The importance of small forest-based processing enterprises in developing countries

J.E.M. Arnold, M.E. Chipeta and Y. Fisseha

J.E.M. Arnold, currently a research fellow at the Oxford Forestry Institute, UK, initiated FAO work on small-scale forestry enterprises while he was Chief of me Forestry Department Policy and Planning Service. Mafa Chipeta is a staff member in the FAO Forestry Department Policy and Planning Service. Yacob Fisseha of the International Studies Centre, Michigan State University, prepared for FAO the first comprehensive review on the subject and has since been FAO's main consultant in the continuing work.

Small-scale forest enterprises are important contributors to the rural economy in most developing countries but have often been overlooked or bypassed in rural development planning because of their size and general lack of a focal point for assistance. Forestry authorities can play a key role in overcoming many of the constraints facing these small enterprises and in helping to identify opportunities for improving their chances of success.

The following three articles touch on several aspects of the subject, including the general characteristics of the sector, the specifics of one particular type of enterprise (charcoaling), and some basic guidelines for creating and managing forestry cooperatives. The subject of small-scale forest enterprises will be receiving increasing attention from FAO in line with the goals and objectives of the Tropical Forestry Action Plan and related initiatives.

· Forests supply raw materials for a range of processed products which enter widely into many aspects of present-day life. Industries manufacturing the lumber, panel materials, pulp and paper which supply the modern sector of the economy make up an important industrial component of nearly every country.

Recently it has become increasingly clear that in developing countries an equally important component is the large number of small processing enterprises meeting a substantial part of the demand for processed forest products generated by agriculture and by the population still associated with it. This market is widely dispersed and is served by a processing industry composed of very small units employing much simpler processes than those supplying the predominantly urban modern sector.

In aggregate this small-enterprise component is very large, both in absolute terms and as a share of the total processing activity. In common with other rural small-scale industries, however, it has been largely neglected. Industrialization in the developing world has been so heavily focused on large industries as to have "led to the popular but misleading impression that rural industries are either insignificant or absent" (Chute and Sethuraman, 1984).

The present article aims to draw attention to the information on small forest-based processing enterprises that is now beginning to become available. It also raises some of the issues that need to be addressed within the forest sector in order to provide better support in situations with developmental potential.

Definition

There is no single definition of what constitutes a "small-scale" enterprise. A distinction is usually made between small "cottage" activities characterized by household locations and traditional artisanal techniques and somewhat larger "workshop" enterprises employing some modern techniques. The dividing line between the two can be taken to be five workers, with 50 workers as the ceiling for small enterprises. Since many small enterprises even if workshop-based continue to depend partly on a household base, it is not easy neatly to categorize "cottage" and "workshop" types.

Small forest-based manufacturing enterprises process a wide range of materials from the forest (such as wood, rattans and other canes, and leaves, roots and fruits of forest plants). In rural areas, they mostly produce either furniture, builders' woodwork, agricultural implements, vehicle parts and other products of wood, or baskets, mats and other products of canes, reeds, vines, grasses and similar materials. Both of these product groups serve predominantly rural markets for which they are usually the principal sources of supply. A third activity is that of handicrafts (especially decorative ones), the output of which usually goes largely to urban markets, to tourists or sometimes even to export destinations. The main types of processing recorded in surveys in six countries are shown in Table 1.

The information relating to Bangladesh, Egypt, Honduras, Jamaica, Sierra Leone and Zambia is drawn from field surveys carried out with the assistance of Michigan State University. (For a full account of the survey results relative to forest-based enterprises, see Fisseha, 1987.)

Table 1. Composition of small-scale forest-based manufacturing enterprises¹ in selected developing countries

Activity	Bangladesh 1978/80	Egypt 1981/82	Honduras 1979/80	Jamaica 1978/80	Sierra Leone 1974/75	Zambia 1985
	(% of total number of enterprises)
Sawmilling/pitsawing	0.9	-	3.2	0.8	0.1	5.6
Carpentry/furniture	27.2	23.8	71.4	23.1	66.8	14.3
Wood carving/bamboo-cane processing	11.6	-	0.2	12.5	5.9	11.9
Basket/mat/hat weaving	32.4	70.4	10.6	63.5	23.8	60.3
Other2	27.9	5.8	14.6	0.1	3.4	7.9

Source: Fisseha, 1987 (Table 3)

NOTES: ¹ Surveys normally enumerated enterprises with fixer location; many activities such as charcoal-making, which change location frequently, were consequently omitted. ² Includes items such as broom-making, fuelwood, agricultural tools, etc.

Small forest-based processing enterprises are characterized by very small size, heavy reliance on entrepreneurs and their family members for labour, technological simplicity of operations, low capital intensity, limited industrial and managerial skills, seasonality of activities (especially for the smallest ones), and rural locational bias (see Table 2). The average size of workforce in the six countries ranged from 1.7 to 3.8 persons. Over half the units were one-person, household-based operations, and less than 1 percent employed ten or more workers. As many as nine or ten persons working in the enterprises were the owners or members of their families, with the rest being mostly informal apprentices. Wages are usually very low, and working conditions poor.

Table 2. Selected basic characteristics of small-scale forest-based processing enterprises¹

Attribute2	Bangladesh	Egypt	Honduras	Jamaica	Sierra Leone	Zambia
Mean values
No. of workers	3.8	1.9	2.2	2.2	1.8	1.7
Total investment (US $)	255	n.a	1055	3030	431	n.a
Annual work-hours (as % of full year of 2200 work-hours)	38	78	57	45	91	55
Shares (%)
One-person operations	36	69	59	58	n.a	69
Production based at home, not workshop	n.a	76	72	52	n.a	81
Share of employment in rural areas	n.a	65	100	79	96	95
Share of women entrepreneurs	3	65	10	32	n.a	12
Entrepreneur's family as share of enterprise workers	73	89	51	82	41	86

NOTES: ¹ For dates of surveys, see Table 1. ² Coverage of the surveys differed. For details, see FAO (1985) and Fisseha (1987).

The typical small forest-based enterprise thus depends heavily on inputs from the entrepreneur and his or her family. While likely to be experienced in craft skills, the entrepreneur often lacks marketing or management training even though having to deal with these activities besides being a production worker. The employees, whether family or apprentices, are generally without formal training in either the craft or management.

Very few of such small enterprises use powered machinery of any kind but must rely instead on hand-tools. Production is rarely specialized, products are usually made to order or in small batches, and work fluctuates seasonally as do agricultural income and activities. The pattern of production does not allow marked sharpening of any particular skill, and the high cost of formal training is yet another barrier to the acquisition of skills.

Size and economic contributions

Despite the very small unit size of many rural woodworking enterprises, aggregate employment usually is several or many times greater than in the medium or large plants making up the rest of the wood industry. Recent surveys have indicated that employment in small enterprises exceeded that in larger forest-based plants by a factor ranging from 3 in Jamaica to 15 in Zambia (FAO, 1985). In the latter, the 137400 persons working in small forest-based enterprises in 1985 accounted for 29 percent of total employment in all industries in that year (Fisseha and Milimo, 1986).

FURNITURE-MAKING IN PAKISTAN small enterprises are a major source of rural income

As the capacity of agriculture to generate additional livelihoods progressively declines, more rural people will likely seek employment in small-scale enterprises. It has already been estimated that household income from rural non-farm work ranges from one-half to three-quarters of the income from agriculture (Kirby and Liedholm, 1986). Within the small-enterprise total, processing and manufacturing account for the largest component: from 42 to 63 percent of all small enterprise employment in the six countries.

In all countries for which information has become available so far, forest products processing has been shown to be one of the largest of the small-scale rural industries, accounting for from 16 percent of total estimated employment in rural manufacturing in Honduras to 35 percent in Jamaica (FAO, 1985). For Africa as a whole it has been estimated to be the second largest rural industry (Page and Steel, 1984), and everywhere in the developing world it generally appears among the first three together with garment-making and food processing (FAO, 1985). Even in Egypt, a country almost devoid of wood resources of its own, the manufacture of wooden furniture is the third largest industry outside large towns and cities (Mead, 1982).

When employment in the processing of forest products through transient and itinerant enterprises such as charcoal production (not recorded in most surveys) is added, it is clear that total employment generated by small forest-based activities is a large part of total off-farm rural employment. This may constitute one of the more important contributions that the forest sector makes to rural development.

In addition to the employment and income that they generate, the small processing enterprises contribute to rural development in other ways: they contribute to agriculture, they smooth out seasonal production/income cycles, they provide goods and services to poorer strata of society which larger industries fail to reach, and they introduce vital skills into rural areas. They also conserve scarce managerial abilities, promote indigenous entrepreneurial capabilities, and channel into industry capital which otherwise would not be available for investment in this sector (Page and Steel, 1984). As investment opportunities or employment sources, small enterprises appear to be relatively highly accessible to the poor and so are better able than larger industries to benefit the landless and other disadvantaged groups: Table 2 shows the very substantial involvement of women, for example. Furthermore, being small, such enterprises are able to utilize valuable but scattered pockets of forest resources which might otherwise be unproductive.

Small enterprises also appear to be an efficient component of industrial development. Limited evidence suggests that small enterprises can be at least as efficient as their larger-scale counterparts in the use of capital and other resources (Liedholm and Mead, 1986).

Growth and change

The importance of learning more about small enterprises lies not in their smallness per se but in understanding better to what extent they are the most appropriate way of achieving development in a particular situation. Small size or labour-intensive technology should not be pursued as ends in themselves. In many situations larger operations are the better approach to industrialization, and many processing activities which start small will need to grow larger in order to remain efficient as operating conditions change. However, experience in India's match industry shows that the structure of fiscal and other incentives can prevent enterprises from growing bigger by making it commercially attractive to remain small (Tendon, 1986).

Small enterprises predominate as a form of manufacturing where there are factors which favour local processing, such as dispersed raw materials, small markets or high transport costs; where there are economies of small scale, such as in handicraft production; or where subcontracting is more efficient than are integrated operations. The large component of small-enterprise operations in the forest sector reflects the size of rural demand for its products, and the dispersion of these markets across large areas with relatively poor transport.

The typical small forest-based enterprise thus depends heavily on inputs from the entrepreneur and his or her family.

Limited evidence suggests that small enterprises can be at least as efficient as their larger-scale counterparts in the use of capital and other resources.

With improvements in rural infrastructure and incomes, manufacturing tends to become more concentrated in somewhat larger, workshop enterprises located in settlements and towns. In the course of economic development, the large-scale enterprise sector may tend to grow much faster than will small-scale operations and so come to account for an increasingly dominant share of sector production.

The small-enterprise sector's declining share of output should not, however, be interpreted to mean that it necessarily declines over time. Though the share Of small enterprises may be getting smaller, they often continue to grow in absolute numbers and output. The experience of the Republic of Korea, summarized in Table 3, is illustrative in this respect. Employment in each small-scale category increased greatly over the period reviewed; nevertheless the share of these enterprises declined because of the even faster growth of very large enterprises. A continuing role for forest-based small-scale enterprises can also be seen in their manufacture of new products which when popularized by rural users are then more widely commercialized by large enterprises. Moreover, some products (such as handicrafts) remain in the domain of small enterprises.

The position of small enterprises tends to be eroded by competition both within the small-enterprise sector and with their larger counterparts. Because of wry low capital and skill requirements for entry into many small processing activities, it is all too common for many more production units to exist than can be supported locally. The resulting competition leads to high failure rates and prevents the generation of profits which can be ploughed back into business. As may be seen from Table 3, average enterprise size at the smallest end of the scale range in the Republic of Korea is hardly growing, while at the upper end there is very fast expansion.

Table 3. Republic of Korea: summary of changes in employment in forest industries¹ by operational scale

Scale (workers)	Employment (E)
	1958		1963		1974		1979		1982
	E	%	E	%	E	%	E	%	E	%
5-9	3810	33	3989	33	8057	16	8379	11	8721	14
10-19	3235	28	2418	20	4532	9	7620	10	10590	17
20-49	2080	18	967	8	3021	6	7616	10	8721	14
50-499	2425	21	1934	16	7553	15	14473	19	14327	23
500	-	-	2780	23	27191	54	38088	50	19933	32
Total	11550	100	12088	100	50354	100	76176	100	62292	100

Source: Chipeta, 1986 (Tables 2.01 and 2.06)

NOTE: ¹ Sawmilling + plywood & veneer + boxes & barrels + bamboo/vine/cane products + furniture & fixtures.

The instability of rural markets is another threat to small-enterprise viability. Incomes, being agriculture-based, have a short peak during which demand may exceed small enterprises' capacity to supply. The resulting "supply gap" provides an opportunity for large industry suppliers. Lack of working capital prevents small-scale enterprises from stocking adequate materials to even out seasonal fluctuations in their markets. Their practice of producing mainly in response to individual orders also hinders them in coping with any increase in demand that would require organized batch or flow-line production.

Improvements in rural infrastructure which enable products from outside to be placed in rural markets at less cost, and changes in rural market demands with rising rural incomes, also put small enterprises under increasing competitive pressure. Thus factory-made furniture tends increasingly to displace its artisanal alternative, and bags, mats and basketware made from synthetics displace similar products made from natural materials. A study on handicrafts in Indonesia has revealed, for example, that home-made bamboo-and-silk umbrellas are rapidly being displaced by mass-produced ones using metal and synthetic materials (Hadi, 1986).

There are several strategies that small enterprises can pursue in order to respond to changing market conditions. They can concentrate on market niches in which factory products are not competitive, such as low-cost basic furniture or high quality hand-carved pieces. Alternatively, they can focus on products in which there is no competitive advantage from large-scale machine production, such as high-value handicrafts. Another approach is to specialize in a particular product or process in order to get the advantages of longer production runs. Or they may use the improved road infrastructure themselves in order to penetrate other markets and increase turnover.

The small-scale furniture industry in Egypt provides an example of development based both on selecting proper market niches (above and below those occupied by factory-made products) and on a specialization. Even the manufacture of chairs is divided among units specializing either in particular parts, such as legs or seats, or in different stages in the production process, such as primary processing, assembling or finishing (Mead, 1982). In northern Thailand, small village-based furniture entrepreneurs have taken advantage of the improved roads in their region to truck pieces they produce to towns or busy roadsides where they assemble and finish them for sale. In this way they compete effectively with furniture from large urban producers and have expanded their markets (Boomgard, 1983). Improved rural road networks, by lowering transport costs, are particularly likely to benefit producers of handicrafts and products such as charcoal, for which there is little if any competition from urban producers.

The strength of small enterprises lies in their ability to exploit those situations in which they can provide a more efficient way of using available resources and of meeting market needs than can their large-scale counterparts. To recapitulate, they may be superior in their ability to use limited capital efficiently, and can show greater profitability under such circumstances. They also have an edge where there is low-cost labour. It is well known, however, that imposing any unproductive overhead expenses on small enterprises poses high risk to their viability. Thus, in the first stages of expansion beyond household operation, small enterprises may fail because of costs of workshop infrastructure and the loss of hidden "subsidies" derived from operation within a household. The lack of access to long-maturity finance at this crucial stage has crippled many otherwise potentially dynamic enterprises.

Problems and possibilities

This section draws upon the discussions and conclusions of the FAO Expert Consultation on Rural Employment in Forestry Based Processing Enterprises, held in Rome, Italy, 27 to 31 October 1986 (FAO, in preparation).

TABLE-MAKING IN THE PHILIPPINES speciality products face less competition from mass production

Within the small-scale forest-based enterprise sector, entrepreneurs themselves most commonly cite finance as the principal problem they encounter in maintaining their competitive position, with raw material shortages cited next. Finance, however, while a real problem in its own right, is also often a symptom of other difficulties, among which may be:

· raw material shortages, often compounded by wasteful processing, restrictive regulations, poor distribution, and lack of working capital;

· availability of tools and equipment as well as technical skills with which to improve productivity;

· shortage of finance, mainly working capital, perhaps worsened by problems of access to what is available and by its cost;

· insecure markets, owing to low rural incomes, seasonality, poor market information and limited access to large markets, and severe competition;

· managerial weaknesses, which serve to worsen all the other problems since small-enterprise entrepreneurs often lack the capacity to analyse situations and to minimize problems;

· lack of organization of the enterprises to make use of available support services or otherwise to solve their common problems or capture growth opportunities.

MAKING CRICKET BATS IN PAKISTAN about 3000 workers are engaged in the manufacture of wooden sports goods

Small enterprises also often encounter official policy which compounds many of their problems, usually because it is oriented toward large modern sector industry. Small enterprises may face higher import duties and obtain fewer discounts on their supplies. In one survey of Sierra Leone, various carpentry requirements were reportedly taxed as "luxuries" while machinery for large-scale industry (including industrial joineries) faced lower rates of duty (Liedholm and Chuta, 1976).

Forest raw material problems are often worsened by unfavourable forest policies and by enforcement practices.

In developing programmes and measures to help small-scale entrepreneurs, it is necessary first to recognize which forest-based activities are viable at a small enterprise scale and have the potential for continued growth. Market prospects are probably usually of overriding importance. The ability to achieve low production costs is likely to be the second most important attribute of viability. This in turn depends on, among other things, good management and high labour productivity.

In planning support to small-scale forest-based processing, it is necessary that assistance be geared to the very small size of the enterprises and to the related constraints of resources and skills. Support activities need to differentiate between the "micro" household units, many of which use non-wood raw materials, and the somewhat larger and more progressive workshops. While the workshops may be able to benefit from certain existing support services, the small units will require other modes of assistance. In addition, enterprises that are moving up from household to workshop level are also likely to require special attention.

Imposing any unproductive overhead expenses on small enterprises poses high risk to their viability.

The needed support is likely to be best provided by existing organizations helping small rural enterprises in general, and not by setting up special extension entities for forest products. Such services usually already exist and aim to improve access to sources of finance, to provide market and product information, and to train entrepreneurs and their employees in technical and management skills. However, the "micro" units unless organized into groups are unlikely to benefit from these services and will probably need help in organizing. In addition, there is a danger that general support agencies may not be able to follow closely the particular needs of an individual enterprise sector. A "focal point" for forest-based activities may therefore be needed, and this function may best be carried out by the forest service.

RESIN PRODUCTION IN HONDURAS access to raw material supplies is essential

The activity where involvement of forestry authorities is most clearly needed is that of raw material supplies. Forest raw materials whether wood or non-wood are usually scarce, and small enterprises are not able to create or sustain their own resources for future use. Sometimes, the problem is a shortage of a specific type or quality of wood or of canes, fibres, or foliage which has been selectively absorbed by large-scale industries, or has been depleted through uncontrolled harvesting by small industries themselves. Access to raw materials from forests is also constrained by transport problems when sources grow increasingly distant.

Raw material problems are often worsened by unfavourable forest policies and by enforcement practices. A survey among furniture makers in northeast Thailand, for example, found that shortage of wood, rising prices for wood, and problems with forestry regulations were among the prime issues raised by entrepreneurs. Forestry laws were cited by nearly half the enterprises as the main negative factor affecting their operations (Boomgard, 1983).

Reorientation of forest management to accommodate small as well as large enterprises is likely to need a number of components. First, management and creation of forests as sources of supply for small enterprises could be encouraged outside state forest reserves, as an additional dimension of communal and private forest management, for example. Second, greater priority needs to be given in management of public forests to non-wood materials such as rattans, bamboos, canes and oil seeds on which many small enterprises are based. Third, licensing and tendering procedures should be modified to ensure that small- as well as large-scale enterprises can qualify. Forest concessions, for example, might contain provision for small enterprises to salvage material that is left by large-scale concession holders and often goes to waste.

Conclusions

Small-scale rural forest-based processing activities constitute an important part of the forestry sector in many developing countries, contributing significantly to the development both of the sector and of the rural and industrial economies. Their contribution needs to be recognized more widely, as a first step toward adapting forest policies and management to accommodate small enterprise needs more adequately.

Particular measures to improve their raw material situation could include, improving forest management and raw material allocation procedures to serve small as well as large enterprises more evenhandedly; broadening forest management to include non-wood raw materials of value to small enterprises; amending legislation and regulations which unnecessarily restrict beneficial small-scale activities; and assisting rural communities in developing ways of managing local forest resources to supply sustainable small-enterprise activities.

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