sector may be less distorted when temporary workers are excluded from the total employment figure, the 1975B distribution in Table 2.7 is probably more reliable. If this is the case, then non-factory manufacturing employment is divided about equally between urban and rural areas (53 percent in urban and 47 percent in rural). Table 2.7 shows that in both 1966 and 1971 over three-quarters of the non-factory employment in Taiwan were located in rural areas. Furthermore, between 1966 and 1971 the share of non-factory employment in rural manufacturing declined from 10 to 4 percent. However, it must be remembered that these percentages are based on data that exclude the household sector. A comparison of factory employment in the two countries reveals a higher degree of industrial spatial concentration in Korea than in Taiwan. It is significant that, over the years, the percentage of factory employment located in urban areas has increased in Korea but has declined in Taiwan. The percentage of Korea's factory employment in Seoul and Busan and that in the Seoul and Busan areas increased from 41 and 58 percent, respectively, in 1958 to 48 and 74, respectively, in In contrast, it is estimated that

32 the percentage of Taiwan's factory employment in its five major cities plus Taipei Hsien was 70 percent in 1966 and 52 percent in In other words, the percentage of factory employment located in "rural Taiwan" increased from 30 percent in 1966 to 48 percent in In both countries, large manufacturing establishments (those with 100 or more workers) are more geographically concentrated than small establishments, and large manufacturing establishments in Korea are geographically more concentrated than those in Taiwan (Appendix Tables D4 and D5). In the early 1970s, for example, the share of establishments with 500 or more workers located outside the urban-industrial centers was 46 percent in Taiwan but only 19 percent in Korea. Furthermore, in Korea, for all size categories except the smallest (5 to 9 workers), the degree of spatial concentration increased between 1958 and 1975, with the largest increases among the small size categories of 10-19, 20-49, and workers. On the other hand, in Taiwan, the degree of spatial concentration in small size categories apparently declined -over time, although the comparison here is for a much shorter time period ( ). It appears that, because of the linkages between large and small manufacturing establishments, the degree of spatial concentration among large establishments and that among small establishments (except for those with fewer than 10 workers) are positively correlated. For those small manufacturing establishments with fewer than 10 workers, the Korean and the Taiwan data suggest that they are always more dispersed, with the majority located outside the major urban-industrial centers. Elsewhere I have argued that the greater dispersal of industry in Taiwan has had important beneficial effects on rural employment and equity. 1/ There are two major reasons why factory distribution is more dispersed, with a larger share of manufacturing located outside the major urbanindustrial centers, in Taiwan than in Korea. One is the early development of agro-industries, which are generally spatially dispersed, in Taiwan. The other is that at the time when rapid industrialization began in the two countries, rural infrastructure was more developed and more evenly distributed in Taiwan than in Korea. An island 380 km by 140 km at its extreme points, Taiwan was served during the postwar period by about 3,000 km of railroads, 2,600 km of highways, and over 13,000 km of feeder roads. The density of paved highway and feeder roads was 76.4 km per thousand sq km in 1962 and in Rural electrification also began early in Taiwan, and, by 1960, 70 percent of its farm households had electric light. Because rural infrastructure was well developed in Taiwan, its rural area was better able to respond to the change in economic climate that resulted when the government switched from an inwardlooking to an outward-looking development strategy in the late 1950s. The 1/ Samuel P.S. Ho, "Decentralized Industrialization and Rural Development: Evidence from Taiwan," Economic Development and Cultural Change, Oct

33 new emphasis on exports and on labor-intensive industries worked to the advantage of the rural area, the primary source of labor in Taiwan. As it became easier and more profitable to export, the labor-intensive industries in Taiwan expanded, and much of the expansion took place in the rural area. From 1956 to 1966, two-thirds of the employment increases in the textile, apparel, and wood products industries were in rural areas. 1/ Thus, in Taiwan rural infrastructure that was built to develop and to commercialize agriculture also helped to transmit industrial growth to the countryside. The sequence of development was different in Korea. Unlike Taiwan, where agriculture and rural infrastructure were first developed and then used to support industrialization, Korea is an example of how industrialization preceded and helped bring about rural development. In 1964, only 13 percent of Korea's farm households had electricity and the province with the highest share of electricity was Gyeonggi, which borders the city of Seoul. By the late 1960s, rural electrification was still limited, reaching less than 20 percent of Korea's farm households. Only in the 1970s, after a decade of rapid industrialization, was electric power extended to the rural areas on a large scale. Road development followed a similar pattern. In 1960, at the start of Korea's industrialization drive, the density of paved road was below 10 km per thousand sq km and only 6.4 if city roads were excluded. 2/ The road system was most developed in the Seoul area where the density of paved road (31.80 km per thousand sq km, and excluding city roads) was about three times that of the national average and about five times the density outside the Seoul and Busan areas. Only after Korea became more industrialized was the road system upgraded. In 1975, the density of paved road in Korea (excluding city roads) was still below 50 km per thousand sq km, a level reached in Taiwan in the late 1950s. Given Korea's emphasis on export and its distribution of infrastructure in the 1960s, a concentrated pattern of industrialization was inevitable. Thus, in Korea, the expansion of laborintensive industries, promoted by the government's outward-looking development policies, took place in a few large cities with workers migrating in from the countryside. 3/ In the early 1970s, even though infrastructure in rural areas had become fairly well developed, the advantages of Korea's primary cities, with their larger pools of labor, more developed technical and banking facilities, and larger markets, had become so entrenched that industries of all sizes continued to prefer locating in these cities. 1/ Based on the 1956 and the 1966 population censuses. 2/ These and the following statistics are derived from Ministry of Transportation, Statistical Yearbook of Transportation, various years. 3/ Seoul and Busan had 14 percent of Korea's population in 1960 and 27 percent in 1975.

34 III. DYNAMIC CHANGES IN SMALL-FACTORY MANUFACTURING The purpose of this chapter is to examine the relative position of and changes in small-factory manufacturing in Korea and Taiwan during the 1960s and the early 1970s, a period of rapid economic growth in both countries. Section 1 examines the relative position of small-factory manufacturing. Section 2 studies the mobility, death, and birth rates of factories by size. Section 3 applies the survivor technique to investigate minimum efficient plant size in 63 Korean manufacturing industries. The fourth and final section examines some of the factors that help determine the size and composition of small-factory manufacturing and how their importance changes in the process of rapid development. Relative Position of Small Factories in Manufacturing In both Korea and Taiwan the pace of economic growth increased significantly after the early 1960s. 1/ Real GDP in Taiwan increased at an average annual rate of 7.4 percent during the 1950s and over 10 percent from 1960 to the early 1970s. In Korea, the growth of real GNP rose from less than 4 percent per year between and to nearly 9 percent between and The rise in the rate of economic growth in both countries can be attributed largely to the more rapid pace of industrialization, particularly the growth of manufacturing production. The average annual growth rate of manufacturing production in Korea was 12.7 percent from 1954 to and 17.5 percent from to In Taiwan, manufacturing production increased at an average annual rate of 20.1 percent from 1963 to 1973 as compared to 10.8 percent from 1955 to As a result of rapid industrial growth in the 1960s and the early 1970s, the share of manufacturing in the real GNP (GDP, in the case of Taiwan) had increased by the mid-1970s to over 35 percent in Korea and over 40 percent in Taiwan. 1/ Many studies of postwar development in Korea and in Taiwan are now available. For example, see David C. Cole and Princeton N. Lyman, Korean Development: The Interplay of Politics and Economics (Cambridge: Harvard University Press, 1971), Larry E. Westphal and Kwang Suk Kim, Industrial Policy and Development in Korea, The World Bank, February 1974, Charles R. Frank, Kwang Suk Kim, and Larry E. Westphal, Foreign Trade Regimes and Economic Development: South Korea (New York: Columbia University Press, 1975), Paul W. Kuznets, Economic Growth and Structure in the Republic of Korea (New Haven: Yale University Press, 1977), Mo-huan Hsing, John H. Power, and Gerardo P. Sicat, Taiwan and the Philippines Industrialization and Trade Policies (London: Oxford University Press, 1970), Ching-yuan Lin, Industrialization in Taiwan, (New York: Praeger, 1973), and Samuel P.S. Ho, Economic Development of Taiwan (New Haven: Yale University Press, 1978). The data used in this paragraph are those cited in Kuznets' volume on Korea and Ho's volume on Taiwan.

35 How did the relative position of small factory manufacturing change in this period of rapid industrialization? Table 3.1 presents the distribution of factory employment in manufacturing by plant size in Korea and in Taiwan for several post-wwii years, 1/ and it shows that the emergence of new and large manufacturing plants and the growth of small manufacturing units have combined to reduce the relative importance of small factories in both Korea and Taiwan. Furthermore, while the decline of small factories relative to large factories occurred throughout the entire postwar period, the pace of the decline increased sharply in the 1960s. In 1954, 45 percent of Taiwan's factory employment in manufacturing was in establishments with 4-49 workers and 47 percent in establishments with 100 or more workers; the percentages were 42 and 51, respectively, in 1961 and 26 and 66 in The growth of the large-factory sector relative to the small-factory sector has been even more dramatic in Korea. Employment in establishments with 100 or more workers was 33 percent of total manufacturing employment in 1958, 43 percent in 1963, and 74 percent in On the other hand, the share of employment in establishments with 5-49 workers declined from 54 percent in 1958 to 45 percent in 1963 and 17 percent in Part of the reasons for the declining position of small-scale manufacturing can be traced to changes in the industrial composition of the manufacturing sector. Because the importance of economies of scale differ across industries, the position of small-scale manufacturing at the aggregate level is in part determined by the type of industries developed in Korea and Taiwan. Table 3.2 distributes factory employment in manufacturing by two-digit industries, and, although the data presented are too aggregated to show many of the important changes that have occurred, it is nevertheless clear that rapid industrialization has been accompanied by changes in the composition of the manufacturing sector. The relative position of the food industry, where scale economies are relatively unimportant, declined in both countries, and, in the case of Taiwan, the decline was quite significant. In both countries, three groups of industries accounted for three-quarters of the net increase in factory employment in manufacturing: (1) textiles and apparels, (2) products of chemicals, petroleum, coal, rubber, and plastic, and (3) metal products, machinery, and equipment. Within these three groups, strong growth was experienced by such industries as man-made fibers, fabrics, petrochemicals, chemical fertilizers, and electrical machinery and apparatus, where the average size of establishment is quite large and where scale economies are known to be important. 1/ For the distribution of all manufacturing (including the very small establishments but excluding household production) employment and valueadded by size of unit and by two-digit manufacturing industries in Korea and in Taiwan in the early 1970s, see Appendix Tables D2 and D3.

36 Table 3.1 Distribution of Factory 1mployment in Manufacturing Sy Size of Plant, Taiwan and Korea, Percentage Size of planta (workers) Total Taiwan: 1954c Korea: ) a For Taiwang enterprise; for Korea, establishment. However, there are very few multi-establishment manufacturing enterprises in Taiwan. In 1971, there were 63,850 establishments and 62,328 enterprises in Taiwan's manufacturing sector. bfor Korea,, 5-9 workers. CThe 1954 Taiwan data-are estimated.as the product of the mid-point of each size class and ihe number of establishments in each class. ddata adjusted to include tailor and repair shops. Sources: Korea: Final Report - Census of Mining and Manufacturing 1958; Report on Mining and Manufacturing Census 1963, and Report on the NAining and Manufacturing Survey, Taiwan: General Report on Industry and and Commerce Census of Taiwan, 1954; General Report, 1961 Industry and Commerce Census of Taiwan, and The Report of the 1971 Industrial and Commiercial Censuses of Taiwan and Fukien Area, Republic of China.

37 Table 3.2 FACTORY EMPLOYMENT IN MANUFACTURING BY INDUSTRY Korea and Taiwan Korea Taiwan Industry Net Increase Net Increase ( ) ( ) Total manufacturing 748,307 1,420, , ,213 1, ,966 Percent of total manufacturing Food beverages, tobacco Textile, apparel, leather products Wood, products of wood, bamboo, cane and cork Paper, paper products, publishing and printing Products of chemicals, petroleum, coal, rubber, and plastics Nonmetallic mineral products Basic metals Metal products, machinery, and equipment Miscellaneous manufacturing industries Sources: Korea: Report on the Mining and Manufacturing Census,1968 and Report on the Mining and Manufacturing Survey, Taiwan: General Report on the Third Industrial and Commercial Census of Taiwan, The Republic of China and The 1971 Industrial and Commercial Census of Taiwan and Fukien Area Republic of China.

38 Since the two countries were approximately at the same level of development in the early 1970s, it is reassuring to find the distribution of their factory employment to be roughly similar. In both countries, plants with 100 or more workers accounted for the bulk--about 70 percent--of factory employment. There are, of course, some differences between the distribution figures for the two countries. One such difference, already noted in Chapter 2, is that plants in the size categories employing 4-9, 10-19, and workers accounted for a larger share of the factory employment in manufacturing in Taiwan (26 percent) than in Korea (17 percent). A second difference is that plants with 500+ workers accounted for a larger share of the factory employment in manufacturing in Korea (44 percent) than in Taiwan (37 percent). Differences in the industrial composition of manufacturing in the two countries help to explain some of the differences in the size distribution of employment. The development and the larger presence of industries where scale economies are not so important such as plastic products, metal products, and machine tools, are some of the reasons for the stronger presence of small-scale manufacturing in Taiwan. Another possible explanation for the more prominent position of large firms in Korea is that the Korean government, much more than the Taiwan government, has been directly and actively involved in that country's industrialization drive, and the government's attention and policy have generally focused on the larger companies. The changing position of small enterprises is of course the result of more than just changes in the industrial composition of the manufacturing sector. Within each manufacturing industry, new firms are born, some small firms grow larger, and many more perish. Accordingly, the size distribution of employment within a given industry also changes in the process of development. How this distribution changes is very much influenced by the absence or presence of scale economies in the industry. However, in some industries, there are also forces that tend to offset the advantages of large size, and thus allow small enterprises to compete effectively and to exist in the company of large firms. These factors are examined in the remaining sections of this chapter, but first the evidence pertaining to the birth, death, and mobility patterns in factory establishments in Korea and Taiwan is briefly discussed. Birth, Death, and Mobility in Factory Establishments An interesting and important question is whether the growth of an industry comes primarily from existing or from new firms. To the extent that the growth comes from existing firms, it is interesting to know how much of it is the result of small firms growing larger. A related question is whether death and mobility rates among small factory establishments are higher than average. To accurately answer these questions, it is necessary to have records of birth and death of enterprises. Unfortunately, neither Korea nor Taiwan collects birth or death statistics for manufacturing enterprises by size of enterprise. There are some survey data that suggest very high death rates among small enterprises. For example, one survey in Taiwan reported that,

39 of the 262 deaths it investigated in 1965, two-thirds were firms with initial capital below US$1,250. 1/ Besides this evidence, there are two other sources that shed some light on these issues: the MSIB surveys in Korea collected the age of small enterprises, and the 1961 and 1966 industrial censuses in Taiwan also reported the age of enterprises. The age data of small manufacturing enterprises in Korea are presented in Table 3.3, where they are tabulated by size of enterprise and years in operation (age). In 1973, 12 percent of the small enterprises (those with 5-49 workers) were less than 3 years old, 39 percent between 4 to 8 years old, and nearly one-half had been in existence for 9 or more years. The estimated average age of small enterprises in 1973 was 10 years. The data also show a slight tendency for the average age of small enterprises to decline with size. This is somewhat surprising since it is believed that, because entry is easy for very small establishments and death rates among the very small firms are significantly higher than average, the average age of very small enterprise would be lower. In the case of Korea, because a greater share of the very small enterprises are located away from urban-industrial centers where competition is probably much keener, their more isolated location may be one reason why very small enterprises are slightly older. Since Korea's manufacturing sector has grown extremely rapidly since the mid-1960s, it is also surprising to find that, in 1973, as many as one-quarter of the establishments with 5-49 workers were born before Using data from the 1961 and 1966 industrial censuses, very crude measures of birth and of mobility for enterprises of different sizes can be constructed for Taiwan. The increase in the number of enterprises in any size category (say workers) between 1961 and 1966 (T1 - To) may be expressed as: T1 - T = B + (M - X), where B is the number of "births" (surviving firms with workers formed during ), 2/ M is the number of "old" firms (those 5 years or older in 1966) that moved from other categories to the size category during and X is the number of "old" firms (those that would be 5 years or older in 1966) that left the size category either by death or by movement to another size category during Similarly the increase in the number of workers in enterprises in any size category between 1961 and 1966 (N 1 - N 0 ) may be written as: 1/ See M.M. Mleeng, "Some Aspects of Financing Small- and Medium-Size Industries in Taiwan," Industry of China, May 1967, p. 7. 2/ Because the data are for a five-year period, some of the births may have been initially in another size category.

40 Table 3.3 Age of Small-Scale Manufacturing Enterprises by Size of Enterprise, Korea, 1973 By size of enterprise (workers) All Average agea (years) Distribution of enterprises by age (%) ; 100% 100% 100% 100% 0-3 years years years years aestimated by assuming the age of enterprises in each age category to be the mid-point of that category. Source: The Citizens National Bank, Report on the Survey of Small and Petty Businesses (Manufacturing), Table 1-6.

41 NI 1 - N 0 =N Nb b+ +(m (N -N) x' 2 where Nb is the number of workers in surviving enterprises born during , N bs the number of workers in M, and N is the number of workers in X. Since the age of enterprises in 1966 and the size distribution of enterprises in 1961 and 1966 are available for Taiwan, (TI - T0), B, (M-X), (N - N ), Nb, (N - N ) can be estimated, and these estimates are presented in Taile 3.4 where they are arranged by size of enterprise. 1/ The data indicate that in 1966 new firms (B, surviving firms formed during ) accounted for over one-half of both the number of enterprises and number of workers in every size category except for the largest (500+ workers). As expected, there were large negative net movements into the smaller size categories and large positive net movements into the largest size category. During , 2,067 more enterprises left than entered the size category with workers, probably because of the very high death rate among small firms. The net movement of enterprises during as a share of the number of enterprise in 1961 was -53 percent for enterprises with workers, -40 percent for those with workers, -21 percent for those with workers, -4 percent for those with workers, and 158 percent for those with 500 or more workers (Table 3.4). In other words, the evidence suggests that death and movement to a different size category occurred frequently among small enterprises. If it is assumed that during no firm with 500 or more workers died or moved to a smaller size category--that is, X = 0 for enterprises with 500 or more workers, then it can be deduced that, during , 38 firms moved from a smaller size into the largest size category, and they contributed between 25 and 72 percent of the increase in employment in the 500+ size category. 2/ In other words, the growth of small and medium scale firms may have contributed substantially to the increase of employment in enterprises in the largest size category. 1/ I have omitted enterprises with 1-9 workers. The 1966 industrial census included many small enterprises in trade and services that were classified in manufacturing in the 1961 census. The size categories most seriously affected were those with between 1 and 9 workers. Despite adjustments (in particular the return to manufacturing of all repair establishments and tailor shops in 1966), it is felt that the data for 1961 and 1966 may still be incompatible in the size categories with between 1 and 9 workers. 2/ The lower percentage is derived by assuming all firms that moved from smaller size categories grew just enough to reach 500 workers in The higher percentage is derived by assuming that firms that already employed 500 workers in 1961 did not increase their employment between 1961 and 1966.

42 Table 3. 4 Birth, Death and Growth of Manufacturing Enterprises, Taiwar,, Distributed by size (workers) of enterprise ± Number of enterprises in 1966, T 1 3,912 2, Number of enterprises in 1966 less than 5 years old, B 2,107 1, Number of enterprises in 1961, T 3,872 1, T 1 - T (M-X) 1-7) 7(T - B -2, 'B/T 1 ) % 56% 5S5% 53K 18' [(M-X)/T 0 o % -40% -21% -4% 158% Workers in enterprises in 1966, N 1 52,012 75,614 51, , ,019 Workers in enterprises less than 5 years old in 1966, Nb 27,656 42,527 28,356 69,548 21,605 Workers in enterprises in 1961, N 0 63,985 53,781 29,052 63, ,961 N 1 - N 0 11,973 21,833 22,249 69,837 76,058 (N m-nx = (Nl-NO) - Nb -15,683-20,694-6, ,453 (Nb/Nl) x % 56% 55% 52% 11% [(Nm-N x)/no] % -49% -22%.4% 252% Notes and Sources: M is the number of enterprises 5 years or older in 1966 that moved into a given size category from other size categories during X is the number of enterprises that exited from a given size category either by death or by movement to another size category. Nm and N are the number of workers in M and X respectively. For consistency, repair establishments and tailor shops are included in The underlying data are from General Report, 1961 Industry and Commerce Census of Taiwan and General Report on the Third Industrial and ComNercial Census of Taiwan, The Republic of China.

43 In summary, the evidence from Taiwan lends some support to the belief that (1) the death rate of small manufacturing establishments is high, (2) there is a great deal of mobility (upwards and downwards) among firms with fewer than 100 workers, and (3) a considerable share of the growth in the largest size category comes from movement of firms from smaller size categories. Efficient Plant Size Over time, the relative position of small enterprises in a given industry depends in part on whether or not scale economies are important in that industry. In consequence, to understand the dynamic changes in the small enterprise sector we must consider the available evidence on scale economies. In particular it is useful to have, for various industries, measures of minimum efficient plant size. There are many ways of investigating scale economies and of estimating the size range over which plants are efficient. To test for economies of scale, production or cost functions may be statistically estimated. Alternatively, the most efficient plant size in an industry can be deduced from engineering data. Finally, the survivor technique has been used to determine the minimum efficient plant size in a given industry. Given the available data in Korea and because we wish to investigate industries at the four- or five-digit level, the only approach feasible is the survivor technique. The survivor technique differs from the other approaches not only because it requires less data but, more important, in what it measures. Basically, the survivor technique calculates for two points in time the share of an industry's output (or value of shipment) by size of establishment. Those size groups that experience increases in their shares are presumed to be efficient sizes while the other size groups are considered inefficient. Obviously, efficient plant size, as determined by the survivor technique, is not the same as the plant size corresponding to the lowest point on the long-run average cost curve. Rather, it is that size which copes most successfully with "all of the various market forces and constraints: labour relations; technological change; government regulations; seasonality of demand; export opportunities; and shifts in the demand curve." 1/ It should also be noted that, because it considers only private costs and benefits, the survivor technique does not measure social efficiency. But, when data are limited, the survivor technique may be the only way of investigating scale economies. 1/ Paul K. Gorecki, Economies of Scale and Efficient Plant Size in Canadian Manufacturing Industries, Bureau of Competition Policy, Research Monograph Number 1, p For criticism of the survivor technique as a measure of scale economies, see W. Shepherd, "What Does the Survivor Technique Show About Economies of Scale?" Southern Economic Journal (July, 1967), pp

44 Appendix A describes the procedure used to select industries for study and how the survivor criterion was applied to the selected industries. Of the 100 manufacturing industries selected for examination in Korea, the survivor technique determined the efficient size range for 63 (Appendix Table Al). These 63 industries represent a wide cross section of Korea's manufacturing sector. Together they accounted for 46 percent of the factory employment in 1975, and, in 39 of the 63 industries, factories with fewer than 100 workers employed a majority of the workers. Table 3.5 lists the number of industries according to "efficient" plant size. The data is arranged by size category and by major industry group. For example, we see that, of the 63 industries, 9 are in the food group, and the efficient plant sizes in 2 of the 9 food industries include the size category 5-49 workers. For all 63 industries, the number of industries with efficient plants in the size category 5-49 workers is 7; in the size category workers, 17; in the size category workers, 34, in the size category workers, 39, and in the size category 500+ workers, 32. Thus, the survivor criterion suggests that only in a few industries are establishments with fewer than 50 workers efficient. Apparently, in the Korean environment, the efficient plant size in most industries is above 100 workers. Efficient plant size, in the survivor sense, is determined by many factors other than scale economies. One of the more important of these factors is monopolistic power. To eliminate the effect of monopolistic power, Table 3.5 also presents the number of industries according to efficient plant size for those industries with 50 or more establishments (these are the numbers in parentheses). However, restricting the tabulation to only those industries with many firms does not change the conclusion that in Korea the efficient plants in most manufacturing industries are those with 100+ workers. The removal of industries with fewer than 50 establishments eliminated not only industries dominated by a few large enterprises but also industries that faced very small markets and could therefore only support a handful of small enterprises. Interestingly, of the 7 industries with efficient plants in the size category 5-49 workers, apparently only one faced a relatively large market, and the employment in 3 of the 7 industries actually declined between 1968 and / Of the 17 industries with efficient plants in the size category 50-99, 7 were also industries with declining employment, suggesting that they faced shrinking markets. On the other hand, industries with efficient plant 1/ The one large tndustry is electrical machinery and industrial equipment which employed 10,967 people in But this is also one of the least well defined industries selected for examination, and it is large mainly because it is so broadly defined. It is most likely that in this industry small and large enterprises in 1975 were producing for totally different markets.

45 Table 3.5 EFFICIENT PLANT SIZE ACCORDING TO SURVIVOR CRITERION Number of industry with "-fficient" plants Industry Number of in size category Group industry in group Food 9 (7)a/ 2 (1) 3 (1) 5 (3) 5 (4) 2 (2) Beverage 2 (2) 0 (0) 1 (1) 1 (1) 1 (1) 1 (1) Textiles 10 (7) 2 (0) 3 (1) 3 (2) 6 (5) 7 (6) Wearing apparel, footwear made-up textile goods 5 (4) 0 (0) 0 (0) 5 (4) 5 (4) 4 (3) Furniture & fixtures 2 (2) 0 (0) 1 (1) 2 (2) 2 (2) 0 (0) Paper & paper products 2 (1) 1 (0) 1 (0) 1 (0) 2 (1) 0 (0) Printing & publishing 2 (2) 0 (0) 0 (0) 0 (0) 0 (0) 2 (2) Leather products 1 (0) 0 (0) 0 (0) 1 (0) 1 (0) 1 (0) Rubber products 1 (0) 0 (0) 0 (0) 0 (0) 1 (0) 1 (0) Chemicals & chemical prods. 4 (0) 1 (0) 1 (0) 2 (0) 2 (0) 1 (0) Petroleum and coal products 1 (1) 0 (0) O (0) 1 (1) 1 (1) 1 (1) Non-metallic mineral products 7 (4) 0 (0) 3 (3) 4 (3) 3 (2) 3 (0) Basic metals 1 (0) 0 (0) 0 (0) 0 (0) 0 (0) 1 (0) Metal products 4 (2) 0 (0) 0 (0) 2 (1) 2 (1) 2 (2) Machinery,exclude electric 2 (2) 0 (0) 1 (1) 2 (2) 2 (2) 1 (1) Electric machinery and equipment 3 (3) 1 (1) 1 (1) 1 (1) 3 (3) 1 (1) Transport equipment 3 (2) 0 (0) 1 (1) 2 (2) 1 (1) 1 (0) Other manufacuring 4 (2) 0 (0) 1 (1) 2 (2) 2 (2) 3 (1) Total 63 (41) 7 (2) 17 (11) 34 (24) 39 (28) 32 (20) Percent of Total 100 (100) 11 (5) 27 (27) 54 (58) 62 (68) 51 (49) a/ Number in parentheses excludes industries that have fewer than 50 establishments. Source: Appendix table Al.

46 size in the larger size categories were mostly those in large or growing markets (as measured by the number of people employed and by employment growth, see Appendix Table Al). Apparently, market size and market growth, probably because they enable firms to take advantage of potential economies of scale, are important determinants of efficient plant size (in the survivor sense). Indeed, as we shall see in the next section, one of the factors favoring small enterprises is a small total market. Changes in the Competitive Bases of Small ManufacturTing Enterprises Because of economies of scale in production and marketing and better access to credits, large manufacturing enterprises enjoy important advantages. Yet, in developing countries as well as in the most industrialized countries, large numbers of SSEs continue to exist in many industries. Apparently there are also forces that favor small and medium sized production units, and these forces are sufficiently strong in some industries to offset the advantages of large size. The purpose of this section is to consider the competitive bases of SSEs in Korea and Taiwan during a period when both countries were industrializing rapidly and to see how the competitive bases changed in the process of development. Small firms (those with fewer than 100' workers) may be said to predominate in an industry if they account for halu or more of the industry's employment. 1/ We shall call industries where SSEs predominate small-scale industries. Since industries that are dominated by SSEs may be presumed to have characteristics that are favorable to small establishments, or at least permit them to compete on even terms, it is theose small-scale industries whose competitive bases we need to analyze. To idenfrify the small-scale industries and for the analysis to be meaningful, it is essential that industries are defined as narrowly as possible. Fortunately, in Korea and Taiwan, data by size of plants are available for industries at the four- or five-digit level. 2/ 1/ Instead of employment as the criterion, value added could have been used. We use employment here partly becaus;e we are interested in the employment effects of SSEs and partly because more manufacturing industries are dominated by SSEs in terms of employment than in terms of value added (since labor productivity is genierally much lower among SSEs). I also selected industrif!s on the basis of the value added criterion, and found that nearly' all the industries that would have been selected under the value added criterion are in fact selected under the employment criterion, 2/ However, it is important to note that even industries at the five-digit level frequently include activities that produce commodities with significant design and quality differences and utilize very dissimilar production methods. It should alsc, be noted that the standard industrial classification used in Taiwaa and that in Korea are quite different, with the one in Korea generally more detailed at every level.

47 Table 3.6 shows that, in Taiwan in 1971, enterprises with fewer than 100 workers accoujated for half or more of the industry's employment in 55 of its 107 manufacturing industries at the four-digit level. Small enterprises in these industries employed about 21 percent of all manufacturing workers, and produced over 13 percent of all manufacturing value added. In Korea in 197j, as shown in Table 3.7, small factory establishments (those with 5-99 workers) accounted for half or more of the industry's employment in 175 of its 373 five-digit manufacturing industries, and they employed 70 percent of the workers and produced 56 percent of the value added in these 175 small-scale industries. When the small establishments are disaggregated into their component size groups, the data in Table 3.7 reveal that establishments with 5-49 workers employed 52 percent of the workers and produced 37 percent of the value added in these same 175 industries. As for their relative importance in all manufacturing (defined here to exclude manufacturing establishments with fewer than 5 workers), small establishments in small-scale industries employed 10.2 percent of all manufactutring workers and produced 5.8 percent of the total manufacturing value added. These small-scale industries will reveal most clearly the conditions that favor small-scale manufacturing. Staley and Morse, in their classical study on small scale industries, grouped into eight categories those factors that help determine small plant predominance in manufacturing industries. 1/ These are listed below under three major headings: I. Locational influences IA. Factories which process a dispersed raw material IB. Products with local markets and relatively higher transfer costs IC. Service industries TI. Process influences IIA. Separable manufacturing operations IIB. Craft handwork IIC. Simple assembly, mixing, or finishi.ng operations III. Market influences IIIA. Differentiated products having low scale economies IIIB. Industries serv:ing small tot'al markets Following the methodology employed by Stale) and Morse, each small-scale tindustry in Korea and Taiwan was classified under that category which seemed to be the major reason for small-firm pradom:inance. In many instances, it 1/ Modern Small Industry for Developing _ountries, Chapters 5 and 6.

48 Table 3.6 Share of Small Enterprisesa in Employment and Value Added, by Four-digit Industries, Taiwan, 1971 Share of manufacturing Share of manufacturing value % of industry Number of workers (000) _ mployment _(%) Value added (NT $ million) added (%) workers in Number of Small Other All Small Other All Small Other All Small Other All small enterprises industries enterprises enterprises enterprises enterprises enterprises enterprises enterprises enterprises enterprises enterprises enterprises enterprises , , ,433 2,386 5,819 8, ,116 7,990 10, ,250 21,624 22, Total , ,932 32,489 41, aenterprises with fewer than 100 workers, except part-time home industry. Source: The Report of the 1971 Industrial and Commercial Censuses of Taiwan and Fukien Area, Republic of China.

49 Table 3. 7 Share of Small Establishmentsa in Employment and Value Added, by Five-digit Industries, Korea, 1975 Number of workers (000), of industry workers in Number of Small establishments establishments All small establishments industries Total establishments Other Total ,416 Share of total manufacturing employment(z) Other 4 of industry workers in Number of Small establishmnts establishments All small establishments industries Total establishments G Total Value added (Billion Won) 4c of industry workers in Number of Small establishments establishments All small establishments industries Total establishments Other D ,415 2,062 Total ,586 2,828 Share of total manufacturing value added (%) Uther, of industry workers in Number of Small establishments establishments All small establishments industries Total establishments Total aestablishments with 5 to 99 workers Source: Report on the Mining and Manufacturing Survey 1975.

50 - 41 is a combination of several of these techno-economic factors that make a given industry suitable for small-scale establishments. Needless to say, because adequate descriptive and technical data are not available for all the industries, a considerable element of judgment is involved in selecting the major reason and in grouping the industries. The main characteristics of each of the influences that Favor smallplant predominance in manufacturing industries and the industries included under each category in Korean and Taiwan are discussed in detail in Appendix B. Here, it is sufficient to take note of the following: The main factors favoring SSEs grouped under locational influences are ligh transport costs and the need for frequent face-to-face contact between producers and their customers. SSEs are also favored in industries where the production processes do not have important scale economies. More specifically, SSEs can be competitive when technology is relatively simple, production runs short, production versatility important, or specialization in operation or parts possible. A third group of factors favoring SSEs is market influences, the most important being small total market. In addition to the industries in which small plants predominate, SSEs are also numerous in industries where they have only a minority position. For example, in Korea in 1975, small establishments in the 198 industries in which small plants do not predominate employed 15.9 percent of all manufacturing factory workers and produced 9.3 percent of the factory value-added in manufacturing, significantly greater than the total volume of small firm activity in the 175 industries in which they were predominant (Table 3.7). Apparently, in these industries, small establishments exist by "filling the cracks" not occupied by the large factories. Not surprisingly, they include many industries involved in simple assembly, mixing, or finishing. The relative importance in Korea and Taiwan of the various types of industry in which small firms were predomiaitoit is shown in Tables 3.8 and 3.9 respectively. Although the data are only available in Taiwan for one year (1971), it is available in Korea for two years (1968 and 1975), and by comparing the data from the two years for Korea it is possible to see how the competitive bases of small industry changed during a period of rapid development. 1/ When examining the data, it is useful to remember that in 1968 Korea was in the early stage of its export-led industrial growth. However, by 1975, Korea had developed a sizeable manufacturing sector and was turning increasingly to the more capital- and skill-intensive industries. We should also note that in 1971 Taiwan had also had nearly a decade of rapid industrial growth based on labor-intensive exports and its manufacturing structure and its level of industrialization closely resembled what existed in Korea in / The standard industry classification used in Korea change-1 bei:otujen 1968 and Unlike that for 1975, the most detailed data for 1968 was for industries at the four-digit level. Thus, in 1968, the grouping of industries was done at the four-digit level. However, many of the fourdigit industries in 1968 had identical coverage as the five-digit industries in 1975.

51 Table 3. 8 Relative Importance of Types of Industry in which Small Establishments Predominatea, Korea, 1968 and 1975 Employment in small establishments Industry Type persons percent persons percent IA. Dispersed resource processors 59, , IB. Market oriented industries 50, , IC. Service industries 15, , IA. Separable manufacturing operations 26, , IIB. Craft handwork 3, , IIC. Simple assembly, mixing, or finishing 94, , IIIB. Small total market 15, , Total 265, , Value added in small establishments Million won Million won in current prices percent in current prices percent IA. Dispersed resource processors 16, , IB. Market oriented industries 11, , IC. Service industries 3, , IIA. Separable manufacturing operations 6, , IIB. Craft handwork IIC. Simple assembly, mixing, or finishing 21, , IIIB. Small total market 2, , Total 62, , aindustries in which small (5-99 workers) establishments accounted for half or more of industry employment. Sources: Underlying data from Report on the Mining and Manufacturing Census, 1968 and Report on the Mining and Manufacturing Survey, 1975.

52 Table 3.9 Relative Importance of Types of Industry in Which Small Enterprises Predominatea, Taiwan, 1971 Employment in Value added in small enterprises small enterprises persons percent Million NT$ percent IA. Dispersed resource processors 41, IB. Market oriented industries 72, , IC. Service industriesc 29, IIA. Separable manufacturing operations 52, , IIB. Craft handwork b b b b IIC. Simple assembly, mixing, or finishing 48, , IIIB. Small total market 8, Total 253, , aindustries in which small (1-99) establishments accounted for half or more of industry employment. bunable to separate from other categories. crepair of machinery and automobiles are not separated from the manufacturing of machinery. For allocation purposes, one-third of the employment and value added in the manufacturing and repair of machinery is assigned to IC and two-thirds to IIA. This division probably overestimates the importance of repair. Source: Underlying data from The Report of the 1971 Industrial and Commercial Censuses of Taiwan and Fukien Area, Republic of China.

53 In terms of the three major influences--location, process, and market--it appears that locational factors and processes were the two most important causes of small firm predominance in manufacturing industry in Korea. In 1968, about 47 percent of the workers employed and 50 percent of the valueadded produced by small establishments in industries shown in Table 3.8 were in small plants that processed dispersed resources, served local and regional markets, or serviced local and regional industries. Taken together, dispersed resource processors and market oriented industries accounted for about percent of the employment and of the value-added in small-scale industries. Service industries, which accounted for about 6 percent of the employment and value-added, were distinctly less important. Industries strongly influenced by production processes employed 47 percent of the workers and produced 45 percent of the value-added in the small-scale industries in Table 3.8. Here, simple assembly, mixing, or finishing industries were dominant, employing nearly 36 percent of the workers and producing 34 percent of the valueadded in the industries in Table 3.8, far greater than the next largest type of small-scale industry. SSEs were beginning to be important in industries in which separable manufacturing operations are possible, accounting for about 10 percent of the employment and of the value added. Finally, small establishments in industries with small total markets employed only 6 percent of the workers in small-scale industries and produced less than 5 percent of the small plant value-added. Given the inadequate road and other transport facilities in Korea in the 1960s, the importance of locational factors in determining predominance of small firms in an industry is understandable. That simple assembly, mixing, or finishing industries accounted for more than one-third of smallplant employment and of small-plant value-added is also consistent with our expectation, considering Korea's factor endowment and its industrialization policies. First of all, simple assembly, mixing, or finishing industries generally require neither large fixed investments nor sophisticated technology. Because entry to these industries is relatively easy, they are the type of industry a less developed country in its early stage of industrialization would be most likely to develop first. Secondly, these are laborintensive industries. Thus, with its low wages and its disciplined and fairly productive labor force, Korea had a significant comparative advantage in these industries. Finally, since product transport costs are usually moderate in these industries, they have good export potentials. With these characteristics and given government policies that encourage' Tadustrial exports, it is hardly surprising that small establishments were so active in the simple assembly, mixing, or finlshing industries. A comparison of the Korean data for 1968 and those for 1975 reveals some interesting changes in the competitive bases of SSEs. However, before discussing them, let us first take note of the fact that small establishments in industries in which they were predominain enployed significantly fewer workers itn 1975 than in 1968 and produced about the same value-added

54 in 1975 (W 85,470 million in 1970 prices) as they did in 1968 (W 74,581 million in 1970 prices). 1/ Clearly the small industry sector had declined in importance. The declining importance of all SSEs and of the small industry sector are brought out even more clearly in Table 3.10, where their positions relative to the factory sector as a whole are presented. Between 1968 and 1975, the employment in industries where SSEs predominate (i.e., employ half or more of the industry employment) declined by 153,000. In addition, the employment in all factory establishments with 5-9 workers declined by 24,000 and those in establishments with workers increased only marginally, by 9,000 workers. In other words, there was a shift of employment and of industries from the small-industry sector to the large-industry sector, and, within industries, a shift from small to large enterprises. As in 1968, locational and process influences were most important in determining small firms' predominance in manufacturing industry in Korea in In fact, industries in which locational factors are important accounted for nearly 60 percent of the workers and of the value-added in small scale industries in It appears transfer costs for raw materials and products continue to be prominent reasons for small-plant operation, even in Korea in a relatively small country with fairly good transport facilities. However, a comparison of industries in categories IA and IB in 1968 and 1975 shows that a number of important industries in these categories in 1968 were no longer dominated by small plants in For example, small plants' share of employment in coal briquettes was 80 percent in 1968 and 49 percent in 1975; in vegetable oils and fats, it was 86 percent in 1968 and 25 percent in 1975; in bakery goods, it was 56 percent in 1968 and 25 percent in Apparently, improved transport facilities and greater concentration of population in large cities such as Seoul, Busan, and Daegu permitted large enterprises to emerge and reduced small establishments to a subordinate position. The most striking difference between the relative significance of the main types of small industry in 1968 and that in 1975 is the decline in the importance of simple assembly, mixing, or finishing industries and the growth in the importance of industries in which separable manufacturing operations are possible. Many simple assembly, mixing, or finishing industries once dominated by small plants no longer had this characteristic in For example, small plants' share of employment in cotton fabrics was 63 percent in 1968 and 45 percent in 1975; in synthetic fabrics it was 61 percent in 1968 and 38 in 1975; in bleaching, dyeing, and finishing of textiles it was 54 percent in 1968 and 22 percent in 1975; in knitted underwear it was 76 percent in 1968 and 24 percent in 1975; in hosiery it was 64 percent in 1968 and 30 percent in 1975; in leather footwear it was 63 percent in 1968 and 25 percent in 1975, and in men's outerwear it was 56 percent in 1968 and 1/ The figures in 1970 prices were obtained by deflating the figures in Table 3.8 by the implicit deflator for manufacturing value added reported in the national accounts. The deflators are from Bank of Korea, Economic Statistics Yearbook, 1977.

55 Table 3.10: SHIFT IN EMPLOYMENT BY SIZE OF ESTABLISHMENT AND BY SMALL-AND LARGE-SCALE INDUSTRIES Korea, (thousands) % of industry employment Total By Size of Establishment in small establishment factory employment C'mall Total Total O Sources: Underlying data from Report on the Mining and Manufacturino Census, 1968 and Renort on the Mining and Manufacturing Survey, 1975.

56 percent in These were also some of Korea's leading export industries in the late 1960s and early 1970s. Apparently, the widening of markets through international trade permitted large enterprises to enter these industries and also enabled small enterprises in these industries to become large ones. Thus, market expansion and the successful growth of small enterprises combined to reduce the importance of small plants in many of the simple assembly, mixing, or finishing industries. The emergence of a large number of small metalworking establishments, many of which undoubtedly began as small repair shops, responding in part to the backward linkages of industries developed earlier, accounted for the rise in the importance of category IIA, separable manufacturing operations. The growth of metalworking industries is, of course, another signal that Korea had developed new skills and entrepreneurs and had entered a more advanced stage of its industrial transformation. Because the Taiwan data are much less detailed, the grouping of small-scale industries into major types was made less precisely than for Korea. A comparison of the 1971 Taiwan data (Table 3.9) with the 1975 Korean data (Table 3.8) shows that the distribution of small-scale industries by major types of industry in Taiwan in 1971 was very similar to that in Korea in This similarity is reassuring since both countries followed nearly an identical pattern of industrial growth, and Korea in 1975 was at a comparable stage of development to Taiwan in As in Korea in 1975, locational factors were very important in determining small-plant predominance in Taiwan's manufacturing industry in Of the minor differences between Taiwan in 1971 and Korea in 1975, two require explanations. First, despite a more diversified agriculture and a more developed agricultural processing industry, the processing of dispersed resources was less important as a factor in determining small-firm predominance in Taiwan than it was in Korea. This discrepancy probably occurred because better rural transport facilities in Taiwan and the presence of important scale economies tipped the scale in favor of large enterprises in some of Taiwan's most important agro-industries such as sugar and vegetable and fruit canning. The second difference between the two countries is that small industries in which separable manufacturing operations are possible occupied a more prominent position in Taiwan in 1971 than in Korea in One suspects that this prominence arose because, in 1971, the metalworking industry in Taiwan was already exporting large quantities of metal products, hand tools, and simple machinery. The wider market undoubtedly created a more favorable environment for small establishments. The evidence from Korea and Taiwan suggests that in the early stages of industrialization, the competitive bases of SSEs are primarily those related to locational factors, particularly high transport costs. As transport costs decline in the process of development, this source of competitiveness weakens. With industrialization, process influences also become important in determining the competitive bases of SSEs. Initially, SSEs dominate those industries in simple assembly, mixing or finishing that are usually the first to emerge in labor abundant countries. However, their relative importance in these industries are likely to be temporary. As the markets of these industries expand, firms will expand to take advantage of whatever scale economies

57 that may exist. With larger markets, the potentials of scale economies, even relatively minor ones, will also make it worthwhile for large firms to enter these industries. In addition, with development, capital also becomes more plentiful, making it relatively easier for entrepreneurs to mobilize the larger initial capital required to establish a large enterprise. As labor cost rises, comparative advantage shifts, and the economy becomes more complexed and developed in Korea and Taiwan, metalworking and machinery industries, in which separable manufacturing operations are possible, have become increasingly more important both within the manufacturing and the small industry sectors. However, it is as yet unclear whether separable manufacturing operations will form a strong competitive base for small establishments in the two countries. Industries in which production can be divided into separate operations permit a high degree of specialization and division of labor. In such industries production can be organized either by the integration of the different tasks in large plants or by the separate performance of the various tasks by smaller plants each specializing in one or two operations (or parts). These industries, particularly at the early stage of development, are also noted for small lots and made-to-order purchases. This implies that small firms can also be competitive if they are versatile and responsive to the needs of customers. Thus, the opportunity for small firms to prosper in these industries is good. The evidence suggests that small metalworking and machinery establishments in Korea and Taiwan have prospered so far not through specialization but through versatility and low labor costs. There is little evidence of subcontracting or division of labor between small and large enterprises in these industries. 1/ Indeed, the degree of vertical integration is high, and large companies in Korea and Taiwan perform many operations and manufacture parts that would typically be subcontracted in the industrialized countries. In consequence, large enterprises in Taiwan and Korea often own specialized equipment that is used only periodically. 2/ This, in turn, increases the cost of production and tends to inhibit the growth of these industries. The reasons why subcontracting and the division of labor between small and large enterprises occur so rarely in Korea and Taiwan are also fairly clear. The quality (in terms of interchangeability of parts and uniformity of tolerances) of products produced by the metalworking and machine tool industries is low, particularly among the smaller establishments, in both Korea and Taiwan. 3/ In other words, the lack of standardization and 1/ For example, see Alice H. Amsden, "The Division of Labour is Limited by the Type of Market: The Case of the Taiwanese Machine Tool Industry," World Development, 1977, Vol. 5, No. 3, pp / Ibid. 3/ For comments on product quality in Taiwan, see ibid. Also see, "A Report on Small Hardware Industries in Taiwan," Industry of Free China, February 1967, pp For a review of conditions in Korea's metalworking industry see IBRD, "Korea: Development of the Machinery Industries," a report prepared by the Industrial Mission to Korea, March 17, 1978.

58 low quality products have kept the division of labor between small and large enterprises to a minimum. Amsden also argues that, in these industries, the division of labor is also restricted by the type of market they face. 1/ The metalworking and machine tool industries in Korea and Taiwan face markets that are composed of large number of small customers with limited resources (local manufacturing firms and Southeast Asian manufacturers), who are very price conscious. Because the quality of the product (be it a tool, machine, or simple metal product) often does not significantly affect its effectiveness, the customers are quite willing to trade off quality for a lower price. Given this type of market, the larger producing firm will want to be as fully integrated and self-sufficient as possible so that it can determine independently the quality of the parts used in its product and thus gain greater flexibility to trade off quality for lower production cost and thus a lower price. Demand as well as supply conditions in the metalworking and machinery industries in Korea and Taiwan are changing. With a domestic economy that is now more developed and sophisticated, the need for better quality metal products and machine tools is rapidly increasing. The export market for high quality metal products and tools is also large and growing. With the experiences gained in the past decade, the Korean and Taiwanese producers are now also more capable to produce better quality and more standardized goods. With the market changing and with product quality improving, the opportunities for division of labor between small and large enterprises are bound to increase. To take advantage of these opportunities, small metalworking and machine tools establishments in both countries will need to upgrade their equipment and acquire new skills and technology so that they can produce higher quality products and thus be able to become more involved in interfirm transactions through specialization. Whether SSEs will be able to alter their competitive base from product versatility and producing inexpensive low-quality goods to product standardization and specialization is likely to determine their future position and strength in these industries. 1/ Alice H. Amsden, "The Division of Labour is Limited by the Type of Market: The Case of the Taiwanese Machine Tool Industry," World Development, 1977, Vol. 5, No. 3, pp

59 IV. RELATIVE EFFICIENCY AND CAPITAL INTENSITY IN SSEs Whether or not SSEs should be promoted depends, at least in part, on how efficiently they utilize resources. If SSEs are more labor-intensive than, and use less capital to produce the same goods as, large enterprises, then, in those less developed countries where labor is abundant and capital scarce, strong economic justification would exist for promoting small-scale industries. The purpose of this chapter is to present the evidence on resource use by different sizes of firm in Korea and Taiwan. The main sources of the evidence are the industrial censuses, and the major issues to be examined are: (1) Are SSEs more labor intensive than large enterprises? (2) In what kind of industries are SSEs likely to be most labor intensive? (3) Do factor productivities differ significantly by size of firm? (4) How well does the total factor productivity of SSEs compare to that of large enterprises? Resource Use in Small Scale Manufacturing Industries: An Overview Many studies have reported that small-scale industries are not only labor intensive but also fairly efficient in their use of capital. The evidence from Korea and from Taiwan reveals both supporting examples of and many exceptions to these generalizations. This is hardly surprising since an industry's labor intensity is often an attribute of the product in question rather than a function of plant size. Table 4.1 presents the output/capital ratios, the capital/labor ratios, and measures of small-plant predominance in major manufacturing industry groups in the two countries. The industries are ranked in the table by the percentage contribution of small (fewer than 100 workers) plants to industry value-added in Taiwan. Before turning to the results, a few words must be said about the data. Appendix C discusses how capital, labor, and value-added are measured in the industrial censuses and surveys in Korea and Taiwan. Here, it is sufficient to say that, of the three measures, capital is the weakest. In both countries, the capital measure used is the book value of fixed assets. It is generally believed that in most countries book values understate, probably by a considerable margin, the current real value of capital. However, in the case of Korea and Taiwan the problem may be somewhat less serious because at the time the data was collected (1968 in Korea and 1971 in Taiwan) much of the industrial capital in the two countries was of fairly recent vintage and the 1960s was a period when the prices of capital goods were still relatively stable. The reported capital/output ratio for the manufacturing sector in Taiwan in 1971 was 2.78, which seems reasonable. However, because in the 1960s inflation was more serious in Korea than in Taiwan, the problem of using book values to measure capital may be greater in Korea. The reported capital/output ratio for manufacturing in Korea in 1968 was a low 1.37, suggesting that the book value of fixed assets may have been significantly below the current real value of capital. An unreliable capital measure of course undermines our confidence in the capital intensity and capital productivity estimates.

60 Table 4.1 Output-Capital and Capital-labor Ratios of Major Industry Groups Taiwan (1971) and Korea (1968). Taiwan, 1971 Korea, 1968 VA per VA per Fixed % VA % emp. unit unit Total Fixed Value added assets in small in small of of assets per assets per % VA % emp. per unit per enter- enter- total fixes employee employee in small in small of fixed worker prises prises assets assets (OOONT$) (OOONTS) est. est. assets (000 Won) Manufacturing Printing and publishing Fabricated metal prods Furniture and fixtures Leather & its prods. (exc. footwear & apparel) Machinery, exc. electrical Precision equip. & inst Nonmetallic minearal products ,329 Misc. manufactures Food and beverages Wood & its prods Transport equipment Basic metals Rubber & its products Apparels (incleather footwear) Paper and its products Chemicals and their products ,385 Textiles Electrical machinery and apparatus Petroleum & coal prods , ,015 Tobacco Notes and Sources: Small enterprises (establishments) are those with fewer than 100 workers in Taiwan and those with 5-99 workers in Korea. The Report of the 1971 Industrial and Commercial Censuses of Taiwan and Fukien Area, Republic of China. Report on Mining and Manufacturing Census, 1968.

61 Among the more significant relationships revealed in Table 4.1 are the following: (1) in both countries the same industry groups have high shares of small plant value-added. Of the first 11 industry groups in Taiwan, 10 are ranked among the first 11 in Korea. The one exception is apparel (including leather footwear), which ranks fourteenth in Taiwan but second in Korea. Small plants produced 21 percent of the apparel industry's value-added in Taiwan but 65 percent in Korea. (2) In both countries industry groups with high share of small-plant value-added also tend to have relatively high output (value-added)/capital ratios and relatively low capital/labor ratios. 1/ Of those industry groups in which small plants contributed 30 or more percent of the industry value-added, printing, metal products, and furniture and fixtures in both Korea and Taiwan have higher output/capital ratios and lower capital/labor ratios than the respective national averages for manufacturing. There are, however, important exceptions. For example, in Korea, leather and leather products and machinery (excluding electrical machinery), two major industry groups dominated by small establishments, have either an output/ capital ratio that is lower or a capital/labor ratio that is higher than the average for manufacturing. Non-metallic mineral manufacturing is another industry group with both substantial small firm participation in the two countries and a lower output/capital ratio and higher capital/labor ratio than the average for manufacturing. (3) Not all industry groups dominated by large plants have high capital/labor ratios and low output/capital ratios. Rubber and rubber products and electrical machinery and apparatus manufacturing are two industry groups that have relatively little small-firm participation in Korea and in Taiwan but which have output/capital ratios that are higher and capital/labor ratios that are lower than the respective national average for manufacturing. The apparel industry in Taiwan is another example. It has a significantly higher output/capital ratio and a significantly lower capital/ labor ratio than the average for manufacturing, yet only 21 percent of its value-added and 24 percent of its employment are accounted for by small enterprises. That the characteristics of the major industry groups are so diverse suggests that simple generalization about resource use in small-scale industries can be misleading. It is therefore important to disaggregate the major industry groups as much as possible. While it would be ideal to define industry at the product level, the most detailed data for Korea and for Taiwan are for industries at the four-digit level. Nevertheless, this amount of detail represents a substantial improvement over the data for major industry groups used in Table 4.1. Relevant ratios for Taiwan's industries in which small plants were predominant appear in Table 4.2, arranged according to the major types discussed in Chapter 3. Similar data for Korea by major types of small-scale industries are presented in Table 4.3 (the capital/labor and output/capital ratios for individual industries are in Appendix Tables D6 and D9). 1/ The capital/labor ratios, of course, only approximate the direct effect on the demand for labor per unit of capital invested. In this study no attempt is made to ascertain the total (direct and indirect) effects on the demand for labor per unit of capital invested either by industry or by the size of establishment.

62 Table 4.2 Output-Capital and Capital-Labor Ratios for Industries in which Small Enterprises Predominate, by Types of Industry, Taiwan, 1971 Value-added per Value-added per Total assets Fixed assets unit of total unit of fixed per person per person assets assets engaged (OOONT$) engaged (OOONTS) Total manufacturing Sna1' industrya ,A. Resource processors Meat processing z8 Dairy products Vegetable oil Rice milling Tea processing Tanning and leather finishing Sawmills and planing mills I1. Market oriented industries Food, n.e.c. Furniture and fixtures Agricultural insecticides Glass and its products Structural clay products Cement products Non-metallic minearal products, n.e.c Metal furniture Tin cans and boxes Aluminum products (e.g. door & window frames) Manufactured ice IC. Service industries Printing TT5 Metal processing (spraying, electro-plating, etc.) IjA. Separable mfg. operations Iron and steep products for industrial use Mfg. and repair of machinery and equipment, exc. elec Transport equipment, n.e.c Metal products, n.e.c Special electrical apparatus Professional, scientific equipment lic. Simple assembly, mixing, or finishing Flavoring exc. monosod. glutamate Products of wood, bamboo, T2.15 S 16 cane, n.e.c Processed paper and its prods Bookbinding Acids and alkalis Paint, color, ink Medical & pharmaceutical preparations Soap, detergent, cosmetics Chemical products, n.e.c Textile products, n.e.c IIIB. Small total market Canning, preserving of meat W 54 7i8 Animal fats Mills, n.e.c Silk textiles Leather apparel Wood preservation Paper bags Publishing Engraving and etching Inedible oils and fats Coal products Asphalt materials Rubber and synthetic rubber Rubber sole Basic metal, n.e.c Electric insulators and insulation Motorized tricycles aall industries where small enterprises predominate, i.e., account for half or more of the industry's employment, except for animal feeds and copper, two industries with negative value added in Small enterprises are those with fewer than 100 workers. Source: Based on data in The Report of the 1971 Industrial Republic of China. and Commercial Censuses of Taiwan and Fukien Area,

63 Table 4.3 Output-Capital and Capital-Labor Ratios For Industries in Which Small Establishments Predominate, By Type of Industry, Korea, 1968 Value added per unit of fixed assets Fixed assets per worker (000 won/person) Total manufacturing Small Industrya IA. Resource processors IB. Market oriented industries IC. Service industries IIA. Separable mfg. operations IIB. Craft handwork IIC. Simple assembly, mixing or finishing IIIB. Small total market aall industries in which small establishments predominate, i.e., account for half or more of the industry's employment. Small establishments are those with 5-99 workers. Note and Source: For the output-capital and the capital-laboratios of the individual small industries in each of the categories, see tables 4.5 and 4.6. Based on data in Report on Mining and Manufacturing Census, 1968.

64 At the aggregated level, it is worth noting that in Taiwan all types of small industries have higher average output/total assets ratio than total manufacturing. However, when fixed assets are used in the calculation, only 3 small industry groups (IC, IIA and IIC) have higher output/fixed assets ratios than total manufacturing. In Korea, all types of small industry except crafts (IIB) have lower average output/fixed-assets ratios than total manufacturing. Because these ratios are averages, we cannot deduce from them alone any meaningful conclusion or hypothesis about the small industries in the two countries. Even though the relative importance of the different small industries was quite different in the two countries, the output/capital and the capital/ labor ratios by types of small industry in Korea and Taiwan reveal some common features. Both countries' processors of dispersed resources (type IA) showed higher capital/labor ratios than the average for all small industries. However, in comparison to the national average for all small industries, the Korean processors had a slightly higher output/capital ratio while the Taiwan processors had a lower output/capital ratio. In both countries the variation among industries is considerable in this category. For example, in Korea, it ranged from a low capital per worker of W 117,000 in cut stone and its products to W 736,000 in sawmills. In Taiwan, it ranged from a low total assets per worker of NT$61,000 in meat processing to NT$367,000 in vegetable oil. In both countries, the capital/labor ratios is sawmills and vegetable oil were among the highest, while the output/capital ratios in these two industries were among the lowest. The capital/labor ratio in small market-oriented industries approximated the national average for all small industries in both countries. However, while the output/capital ratio in small market oriented industries was near the national average for all small industries in Korea, it was substantially lower in Taiwan. In both countries, low output/capital ratio was a feature of three types of industry: miscellaneous food, ice, and nonmetallic mineral products. Apparently the relatively greater importance of these industries in Taiwan is the main reason why the output/capital ratio in its market oriented industries was lower. Separable manufacturing operations showed a lower capital/labor ratio and a higher output/capital ratio than the national average for all small industries in Taiwan but was near the national average in Korea. It also appears that there is less variation among industries in this category. Simple assembly, mixing, or finishing industries approximated the national average for all small industries in both output/capital and capital/ labor ratios. However, variation among the industries in this category is considerable. In general, the small chemical and chemical products industries have relatively high capital/labor ratios and relatively low output/ capital ratios, while the apparel, wood product and paper product industries have relatively low capital/labor ratios and relatively high output/capital ratios. Because so few industries are included in the service category (IC), it is difficult to make any generalization. One of the more important service industries is the metal processing industry (plating and galvanizing), and in both Korea and Taiwan it showed significantly lower caital/labor and higher output/capital ratios than the national average for all small industries.

65 Handicraft industries, a category (IIB) available only for Korea, showed the highest output/capital and the lowest capital/labor ratios. Finally, the composition of industries with small total markets in both countries is very diverse. It should be noted that many of them showed relatively high capital/ labor ratios, and that their average output/capital ratio was l½wer than the national average for all small industries. The data presented so far are the averages for individual industries or industry groups. We turn now to discuss the more interesting and important question: within industries, are there significant differences between small and large plants in their capital intensity and efficiency? Capital Intensity by Size of Establishment in Manufacturing This section compares the capital/labor ratios, constructed from census and survey data, for industries at the four-digit level by size of establishment. Because this type of comparison is fraught with pitfalls, we begin by summarizing some of the more important difficulties. There are, of course, the usual measurement problems. We have already mentioned that book values may seriously understate the true value of capital. If the extent of understatement is the same across firm size, then comparisons of capital intensity by size of firm may still be reasonably meaningful. But, if the extent of understatement differs systematically by firm size, then it becomes much more difficult to interpretate the observed differences in capital intensity unless there is also information about the extent of understatement by size of firm. Firms may also have different capacity-utilization rates. In which case, the capital/labor ratio (unless properly adjusted for the difference in utilization rates) will give an incorrect measure of capital intensity. Though usually less troublesome than capital, labor measurements are, however, not free of problems. For example, to the extent that labor quality varies systematically by size of firm, differences in capital/labor ratios may reflect this difference rather than any difference in capital intensity. Comparison of capital intensity by firm size is meaningful only if all firms belong to the same industry and if the industry is precisely and carefully defined. Ideally, all firms should produce the same product of similar quality. If not, differences in capital intensity may be caused by product or quality differences rather than differences attributable to firm size. We attempt to minimize this problem by using the most disaggregated data available in Korea and Taiwan. However, even industries at the four digit level are seldom defined for a single product of a given quality. In other words, disaggregation can reduce but not eliminate the problem. Finally, if firms within a given industry are not vertically and horizontally integrated to the same extent, then differences in capital/ labor ratios may be the result of differences in the degree of integration and in the types of ancilliary goods and services provided. Again, this is a problem that cannot be eliminated when we are restricted to census data. Despite these considerable shortcomings, comparing the capital labor ratios at the four-digit industry level by size of establishment is still a useful part of any investigation into capital intensity by size of establishment.

66 57 - Because the four-digit industries used in the 1968 Korean manufac turing census are defined more narrowly (indeed, many are at the product level and correspond to the five-digit classification used in Korea since 1975) than those in the 1971 Taiwan industrial census, and because the Korean data can be disaggregated into finer size categories (the Taiwan data can be classified into two size categories only and 100+), factor proportions derived from the Korean data are more revealing and useful than the ones calculated for Taiwan. Accordingly, our discussion shall focus primarily on the Korean data and examine the Taiwan results only very briefly. Appendix table D12 presents the capital/labor ratios of large (100+ workers) and small plants in each of the industries in which small plants were predominant in Taiwan in An inspection of the data reveals that small plants had lower capital/labor ratios than large plants in the vast m.ajority of the small scale industries. However, because many of the fourdigit manufacturing industries in Taiwan are defined quite broadly, we must not accept these results at face value, particularly since the more detailed Korean data reveal somewhat different results. The capital/labor ratios for industries in which small establishments (5-99 workers) were predominant in Korea in 1968, for industries in which small establishments accouated for percent of the industry employment in 1968, and for industries in which small establishments accounted for 0-24 percent of the industry employment in 1968 are presented in appendix tables D6, D7, and D8 respectively. Thne more significant relationships between capital/labor ratio and firm size found in these tables are discussed below. The capital/labor ratio for all manufacturing industries increases with the size of establishments, although it remains nearly constant through the range of 10 to 199 workers. The capital/labor ratio for all small industries (those in which small plants were predominant in 1968) also shows a tendency to rise with size of establishment, except for the fact that there is a sharp drop once the size category of 500+ workers is reached. However, one should not attribute too much significance to this decline, since the capital/labor ratio for establishnients with 500+ workers reflects only the conditions in the very few small industries that had such large establishments. Treating the manufacturing sector and the small-industry sector as agggregates mixes the influences of products and of size. To separate as much as possible the product from the size effects, the capital/labor ratio of each individual industry in appendix tables D6, D7, and D8 must be examined. The size category with the highest capital/labor ratio is identified for each industry and the results are summarized in table 4.4. The "not classified" category includes the less homogeneous industries and industries where establishments are concentrated in a few size categories. Perhaps the most salient feature of table 4.4 is that the capital/labor ratios foor

67 the individual industries do not vary in a consistent manner with the size of establishment. For example, of the 10 type IA small-scale industries classified in table 4.4, the highest capital/labor ratio is found in every size category except the category It has often been noted that low volume technique is usually the labor-intensive technique. But, judging by the Korean data, low volume techniques do not always have capital saving attributes. While there are many small-scale industries in Korea in which the capital/labor ratio is lowest in establishments with 5-9 workers and rises with the size of establishment, there are just as many in which the capital/labor ratio is highest in establishments with 5-9 workers and declines substantially as the size of establishment increases. Of the 71 small-scale industries classified in Table 4.4, only in 22 was the highest capital/labor ratio in a size category above 100 workers. Indeed, the distribution for small-scale industries shows a sharp drop in the number of industries with highest capital/ labor ratio when establishment size increases from below to above 200 workers. For those industries not dominated by small enterprises, the distribution of highest capital/labor ratio by size category also does not show any consistent pattern. Table 4.4 shows that among these industries, the highest capital/labor ratio was found about as often in size categories below as above 100 workers. For all manufacturing industries classified in table 4.4, the size categories with the most cases of highest capital/labor ratio are "10-19 workers" and "20-49 workers," each with 26 industries. Apparently the capital saving aspect of low volume techniques are present only for some products and some processes. Even though the capital/labor ratios for many industries in Korea do not increase with establishment size, a sufficient number of industries do have this characteristic to warrant some speculation about why capital intensity increases with firm size. The observed rise in capital intensity, of course, may be simply a reflection of the statistical and coverage problems cited earlier. In other words, the difference between the capital/labor ratio of SSEs and that of LSEs may be due to differences in the product produced, differences in the rate of capacity utilization, 1/ and other measurement problems. Besides these statistical explanations, two additional reasons have frequently been offered to explain the rise in capital intensity with firm size. The one most often mentioned in that SSEs and LSEs face very different factor prices. Because, in comparison with LSEs, SSEs pay a higher price for capital and a lower price for labor, they tend to select the more labor-intensive technique. However, one suspects that a part of the observed differences in factor prices may just be reflecting the fact that SSEs and LSEs use factors of differing quality. For instance, SSEs generally employ 1/ There is some evidence that large firms in Korea have higher rates of capacity utilization. Consequently, while their higher capital/labor ratios may reflect a higher degree of mechanization, they do not necessarily imply a higher capital intensity once differences in utilization rates are accounted for.

68 Table 4.4 NUMBER OF CASES (INDUSTRIES) WHERE CAPITAL/LABOR RATIO IS HIGHEST IN THE SIZE CATEGORY INDICATED Korea fieda/ Total IA Industries where IB SSEs have IC % of IIA employment IIB (Small-Scale IIC Industries) Subtotal IIIA Total Not Industries where have 25-49% of employment Industries where SSEs have 0-24% of employment Grand total a/ All industries which contain the word "Miscellaneous", "other", or "not elsewhere classified" in their titles plus all industries which did not have establishments in at least 4 size categories, at least one of which is below and one above 100 workers. Source: Appendix tables D6, D7, and D8. See chapter 3 for the description of the various categories of small-scale industries.

69 a significantly larger share of unskilled workers and workers with limited or no education. Data from Korea and Taiwan suggests that, once these quality differences are accounted for, the wage difference between SSEs and LSEs narrows but does not disappear. 1/ To the extent that the differences in factor prices are caused by market distortions and that the p_ices paid by SSEs reflect more accurately the factors' social opportunity costs, then LSEs are economically inefficient. In which case, attempts should be made to reduce or eliminate the market distortions. There is evidence that, in some industries, the rise in capital intensity with firm size is a characteristic of the production function. That is to say, the production function is not homothetic, but rather one in which the capital intensity of the technique selected, at given factor prices, increases with scale. In this case, it is economically efficient for the small plants to select a labor intensive technique and the large plants to choose a capital intensive technique. Another important finding of appendix tables D7 and D8 is that the capital/labor ratios of many of the industries in Korea not dominated by small establishments are quite low, often considerably lower than the average for the manufacturing sector as a whole or the average for the smallindustry sector. Indeed, in 35 of the 81 industries in Korea not dominated by small establishments (i.e., where small establishments accounted for fewer than 50 percent of the industry employment) in 1968, the capital/labor ratio was lower than the average for the small-scale industry. In total, these 35 industries employed nearly 190,000 workers, or approximately one-quarter of Korea's total factory employment in manufacturing. Included among these 35 industries are also some of the fastest growing industries in Korea (e.g., electrical machinery, rubber footwear and various textile products). Apparently, the success of Korea's and Taiwan's manufacturing sectors in absorbing labor is due, to a large part, to the development in the two countries of industries that produce labor-intensive products rather than to any special attention to the small-industry sector. Efficiency by Size of Establishment in Manufacturing Meaningful measures of efficiency or productivity by size of establishment are also difficult to construct. Besides the difficulties of measuring capital and labor already discussed, there are some additional problems that need to be noted. Ideally, efficiency comparisons by size of establishment should be restricted to firms that produce the same product, face the same market (so that they receive the same price for their output), and are vertically and horizontally integrated to the same degree. Clearly census and survey data do not meet these conditions a'nd disaggregation to the four-digit industry level reduces but does not eliminate these problems. Consequently, there are likely to be distortions in our efficiency measures so that comparison across firm size must be made with some caution. 1/ See chapter 5.

70 Although they are approximations, the comparison of productivity by establishment size to be presented in this section is nevertheless a useful first step in analyzing relative efficiency across firm size. Because its data are less detailed, the efficiency measures for Taiwan are less meaningful. Accordingly we shall limit our discussion of relative efficiency in Taiwan's small scale industries to a brief summary. In assessing the evidence, it is important to keep in mind that in Taiwan small-scale industries, even when disaggregated to the four-digit level, are not very homogeneous. Consequently, our findings must be viewed with considerable caution. Appendix table D12 presents the output/capital and the output/labor ratios of large and small plants in each of the industries in which small plants were predominant in Taiwan in An inspection of the data reveals that small plants had equal or higher labor productivity than large plants in a sizeable number of small scale industries. However, small-scale industries in which the output/capital ratio was higher in small than in large plants were much fewer in number. But, interestingly, in nearly every marketoriented small-scale industry (category IB), small plants had higher output/ capital ratios than large plants. Altogether, in 14 small-scale industries (out of the 42 in appendix table D12 in which large enterprises co-existed with small enterprises), small plants had both higher output/capital and higher output/labor ratios, 1/ suggesting that in these industries small plants used resources more efficiently than did large plants. But there were also 11 small-scale industries in which small plants had both lower output/ capital and lower output/labor ratios. Since input-output coefficients are available for small and for large plants, measures of relative total factor productivity (relative efficiency), A(s)/A(1), can be constructed for each industry using the equation: A(s() m l ro(s)/ii(s) A (1) i O)/ IIi()1 a. = 1 ai where A(s) is the total factor productivity of small plants, A(1) the total factor productivity of large plants, O(s) the value added produced by small plants, O(l) the value added produced by large plants, Ii(s) the ith factor of production used by small plants, I.(1) the ith factor of production used by large plants, and a 's are the factor shares. Only two factors of production are explicitly identified, capital (total assets in operation) and labor. 1/ They were tea processing, structural clay products, manufactured ice, products of wood, bamboo, cane, n.e.c., soap, detergent, and cosmetics, motorized tricycles, copper, food, n.e.c., non-metallic mineral products, n.e.c., professional and scientific equipment, process paper and its products, mills, n.e.c., silk textiles, and animal feeds.

71 For each industry in appendix table D12, two 9-Eculations of relative efficiency are presented. In calculation A the a s are the industry's actual factor shares recorded in the 1971 industrial census, and in calculation B the capital share is assumed to be.2k/(2k + W), where K is the indust-y's total assets in operation and W is the industry actual wage bill. Calculation B is presented in recognition of the fact that factor prices in less developed countries do not generally reflect their opportunity costs. Specifically, in Taiwan, with ceilings on interest rates and credit rationing, the accounting costs of capital understate the opportunity costs of capital. The assumption in calculation B is that the shadow interest rate is about 20 percent. Since by 1971 much of Taiwan's surplus labor had already disappeared as the result of rapid industrial growth in the 1960's Taiwan's wage rates are unadjusted on the assumption that they reflect reasonably well the opportunity costs of labor. Relative efficiency measures were also calculated using shadow interest rates of 25 percent and 30 percent, but they gave fairly similar results and are not presented here. Using actual factor shares as weights, the relative efficiency measures show small plants to be equally or more efficient (ratios equal or greater than 1) in 20 (including the two in which large enterprises produced negative value added) of the 42 industries in appendix table D 12 where comparisons were possible. When factor shares that reflect an interest rate of 20 percent are used as weights, the relative efficiency ratio equaled or exceeded I in 23 industries, and in 6 other it was greater than.80. Productiv:ity in small plants became competitive with that in large plants in a greater number of industries when weights reflecting an interest rate of 20 percent were used because in most small-scale industries in Taiwan, the capital/labor ratio was generally higher in large than in small enterprises, while labor productivity was not comparably higher. The total factor productivity of both small and large enterprises do not differ systematically by type of small-scale industries. Small plants were found to be more productive than large ones in all types of industries. However, in many small-scale industries, SSEs were also found to be distincti-vely less productive than large enterprises. This raises the question of how to explain small plant predominance in these industries. Since some of these industries are not very homogeneous, one obvious explanation is that SSEs produce different products than do LSEs, and the products they produce are not in competition with one another. Another likely reason is that SSEs prevail by paying lower wages than LSEs. SSEs are able to do this in part because they use lower quality labor. In other words, our productivity measures are distorted, and in reality SSEs are not less efficient than large enterprises. Finally, our relative efficiency measures may be accurate, so that in time the predominance of SSEs in these industries will decline. Because industries are defined more precisely and narrowly in the 1968 Korean manufacturing census than in the 1971 Taiwan industrial census, and because the Korean data can be disaggregated into more and finer size categories, the productivity estimates by firm size derived from the Korean data are more revealing and useful than the ones in Taiwan just discussed. We turn now to examine these estimates.

72 Many studies have observed an apparent inverted "U" relationship between the output/capital ratios of manufacturing industries and firm size, i.e., the output/capital ratio rises as firm size increases, usually reaching a peak somewhere in the size range of workers and then declines. Because of this relationship, SSEs are believed to use capital more productively than LSEs. However, the more detailed Korean data suggest that the inverted "U" relationship exists only at the aggregated level and reflects product differences more than size differences. Appendix table D9 presents the output/capital ratios by firm size for the manufacturing sector as a whole and for those industries with small firm predominance (the small-industry sector) in Korea. Output/capital ratios by firm size for industries in Korea not dominated by SSEs are presented in appendix tables D1O and Dli. The inverted "U" relationship is observed for the manufacturing sector as a whole, with the output/capital ratio rising to a peak at the size category workers and then declining. Reflecting this inverted "U" relationship, the output/capital ratios for establishments in the size categories below 100 workers are significantly lower than the average for the manufacturing sector, while those for establishments in the size categories above 100 workers are higher than average. Interestingly, when the output/capital ratios for small industry as a whole are calculated by size, the inverted "U" relationship becomes very much less noticeable. Furthermore, the output/capital ratios for the small industry sector do not differ as significantly by size of establishment as they do in the manufacturing sector as a whole. For example, in the small industry sector, the output/capital ratio is.67 for establishments with 5-9 workers and.65 for establishments with workers. The exceptions are the size categories and workers where the output/capital ratios, at about.81, are somewhat higher than those in the other size categories. When the small-industry sector is disaggregated to individual small industries, appendix table D9 shows that the output/capital ratios do not vary in a systematic manner with the size of establishment. One interesting finding, however, is that, among all size categories, establishments with workers had the highest output/capital ratios in a surprisingly large number of small industries, particularly among those in categories other than IIIB (small total markets). Finally, the evidence also does not suggest any consistent relationship between the output/capital ratio and firm size for those industries in Korea not dominated by SSEs (see appendix tables D1O and D1I). A firms's efficiency depends, of course, not only on its capital productivity but also on the productivity of its other factors. Appendix tables D13, D14, and D15 present efficiency measures by establishment size for individual four-digit manufacturing industries in Korea on the assumption that only two factors, capital and labor are used. The relative efficiency measure is similar to the one used earlier, except the comparison is now between the total factor productivity of establishments of a given size and that of the industry as a whole. In other words, the equation used to compute the relative efficiency of establishments in the jth size category of a given industry is:

73 A (i) = L(j)/Ii(j) - a i i a A i=1 L 0 ai where A(j), 0(j), and Ii(j) are respectively the total factor productivity, value added, and ith factor of production in the jth size category of the industry. A, 0, and I. are respectively the total factor productivity, value added, and ith factor of production in the industry. a I's are factor shares. As there are only two factors -- capital (fixed assets in operation) and labor -- m = 2. When the relative efficiency measure, A(j)/A, equals one, it means that the total factor productivity of establishments in the jth size category equals the average total factor productivity for all establishments in the industry. Relative efficiency measures are calculated using actual factor shares for the ai's as well as using shadow interest rates of 20, 25, and 30 percent. Shadow interest rates are used in the belief that in Korea, as in Taiwan, interest paid on capital is below the social opportunity cost of capital. Because efficiency measures calculated with capital shadow priced at 20, 25, and 30 percent yield similar results, appendix tables D13, D14, and D15 present only the relative efficiency measures based on the actual factor shares and on capital shadow prices at 20 percent. For each four-digit manufacturing industry in Korea, the size category with the highest total productivity (capital shadow-priced at 20%) is identified and the results, distributed by firm size, are summarized in table 4.5. To make the analysis more meaningful, the less homogeneous industries and industries where establishments are concentrated in only a few size categories are not considered. Accordingly, all four-digit industries which contain the words "miscellaneous," "other," or "not elsewhere classified" in their titles and industries which do not have establishments in at least four size categories (at least one of which is below and one above 100 workers) are grouped together in table 4.5 under the heading "excluded." Of the 213 four-digit industries in 1968, 75 are in the "excluded" category (half of them from category IIIA of the small industry sector), and together they accounted for 14.5 percent of the factory employment. Table 4.5 shows that in only a limited number of industries is total productivity highest in small establishments, particularly if small is defined to exclude the size category workers. In only 16 of the 71 small industries condidered is total productivity highest in a size category below 50 workers. Interestingly, 8 of the 16 are simple assembly, mixing, or finishing industries (IIC). Together these 16 industries accounted for only 7.3 percent of the total factory employment in In other words, they are relatively minor industries. Total productivity is highest in the size category workers in 22 of the small industries considered, and in 1968

74 Table 4.5 Number of Cases (Industries) Where Total Productivity (Capital Shadow Priced at 20%) is Greatest in The Size Category Indicated - Korea, Excluded-/ Total IA Small scale industries IB (Industries where IC SSEs have 50%+ IIA of employment) IIB IIC Subtotal IIIA Total Industries where SSEs have 25-49% of employment Industries where SSEs have 0-24% of employment Grand Total Employment in corresponding industries as % of total factory employment Industries Where SSEs have: 50% of employment % of employment % of employment All industries % a/ All industries which contain the words "miscellaneous", "other", or "not elsewhere classified" in their titles plus all industries which did not have establishments in at least 4 size categories, at least one of which is below and one above 100 workers. Sources: Appendix tables D13, D14, and D15. See chapter 3 for the description of the various categories of small scale industries.

75 they accounted for 10.6 percent of the total factory employment. Clearly, in the Korean context, workers is the most important of the small size categories. In total, some 18 percent of all factory employment in manufacturing or about 36 percent of the factory employment in the smallindustry sector are accounted for by small industries where total productivity is highest in establishments with fewer than 100 workers. Table 4.5 also shows that 33 of the 71 small industries are most efficient in a size category above 100 workers. Many of the small industries in type IA and IB seem to fall into this category. In 6 small industries the highest total productivity is found in the 500+ size category, and these 6 industries accounted for 11.2 percent of all factory employment in manufacturing or nearly one-quarter of the factory workers in the smallindustry sector. In some of the industries where SSEs do not predominate, the highest total productivity is found in size categories below 100 workers, particularly in the size category However, these appear to be relatively minor industries as their total employment is but a small percentage of all factory employment in manufacturing. In most industries not dominated by SSEs, the most productive establishments were those with 100+ workers. Indeed, in many of these industries, both the output/capital ratio and relative efficiency increase significantly with the size of establishment. Because these are also some of the most labor-intensive industries in Korea, they are important providers of employment in the manufacturing sector. This evidence lends support to the observation that in many industries large establishments are not only more productive but also more labor intensive than small establishments. In assessing the above findings, it should be noted that there exist several reasons for believing the efficiency measures to be biased against SSEs. In contrast to LSEs, SSEs in Korea are more likely to underreport their value-added, use lower quality labor, have a lower rate of capacity utilization, and operate in more competitive conditions. All of these would show up in the productivity measures as lower efficiency. However, there also may be some factors that bias the productivity measures in favor of SSEs. In particular, capital may be understated to a greater extent for small than large establishments. If so, this difference may offset some of the biases against the small establishments. With these qualifications in mind, what conclusions can we draw from the Korean data? The evidence strongly suggests that establishments in size categories below 100 workers are most productive in only a limited number of industries, and in half of these cases the most productive size is the "small-medium" size category of workers. Furthermore, the employment impact of these industries, particularly those that are efficient for establishments with fewer than 50 workers, are limited. Employment in all industries where establishments in size category 5-9 workers are most productive accounted for only 2 percent of the factory employment in manufacturing; in size category workers, 1.9 percent; in size category workers, 13.2 percent, and in size category workers, 17 percent. If only industries where small establishments predominate are considered,

76 the impact declines significantly. Employment in small industries where establishments in size category 5-19 workers are most productive amounted to only 1 percent of all factory workers; in size category workers, 6.3 percent, and in size category workers, 10.6 percent. It would appear from the Korean data that establishments with fewer than 50 workers cannot be relied upon to generate a large amount of employment efficiently. In part this is because small establishments are found to be efficient in only a few industries, and in part because the few industries where small establishments are efficient do not absorb large number of workers. Thus, from the viewpoint of efficient employment creation, small (particularly the very small) may not necessarily be beautiful. Resource Use in Small Scale Non-Manufacturing Industries Up to this point I have said little about SSEs in non-manufacturing industries. In part this is because there are less data on non-manufacturing activities by size of establishment. Tables 4.6 and 4.7 present respectively the relevant ratios and relative efficiency measures in a number of important non-manufacturing industries in Taiwan in which SSEs play a prominent role. Needless to say, these ratios and efficiency measures suffer from many of the same problems mentioned in the earlier discussion of manufacturing. Salient features revealed in these tables are discussed below. In all construction activities, there is a tendency for the capital/ labor ratio to decline with the size of enterprise, but this tendency is particularly strong in painting and well drilling, the two construction activities in table 4.6 most precisely defined. In some of the other construction activities, such as civil engineering, the capital/labor ratio, after falling with the size of enterprise, rises at the largest category, confirming the fact that large civil engineering firms often engage in different types of construction work than small establishments. Although value-added per unit of total assets rises with the size of enterprise in all construction industries except civil engineering, the relative efficiency measures (either those constructed with the actual factor shares as weights, or those constructed on the assumption that capital share is.2k/(.2k + W)) show construction enterprises with fewer than 30 workers to be clearly the more efficient users of resources in all types of construction activities except electrical engineering, where they are about equally productive as larger enterprises. Restaurants and hotels and transportation and storage also display capital/labor ratios that appear to increase with the size of establishment, but the rise occurs primarily in the size range of 100+ workers. One suspects that the large enterprises are tourist hotels, airlines, and railroads that are not usually considered part of the small-industry sector. One may conclude that the more traditional transport facilities and restaurants that are part of the small-industry sector have capital/labor ratios that do not vary significantly by size of enterprise. For restaurants

77 sable 4.6 Total Assets in Operation per Person Employed and Valueadded per Unit of Total Assets in Operation for Construction, Trade, and Selected Service Industries By Size of Enterprise, Taiwan, 1971 Total assets per Size of enterprise (workers) person employed, 000 NT$ Construction Civil engineering Electrical engineering Pipe installation Painting Well drilling Others Wholesale trade Retail trade Restaurants and- hotels Transportation and storage 1r Personal service Value added per unit of total assets ConstructiOn Civil engineering Electrical engineering Pipe installation a - Painting Well drilling Others Wholesale trade Retail trade Restaurants and hotels Transportation and storage Personal services anegative value-added. Source: Based on data in The Report of the 1971 Industrial and Commercial Census of Taiwan and Fukien ka-ea, Reou blic of China.

78 Table 4.7 Relative Efficiency by Size of Enterprise, A(j)/A, for Construction, Trade, and Selected Service Industries, Taiwan, 1971 Size of enterprise (workersl _ I. Actual factor shares Construction Civil engineering Electrical engineering Pipe installation a - Painting, etc Well drilling Others Wholesale trade Retail trade Restaurants and hotels Transportation & storage Personal services II. Capital share =.2K(.2K+W) ConstructiJon Civil angineering Electrical engineering Pipe installation Painting, etc a Well drilling Others Wholesale trade Retail trade Restaurants & hotels Transportation & storage Personal services aenterprises in this category had negative value added. Source: Based on data in The Report of the 1971 Industries and Commercial Census of Taiwan and Fukien Area, Republic of China.

79 and hotels, both output/capital ratio and relative efficiency are highest for establishments with 1-3 workers and 500+ workers, that is, among the smallest eating establishments and the most modern tourist hotels. For restaurants and hotels with 4-99 workers, the output/capital ratio and relati-ve efficiency are somewhat lower and do not change significantly with size. Enterprises with 1-99 workers in transportation and storage have approximately the same output/capital ratio, about.25, but larger enterprises have significantly lower output/capital ratios. Except for those with 500+ workers, enterprises with 1-6 workers in transportation and storage are the most efficient users of resources. And, when relative efficiency is calculated on the assumption of a 20 percent rate of return on capital, enterprises with 1-6 workers in transporation and storage are even more productive than those with 500+ workers. There is no discernible trend in the capital/labor ratios by size of enterprise in wholesale trade, retail trade, or personal services. In wholesale trade, both the output/capital ratio and relative efficiency rise with the size of enterprise, but they drop sharply in enterprises with 500+ workers. However, over a wide size range ( workers) the variation occurs within very narrow bands: between.24 and.27 for the output/capital ratio and between 1.5 and 1.8 for the relative efficiency measure. As expected, the output/capital ratio and the relative efficiency measure in retail trade establishments show little variation by size of enterprise, except that those with more than 100 workers have significantly smaller output/capital ratio and lower relative efficiency. Finally, both the output/capital ratio and the relative efficiency measure in enterprises that provide personal services fluctuated by size, but within relatively narrow limits.

80 V. CAPITAL, LABOR, AND ENTREPRENEURS IN THE SMALL ENTERPRISE SECTOR This chapter presents evidence from Korea and Taiwan pertaining to the sources of capital for small enterprises, the prices small enterprises pay for factors, and the characteristics of entrepreneurs in the small enterprise sector. Capital The initial capital requirement is one, and perhaps the most important, potential barrier to entry into the small enterprise sector. A 1973 survey of small (5 to 49 workers) manufacturing enterprises, conducted by the Citizens National Bank (CNB) in Korea, asked "new" firms (those established between January 1971 and June 1973) to indicate the approximate magnitude of their initial investment. 1/ From the responses received, the 2,510 manufacturing enterprises with 5 to 49 workers established between 1971 and June 1973 are distributed by industry, size, and size of initial investment in Table 5.1. Unfortunately, it is not possible to deduce the average initial investment from the information in Table 5.1, but the data suggest that it increased with size (number of workers) of enterprise. Of the 1,411 "new" enterprises with 5-9 workers, 44 percent began with initial capital below 1 million won (about US$2,500 at the exchange rate), 49 percent with initial capital between 1 and 10 million won (US$2,500-25,000), and 6 percent with initial capital between 10 and 30 million won (US$25,000-75,000). Of the 724 "new" enterprises with workers, the distribution by size of initial capital was as follows: below 1 million won, 20 percent; 1 to 10 million won, 58 percent; 10 to 30 million won, 19 percent, and above 30 million won, 3 percent. Finally, of the 375 "new" enterprises with 20 to 49 workers, distribution by initial capital was as follows: below 1 million won, 7 percent; 1 to 10 million won, 38 percent; 10 to 30 million won, 35 percent; and above 30 million won, 21 percent. To put the distribution somewhat differently, more than two-thirds of the "new" enterprises with 5 to 49 workers began with initial capital greater than US$2,500. Of the 798 enterprises that began with initial capital of less than US$2,500, 75 had less than US$250, 95 between US$250 and US$500, 112 between US$500 and US$750, 186 between US$750 and US$1,200, and 329 between US$1,200 and US$2,500. These figures suggest that, while the initial capital requirements were not prohibitively large, they were also far from modest. With a per capita GNP of US$375 in 1973, not many Koreans could easily have raised US$2,500. However, 1/ The Citizens National Bank, Report on the 1973 Survey of Small and Petty Businesses (Manufacturing). The survey interviewed 1,684 small enterprises, selected by stratified random sampling techniques from a population of 21,045 enterprises with 5 to 49 workers.

81 Table 5.1 Number of Small Manufacturing Enterprises Established During Distributed by Size of Initial Investment, Size of Enterprise, and Industry, Korea By size of enterprise and size of initial investment 5-9 workers workers workers Below Below Below Total mil won mil won mii won mil won mil won mil won mil won mil won mil won mil won mil won Manufacturing Food Beverage <0 0 0 Textile Apparel Wood & its prod Furniture & fix Paper & its prod Printing & pub Industrial chem Other chem Prods. of pet. and coal Nonmetallic minearal prod Metal products Machinery Elec. mach. and apparatus Transp. equip Other mfg. ind Source: The Citizens National Bank, Report of the 1973 Survey of Small and Petit Businesses (Manufacturing), Table 1-5.

82 we need to remember that these figures are for establishments with 5 to 49 workers. Establishments smaller than 5 workers would undoubtedly have much more modest initial capital requirements. The initial capital requirements differ, of course, oy industry. In Korea, industries with relatively modest initial capital requirements include wearing apparel, furniture and fixtures, and non-metallic mineral products. 1/ Fifty-one percent of the "new" small (5 to 49 workers) enterprises in wearing apparel, 68 percent of those in furniture and fixtures, and 53 percent of those in non-metallic mineral products began with initial capital of less than 1 million won, and the initial capital invested in 90 or more percent of the "new" small enterprises in these three industries was less than 10 million won. It is not surprising, therefore, to find one-third of the small enterprises established during in these 3 industries. Industries where a substantial share of the small enterprises established during began with initial capital of 10 million won or more included beverages (29 percent), paper and its products (38 percent), industrial chemicals (30 percent), metal products (32 percent), machinery (39 percent), and transport equipment (37 percent). Furthermore, during , no small enterprises with less than 1 million won in initial capital were established in the following 5 industries: printing and publishing, electrical machinery and apparatus, industrial chemicals, paper and its products, and transport equipment. In three industries, printing, petroleum and coal products (mainly coal briquettes), and electrical machinery and apparatus, nearly all of the small enterprises established during began with initial capital between 1 and 10 million won. Finally, it should be noted that in many industries--most notably in food, beverages, and textiles--the variance in the size of initial investments was quite large--even when the size (number of workers) of the enterprises is taken into consideration. For example, of the 138 beverage enterprises with 5-9 workers established during , 51 began with less than 1 million won, 50 with between 1 and 10 million won, and 37 with 10 to 30 million won. The large variance undoubtedly reflects, in part, the fact that small enterprises in these industries produce a large variety of goods of varying qualities so that the type and therefore the cost of capital equipment required would differ widely. The working capital requirements of small-scale industries or, as defined by the 1973 CNB survey, the amount of funds needed to operate a small manufacturing enterprise for one cycle (or circulation), are also available. These are tabulated and arranged by industry and by size of enterprise in Table 5.2. Not surprisingly, the amount of working capital required increases with the size of enterprise. Thus, the average requirement for enterprises with workers was more than twice that for enterprises with workers and more than 6 times that for enterprises with 5-9 workers. The average working capital required by a manufacturing enterprise with 5-9 workers in / All figures in this and the following paragraph are calculated from figures in Table 5.1.

83 Table 5.2 Average Working Capital Required by Size of Enterprise and Industry, 1973 (000 won/enterprise) Size of enterprise (workers) Total Manufacturing 1, ,229 5,344 Food 1, ,695 2,903 Beverages ,496 1,894 Textiles 3, ,037 5,393 Wearing apparel ,003 5,028 Leather and its products 4,595 2,931 9,029 2,611 Leather footwear ,204 2,043 Wood and its products 3,650 2,520 3,551 15,725 Furniture and fixtures ,279 2,250 Paper and its products 2, ,333 6,526 Printing and publishing 2, ,198 12,105 Industrial chemicals 3,137 2,941 2,900 3,626 Other chemicals 4, ,000 13,941 Petroleum refining 1,541 1, Petroleum and coal prod. 4,066 2,483 2,813 16,292 Rubber products 1,444 1,424 1,737 1,184 Plastics products 2, ,552 Non-metallic minearal products ,299 3,199 Basic metals 3,010 1,266 2,249 5,023 Metal products 2,104 1,162 2,385 4,696 Machinery 2,033 1,098 2,402 3,937 Electrical machinery and apparatus 1, ,141 3,430 Transport equipment 3,326 2,105 3,342 4,974 Photographic, scientific, measuring equipment ,604 Other manufacturing 1, ,654 2,609 industries Sources: The Citizen National Bank, Report of the 1973 Survey of Small and petit Businesses (manufacturing), Table 1-25.

84 was W 857,000 (about US$2,100) but varied considerably by industry. In 3 industries (wearing apparel, leather footwear, and furniture and fixtures), the average working capital required by an enterprise with 5-9 workers was about US$1,00u, but in five others (transport equipment, petroleum and coal products, industrial chemicals, wood and its products, and leather and its products) it exceeded US$5,000. Consistent with our expectation, since a substantial portion of the initial capital is used as working capital, industries with relatively modest working capital requirements, such as apparel, furniture and fixtures, and non-metallic mineral products, were also those with relative low initial capital requirements. The 1973 CNB survey also identified the main sources of initial capital funds as well as the sources of working capital, and the survey results appear to confirm two important characteristics commonly attributed to the small-enterprise sector. The first is that the small-enterprise sector operates in a fragmented capital market and is isolated from the organized or the institutional credit market. The second is that small enterprises appear to play an important role in mobilizing savings that might otherwise be used unproductively. The survey findings show that, of those enterprises with 5-49 workers established from 1971 to June 1973, 25.5 percent identified their main source of initial capital as loans from friends and relatives; 8.8 percent, financial institutions; 6.4 percent, private lenders; 4.9 percent, severance pay, and 54.4 percent, other sources (the main one, presumably, was personal savings). This clearly suggests that little of the initial capital invested in the smallenterprise sector in Korea came from either the organized credit market or from the informal curb market (private lenders). Rather, the bulk of the initial capital was financed from the accumulated savings of the entrepreneurs and their immediate circle of friends and relatives. Apparently, in less developed countries, where financial institutions often do not serve the small savers, small enterprises provide a channel through which savings can be put to productive uses. Financial institutions in Korea apparently play a somewhat larger, but still a minor, role in supplying funds to existing small enterprises for use as working capital or to help finance additional fixed investments. A Medium-Small Industry Bank survey reported that, of the investments in fixed capital made by manufacturing enterprises with 5-49 workers in 1975, 32 percent were financed by financial institutions, 3 percent by private lenders, and 65 percent self-financed (presumably from own savings and that of friends and relatives). 1/ However, the very small enterprises still had to depend almost exclusively on their own resources for expansion. Eighty-four percent of the fixed capital investments made by enterprises with 5 to 9 workers in 1/ The Medium-Small Industry Bank, Report on the Status of Medium-Small Industries, 1975, Table 2.9.

85 was self-financed. In Korea, small enterprises also depend primarily on their own resources for working capital. According to the 1973 survey of small and petty businesses, approximately three-quarters of the required working capital of small manufacturing enterprises was self-provided. 1/ Of the one-quarter that was borrowed, 61 percent was from financial institutions, 8 percent from private lenders, 17 percent from other enterprises (presumably trade credits), and 14 percent from friends and relatives. In general, the larger the enterprise, the larger share of the borrowed portion of the working capital was financed by financial institutions. Of the working capital borrowed by enterprises with workers, 70 percent came from financial institutions, but for enterprises with 5-9 workers the share was only 44 percent. It is easy to understand why small enterprises have received so little institutional credit. Loans are more costly to process and default risks are perceived to be substantially higher for SSEs than LSEs. This means that, unless special institutions are created to serve SSEs, their needs will be largely ignored. Until recently, such institutions did not exist in Korea or in Taiwan. Furthermore, the financial institutions in Korea and Taiwan are largely government owned and controlled, and during much of the postwar period institutional credits, by and large, were allocated administratively. In consequence, credit flowed primarily to those enterprises (government or private) or projects the government favored, and neither the government in Korea nor the one in Taiwan considered the development of the small-enterprise sector important in itself. Under such conditions, it is not surprising to find the small-enterprise sector isolated from the organized credit market. Because of the fragmented capital market, it is widely believed that small and large enterprises pay significantly different prices for their capital. It is true that in Korea and Taiwan the interest on institutional loans is low and usually subsidized and that enterprises that are able to get institutional credits are generally large. Enterprises that cannot get institutional loans, and most SSEs would fall into this category, must borrow from the informal credit market where the lending rates are much higher. 2/ The little evidence we have suggests that in the mid-1970s private lenders in the unorganized credit market charged interests of 3-4% per month in Korea and 2-3% per month in Taiwan. Thus, interest rates on the unorganized market are several times higher than that charged by financial institutions. It would appear that, in Korea and Taiwan, interest costs are significantly 1/ This and the following statistics are from The Citizen National Bank, Report of the 1973 Survey of Small and Petty Businesses (Manufacturing), Table / For one description of the informal credit market in Taiwan, see D.R. DeGlopper, "Doing Business in Lukang," in W.E. Willmott, ed., Economic Organization in Chinese Society (Stanford: Stanford University Press, 11972), pp

86 lower for LSEs than for SSEs, and that the higher interests paid by the SSEs cannot be completely explained by the higher cost and greater risk of lending to small enterprises. These differences may help explain why some SSEs in Korea and Taiwan are more labor intensive. Lack of access to institutional credit may also be why SSEs in Korea and Taiwan are under-cai :alized and operate with insufficient working capital. Undercapitalization is, of course, one reason why the mortality rate is so high among SSEs. 1/ Labor Because of imperfections in the labor market, it is widely believed that wage costs are substantially higher in LSEs than in SSEs, and this differences is one important reason why SSEs are able to compete against the technically more superior LSEs. Is this wage difference between small and large enterprises observed in Korea and Taiwan, and to what extent is the difference due to market imperfections? At the aggregate level, the wage difference between small and large enterprises is obvious and substantial. In Korea, the annual average wage in 1968 was W 63,000 in manufacturing establishments with 5-9 workers, W 83,000 in establishments with workers, W 84,000 in establishments with workers, W 92,000 in establishments with workers, W 102,000 in establishments with workers, and W 125,000 in establishments with 200+ workers. 2/ In other words, the annual average wage paid by establishments with 200+ workers was about twice that paid by establishments with 5-9 workers. In Taiwan, the wage differential between large and small enterprises is apparently somewhat smaller. In 1971, manufacturing establishments with 500+ workers paid an annual average wage that was about 60 percent higher than that paid by establishments with 1-9 workers. 3/ Aggregate data often hide as much as they reveal. In Korea, more detailed data suggest that the relationship between wage and establishment size is much more varying at the disaggregated level, and that some of the wage differences are caused by differences in the quality of workers employed by small and large establishments. To see whether the positive relationship between wage and firm size exists when industries are more precisely defined, I used the data from the 1968 manufacturing census in Korea and calculated 1/ Undercapitalization is one reason often cited by small entrepreneurs for going out of business. See Donald R. DeGlopper, "Artisan Work and Life in Taiwan," Modern China 5 (July 1979), pp / Report on Mining and Manufacturing Census, / The 1971 Industrial and Commercial Censuses of Taiwan and Fukien Area, Republic of China. The annual average wage per worker was NT$16,539 for establishments with 1-9 workers and NT$26,172 for establishments with 500+ workers.

87 the annual average wage by establishment size for all four-digit industries. The establishment size that reported the highest annual average wage per worker is identified for each industry, and the results are distributed by establishment size and presented in Table 5.3. As before, the less homogeneous industries and industries where establishments are concentrated in a few size categories are excluded. Once the wage data is disaggregated to the four-digit industry level, average wage is no longer found to increase always with firm size. Indeed, Table 5.3 shows that in 26 industries the highest wage is paid by establishments with fewer than 50 workers. However, in 88 of the 138 fourdigit industries considered, the highest wage is paid by establishment with 100+ workers, and in many cases the wage difference is considerable, with large establishments paying average wages as much as two or three times that paid by the smallest establishments. Apparently, even within individual industries, there is still substantial wage difference by plant size, with large plants generally, but by no means always, paying higher wages. Because labor is not homogeneous and because different plants use workers of differing characteristics (quality, training, skills), whether or not the wage difference between size categories is a real difference cannot be determined unless the wage statistics are standardized for quality and skill differences. Available data do not permit us to take account of all the differences in workers' characteristics. However, the 1967 wage survey in Korea does identify earnings by broad categories of workers according to two-digit industries and size of establishment. Earnings data for two prominent types of workers are tabulated in Table 5.4. The average hourly wages of permanent male production workers with middle school education or less (grade 9 or less) are presented in panel A and that of temporary male production workers in panel B. Both sets of data suggest that (1) the average wage of the largest enterprise is not always the highest and (2) the wage gap between large and small enterprises is considerably smaller when the type of worker is defined more precisely. For example, temporary male production workers (most of whom are presumably unskilled), receive, as expected, a lower wage than permanent male workers. However, in addition, the data also show that large enterprises do not always pay the highest wage for this type of worker, and that the difference between the wage paid by small and large enterprises, in many industries, is quite limited (less than 40 percent). One other difference between workers in LSEs and those in SSEs need to be noted. In Korea and Taiwan, the turnover rates of workers are substantially higher in SSEs than in LSEs. While precise statistics are not available, it is indicative that in Taiwan workers in SSEs are sometimes referred to as "floating labor." 1/ This difference between the workers in SSEs and 1/ Donald R. DeGlopper, "Artisan Work and Life in Taiwan," Modern China, 5 (July 1979), pp

88 Table 5.3 Number of Cases (Industries) Where Annual Average Wage Per Worker is Highest in The Size Category Indicated - Korea, 1968 Not Classified- Total IA IB b/ 22 Small scale industries IC (industries where IIA SSEs have 50+% IIB of employment) IIC Subtotal liza Total Industries where SSEs have 25-49% of employment Industries where SSEs have 0-24% of employment All industries a/include all industries which contain the words "miscellaneous", "other", or " not elsewhere classified" in their title plus all industries which did not have establishments in at least 4 size categories, at least one of which is below and one above 100 workers. b/include one industry where the annual average wage per work was the same for all establishment sizes. Sources: Based on data in Report on Mining and Manufacturing Census, See chapter 3 for the description of the various categories of small industries.

89 Table 5.4 AVERAGE WAGE-/ BY TWO-DIGIT MANUFACTURING INDUSTRY AND ESTABLISHMENT SIZE - KOREA, 1967 (Won/hour) Industry Establishment Size Category (Workers) 200+ All A. Permanent male production worker with middle school education or less Food Beverage Textile Apparel and footwear Wood and cork products Furniture and fixtures Paper and paper products Printing and publishing Leather and its products b/ 1.52 Rubber products 39 31b/ Chemicals Petroleum and coal products Nonmetallic mineral products Basic metals Metal products Machinery (excluding electric) Electric machinery & apparatus Transport equipment Miscellaneous B. Temporary Male Production Worker Food Beverage Textile Apparel and footwear Wood and cork products Furniture and fixtures Paper and paper products Printing and publishing Leather and its products Rubber products Chemicals Petroleum and coal products Nonmetallic mineral products Basic metals Metal products Machinery (excluding electric) Electric machinery & apparatus Transport equipment Miscellaneous a/ Total earnings divided by total hours worked. b/ No educational breakdown available Source: Calculated from data in Bank of Korea, Report on Wage Survey, 1967, pp

90 those in LSEs undoubtedly also help to explain some of the observed differences between the wages paid by small and large enterprises. It appears that, once these quality and other differences between workers are taken into account, much of the observed wage differences between small and large enterprises would be eliminated, though probably not completely. The conclusion that the wage gap between small and large firms in Korea and Taiwan, once the characteristics of workers are standardized, is small does not come as a surprise. Labor markets appear to be relatively free of distortions in both Korea and Taiwan, In both countries,. unions are weak and disorganized, and government interventions such as minimum wage legislation are few and not vigorously enforced. If there are imperfections in the labor maarket, they appear to be minor, certainly less serious than the distortions in the capital market. Entrepreneurs Whether or not a small business is successful and whether or not a small enterprise is able to grow into a large firm depends, more than on any factor, on the ability of the entrepreneur to recognize and seize opportunities and to manage the enterprise's operation. This section examines the socio-economic characteristics of proprietors of small manufacturing enterprises in the hope of gaining insight into the characteristics of entrepreneurs. The primary source of information is again the 1973 CNB survey of small and petty businesses. From this survey, selected characteristics of small-scale industrial proprietors in Korea are obtained and presented in table 5.5. We are interested in the background of small-scale proprietors for what it may reveal about the characteristics of entrepreneurs. Seventy-three percent of the small scale proprietors in Korea started their businesses from scratch, 22 percent purchased their business, and only 4 percent acquired their business through inheritance (item 1, Table 5.5). This distribution varied little by size of enterprise. Although the surprisingly small percentage of proprietors who obtained their business through inheritance may be explained, at least in part, by the Korean War which destroyed much of the country's industrial capital, it is also evidence that most small scale proprietors are self-made. Because formal education may enhance a person's managerial and technical skills, an important characteristic of a small-scale proprietor is his educational attainment. Unfortunately, the 1973 CNB survey did not obtain this information. It did, however, obtain some information about the experience of small-scale proprietors. Since experience is not only a substitute for formal education but may, in many cases, provide better training for the proprietor, this information is useful. Two indicators of experience are presented in Table 5.5 (items 2 and 3): the distribution of proprietors by age and by occupation before becoming owners.

91 Table 5.5 Characteristics of Small-Scale Industrial Proprietors and Their Enterprises by Size of Enterprise, Korea, 1973 Size of enterprise (workers) Total (1) Percentage distribution of how proprietors acquired business 100% 100% 100% 100% Established business Inherited business Purchased business Others (2) Percentage distribution of proprietors by age 100% 100% 100% 100% Below (3) Percentage distribution of proprietors' occupation before becoming owner 100% 100% 100% 100% Worked in an enterprise in same line of business for 0-5 years for 5-10 years (5) (13) (5) (13) (6) (13) (5) (9) for 10+ years (14) (15) (16) (11) Woriked in an enterprise in a different line of business Worked in family business Merchant Civil service, police, and military service Others

92 Table 5.5 Characteristics of Small-Scale Industrial Proprietors and Their Enterprises by Size of Enterprise, Korea, 1973 Size of enterprise (workers) Total (4) Percentage of enterprises 31% 21% 39% 65% with separate accounts for enterprise and for household (5) Percentage distribution of enterprises by book-keeping methods used 100% 100% 100% 100% Double entry Single entry Others (inc. memo) Source: The Citizens National Bank, Report on the Survey of Small and Petty Businesses (Manufacturing), 1973, Tables 1-2, 1-3, and 1-15.

93 If we assume that age and experience are positively related, then the age distribution of small-scale proprietors gives some indication of their experience. In Korea only 2 percent of small-scale proprietors were younger than 30 years and 68 percent were between the ages of 40 and 59. Furthermore, the proprietors of enterprises with workers were slightly older than those of smaller enterprises. These figures suggest that most small-scale proprietors have some experience, and that proprietors of enterprises with workers have somewhat more experience than those of the smaller enterprises. The data under item 3, Table 5.5, show that, before becoming owners of small enterprises, 84 percent of the proprietors had experience in commerce or industry. In fact, one-third of the proprietors, before becoming owners, worked in the same line of business, and most of them for at least 5 years. This reflects the well-known fact that, in many industries, e.g., furniture, the aim of most apprentices and journeymen is to go into businessfor themselves. 1/ Usually, the main obstacle is capital. The desire to be independent often leads to the establishment of businesses before sufficient capital has been accumulated. Because of undercapitalization, most of these ventures end in failure. The data also show that 20 percent of the small-scale proprietors were previously merchants, and that more of the owners of enterprises with workers had commercial experience than did owners of smaller enterprises. Apparently, commerce is a good training ground for entrepreneurs. This is understandable considering that proprietors of small-scale industrial enterprises are as much involved in commerce as in manufacturing. That many proprietors were once merchants is also evidence that commercial profit is a major source of capital for small-scale industry. Another possible indicator of the ability of the small-scale proprietor is whether or not the small enterprise separates its own account from the proprietor's household account. How the enterprise keeps its records may also indicate the proprietor's ability. The available evidence for Korea is presented as items 4 and 5 in Table 5.5. As the data indicate in 1973, only 31 percent of the small-scale proprietors kept separate accounts for their enterprises. The percentage, however, increased with size of enterprises. Whereas 21 percent of the enterprises with 5-9 workers had separate accounts, 65 percent of those with workers had separate accounts. The larger enterprises also used more sophisticated book-keeping methods. More than three-quarters of the enterprises with workers used either the double entry or the single entry book-keeping methods, but less than one-quarter of the enterprises with 5-9 workers used these methods. Most of the very small enterprises, if they kept records at all, maintained only a very rudimentary set of accounts. This lack of accounting and managerial know-how is one reason why small firms find it so difficult to expand beyond workers. 1/ Ibid., p. 292.

94 also not clear whether operating a small business will necessarily give an entrepreneur the needed managerial and financial skills for operating a medium-large enterprise.

95 VI. ECONOMIC POLICIES AND THE SMALL-ENTERPRISE SECTOR The small-enterprise sector has received relatively little attention from policy makers in Korea and Taiwan. In the 1950s and the early 1960s, government policy in both countries focused on promoting industrialization through import substitution. Enterprises that received special governmient attention and assistance in this period were usually large and, at least in Taiwan, many were also enterprises the government inherited from the Japanese. However, the development policy adopted in the early postwar period, as well as the changes in policy introduced in the early 1960s, had important indirect impact on the small-enterprise sector. This chapter begins by reviewing the policy environment in Korea and Taiwan and assessing its effects on the small-enterprise sector. It then briefly discusses government policies in two areas that are thought to be particularly critical to the development of small enterprises: credit and technical assistance. Development Strategy and The Small-Enterprise Sector Because of the difference in the pace of industrialization before and after 1960 and because in both countries the underlying forces responsible for industrialization in the 1950s were different than those in the 1960s and the early 1970s, it is useful to divide the postwar period into two subperiods. 1/ During the first subperiod ( for Taiwan and for Korea), both Korea and Taiwan, partly in response to their economic environment (inflation, balance of payment difficulties, and unpromising markets for traditional exports), followed an import substitution approach to industrialization. This period was characterized by overvalued exchange rates, complex exchange and import controls, continued trade deficits, low bank interest rates with credit rationing, and large government budget deficits financed by borrowing from the central bank. At first, import substitution was successful in stimulating growth as domestic production of numerous consumer non-durables, such as flour, fabrics, and flat glass, and some intermediate goods, such as, cotton and synthetic yarns, newsprint, and selected industrial chemicals, expanded to replace imports. Indeed, during the early (and easy) phase of import substitution in Taiwan ( ), manufacturing production increased at an average rate of 22 percent per year, although rehabilitation of war-torn industries was partly responsible for the rapid rate of growth. Following this expansion, however, opportunities for easy substitution were soon exhausted in both countries, and continued rapid industrialization become problematic. 1/ The data used in this and the following three paragraphs, unless noted otherwise, are those cited in Paul Kuznets, Economic Growth and Structure in the Republic of Korea (New Haven: Yale University Press, 1977) and Samuel P. S. Ho, Economic Development of Taiwan (New Haven: Yale University Press, 1978).

96 The first subperiod came to an end in the early 1960s when both countries switched from an inward- to a more outward-looking strategy of development. It is important to point out that in the second subperiod (roughly the 1960s and the early 1970s) neither country entirely abandoned import substitution. Indeed, direct and indirect controls continued to protect many industries and were partly responsible for the rapid growth since the early 1960s in the production of such import substitutes as chemical fertilizers, petrochemicals, basic metals, automobiles, and plastics. What sets the two subperiods apart is that in the second subperiod industrial exports were also intensively promoted by both countries. In the 1960s Korea and Taiwan adopted more realistic foreign exchange rates, liberalized import controls, and generally reduced the distortions caused by previous economic policies. At the same time, both countries introduced such export incentives as tax reductions and exemptions, improved access to imported raw materials and capital goods, and easy credit to finance working capital and fixed investments for exporting firms. By turning to exports and allowing market forces to play a greater role in the allocation of resources in the second subperiod, industries in Taiwan and Korea were induced to develop more in line with the countries' comparative advantage, that is along a labor-intensive growth path. This heavy emphasis on export expansion, particularly of industrial goods, produced spectacular results. The improved performance of manufacturing since the early 1960s has already been noted. In Korea exports rose from US$43 million in to TJS$ -176 billion in In Taiwan exports soared from US$174 million in 1960 to US$3.114 billion in As a share of GNP, exports increased from 5 percent in to 20 percent in in Korea, and from 11 percent in 1960 to 45 percent in 1972 in Taiwan. In both countries, the share of manufactured goods in total export rose from about 20 percent at the end of the first subperiod (1959 for Taiwan and 1962 for Korea) to over 80 percent by the end of the second. In the early 1970s, about one-quarter of Korea's manufacturing output was exported, and the principal exports during the second subperiod were plywood, finished textiles, and electronic equipment. In Taiwan, industries that exported 30 or more percent of their output included textiles and clothing, wood products, leather and leather products, rubber products, plastic products, and electrical machinery and apparatus. Korea's and Taiwan's manufactured exports have been generally labor intensive (particularly in comparison to their imports and import substitutes) so that the export induced industrial growth in the 1960s has been extremely successful in creating employment. In both countries, manufactured output and export growth were led in the 1960s by such labor-intensive commodities as clothing, shoes, electronics and electrical apparatus, and simple metal products. The data suggest that manufactured exports and output became increasingly more labor intensive in the 1960s. In contrast, Wontack Hong's study shows that the labor intensity of Korea's exports began to decline in

97 the 1970s. 1/ And the evidence from Taiwan suggests a similar trend: industrial output and exports have gradually become more capital- and skill-intensive. In the two subperiods just described neither the government in Korea nor the one in Taiwan actively promoted the development of the small enterprise sector per se. Rather, SSEs were left largely to fend for themselves. However, because they helped determine the economic environment within which SSEs operated, the general development policies of the two governments probably had considerable indirect impact on the small enterprise sector in both subperiods. The first subperiod, when import substitution was emphasized, provided an opportunity for many SSEs to emerge in industries that relied on relatively simple technology and where the required initial capital was not large. However, the first subperiod was also one during which the governments in both countries relied heavily on administrative devices to implement their policies. For example, credits and foreign exchange to buy raw materials and capital goods were rationed by government agencies. Because large enterprises are better able to deal with bureaucratic procedures, it is believed that direct controls like those used in Korea and Taiwan in the 1950s and early 1960s generally favored LSEs over SSEs. Accordingly, in the first subperiod, SSEs probably found it difficult to grow beyond the smallest size. In the latter part of the first subperiod, when the easy import-substitution phase was over, the economic environment became uncertain and less favorable to rapid growth. In these years, small as well as large enterprises found the going very difficult. In the more outward oriented second subperiod, the governments in both countries relied less on direct controls and more on prices to implement their policies. Thus, for example, interest rates and foreign exchange rates were permitted to move to more realistic levels and to play a larger allocative roles. Increasingly, tariffs rather than direct controls were used to limit imports. It is difficult to measure the net effects of these changes on the small enterprise sector. Some export promotion schemes affected the SSEs directly. For example, the government sponsored Taiwan Handicraft Productivity and Trade Center provided product development and marketing services to firms producing handicrafts for exports, and most of these firms, but by no means all, were small. However, because most SSEs produced primarily for the domestic market, the export promotion policies did not in general directly affect the small-enterprise sector. More important were the indirect effects of the outward-looking policies. While the liberalization of controls and the shift from quantity to price rationing introduced in the second subperiod reduced some of the discriminatory effects of earlier policies towards SSEs, and may have made 1/ Wontack Hong, Factor Supply and Factor Intensity of Trade in Korea (Seoul, Korea: Korea Development Institute, 1976).

98 it easier for some SSEs to expand, other aspects of the outward looking strategy made conditions more difficult for the small enterprise sector. The outward-oriented policies altered the incentive framework in favor of exports, and very quickly Korean and Taiwanese firms discovered that they faced a very much larger total market than in the first subperiod. With increased opportunity to take advantage of scale economies, size became a much more important advantage. To export, firms also had to meet more stringent design and quality standards, and in achieving these standards size was again important. Because in the second subperiod both countries followed their comparative advantage more closely, it was also a time when labor intensive manufacturing industries expanded rapidly. Consequently, SSEs in both Korea and Taiwan found that they were in competition with many new and often very large enterprises for the same unskilled and semi-skilled workers. On the whole, these indirect effects probably made conditions less favorable for the SSEs, particularly the very small. The growth and changing relative position of the small enterprise sectors in Korea and Taiwan in the two subperiods lend considerable support to the above analysis. Table 6.1 presents the annual growth rates of manufacturing employment by the size of plants in Korea and in Taiwan. For the postwar period as a whole ( for Korea and for Taiwan), the rates of growth of manufacturing employment in both countries increased with plant size. For example, in Korea, the growth of employment in manufacturing establishments with 500 or more workers betw7een 1958 and 1975 was more than 9 times that in establishments with 5-9 workers. However, when the two subperiods are examined separately, they show significantly different patterns of growth. In the first subperiod, when both countries attempted to industrialize through import substitution, the rates of growth of employment in very small establishments (those with fewer than 10 workers) were quite rapid, relative to those in establishments of larger sizes and also in comparison to the rates of growth of employment in very small units in the second subperiod. The rapid growth in employment in the smallest size category (and also the employment in establishments with workers in Korea) in the first subperiod appears to be a consequence of a large number of births in the small size categories. Birth, death, and mobility statistics by size of establishment are not available, but the substantial increase in the number of small establishments during the first subperiod certainly suggests a very high birth rate, especially in the smallest category. In Korea, the number of establishment with 5-9 workers increased from 7,019 in 1958 to 10,132 in / In Taiwan, the number of enterprises with 1-3 workers and those with 4-9 workers increased from 30,643 and 7,724 in 1954 to 34,695 and 11,430 in 1961, respectively. 2/ 1/ Final Report - Census of Mining and Manufacturing, 1958 and Report on Mining and Manufacturing Census, / General Report on Industry and Commerce Census of Taiwan, 1954 and General Report, 1961 Industry and Commerce Census of Taiwan.

99 Table 6.1 Annual Growth of Manufacturing Employment By Size of Plant, a Korea and Taiwan All Size of plant (no. of workers) plantsb d Korea St subperiod ( ) nd subperiod ( ) TaiwanC S subperiod ( ) subperiod ( ) ain the case of Korea, establishment, and in the case of Taiwan, establishment in 1954 and enterprise in 1961 and bin the case of Korea, excludes establishments with fewer than 5 workers. ctailor and repair establishments are included in manufacturing. dfor Korea, 5-9 workers. Sources: Korea: Final Report - Census of Mining and Manufacturing 1958; Report on Mining and Manufacturing Census 1963, and Report on the Mining and Manufacturing Survey, Taiwan: General Report on Industry and Commerce Census of Taiwan, 1954; General Report, 1961 Industry and Commerce Census of Taiwan, and The Report of the 1971 Industrial and Commercial Censuses of Taiwan and Fukien Area, Republic of China, The 1954 Taiwan data are estimated as the product of the mid-point of each size class and the number of establishments in each class.

100 When export growth quickened the pace of industrialization in the second period, the rate of employment growth in the larger units, with the exception of establishments with 500+ workers in Korea, increased significantly. In Korea, the employment growth rates in units with fewer than 20 workers decliaed while those in units with workers increased. In Taiwan, the rates of employment growth in units with fewer than 10 workers declined while those in units with 10 or more workers increased. Indeed, in the second subperiod, employment in establishments with fewer than 4 workers declined absolutely in Taiwan, from 72,984 to 61,957 (or to less than 5 percent of Taiwan's manufacturing employment). There is also evidence that the employment in establishments with fewer than 5 workers in Korea also declined in the second subperiod. 1/ It is interesting to note that in both countries the number of establishments in the smallest category declined in the second subperiod, suggesting that the birth rate in this category was relatively modest and therefore unable to offset deaths and movement to other size categories. 2/ The growth pattern just described was not confined to a few industries but was a sector-wide phenomenon. Table 6.2 presents the percentage distribution of the net increase in manufacturing employment between 1961 and 1971 in Taiwan by two-digit industries and by size of enterprise. In all manufacturing industries, at least 50 percent of the net increase in employment was in establishments with 100 or more workers and, in the food and beverage, textile and apparel, and wood-product industries, over 80 percent of the increase was in these size categories. Except for the basic metal and the metal product and machinery industries, all manufacturing industries experienced an absolute decline in the number of workers employed by establishments in the smallest size category (1-3 workers). However, the decline was relatively minor except in two industries: food and beverages and wood products. In the food and beverage and the nonmetallic mineral product industries, the decline in employment also extended to the size categories of 4-6 and 7-9 workers. The growth pattern of manufacturing employment for two-digit industries in Korea during the second subperiod ( ) was very similar to that described for Taiwan. A preponderant share of the total increase in manufacturing employment occurred in establishments with 100 or more workers (Table 6.3). Although there are no data on establishments with fewer than 5 1/ The 1966 population census reported manufacturing employment (excluding temporary and daily workers) to be 763,920. The 1966 manufacturing census reported persons employed in manufacturing establishments with more than 5 workers to be 566,665, suggesting that workers in establishments with fewer than 5 workers to be 197,255. In 1973, results from a sample survey suggest that small establishments with fewer than 5 workers employed 156,783 workers. For reasons why temporary workers are excluded from the 1966 population census figure, see chapter 2. 2/ In the second subperiod, the number of manufacturing establishments in the smallest category (5-9 workers in Korea and 1-3 workers in Taiwan) declined from 10,132 to 9,641 in Korea and from 34,695 to 32,000 in Taiwan. The Taiwan figures include tailor shops and repair establishments.

101 Table 6.2 Net Increase in Manufacturing Employment, By Size of Enterprise and By Industry, Taiwan Total increase Distributed by size (workers) of enterprise, % (000) Total Manufacturing Food, beverages, tobacco Textiles, wearing apprel, leather producta a Lumber and products of wood, bamboo, cane, and cork a Paper, paper products, and printing Chemicals, products of chemicals, petroleum, coal, rubber, plastics a Nonmetallic mineral products Basic metals Metal products, machinery, & equipment Other manufacturing industries aless than.5% Sources: Underlying data from General Report, 1961 Industry and Commerce Census of Taiwan and The Report of the T17T1Tndustrial and Commercial Censuses of Taiwan and Fukien Area, Republic of China. The 1971 data has been adjusted to include tailor and repair shops.

102 workers, the growth pattern of employment in establishments with 5-9 workers in Korea is consistent with that in Taiwan; a decline in employment in several industries, most notably in food and beverages and in petroleum and coal products. The decline in the petroleum and coal product industry occurred primarily among small establishments producing coal briquettes. an important product in Korea but unimportant in Taiwan where the climate is subtropical. The growth pattern described above has had the effect of increasing the average size of manufacturing establishments. In both countries, the increase was due in part to a significant rise in the average size of establishments in nearly every two-digit manufacturing industry, but it was also due partly to a very rapid expansion of a number of industries where the average size of establishment was substantially larger than the average for manufacturing as a whole. In Taiwan, for example, 46 percent of the increase in manufacturing employment between 1961 and 1971 occurred in the textile and clothing and the chemical industries (including petroleum, coal, rubber, and plastic products). In 1971, the average number of workers per establishment was 80 in the textile and clothing industry, 38 in the chemical industry, but only 28 for manufacturing as a whole. 1/ The Korean data in Table 6.3 also show that the difference in growth patterns between the two subperiods observed at the aggregate level also exists for most two-digit industries. In the first subperiod, the import substitution phase, when industrial growth was relatively slow, employment growth was spread over all the size categories from 5 to 500+ workers with no apparent relationship between employment growth and plant size. Interestingly, however, in many two-digit industries, establishments with 5-9 workers absorbed a large share of the net increase in employment, often larger than establishment in the 20 to 199 size categories. For establishments with 5-9 workers, such a substantial expansion of workers, despite loss of employment through a possibly large number of failures, and growth to larger size categories, is evidence that births (including growth from the 1-4 category) in this size category were large. This is, of course, consistent with our earlier finding that the total number of manufacturing establishments in the smallest size category increased rapidly in the first subperiod. In the second subperiod ( ), when manufacturing absorbed over 1 million workers in contrast to 133,000 in the first subperiod, establishments in the smaller size categories (5-9 and workers) absorbed little of the net increase. Indeed, at the two-digit industry level, birth and movement into the 5-19 size categories only just exceeded deaths and movement to larger size categories. Above the 5-19 size range, the larger the size class, the greater share of the net increase in employment it absorbed. This was true for manufacturing as a whole as well as for nearly all the twodigit industries. 1/ All the figures here exclude repair and tailor shops.

103 Table 693 Net Increase in Manufacturing Employment, and By Size of Establishment and By Industry, Korea Total Distributed by size (workers) of establishment, _ increase Total Manufacturing (excluding tobacco) 132, Food 10, Beverages 1, Textiles 22, a Apparel and footwear 5, a Wood and its products Furniture and fixtures 2, Paper and its products 5, Printing and publishing 3, Leather and its products Rubber and its products 8, Chemicals and their products 14, Petroleum and coal products 8, Nonmetallic mineral products 4, Basic metals 5, Metal Products 7, Machinery, excluding elec. 6, Electrical machinery and apparatus 8, Transport equipment 10, Other manufacturing industries 5, Manufacturing 1,018, a Food 71, Beverages 11, Tobacco 7, Textiles 212, a Apparel and footwear 146, Wood and its products 30, Furniture and fixtures 4, Paper and its products 19, Printing and publishing 22, S Leather and its products 17, Rubber and its products 45, a a 1 94 Chemicals and their products 74, S Petroleum and coal products 2, Nonmetallic mineral products 36, Basic metals 34, a Metal products 37, Machinery, excluding elec. 33, Electrical machinery and apparatus 116, a Transport equipment 31, Other manufacturing industries 62, a -a aless than.5 Sources: Underlying data from Final Report - Census of Mining and Manufacturing, 1958, Report on Mining and Manufacturing Census, 1963, and Report on the Mininq and Manufacturiwn Survey,1975.

104 In summary, the evidence suggests that the relative position of the small enterprise sector may have been indirectly but strongly influenced by the development strategy pursued in Korea and Taiwan. It seems that the first period of import-substitution was less damaging to the relative size of the smallenterprise sector than the second period of export promotion, even though the means by which the import-substitution policies were implemented in the two countries discriminated against the SSEs. Apparently, when the development strategy turned outward, the relative position of the smallenterprise sector was weakened partly because larger markets increased the importance and advantage of large plant size and partly because in the freer economic environment of the second subperiod SSEs may have found it easier to expand and move to a larger size category. Credit and Technical Assistance to SSEs Among the many problems faced by SSEs, capital scarcity and the lack of managerial and technical skills are mentioned most frequently and considered most critical by both government agencies responsible for small industry development and by small entrepreneurs themselves. It is therefore not surprising that the literature on small industry usually considers credit availability and technical and managerial assistance to be the key to success in the promotion of the small-enterprise sector. This section discusses the credit and technical assistance programs available to SSEs in Korea and Taiwan in the postwar period. The banking system is the only organized credit market in Korea and Taiwan. Because SSEs lack suitable collateral and keep inadequate records and because of the high cost of servicing SSEs, banks are extremely reluctant to provide credits to small enterprises unless given special incentives to do so. In a free market, the incentive would be higher interest rates. But, in Korea and Taiwan, the problem is complicated by the fact that interest rates are regulated by the government, and credits are allocated according to government-determined priorities. Consequently the amount of bank credits available to SSEs in Korea and Taiwan in the 1950s and the 1960s depended on the priority the government-assigned to the small-enterprise sector. In Taiwan, the government did little to make the organized credit market accessible to the small-enterprise sector. The few programs in existence were and are still small and limited in scope. Since 1954, the government, in cooperation with commercial banks, has operated a small industry loan program, but the amount of funds distributed through the program has been limited. In 1966, the government launched a pilot program to help develop the island's small industries. A Small Business Committee was organized in the Council for International Economic Cooperation and Development (CIECD) to assist promising small manufacturing establishments (less than 100 workers or with total assets below NT$5 million [US$125,000]) with good export potential. 1/ The committee adopted a "total approach," as it attempted not only I/ C.C. Chao, "Scheme of Assistance to Small Industries," Industry of Free China, Oct. 1966, p. 23.

105 to help the selected SSEs to obtain credits but also to provide them with technical, marketing, and managerial assistance. Because the program reached only a small number of SSEs, its impact on the small-enterprise sector was limited. Only in 1976 did the government create a Small and Medium Industries Bank. In Korea, government assistance to the small-enterprise sector appears, at least on paper, more organized and better financed. Before 1961, the government, in cooperation with commercial banks, provided credits to SSEs through several special funds, among which the most important were "Production Loans for Small Industries," "Loans from Vested Property Funds," and "Loans from Counterpart Fund." 1/ In 1960, loans to small industries in mining, manufacturing, transportation, and commerce from these funds and from other bank sources amounted to 7 percent of total bank loans. 2/ In 1961, as part of its intensified effort to industrialize, the government created the Medium Industry Bank (later renamed Medium-Small Industry Bank) to promote small industries. 3/ The government not only allocated, with the help of its new banks, more of its own funds to small industries, but it also stipulated in 1965 that at least 30 percent of the new loans extended by commercial banks must be to small industries. As a result of these actions, loans to small industries as a share of total loans made by all (government and commercial) financial institutions increased from 7 percent in 1960 to 15 percent in 1964 and over 24 percent in / However, as an indication of the amount of credit actually made available to the small-enterprise sector as defined in this paper, these figures are very misleading. This is because the Korean government defines small industries to include mining and transportation enterprises with workers and total assets below W 30 million and manufacturing enterprises with workers and total assets below W 30 million. Thus what happened in Korea in the 1960s probably was not so much an expansion of credit to small establishments as an expansion of credit to medium-sized enterprises. That small manufacturing enterprises, particularly those with fewer than 50 workers, were given little access to the organized credit market in Korea is suggested by the priorities set by the Korean government and used by the banks to allocate industry loans. 5/ In the 1960s, high priority for 1/ The Medium Industry Bank, Financing Small Industry in Korea, 1968, pp / Ibid., p / Besides the Medium Industry Bank, the government also created the Citizens National Bank in 1963 to help finance small industries. 4/ The Medium Industry Bank, Financing Small Industry in Korea, pp. 40 and 73. 5/ Ibid., pp

106 loans was given to (1) those enterprises that were designated export-producing firms, (2) help convert enterprises with good prospects for exports and high rates of net foreign exchange earnings to export industries, and (3) enterprises in specialized export industries. 1/ Since establishments with fewer than 50 workers are seldom important exporters or have good export prospects, the government priority scheme, by stressing export, effectively precluded many SSEs from the organized credit market. It would appear that the bulk of the bank credits provided in the 1960s under the title of small industry loans in fact went to medium sized firms, particularly those with 100+ workers. That this was indeed the case is confirmed by various surveys of SSEs which show that credit received from financial institutions to be positively related to firm size and that firms with fewer than 50 workers received little credit from the organized market. 2/ The effect of restricting SSEs' access to the organized credit market was to force the small entrepreneurs to look for funds from non-institutionalized credit sources, e.g. from family members, friends, relatives, and private money lenders. Apparently, in Korea and Taiwan, considerable amounts of funds were made available through these non-institutionalized sources. There was a rapid increase in the number of SSEs in the 1950s and the early 1960s, and surveys show that the bulk of the initial capital came from non-institutional credit sources. Furthermore, over the years, the gap between the curb interest rates and the lending rates of commercial banks has narrowed significantly in both Korea and Taiwan, and this would not have occurred if credit was difficult to obtain on the informal market. All this is not to say that SSEs in Korea and Taiwan are not short of capital or that SSEs do not have great difficulties in raising funds. What is clear is that the small-enterprise sectors in Korea and Taiwan have been able to mobilize considerable funds from sources other than the organized credit market. The experience in Korea and Taiwan suggests that the lack of bank credit may not be an insurmountable obstacle to the development of the smallenterprise sector as long as funds are available from non-institutionalized sources. Indeed, a major contribution of SSEs is that they provide a channel through which savings not served by existing financial institutions can be mobilized for productive uses. Ideally, one would like to see the credit market less regulated and that SSEs be given a chance to compete on equal terms with LSEs for credit. But, when interest is regulated, providing subsidized credit to SSEs may lead to a serious waste of resources. SSEs are 1/ In 1965, 13 products were identified as specialized export goods and enterprises producing these goods were given preferential financing for development. The 13 products were raw silk, silk fabrics, ceramic products, rubber products, radio and electrical appliances, canned marine products and mushrooms, woolen fabrics, plywood, cotton fabrics, clothing, leather products, industrial handicrafts, and miscellaneous articles (e.g., metal tableware). 2/ See Chapter 5.

107 extremely difficult to assess so that a general subsidized credit scheme aimed at supporting the small enterprise sector may end up financing many establishments that are wasteful users of capital. Perhaps more useful are credit schemes like those in Korea that are aimed at achieving well-defined government objectives (e.g., export promotion), rather than directed at the general goal of small-enterprise promotion. However, in such cases, the criteria used to distribute loans are likely to preclude many, if not most, small establishments. Because the lack of managerial and technical skills is a major handicap for most SSEs, government intervention to upgrade the know-how and skills of small entrepreneurs may pay off handsomely. In the past and at present in Korea and Taiwan, the government has been only marginally involved in providing managerial and technical training and extension to SSEs. In Korea, the Medium Industry Bank has attempted to help some small industries to improve their management and technology but the bank does not consider this its main function. The government also helps finance various small industry cooperatives that provide their members with a variety of services such as management and technical guidance. Finally, since 1967, the government has operated a modest program to encourage the household production of handicrafts, agricultural and fishery by-products and agricultural process goods. 1/ In Taiwan, numerous institutions have been created to facilitate the dissemination of industrial technology and to improve managerial and technical skills, e.g., the China Productivity and Trade Center (CPTC), the MYetal Industries Development Center (MIDC), and the Taiwan Handicraft Promotion Center (THPC). 2/ THPC was established specifically to provide overall support to Taiwan's handicraft industries, particularly those with good export potential. Its main customers have been small establishments, most with fewer than 20 workers. Although CPTC and MIDC were designed to serve industrial enterprises irrespective of their size, they have in fact served primarily the larger establishments, mostly those with 100+ workers. Thus, there does not exist in Taiwan an organization that specializes in providing managerial and technical training and assistance to SSEs in the size range 20 to 100 workers. 1/ Three government agencies are involved in this program: the Ministry of Agriculture and Fisheries, which gives administrative support, Office of Rural Development, which gives technical support, and National Agricultural Cooperative Federation, which gives marketing support. Because so many agencies are involved, there are complaints that the program is not well coordinated. 2/ W. van Warmelo, "The Development of Small Enterprises in Taiwan, Republic of China," Industry of Free China, November, 1967, pp

108 Presumably small-industry development is the transformation of small traditional enterprises to small modern enterprises. Whether or not this can be successfully achieved depends ultimately on the quality of the small entrepreneurs and their ability to operate efficiently and productively. Even in Korea and Taiwan, where literacy is high and development has been in progress for some time, a large number of small entrepreneurs lack the technical, financial, and managerial know-how needed to operate a modern establishment successfully. It would appear that the government has an important role to play in disseminating new technology to the small-enterprise sector and in helping small entrepreneurs to acquire the skills needed to survive in a more complex economy. More specifically, what is needed is an organization that can provide managerial and technical training and extension to establishments in the size range of 10 to 100 workers. The level of training should not be so sophisticated as to be impractical or beyond the grasp of small entrepreneurs, many of whom have had only a grade-school education. In other words, something like the agricultural extension service should be made available to the small-industry sector. One way of organizing such a service is to work through existing industry associations or cooperatives. A related problem is the lack of interaction between small and large enterprises. As discussed earlier in Chapter 3, most large firms in Korea and Taiwan are highly integrated, often performing tasks that would typically be subcontracted in industrialized countries. This, of course, is a source of inefficiency in the economy. The lack of specialization and division of labor between small and large enterprises in Korea and Taiwan reflects partly the type of market faced by Korean and Taiwanese producers, in which customers consider low costs more important than high quality; and partly the low level of technical skills among SSEs. With the economy developing rapidly, SSEs in Korea and Taiwan, in order to survive and prosper, will need to upgrade their equipment and acquire new skills and technology so that they can produce better quality products and become more involved in interfirm transactions through specialization. Policy makers need to be aware that promoting the small-enterprise sector through managerial and technical training and extension will in the long run facilitate over-all industrialization. It is more efficient and more profitable for firms of all sizes if small and large enterprises grow together in a mutually reinforcing and complementary manner, taking full advantage of all the possibilities for specialization and division of labor that exist in the industry. Because large enterprises are likely to benefit from the modernization of the small enterprise sector, they may be willing to participate in helping existing SSEs to acquire new skills and technology. In this regard, the government should consider introducing incentives that will encourage large firms to subcontract work and to provide training and other assistance to SSEs.

109 VII. SUMMARY AND CONCLUSIONS The purpose of this study is to better understand the development potentials of SSEs by examining the history, structure, productivity, and changing position of the small-enterprise sectors in Korea and Taiwan. The study indicates that both the size and composition of the small-enterprise sector undergo significant changes as the economy develops. At the early stage of development, nearly all non-agricultural activities take place in the small-enterprise sector and a preponderant share of it is non-factory production. The evidence from Taiwan shows that when it began its transition from a traditional to a modern economy, the small-enterprise sector monopolized manufacturing, and within small industry, non-factory manufacturing predominated over factory manufacturing. As the economy developed, the position of non-factory manufacturing declined, but the small-enterprise sector as a whole continued to remain important. As Taiwan approaches the end of its transition to a modern economy, the position of non-factory manufacturing has become relatively unimportant. Both household and craft production are gradually disappearing in Taiwan. The most important component of the small-enterprise sector in Taiwan and Korea is now the small factories. Currently, about a third of the manufacturing employment in Korea and Taiwan is in the small-enterprise sector, with the majority employed in small factories (establishments with 5-49 workers). The importance of small factories is of course even greater if its definition is broadened to include factory establishments up to 100 workers. Besides manufacturing, SSEs are important in several other non-agricultural sectors, particularly construction, trade, and services. In contrast to manufacturing, where the distribution of employment by size of enterprise has undergone significant changes over the years, the distribution of employment by size of enterprises in trade, construction, and services has remained relatively stable. In Korea and Taiwan, SSEs in manufacturing appear to be concentrated in the food and textile and textile products industries. In addition, SSEs are of some importance in the metal products and plastic products industries. Confirming what is found in other countries, the SSEs in Korea and Taiwan serve primarily the domestic market, although, reflecting the outward-looking development policies of the two countries, significant numbers of SSEs (particularly those in the size range) also export their outputs. Nevertheless it is safe to say that in Korea and Taiwan in the 1960s and the 1970s, SSEs with fewer than workers produced almost exclusively for the domestic market. The evidence from Korea and Taiwan suggests that the degree of spatial concentration among large establishments and that among small establishments (except for those with fewer than 10 workers) are positively correlated, reflecting perhaps the linkages between small and larger manufacturing enterprises. In Korea, both large and small establishments are geographically concentrated, and in Taiwan both are geographically less concentrated. One reason why industry is geographically less concentrated in Taiwan than in Korea is that Taiwan's rural infrastructure was developed

110 earlier and distributed more evenly. The wider dispersal of industry in Taiwan has had important and positive effects not only on the development of rural and regional industries but also on employment and income distribution in the countryside. In the postwar period, the emergence of new and large manufacturing plants and the growth of small manufacturing units into medium or large establishments have combined to reduce the relative importance of small factories in Korea and Taiwan. Because the importance of economies of scale differs across industries, the position of small scale manufacturing at the aggregate level is partly determined by the composition of the manufacturing sector. One reason for the decline in the relative importance of small factories in Korea and Taiwan is the rapid growth in recent years of industries where scale economies are important. Because the importance of SSEs in an given manufacturing industry is likely to be influenced by the presence or absence of scale economies, it is important to have estimates of minimum efficient plant size for various industries. Using Korean data, "efficient" plant size is determined for 63 four-digit manufacturing industries by the survivor technique, and in only 7 of the 63 industries were establishments with fewer than 50 workers found efficient by this criterion. Efficient plant size, as determined by the survivor technique, is not, of course, the same as the plant size corresponding to the lowest point on the long run average cost curve. Rather it is the smallest plant size that can cope successfully with the total economic environment. Nevertheless, the findings are at least suggestive that in Korea scale economies appear to be present in most manufacturing industries. In any case, in the Korean environment the most efficient plant size is not small but in the range of 100+ workers. While the presence of scale economies favors LSEs, there are also forces that favor small and medium size production units, and these forces are sufficiently strong in some industries to offset the advantages of large size. In some industries, locational factors such as high transport costs and the need for frequent face-to-face contact between producers and their customers work in favor of SSEs. SSEs also tend to be competitive when production technology is simple, production runs short, production versatility important, or specialization in operation or parts possible. A third group of factors favoring SSEs is market influences, the most important being small total markets. Small total markets are important to SSEs because it reduces the potential advantages from scale economies. In terms of the three major influences that favor SSEs -- location, production process, and market -- it appears that locational and production factors are most important in favoring small-firm predominance in Korea's and Taiwan's manufacturing industries. A comparison of the Korean data over time also suggests some interesting changes in the competitive bases of SSEs. The evidence suggests that in the early stages of industrialization, the competitive bases of SSEs are primarily those related to locational factors, particularly high transport costs. As transport costs decline in the process

111 of development, this source of competitiveness weakens. In its place, production influences become more important in determining the competitive bases of SSEs. Initially, SSEs are predominant in industries engaged in simple assembly, mixing, or finishing that tend to be developed first in less developed countries. However, small-firm predominance in these industries is likely to be temporary. As the markets of these industries expand, the potential advantages of even relatively minor scale economies make it worthwlhile for large firms to enter these industries and for existing small firms ito expand. Finally, as the economy develops and becomes more complex, SSEs in some industries may become competitive through specialization and cooperation with larger firms. This development has not as yet become widespread in Korea or Taiwan. Of the many issues related to the small enterprise sector, perhaps the single most important is whether SSEs are efficient users of resources. If SSEs are more labor intensive than, and use less capital to produce the same goods as, large enterprises, then strong economic justification would exist for promoting small scale industries in labor-abundant less developed countries. Our current interest in SSEs is at least in part the result of a belief that SSEs generally are not only labor intensive but also quite efficient. However, the evidence from Korea and from Taiwan reveals many exceptions to these generalizations. It has often been noted that low-volume technique is usually the labor-intensive technique, and that the capital/labor ratio rises with firm size. But, judging by the Korean data, low-volume techniques do not always have capital-saving attributes. Furthermore, our findings show that the capital/labor ratios in a wide variety of industries in Korea do not vary in any consistent manner as firm size increases. Another important finding is that many of the industries in Korea not dominated by small establishments have low capital/labor ratios, often considerably lower than the average for the manufacturing sector as a whole or the average for the small-enterprise sector. Furthermore, these industries are major employers. Apparently, the success of Korea's and Taiwan's manufacturing sectors in absorbing labor is due, to a large part, to the development of industries that produce labor-intensive products rather than to any special attention to small-scale manufacturing. Total factor productivity measures by size of establishment were constructed for 213 four-digit manufacturing industries in Korea. Our analysis of the results suggests that establishments in the size range 5-99 are most productive in only a limited number of industries, and in half of these cases, the most productive size is the "small-medium" category of More important, the employment impact of these industries, particularly those that are efficient for establishments with fewer than 50 workers, is limited. It appears that, at least in Korea, establishments with fewer than 50 workers cannot be relied upon to generate a large number of jobs efficiently. This is because small establishments are efficient in only a few industries, and where they are efficient, the industries do not absorb large numbers of workers. Thus, if the objective is employment creation, the development of the small-enterprise sector may not be the most appropriate policy to pursue.

112 It is widely believed that factor markets in less developed economies are imperfect, so that SSEs and LSEs face very different factor prices. If so, this would help explain the observed differences in factor proportion employed by small and large enterprises in the same industry. The evidence from Korea and Taiwan lends some support to this view. The labor markets in Korea and Taiwan appear to be relatively free of major imperfections. The wage gap between small and large firms, once the characteristics of workers are standardized, is fairly small. The serious distortions are in the capital market. In Korea and Taiwan SSEs operate within a fragmented capital market, and have only limited access to institutional (government and commercial banks) credit. Financial institutions are the source of a very small share of the initial capital invested in the small-enterprise sector, although they do provide SSEs with some working capital. The bulk of the capital and operating funds in the small-enterprise sector are financed apparently from the accumulated savings of the small entrepreneurs and loans from friends, relatives, and private lenders. The rates of interest on the informal market are, of course, significantly higher than the regulated interest rates charged by the public and commercial banks. The higher rates of interest paid by the small-enterprise sector reflect in part, of course, the higher costs of servicing small borrowers and the higher risks of lending to small enterprises. However, the differences in interest rates paid by SSEs and LSEs reflect more than the differences in cost and perceived risk. In any case, the evidence strongly supports the view that SSEs pay higher interest rates than LSEs so that the small enterprise sector has a greater incentive to economize on capital. Capital scarcity and the lack of access to commercial credit also explain why so many SSEs are undercapitalized and operate with inadequate working capital. These difficulties are frequently cited by small entrepreneurs themselves and may be a major cause of business failures among SSEs. The fragmentation in the capital market can be attributed in part to the difficulty and high cost of administrating loans to small borrowers. But, since the allocation of credit is government-regulated in Korea and Taiwan, another reason for the fragmentation is that both governments have paid little attention to the small-enterprise sector and consequently have neglected its financial needs. The lack of access to institutional credits has turned small entrepreneurs in Korea and Taiwan to other sources for funds. It appears that considerable funds have been mobilized by the small entrepreneurs from their own personal savings and borrowing from relatives, friends, and private lenders. In other words, SSEs have provided a channel through which small savings can be put to productive uses. In Korea and Taiwan, the lack of bank credit, though a handicap, have not been an insurmountable obstacle to SSEs. From a policy viewpoint, it would be desirable to remove the imperfections in the capital market and to give SSEs the chance to compete on equal terms with LSEs for credit. However, given the fact that our findings suggest that few small establishments in the 5-49 workers range are efficient and that

113 it is extremely difficult to assess the capability of small entrepreneurs, making large sums of credit available to the small-enterprise sector is not likely to be very productive. In particular, a general subsidized credit scheme for SSEs is likely to be a wasteful use of scarce resources. If institutional credit is to become more accessible to SSEs, it should be at competitive terms or made available to achieve well-defined objectives. Furthermore, to help ensure that capital is utilized effectively, managerial and technical training and extension should also be made more available to SSEs. Finally, the evidence from Korea and Taiwan suggests that the small enterprise sector has been strongly but indirectly influenced by the general development strategy pursued in the two countries. In particular, the relative and absolute decline of the small enterprise sector has been accelerated by the outward-looking policies adopted in Korea and Taiwan. Exports have substantially enlarged the markets faced by Korean and Taiwanese producers. With larger markets, scale economies and other advantages of size have also become more important and have encouraged large plants to emerge and small plants to expand and leave the small-enterprise sector.

114 APPENDIX A THE SURVIVOR TECHNIQUE The purpose of this appendix is to describe the procedure used to select industries for analysis by the survivor technique and to explain how the survivor criterion was applied. The first step taken was to identify those industries for which it is suitable to apply the survivor technique. On the guideline that industries should be defined as precisely as possible, all industries which contain the words "miscellaneous," "other," or "not elsewhere classified" in their title were excluded. In addition, data availability also influenced the choice of industries. The data used in the analysis are from the 1968 census and the 1975 survey of the Korean manufacturing sector. Between 1968 and 1975 the Korean Standard Industrial Classification (SIC) changed in important ways. Industrial activities were organized into 213 four-digit industries in 1968 and into 373 five-digit industries in Because of the definitional changes, it was not possible to apply the survivor technique to all industries. Of the 373 industries identified in 1975, only 92 were similarly defined in In addition, 8 of the four-digit industries in 1975 were found to be comparable in coverage to 8 three-digit industries in These 100 industries form the population on which the analysis was based. Finally, it should be noted that census convention classifies all establishments according to the primary product produced, and that all activities of an establishment are classified into a single industry. This means that industries are not as homogeneous as their titles suggest. After the 100 industries were identified, the share of each industry's shipment by size of establishment in 1968 was compared with that in Those size groups that experienced increases in their shares were presumed to be efficient sizes. To avoid drawing inferences from small changes in the shares, percentage differences between +0.5 and -0.5 were considered zero changes. When the share of one size category or that of a continuous range of size categories increased, that size category or range of size categories was considered efficient. For example, in table Al, the efficient plant size categories for the meat and dairy products industry are 5-49, 50-99, and However, if a size class was contiguous to other efficient size classes but registered a zero change (when establishments existed in this category in both 1968 and 1975), it is also included in the efficient range. This occurred in one case, lime production. These instances were the only cases when an efficient size or size range was identified; all other possibilities were considered ambiguous. In particular, in many industries, the increases in share occurred in two or more non-contiguous size categories. While it is possible that an industry may have two distinct ranges of efficient plant size, the more likely reason for the ambiguous result is that the industry was too broadly defined and included several distinct industries.

115 Table Al. SURVIVOR ESTIMATES OF EFFICIENT PLANT SIZES FOR 463 KOREAN MYANUACTURING INDUSTRIES: Industry Chaiges in the Pe--entage Shore of VoIce of Shipment Minimum efficeot plant 1968 Desrription by Size of Etablishneot Size as % of Indostry 1975 employment mployveot Cede Size (eploys-ent) (tho--ands) 1968 employve-t Food 2010 Meat dairy products * Canning of fish & nra food * Rian mills Bisu-it & dry bakery pruducts * Soybean Sloo & poste * Ice Manufactoring * Starch ** Blan cord & ito produnto Feed Beverage 2111* So-jo * Ysg-ju & Tog-jo Tastile peoducts 2312 Wolleo, spinning nill * Thread * Catton fabrics * Woolen & worsted fobrias NSrrow Fabrics * Syntbetia fabrics * Bleahiag,Dyning, finishing '* So-ks & Stonking * Cnittnd onder--ar Rope products z Wearing apparel footwear. made-up te-tile goods 2411* Leather footwear * Women's outerwear Infant's outerwar g 2434** UIde--ear Hats F-urniture & Fiatures Woode- fornitore c Motal furnitore Paper & Paper Praducts 2714 Kraft paper e Products of paper & paper board Printiog & pobliehiog Newupapern Lea..tk rlea.th C1 picacnlt?intiog Leather Produots excloding footwear Robber prud-ats Rubber footwear Che-icul cad cheuical products 3112 I-orga-ia booical%s P-rfames, cosoetics Ag. pestiuides Matohas Petruleum a-d coal products 3220* Coal briqu-tte onmetallic mineral products 3312* Clay roofing tiles Tileu Refr-ctori-s , * Pottery, china, earthenware * Concrete products Lion * Cut st... & ito prodacts Bausia -tals 3412 Rolling of pcrchased iron and oteel Metal products 3521 Cutlery & tablewaee Haodtools, excluding farm tools * Structural prnducts **- Wire pr-docts Machinery eucloding nectrica-l 3620* Farm machinery excluding tools * Motel worbkig machinery Electrical machinery & equipment 3710* Electeic mabhi-e & indotrial equipment ** Coommni-ation e-uipment ** Light bulbs Transport e-uipment 3812 Steelship (in-ladiog r-pairs) * Woodoo ship (including repairs) r Motor vehicles (i-cluding ropairns Other - anafaturiog 3912 Sciemtific instranents Watuhes & Clocks * Umbrella ** Toy 4 sportiog goods *D-eotes 103 or core ustablishments in the indastry..*dnontes 50 or moe- entabliusments in the industry. Sources: Report an Miming and M-afuact-ring Conus 1968 (Seoul: Ec.onomi Planning Bgard, 1970) and Report o Miniog amd M-nufacturing Survey 1975 (Socal: Ecanomic Planning Board, 1976).

116 After eliminating all the ambiguous cases, 63 industries remained. The results for these industries are presented in table Al and analyzed in table 3.5. To compared the minimum efficient plant size with industry size, minimum efficient plant size (in terms of employment) as a percentage of total industry is calculated and reproduced in table Al. Finally, two measures of the market size of each industry -- the ratio of 1975 employment to 1968 employment and the absolute number of employment in are also provided in table Al.

117 APPENDIX B TYPES OF SMALL-SCALE INDUSTRIES A small-scale industry is one in which small firms (those with fewer than 100 workers) account for half or more of the industry's employment. Staley and Morse, in their classical study on small industries, grouped into eight categories those factors that help determine small-plant predominance in manufacturing industries. These are listed in chapter 3. Small industries in Korea and Taiwan were classified into these eight categories. The purpose of this appendix is to discuss each of the factors that help determine smallplant predominance in Korea and Taiwan. To avoid repetition and because Korean data are more detailed, our discussion will focus primarily on Korea. The Taiwan data are presented in table B1 and the Korean data in table B2. Under category IA, dispersed resource processors, we find mostly food and agricultural resource industries. Farms are typically widely dispersed, and in any given district only a limited supply of agricultural raw materials is available for processing. These facts plus the high cost of transporting raw materials to central locations combine to keep most processors of agricultural products from growing beyond a given size. Besides food and agricultural resource industries, the only other industries of importance included in this category are sawmills and cut-stone products. The rationale for including these industries in category IA is the same as that for agricultural resource industries. Finally, in all the industries in this category, processing usually reduces the weight of the principal raw material substantially, making the final product much cheaper to transport. The characteristics of industries in category IB, market oriented industries, are that they serve local and regional markets and produce bulky or perishable goods that are difficult and costly to transfer. The Korean industries in this category fall roughly into the following types: (1) agricultural supplies and equipment, such as animal feeds and agricultural hand tools; (2) perishable consumer goods, such as ice cream, ice, and bean curd; (3) durable household goods, such as house furnishings, furniture, and caneware; (4) construction materials, such as carpentry and joinery, structural clay products, cement products, and structural metal products; (5) bulky final products, like containers, cans, boxes, sheet metal products, and boiler shop products, and (6) transport equipment and services, such as wooden ship building and repairs, manufacture and servicing of engines and other parts for ships. It may be noted that, in terms of capital investment and technical requirements, it is relatively easy to enter most of these industries. The service industries, category IC, are those in which enterprises perform specific jobs on request from their customers, usually another business or industrial enterprise. Often the jobs involve processing or repairs. In Korea, service establishments are found primarily in two areas: printing and its allied industries like typesetting and photoengraving, and in the

118 metal and metal product industries, such as metal casting and metal coating and plating. As service establishments tend to be quite small (in fact, most repair shops are tiny), probably more industries would have been included in this category had the coverage of the 1975 manufacturing survey not excluded establishments with fewer than 5 workers. Because they depend on other enterprises for business, the service industries are likely to be located in the large manufacturing centers. In industries that use production processes in which scale economies are relatively unimportant, SSEs can be very competitive. Staley and Morse grouped such production processes into three main categories: separable manufacturing operations (IIA), craft handwork (IIB), and simple asembly, mixing, or finishing (IIC). In Korea, industries that fall into category IIA, separable manufacturing operations, are primarily those in metalworking. The hallmark of the metalworking industry is that its production process can be broken down into many separate operations, thus permitting a high degree of specialization and division of labor. In this environment, small firms can prevail by specializing. However, at present small firm predominance in the metalworking industry in Korea is probably explained not by specialization but by their versatility and ability to respond to the special demands of their customers. In less developed countries, many industries still operate in small establishments because they are involved in producing handicrafts. In Korea, rapid industrialization has greatly reduced the importance of crafts. Table B2 identifies only two industries involving crafts in which SSEs were predominant in 1975: handmade paper and lacquerwares. Undoubtedly, others existed but they were aggregated with non-craft industries to form larger industry groups such as caneware and wood products, and placed elsewhere. The characteristics of industries in category IIC, simple assembly, mixing, or finishing, are that (1) they use relatively simple technology that does not require large investment in machinery and equipment, (2) they are labor intensive (labor content in value added is high), (3) they produce goods with relatively low transfer costs, (4) they are highly competitive (easy entry and low profit margins). In Korea, as table B2 shows, industries in this category produced primarily two types of goods in 1975: textiles and clothing (for example, knitted fabrics, narrow fabrics, and outerwear for children) and chemicals and chemical products such as pigments, paints, ink, and drugs. In some 60 of the 175 Korean industries in which small establishments were predominant in 1975, small plants produced less than W 200 million (about US$412,000). In other words, these industries produced goods that had very limited total demand. Thus, a small total market, more than any other reason, explains small firm predominance in these industries. As table B2 shows, a wide variety of industries are included in this category. Although the nucleus of the small industry sector is composed of industries in which small plants predominate, the total number of workers employed and the total value-added produced by small firms in Taiwan and in

119 Korea are nearly as great or greater in those industries where they do not predominate. For example, in Korea in 1975, small establishments in the 198 industries in which small plants do not predominate employed 15.9 percent of all manufacturing workers and produced 9.3 percent of the total manufacturing value added, significantly greater than the total volume of small-firm activity in the 175 industries in which they were predominant. In tables B3 and B4, the positions of small establishments in industries in which they do not predominate are summarized, and the summaries show that in many of these industries small plants were clearly competing on fairly even terms with large factories. In other industries, small plants played a relatively minor role, but their output and employment were substantial. Apparently, in these industries, small establishments were able to "fill the cracks" not occupied by the large factories. For examples of industries in which small establishments are moderately important, or "fill the cracks" not occupied by the large factories, the reader should consult appendix tables B3 and B4. Not surprisingly, they include many industries involved in simple assembly, mixing, or finishing (for example, textiles and wearing apparels) and industries where location influences were particularly strong such as bread, coal briquettes, and various non-metallic mineral products.