Turkey - Prospects for small-medium scale industry development and employment generation : Summary report

FILE COpy Report No. 2913-TU Turkey - Prospects for Small-Medium Scale Industry Development and Employment Generation (In Three Volumes) Volume 1: Summary Report September 10, 1980 EMENA Projects IDF Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Turkish Liras per US$ 1959-70 - average 09.00 1970 - average 11.50 1971 - average 14.90 1972 - average 14.15 1973 - average 14.15 1974 - average 13.90 1975 - average 14.45 1976 - average 16.05 1977 - before March 16.05 - March - September 17.50 - September - December 19.45 1978 - January - March 19.45 - March - December 25.25 1979 - January - April 25.25 - April - June 26.35 - June - December 47.10 1980 - January to May 70.00 - June to July 78.00 - August to date 80.00 ABBREVIATIONS AND ACRONYMS DESIYAB Devlet Sanayi ve Isci Yatirim Bankasi DYB Devlet Yatirim Bankasi HB Halk Bank IED Department of Organized Industrial Zones and Small- Scale Industrial Estates at Ministry of Industry and Technology MIT Ministry of Industry and Technology PENDIK Leather Research and Training Center SBAG Small Business Advisory Group SEE State Economic Enterprises SIDO National Small Industry Organization SMI Small-Medium Scale Industry SPO State Planning Organization SSI Small Scale Industry SYKB Sinai Yatirim ve Kredi Bankasi A.0. TBTAK Marmara Institute for Science and Technology (at Gebze) TSKB Turkiye Sinai Kalkinma Bankasi A.S.  FOR OFFICIAL USE ONLY This report is based on the findings of a mission composed of Messrs. G.C. Maniatis, C. Goderez, E. Kepper and S. Banerji, which visited Turkey for approximately four weeks in November- December 1978, and subsequent extensive work at headquarters. The mission visited industrial estates and establishments in Ankara, Istanbul, Izmir, Gaziantep and Kayseri, and had discussions with Government officials and the business and banking communities. The cooperation and assistance of all persons and agencies contacted is gratefully acknowledged. The report draws on a number of studies, referred to in the text. The report has been discussed with, and cleared for release by, the Government. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenst may not otherwise be disclosed without World Bank authorization.   TURKEY PROSPECTS FOR SMALL-MEDIUM SCALE INDUSTRY DEVELOPMENT AND EMPLOYMENT GENERATION VOLUME I TABLE OF CONTENTS Page No. I. INTRODUCTION ....... .......................... . ......... 1 Scope of the Survey .................................... 1 Definition ....1......................................... II. URBAN UNEMPLOYMENT - ISSUES AND POLICIES ............... 1 Urbanization Trends and Implications .................... Policies to Foster Urban Employment Generation .... ..... 2 Measures to Promote Industrial Employment in Regional Urban Centers ............................ 2 III. PROFILE OF SMALL-MEDIUM SCALE INDUSTRY ................. 3 Size, Employment and Regional Distribution .... ......... 3 Sectoral Distribution ...... .............. 4 Capital Intensity ......... ................... ....... 4 IV. PROBLEMS HAMPERING THE EFFICIENCY AND GROWTH OF SMALL- MEDIUM SCALE INDUSTRY ................................ 4 Internal Constraints ...... ........................... 4 External Constraints ... .................................. 5 The Halk Bank .......................................... 6 V. POLICY INSTRUMENTS AND THEIR IMPACT ON SMALL-MEDIUM SCALE INDUSTRY ....................................... 7 Investment Incentives ................... ............... 7 Export Rebates ......................................... 7 Export Financing ....................................... 8 Procurement ...................................... ...... 8 Subcontracting ......................................... 8 VI. GOVERNMENT PROGRAMS IN SUPPORT OF SMALL-MEDIUM SCALE INDUSTRY ............................................. 9 The Industrial Estates Development Program ............ . 9 The SIDO Program ...... .............. ................... 10 Industrial Training ................. .. ................. 11  TABLE OF CONTENTS (Continued) Page No. VII. PROPOSED TECHNICAL ASSISTANCE PROGRAMS .................. 11 Technical Assistance to Small-Medium Scale Industry ..... 12 Development of a Subcontracting Exchange ................ 12 Creation of an Industrial Research Service .............. 12 VIII. PROMISING SUBSECTORS FOR SMALL-MEDIUM SCALE INDUSTRY DEVELOPMENT .................................. 13 The Evidence ................................... ****. ....... o 13 The Foundry Industry * . ................................... 13 The Engineering Industries .............................. 14 The Leather Processing and Footwear Industries .......... 16 The Wood-based Industries o ..o..*.*. . o.*. . o*o*...... . .... .o. ... . 18 The Garment Industry *................................... 19 IX. OBJECTIVES AND STRATEGY FOR SMALL-MEDIUM SCALE INDUSTRY DEVELOPMENT ........o........................o.. . ....... 19 Contribution of SMI to Industrial Development ........... 19 Urban Employment Generation .....o .......*... o...... 20 Efficiency Improvement and Growth oe...oo......o........... 21 X. RECOMMENDATIONS .. ...................... ....o .......... 23 Policy Measures tc.0.0.0 ...... . .0.0 .... . .. ..... ..... 23 'Technical Assistance ............. ooo............ o...................... 24 Studies oo*o*o**o.9...... ................................ 25  I. INTRODUCTION Scope of the Survey 1. This survey attempts to establish the prospects for growth and the attendant potential for urban employment generation of the small and medium scale industry (SMI); to assess the policy framework and its impact on the development of the SMI; to ascertain the adequacy of the existing infrastructure (e.g., industrial estates, technical assistance delivery systems); to identify basic technical and financing problems hampering the efficiency and growth of the SMI; to suggest suitable financial intermediaries for possible Bank support; and to formulate a technical assistance package that could be part of a DFC operation. 1/ Definition 2. For the purpose of this report, small scale industry is defined as comprising establishments employing up to 50 workers; medium scale between 50-200; and large scale 200 or more workers. The only demarcation in manufac- turing in Government statistics is that between the organized sector (large industry) which comprises establishments employing 10 or more workers, and the unorganized sector (small industry), which includes establishments employing up to 9 persons. Such a broad classification of manufacturing industry is patently inadequate and provides very limited information on the SMI, a segment which accounts for some 99% of the total number of establishments, 55% of employment and 41% of value added in the manufacturing sector. Adoption of a more operational definition of small and medium scale industry to reflect present realities would be more serviceable. II. URBAN UNEMPLOYMENT - ISSUES AND POLICIES Urbanization Trends and Implications 3. Turkey is rapidly becoming a predominantly urban and industrial country. Urban population has been growing at over 5% per annum, or double the national average. The increase is primarily due to the continuing high rural-urban migration, in response to strong "pull" and "push" factors. Urban population growth is projected at 5.5% per annum for the next decade, and it is anticipated that 75% of the population might be urban residents by 1995. Urban unemployment exceeded 10% of the labor force in 1979 (total unemployment reached 20%), as a result of reduced external emigration, worsening economic conditions and sluggish growth of productive employment opportunities. With the continued growth of the civilian labor force, inauspicious prospects for 1/ The development potential of SMI was first highlighted in the Bank Report "Export-Oriented Industries and Small-Scale Industries in Turkey" (No. 1359-TU, August 17, 1977), in the context of a survey of the export possibilities of the manufacturing industries.  increasing external emigration, circumscribed productive employment oppor- tunities in the services sector, and persistent rural-urban migratory trends, unemployment is likely to swell, creating a nagging social problem and pre- senting policy makers with a major challenge. Policies to Foster Urban Employment Generation 4. The Government is keenly interested in accelerating the process of urban job creation. In this effort, the role of the manufacturing sector looms large, as it is expected to absorb 30-40% of the projected increase in labor force, or some 75,000 workers a year, during the next five years. This clearly suggests the need for greater consideration of the capital intensity in industrial investment. The challenge can be met inter alia by giving greater attention to the possibilities of job creation in the small and medium scale segment of the manufacturing industry (SMI), which has the greatest potential of creating jobs at relatively low investment outlay (see paras. 36, 56, 58). 5. To foster urban employment opportunities would require, in addition, setting right factor prices which, because of the present system of incentives, tend to favor capital-intensive technologies and production. Subsidized interest rates and exemption from duties of imported equipment tend to lower the price of capital and the cost of machinery, while unrealistically high minimum wages and the incidence of social benefits (about 55% of the wage base), tend to raise the effective cost of labor. Both these tendencies induce substitution of capital for labor, and are reinforced by increasing unionization and difficulties in laying off workers when activity slows down. The Government should seriously consider the discontinuation of these sub- sidies or at least, as a first step, grant them only for projects that demon- strably have a significant (direct and indirect) employment effect. A policy of setting realistic minimum wages and encouragement of multi-shift work also deserves full consideration. Measures to Promote Industrial Employment in Regional Urban Centers 6. The Government is also cognizant of the need for balanced develop- ment of large and small urban centers and has taken measures to foster regional development, with modest results. Government industrial investment in small towns in itself is unlikely to generate sufficient employment for the urban poor. In view of the incidence of unemployment and poverty in the smaller and intermediate size urban centers, creation of low investment cost industrial jobs in these centers by marshalling private sector entrepreneurship should be encouraged. A reassessment, and possibly redesign, of the existing incentives scheme might also be advisable to thwart the concentration of private industry in the major metropolitan centers. Continuation of a vigorous industrial estates program should also help promote the regional dispersion of industry, .while financial intermediaries could make an important contribution to this effort by redirecting available resources.  - 3-- 7. In the special case of Istanbul, 1/ the Government should consider containing the growth of the labor force and fostering the development of skill-intensive and advanced technology oriented industries. The higher and rising level of education of Istanbul's labor force clearly suggests the need to c.eate an increasing proportion of jobs requiring higher skills. This could be achieved by devising appropriate incentives. The process could be reinforced by discouraging industries generating low-skill employment through appropriate administrative measures (e.g., land use planning, zoning, licensing), since they encourage rural-urban migration. To ensure their effectiveness, however, the measures to be adopted should be adequate to offset the perceived advantages of locating in Istanbul by those the Govern- ment wishes to discourage from moving into the city. For instance, to stem the inflow of rural migrants into Istanbul, work opportunities with a job mix heavily weighted in favor of unskilled work should be created in alternative growth centers to attract them there (para. 6), regional wage differentials should be reduced, social infrastructure and educational possibilities should be improved. III. PROFILE OF SMALL-MEDIUM SCALE INDUSTRY 2/ Size, Employment and Regional Distribution 8. There were some 175,000 privately owned manufacturing establishments in Turkey in 1970 (their present number is probably around 180,000). Of these, SMI, i.e. establishments.employing 1-200 workers, account for a stagger- ing 99.7% of the total number of manufacturing establishments in the sector. Between 1970 and 1977, there has been a dramatic increase in the number of medium (50-200) and small-scale industry (10-49) sectors--88% and 82%, respectively. The observed increase is mostly the net result of new entry and 1/ Istanbul is the nation's major industrial center accounting for some 42% of the total number of establishments in the organized manufacturing sector, 38% of employment and 35% of total value added. 2/ Available information on SMI is fragmentary. The lack of comprehensive and sufficiently detailed time series by size of establishments and subsector on important economic indicators (e.g., investment, production, value added, exports, capital/labor ratios, labor and capital produc- tivity, profitability, capital structure, etc.) makes the study of trends in the SMI sector and the assessment of the performance of the SMI extremely difficult. Building up a reasonably adequate and reliable data base and ensuring a constant inflow and timely processing of information would enable policy-makers to better appreciate the contribution and prospects of SMI and would greatly facilitate policy formulation to realize its potential. Until a comprehensive census is taken, our knowledge of the vital statistics of the SMI sector is bound to remain incomplete, our analysis limited and inadequate, and our approach largely impressionistic.  -4- upward inter-class shifts throughout the spectrum, effected mainly through growth in enterprise size. SMI accounts for 55% of total private sector employment. Enterprises in the 10-200 workers range created 118,000 new jobs between 1970 and 1977, or 17,000 a year, which is quite remarkable when compared with 161,000 jobs, or 23,000 annually, created by the 200+ firms during the same period. Furthermore, SMI accounts for an impressive 41% of total value added in the manufacturing sector. These figures suggest that SMI constitutes a vital part of private sector manufacturing activity. Sectoral Distribution 9. In the organized sector, small (10-50 workers) and medium scale (50-200) enterprises are dominant in metal products, basic metals, food and beverages, and textiles and clothing. Although there are activities in each industry which fall within the domain of large scale industry, particularly in basic metals, metal products, plastics, and chemicals, the fact remains that the entire spectrum of industries in the manufacturing sector is heavily populated by smaller undertakings. This implies inter alia that economies of scale vary greatly within each subsector and that smaller firms are able to capture a share in the market large enough to ensure survival and even growth (see alAo paras. 36, 56). During 1970-77, the most dramatic increases both in absolute numbers and percentage-wise have been in basic metals, including castings, and metal products, followed by leather products, plastics, and chemicals. This reflects the potential in these industries and the quick response of new entrepreneurs, as evidenced by the high incidence of new entry. Capital Intensity 10. The average capital/labor ratio in private organized manufacturing (establishments employing 10 or more workers) is about one, half that of public sector manufacturing enterprises. In reality, the ratio is much higher in the public sector due to overstaffing. In very general terms, this attests to the lower capital intensity of private firms, in part due to their greater involve- ment in light and non-process industries. Unfortunately, there is no informa- tion on private sector capital/labor ratios by class of enterprise size and major product categories, to establish in a more definitive manner its capital intensity. Nonetheless, using as a proxy the investment cost per job created as estimated in Certificates of Encouragement granted recently, it can be argued convincingly that SMI tends to be considerably less capital intensive than larger enterprises. IV. PROBLEMS HAMPERING THE EFFICIENCY AND GROWTH OF SMALL-MEDIUM SCALE INDUSTRY Internal Constraints 11. Major internal problems adversely affecting productivity, quality of output or service and, by extension, constraining the growth of SMI and particularly of SSI, include: (a) out-of-date machinery; (b) deficient  technical and management methods (product design and new product development, process engineering, production planning and work methods, raw and intermediate materials selection and procurement, quality control, preventive maintenance, etc.); (c) poor working cpnditions and housekeeping, in part due to shortage of suitable factory premises and infrastructure; and (d) markeeing problems. Their relative importance varies with the particular industrial activity, size of establishment, and the surrounding circumstances of each enterprise. To rectify the situation, a comprehensive program of technical assistance is called for. 12. At this juncture, the "technological gap" and the attendant need for "vertical" as opposed to "horizontal" growth of production units pose a more intractable problem. For SMI using traditional skills to produce basic consumer goods for a relatively undemanding market, this is not a serious problem. But industrial development in Turkey has reached the point where future growth of the SMI sector must be based increasingly on modern, efficient production techniques, involving a shift of the product mix to more sophisti- cated designs and special emphasis on the provision of parts, components and sub-assemblies for large-scale factories (subcontracting or ancillary linkages). This dictates a size of factory and management sophistication above the micro-range, and the need for adequate production facilities, management skills (financial, technical and commercial), and specialized staff. Modern small-medium scale enterprises are emerging spontaneously as the more enterpris- ing master craftsmen seize the more obvious opportunities. 1/ But the trend is constrained by their inadequate business and technological talents, in- appropriate business organization forms, and insufficient technical assistance and capitalization. 13. The introduction of more sophisticated machines, in turn, creates a demand for highly skilled craftsmen. There is therefore need for training more skilled workers and skill upgrading, with greater reliance on formal vocational training. The issue deserves to be reviewed from a longer term perspective by Government Authorities in collaboration with the respective associations of the various trades, in order to determine structural trends in demand and supply in the relevant range of skills, to ascertain possible need for reforms of the existing training systems, to identify technical assistance and finance requirements, and to map out a strategy, requisite policies and a timetable for implementation. External Constraints 14. Non-financial Impediments. External problems tend to compound the internal ones. Limited access to technical assistance makes it difficult for smaller firms to improve their operations. The incentives system (paras. 17-21) is biased in favor of large-scale industries but administrative com- plexities (e.g., minimum project size, minimum number of participating firms) 1/ Individuals with technical or business background is another important source of SMI entrepreneurship in Turkey.  also make it difficult for smaller firms to take advantage of such benefits, such as are available. Finally, the purchase of inputs from inefficient or dominant domestic producers at prices well above world market levels due to import quotas or prohibitions erodes significantly profit margins, given that SMI operates in a fairly competitive environment. The Government's deter- mination to rationalize the system of protection should help alleviate the situation. 15. Financing. Recourse to non-institutional sources of funds (self- financing, curb market, sale or mortgage of personal property, solicitation from family members) is an important feature of the SMI segment of industry. The supply of equity capital is patently inadequate. Lack of access to institutional finance is particularly noticeable in SSIs occupying the middle of the size range and in MSI. Small enterprises occupying the lower end of the SSI size range and artisans are conveniently, though not adequately, served by the Halk Bank through the intermediation of some 650 guarantee cooperatives with a membership totalling 415,000. Commercial banks remain uninterested in financing small and medium scale industries. They prefer to direct their lending almost exclusively to large, capital-intensive projects promoted by interest groups, since transaction, processing and supervision costs, and the default risk are much lower. TSKB's support to medium size enterprises is limited. This is understandable since TSKB is geared to supporting larger projects, has no extensive branch network, and provides no loans for working capital. SYKB extends no loans to SMI, but is prepared to do so for SMI under the proposed Bank loan. Thus, the Halk Bank remains the major supplier of short and medium term funds to SMI. The Halk Bank 16. The Halk Bank's involvement in development financing so far has been limited. Because of shortage of funds and orientation toward cooperative financing, its lending to manufacturing enterprises for working capital has been limited to about 12% of its portfolio and for machinery and equipment to only 8% (1977). Appraisal and lending procedures are simple and expedi- tious; but in order to appraise larger projects and to increase significantly the volume of project lending it needs to build up its project appraisal capability. Other weaknesses include: undefined lending objectives and lack of credit policy statement; absence of operating plans for the short and medium terms; overly ambitious plans for branch network expansion without study of their cost-effectiveness; lending on highly secured basis; lack of well-conceived staff recruitment and training programs; and inadequate systems and procedures (e.g., deficiencies in the accounting and management information systems). The proposed Bank loan would increase the resource availability and assist the Halk Bank to implement a time bound action pro- gram to rectify these institutional shortcomings so that it can perform more effectively its role as an intermediary for term financing of SMI projects.  - 7 - V. POLICY INSTRUMENTS AND THEIR IMPACT ON SMALL-MEDIUM SCALE INDUSTRY 17. U il very recently, the SMI sector has had very limited access to Government incentives (exemption or deferral from customs duties, tax holidays, interest rate subsidies, export rebates and financing, etc.), since the criteria of eligibility and the administration of the scheme were designed to support large scale operations. Inadvertently, this policy framework discriminated against SMI. In 1979, in recognition of the potential contribution of SMI to industrial development and employment generation, the Government took steps to rectify the situation (see para. 18). Nevertheless, there remain certain other areas where the concern of the Government is invited, which include the exist- ing arrangements concerning export rebates and financing and the institution of appropriate procurement and subcontracting policies. Such policy instruments and their impact on SMI, as well as suggested corrective action, are discussed briefly below. Investment Incentives 18. As conceived and administered in the past, the eligibility criteria for investment incentives (e.g. scale and technological requirements) ruled out all small and many medium size establishments. Inconvenience and delays during the processing of applications also tended to discourage smaller applicants. However, in 1979, though effectively since March 1980, the newly established Incentives Department at the Office of the Prime Minister began issuing Letters of Encouragement for projects in priority sectors with an investment cost not exceeding US$750,000, thereby providing incentives that otherwise were available only under the Certificate of Encouragement. If organized and implemented effectively, this newly introduced system of Letters of Encouragement could be an important step toward putting SMI on an equal footing with large enterprises. 19. The Government nevertheless might wish to reconsider the expediency of subsidizing interest rates and the importation of machinery and equipment for both small and large enterprises. As alluded in para. 5, subsidized interest rates distort the true price of capital, introducing a capital-intensive bias and thereby influencing the choice of technology. Besides, if there is strong conviction about the need for additional inducement, it could be provided in a different form--e.g. by increasing tax credits. By the same token, exemption of imported capital goods from duties also results in reduced cost of capital and tends to promote the use of capital-intensive techniques. Defer- ment of duties should perhaps suffice; but with persistent high inflation rates, deferment becomes tantamount to exemption. Export Rebates 20. As presently designed, export rebates discriminate against smaller exporters who fail to qualify as bona fide traders. The incentive could be granted to smaller firms which combine in order to reach some minimum absolute value of exports--perhaps using an export agent. More generally, the present system could become more effective by providing greater rewards to  - 8 - better export performers and by instituting a greater degree of progressivity based on higher value added. There could also be an additional export stimu- lus by extending the incentive to immediate intermediate suppliers of exporters to induce them to upgrade quality and thereby facilitate the development of new export outlets. Export rebates for indirect exporters have been used in a number of countries, most notably Korea. Admittedly, its administration is more complex than for direct exports but is workable. Export Financing 21. The Government has taken courageous measures inter alia to improve the export institutional framework (e.g. streamlining of export procedures and licensing, easing of imports for production of export items, etc.), and to increase export credit availability. Export financing could become more effective for SMI if: (a) it is made more accessible to smaller exporters (publication of a guide on how to obtain this credit would be helpful); (b) exporters are allowed to utilize their local banks to process applications, thereby minimizing contacts with Government agencies. Procurement 22. Within the present industrial structure of Turkey, there is consider- able potential to expand markets for SMI through access to public sector procurement. The various schemes whereby the Government could foster the development of SMI through public sector purchasing contracts and tenders are discussed in Vol. III, Annex E. The Government could identify particular items suitable for procurement by SMI and adopt appropriate programs (e.g., improved information about public procurement opportunities, set aside programs, etc.) to ensure SMI participation. The Department of Small-Scale Industries in the Ministry of Industry and Technology, properly strengthened, seems to be the most appropriate agency to administer this activity. Subcontracting 23. The importance of developing commercial linkages between SMI suppliers and medium to large scale producers of finished goods is overriding. 1/ Aside from the typical advantages of subcontracting to principal firms, recent trends in Turkey tend to enhance the attractiveness of subcontracting arrange- ments. Manufacturing enterprises are required to increase each year the proportion of locally produced parts and components. Also, the increasing unionization of the labor force in larger enterprises has brought along a constant demand for higher wages, fringe benefits, and severance payments, 1/ The lines along which subcontracting, as an instrumentality to facilitate the growth of SMI, could be promoted through a concerted effort of private and Government initiatives are discussed at length in Vol. III, Annex F.  - 9 - including substantial loss of man-hours from strikes, and has fostered an attitude opting for farming out the production of components. The key con- straint is availability of efficient and reliable SMI suppliers. Neverthe- less, some activity is going on in the private sector. Specific measures to promote subcontracting arrangements between SMI and large engineering firms are outlined in paras. 34 and 63(vii). VI. GOVERNMENT PROGRAMS IN SUPPORT OF SMALL-MEDIUM SCALE INDUSTRY 24. The Ministry of Industry administers the following major programs supporting SMI development: (a) industrial estates; (b) the National Small Industry Development Organization (SIDO) program, including the pilot service center known as the KUSGEM project at Gaziantep; (c) and industrial training. An assessment of these programs follows. The Industrial Estates Development Program 25. The industrial estates program has effectively addressed the infra- structure problem and must be recognized as one of the pillars of industrial development policy in Turkey not only because it benefits directly thousands of small-medium size enterprises but also because it fosters regional indus- trial growth and urban decongestion. Today, there are 195 SSI estate projects (including 19 classified as municipal projects)--52 operating, 59 under construction, 11 being tendered, and 73 in early phases of study. Organized Industrial Zones for larger enterprises number 20 in varying stages of comple- tion and occupancy. In addition to these Ministry of Industry/Halk Bank financed projects, it is estimated that some 100 privately financed SSI estates are in existence, completed or under construction. By any measure, the industrial estate program is massive and promises to maintain its momentum. 26. Partly because of the technical assistance provided by the Ministry of Industry, but also by a process of "learning by doing," earlier errors in site location, 1/ building design, road and utility network specifications, inadequate expansion areas, failure to take into account project related housing, transport and waste disposal demands, are being eliminated. The newer projects demonstrate an improved level of professional competence in design and execution. Increasingly, the projects are also expanding their scope; many now plan common laboratory and shop facilities for raw materials testing, precision machining, tool and die making, product quality control, and special processing needs. 1/ Many earlier projects have already been engulfed by urban growth and its occupants are planning second stage projects further out.  - 10 - The SIDO Program 27. The SIDO (National Small Industry Organization) program has been evolving since 1968 with UNDP/UNIDO finance and technical assistance. In the first phase (1968-1978), a regional pilot program was implemented at Gaziantep (the KUSGEM project). The Ministry of Industry, with UNIDO assistance, proposes to organize a comprehensive system of technical exten- sion services and common facilities for SMI on a national scale, with head- quarters in Ankara and offices in initially half a dozen and ultimately 14 major regional centers. The Gaziantep project will serve as a model, with modifications as appropriate to take into account regional needs and priori- ties. In addition, to assist the approximately 110 small foundries in the Aakara region, a specialized service center is proposed to be developed under the program which will provide technical extension services, common facilities such as material testing, special machining and heat treatment, quality control laboratories, etc. and training facilities to upgrade the skills of foundry workers. 28. The specifics of organization, staffing and administration are still under study. But it is of cardinal importance for the success of the program that SIDO function as an autonomous institution under the Ministry of Industry's aegis. By not being part of the civil service system, conditions of employment and compensation of SIDO's staff could be set at levels that should attract and retain qualified personnel from the private sector; ser- vices, technologies and other inputs could be better adapted to the needs of prospective users; businessmen's fears of Government prying into their affairs would be allayed. These features should enhance SIDO's effectiveness and performance. The Ministry of Industry would provide policy guidance, budget control and would monitor performance. 29. The experience already accumulated at the Gaziantep pilot project suggests that implementation of this ambitious expansion program would be very difficult, particularly within the assumed time frame (1981-85). In view of the limited results to date at Gaziantep, it would be prudent for the Ministry of Industry to critically review its current proposal to establish a SIDO program in the proposed scale. A more rational approach would be to complete the Gaziantep project in an effort to achieve a more effective pilot operation. Among the measures needed are: (i) improved levels of compensation to attract and retain qualified staff; (ii) expanded budgetary allocations to cover non-salary operating expenses; (iii) a more businesslike approach to operating the pilot industrial estate, i.e., immediate negotiation of sale and rental contracts; (iv) a revision of pricing policy to reflect market rates to the extent possible (some small element of subsidy may be needed in disposing of buildings over the near term); (v) more intensive promotion of unused plant and common service facilities with service charges applied where feasible (at least to larger firms). Once the Gaziantep project achieves more visible success, replication on a national scale would be more justifiable. At this stage, the Government should perhaps consider supporting a scaled down, appropriately phased, and thereby more manageable and affordable SIDO program. 30. Specifically, a more realistic program for SIDO would be to estab- lish initially 1 or 2 regional extension service offices in major urban  - 11 - centers without the huge investment in physical facilities carried out in the KTJSGEM project. These regional teams would need to be sufficiently mobile to visit individual establishments to diagnose problems and to provide assis- tance. In addition, each regional office would be responsible for undertaking market stuejes, industrial surveys and subsector reviews on a regional basis. A small gruup of technical and management staff could administer the program from Ankara. Sucb a SIDO program would complement the Business Advisory Services to be provided by the Halk Bank and could draw on private consultants. This pilot program could be gradually replicated to cover additional regional centers. The Government should also reconsider the actual need and ponder the problems likely to arise from establishing a foundry extension center at Ankara. In this regard, it might be advisable for SIDO to investigate the possibilities of arranging training for workers from small foundries at large private foundries, subsidizing the costs involved. The mechanical and metallurgical testing facilities already available in large foundries could probably be utilized by small foundries with the Government subsidizing the charges. After an evaluation of the experience to be gained from this effort, a sounder decision could be made as to whether or not to establish the proposed foundry facilities at Ankara--although a specialized extension service team can probably be justified. Industrial Training 31. The Ministry of Industry supervises a skill upgrading program for industrial workers, administered by a committee representing the Ministries of Industry and Education, Halk Bank, and the Union of Guarantee Cooperatives. The program was instituted in 1964, but it is being curtailed due to inade- quate funding. Between 1972 and 1976, the number of training centers has declined from 9 to 6, and that of trainees from about 1,500 to 500. No program was offered in 1977 because of unavailability of instructors. In 1978, the program was further curtailed, and in 1979 training was provided for 400 students in 5 centers. Given the need for more training, the present program is inadequate and steps should be taken to improve the situation. VII. PROPOSED TECHNICAL ASSISTANCE PROGRAMS 32. Technical assistance delivery agencies catering to SSI are virtually non-existent. To help the small scale manufacturing sector alleviate the problems currently impeding its full development, a program of technical assistance is proposed which would complement on-going or proposed related activities in support of SMI. Efforts should be directed: (a) to raise the productivity of enterprises, by improving manufacturing processes and exten- sion of assistance to solve problems in areas of production management and engineering; (b) to remedy deficiencies in the commercial aspects of manage- ment and facilitate project preparation (technico-economic aspects); and (c) to develop ultimately a Subcontracting Exchange, in an attempt to forge  - 12 - commercial linkages between SMI and large manufacturing enterprises (private and, hopefully, public). The suggested program is outlined below. 1/ Technical Assistance to Small-Medium Scale Industry 33. At present, the Halk Bank provides rudimentary technical assistance to its clients on an ad hoc basis and not as part of an organized program. The proposed project would include a component for setting up a Small Business Advisory Services Group (SBASG) in the Halk Bank to provide a broad range of services to its existing and prospective SMI clients, as follows: (a) assist entrepreneurs in preparing projects for setting up new SMI or expanding existing ones, in choosing appropriate technologies, processes and equipment, and in promoting partnership, corporate or cooperative ownership; (b) assist small and medium enterprises to resolve technical, quality, production and management problems during the operational phase of their projects; (c) provide assistance in domestic and export marketing; (d) help SMI to enter into sub-contracting relationships with larger enterprises and to expand such links where they already exist or where they face problems. Also, SYKB has agreed under the proposed Bank loan to extend technical assistance to its SMI borrowers on a cost sharing basis. Development of a Subcontracting Exchange 34. As indicated in para. 23, there is considerable potential for a properly organized and supported Subcontracting Exchange. The fact that the Istanbul-Izmit-Bursa region is the most highly industrialized in Turkey with the highest concentration of metal-working industries and large engineer- ing firms suggests that Istanbul should be the focal point of the proposed subcontracting program. Similar units could be replicated in other major regions and industries in the future. The possibility of promoting sub- contracting arrangements in the public sector also deserves serious con- sideration. TSKB's efforts, in cooperation with the Middle East Technical University and TBTAK, to develop a data bank to record the available capa- cities and capabilities of SMIs to perform different types of technical work, could greatly facilitate the task. Creation of an Industrial Research Service 35. To meet the evolving needs of SMI, there is need for establishing an Industrial Research Institute, preferably as part of the CIDO program. The research should focus on economic, market, engineering and management aspects of SMI operations. 1/ To meet the technical assistance and training requirements of the garment industry, a pilot technical assistance program was tacked onto a recent Bank loan, with TSKB as a delivery agency.  - 13 - VIII. PROMISING SUBSECTORS FOR SMALL-MEDIUM SCALE INDUSTRY DEVELOPMENT The Evidence 36. Subsectors which appear most promising in terms of potential growth of SMI comprise the foundry, engineering, food processing, ready-made gar- ments, footwear and leather products, wood-based and furniture, plastics, and construction materials. Aside from growing domestic demand and export potential, factors reinforcing the potential growth and viability of the SMI in these industries include: relatively low scale economies in a wide range of activities in each industry; locational factors, such as local process- ing of bulky raw materials (saw mills) or local production of bulky products (construction materials); complementarity with larger industry, involving manufacturing operations in which the processes are readily separable (e.g., producing specialized machine products, components and tools), craft or precision handwork, simple operations of assembly, mixing, or finishing, provision of services and repairs to other industries; production of differ- entiated products for specialized markets, or low-priced mass consumption goods. Engineering is perhaps the most inviting of all subsectors, and its development should therefore command higher priority, as it combines virtually all the above mentioned features: it envelops numerous intermediate and final goods which can be produced efficiently at small-medium scale; it is relatively less capital-intensive and highly skill-intensive; entails comparatively low capital requirements; has strong backward and forward linkages; demand is income elastic in many segments; could exploit substantial possibilities for replacement of imported parts and components; and it fosters a link between small-medium-large scale industry through ancillary or subcontracting relation- ships. In general, all industries mentioned above are "non-process" and belong to the so-called "modern" SMI sector but, for a wide range of products, they require small-medium scale of plant (and size of firm) and relatively low capital intensity. 1/ Their expansion should inter alia enlarge employ- ment for the urban poor. Evidence from industrialized countries (e.g., Japan) and other countries of similar level of industrialization (e.g., Korea, Taiwan) reinforces this view. The potential for development and, by extension, low-cost employment generation, of the foundry, engineering, leather process- ing and footwear, wood-based, and garment industries is briefly discussed below. The Foundry Industry SMI Potential 37. The Government's policy to encourage the gradual substitution of imports has led to local manufacture of more complex castings, with imports confined to specialty items. The increasing technological sophistication, 1/ The kind of activities suggested here are known to be dominated by SMI and expressly exclude the traditionally large scale, capital- intensive "process industries" (steel, aluminum, pulp, fertilizers, etc.).  - 14 - product mix and output of the engineering industries has resulted in sub- stantial growth of the number and size of foundries. Large firms (capacity over 5,000 tons/year) account for about 23% of existing capacity, medium (500-5,000 tons/year) for 55%, and small (less than 500 tons/year) for 22%. Aside from the growing domestic market for more sophisticated and complex iron and steel castings, there is considerable potential for exports of both rough and machined castings, provided the industry can gear up and modernize. The motor vehicle, machine tools, construction machinery, materials handling equipment and heavy electrical machinery industry are possible sources of demand. Medium scale foundries have the largest potential for exports, assum- ing they develop the technical and management capabilities to produce complex and high quality castings on a consistent basis. The way to penetrate foreign markets would be through development of international subcontracting linkages with European firms. Small foundries, properly reorganized and assisted, could in turn cater to the needs of an expanded domestic (and indirectly export) market for a significantly larger range of products. An extensive list of typical items suggested for manufacture by small foundries is given in the Vol. III, Annex H. Strategy for Subsector Development 38. To grow, small and medium foundries need to improve significantly their technological capabilities and productivity. Improved technological facilities would be essential for the manufacture of more complex castings required for sophisticated end use products for which demand is projected to grow rapidly, while improved production management, including rationali- zation of production, is essential to improving efficiency. An approach for improving technological capabilities would be for the Government to help finance a common service facility involving a group of small foundries clus- tered in close proximity, in cases where minimum scale of operation would not justify the establishment of such facilities by a single small plant. Such a facility could include laboratory facilities. However, the possibility of obtaining such services from large foundries on a contractual basis should be investigated before establishing common service facilities (see para. 30). Investment in common service facilities could also be undertaken by the small firms themselves on a cooperative basis, or through integration and establish- ment of a medium size jobbing foundry designed to produce more complex products on a rationalized production system. Financial intermediaries could organize the setting up of such common facilities. Technical assistance to small foundries to help them establish such services would be necessary. The Engineering Industries Development of the Subsector 39. The engineering industries as a group (fabricated metal products, non-electrical machinery, electrical machinery, transport equipment, profes- sional and scientific equipment) is one of the most important manufacturing industries in terms of investment, employment and value added, and one in which the private sector is dominant. SMI employs more than two-thirds of the  - 15 - sector's labor force. The nunber of firms in the sector tripled between 1970 and 1977 while employment doubled, reflecting the rapid growth of the sector effected through new entry and the growth of enterprises throughout the spectrum of size brackets. Some 94% of all establishments employ less than 200 workers Thich demonstrates the persistent importance of SMI. 40. The technological capability of engineering firms varies with the size of establishment and products manufactured. The trend has been to intro- duce more sophisticated technology and to produce higher value added products. The larger firms are generally equipped with imported modern machinery. In the smaller firms, much of the equipment is home-made or second hand. Such equipment tends to be old or obsolete with limited capability to produce at required tolerances and rated capacity. Production processes often are wasteful of raw material and fail to produce goods of consistent quality. Quality control standards and procedures are inadequate. There is generally a lack of modern measuring tools and procedures. Nevertheless, the overall picture which emerges is that of an industrial sector based on a well-diffused technological capability in both the SMI and large scale segments, with excellent prospects for growth and improved efficiency. Strategy to Promote SMI Development 41. The strategy to develop SMI's potential should be to direct resources and effort to support expansion of the product areas outlined in paras. 42-45 below. 42. Low Value - Low Technology Standard Products. There is a wide range of industrial intermediate and final consumer goods which comprises low-quality and low-priced standard items, providing ample opportunities for SMI to operate in market niches without engaging in direct competition with larger firms. Markets for such items often tend to be small, requiring capability to manufacture a wide range of items in short production runs. Also many of these products are bulky and costly to transport. 43. High Technology - High Unit Value Products. There are many products at the opposite end of the technological spectrum which have a high unit value and cater to the needs of sophisticated, high technology users (e.g., precision measuring instruments, scientific and laboratory instrumentation, medical equipment, process control equipment, electronic and electromechanical tele- communication products, etc.). Because of the high level of product differen- tiation, lot sizes are small and manufacture can be carried out in small-medium scale establishments. The availability of highly trained technicians and engineers in Turkey further encourages the development of such industries. 44. Products Manufactured Under Ancillary and Sub-Contracting Relation- ships. The engineering industries provide the most fertile area for develop- ing ancillary and subcontracting linkages between large-scale manufacturer/ assemblers and small- to medium-scale suppliers. Such a division of labor comes about because of the short production runs typical of many processes. Also, since engineering goods in general are skill-intensive and Turkey has a supply of labor with basic industrial skills, engineering products  - 16 - can be produced efficiently at small and medium scales and at varying levels of technology. Presently, the automotive (cars, trucks, tractors) and con- sumer durable (refrigerators, washing machines, stoves) are the main industries in the engineering sector utilizing to some extent SMI firms as ancillary suppliers. To realize its full potential, the SMI sector must improve produc- tivity and quality and, to do so, financial and technical assistance are required. Small shops should be merged or form cooperatives to increase their production capacity to handle larger orders and to make it more practicable to channel credit and technical advice and assistance. But efforts towards standardization of models and components by large firms, particularly in the automotive sector, and greater product specialization by ancillary suppliers, are crucial. 45. Production of Selected Capital Goods. Capital goods production evokes the image of large, highly mechanized plants, with large scale economies. What is not fully appreciated is that the capital goods sector comprises many industries which are skill-intensive, and that many product lines of the industry, even in advanced countries, are characterized by a relatively large number of medium-sized firms. Assuming availability of a substantial supply of skilled workers at a fraction of the wage paid to their counterparts in developed countries and not significantly lower productivity, wage levels should confer a cost advantage and ensure efficient operation of medium scale firms. An array of capital goods that could be produced in Turkey by medium scale industries is provided in Vol. III, Annex I. Some of them are already produced, while other items could be identified by commis- sioning studies to qualified institutions, such as the Marmara Institute for Science and Technology. The Leather Processing and Footwear Industries Background 46. Despite the adequate resource base and the trend toward larger and modern units, the leather processing industry has not realized its full potential because of structural and production problems, and poor quality of raw material. Efforts are underway to ameliorate the adverse conditions affecting hide and leather quality but much remains to be done, particularly in improving pastures and feeding practices, establishment of better managed and more efficient abattoirs, tightening government inspection, improving handling, storage and transport facilities, and modernizing production facilities and technology. Prospects and Strategy for the Development of the Leather Garment Industry 47. Although Turkish production is quite well-established in world mar- kets, there are quality and delivery problems. Performance is also hampered by the large number of inefficient producing units, shortages of qualified labor, and management and technical weaknesses. Government strategy to improve the sector places primary emphasis on expanding the large-scale subsector. But in view of the important complementary role of SMI, it would be prudent to concentrate attention also on the SMI subsector. The strategy  - 17 - should have the parallel aim (a) to facilitate the expansion of large scale firms and the adoption of appropriate technologies; and (b) to strengthen the small-medium scale firms, to the end of developing a functionally integrated sector. SSI can be upgraded as sub-contractors to larger factories as well as manufacturers of special short production run items through the provision of adequate physical facilities (industrial estates), term credits for appro- priate types of modern equipment (many of simple but efficient design which could be produced in Turkey), technical and marketing assistance, and train- ing. Of fundamental importance would be incentives to foster cooperative arrangements and mergers. Larger, but still small-scale, production units-- say in the range of 10 to 40 workers each--working in close harmony with large production/marketing groups would contribute effectively in maintaining and enhancing Turkey's international competitiveness. Development Strategy for the Footwear Industry 48. In the past, Government strategy to expand and improve the shoe industry emphasized the promotion of the large-scale segments of the industry. However, efficient shoe production can be based on linkages between well- managed SSI units and larger factories. In adopting a strategy which recognizes the potential of SSI, sectoral performance will depend on the successful integration of SSI production capacity with the production and, more importantly, the marketing capabilities of the larger-scale enterprise. Employment considerations alone would justify the rational nurturing of small labor-intensive but efficient workshops. The SSI subsector--which currently accounts for about 90% of national leather shoe output--cannot be ignored without serious social and economic effects. Corrective action will therefore be needed on many fronts to achieve: institutional strengthening of both public sector agencies concerned with the shoe industry (e.g., PENDIK) and the private associations of enterprises; expansion of production and/or improve- ment of quality of leather; improved plant and infrastructure--relocation on industrial estates; term credits, technical assistance, management and skilled worker training and upgrading; formation of larger (but still small-scale) and more efficient producing units through mergers of micro-shops and organization of cooperatives; promotion of sub-contracting (for large-volume assembly and distribution organizations, e.g., chain stores) and other marketing assistance, including organized procurement by public agencies and export development. 49. To deal with the singular problems--structural, technical, financial and marketing--of the footwear industry there is need for a comprehensive program of development. A basic study is, therefore, proposed leading to the formulation of an integrated national program of rehabilitation and reorganiza- tion of the sector. Much of the needed sectoral data and analyses already exist in past studies. The new study would be oriented more to the preparation of a comprehensive Action Plan of institutional reorganization and strengthen- ing, technical assistance and credit, aimed at transforming the industry into an efficient, cost-competitive activity. The study would also suggest a course of action concerning the restiucturing of the leather tanning segment, including realistic options for possible relocation. The study should be carried out by an internationally recognized consulting firm, under the auspices of TSKB/Sumerbank/Ministry of Industry.  - 18 - The Wood-based Industries The Sector 50. The most striking feature of the sawn-wood subsector is the large number of private SMI units using simple low-capacity tools, equipment and technology, existing side-by-side with a small number of much larger, rela- tively modern public sector enterprises. Despite the persistent low capacity utilization (44%)--resulting from the uneven supply of raw material and market- ing procedures which favor the public sector--and the outdated equipment and production techniques employed, the SMI sector has survived and grown, accounting for almost 90% of sawn-wood production. Nonetheless, the SMI sector is sustained in large measure by paying low wages and earning marginal profits, a situation that can be improved through technical assistance and better equipment to enhance operating efficiency. Downstream, the wood-based panel industry (plywood, fiberboard and particle board) has developed rapidly in the last fifteen years, particularly the particle board segment, and it is expected to grow in the immediate future. Only a small fraction of the furniture industry is modern and assistance is needed (e.g. in designing, knock-down constructions, production management, etc.) to improve its per- formance and to expand exports. Strategy and Policies 51. The forest resources of Turkey, properly developed and managed, are sufficient to support a major expansion in the efficient production of logs and the intermediate and finished products derived from logs. The Government, with Bank support, is introducing a comprehensive forest management system to expand log production. As a first step, the General Directorate of Forestry, the monopoly producer, needs to take steps to expand production, to improve its marketing system, and to follow a more balanced approach to raw material allocation between private and public sector, in recognition of the important role of the private sector. The ensuing benefits will be felt by the down-stream sectors (sawn wood, panels and furniture) as a whole--but especially so within the important SSI segments of these sectors-- in terms of raw material availability, quality and price. 52. Government policy has strongly favored the creation of publicly owned large-scale modern sawmills, and little organized assistance is avail- able to the private sector. Presumably, the rationale is that large modern mills are more efficient because of economies of scale. Yet, the SMI private sector still accounts for an overwhelming proportion of both production and employment and is competitive under adverse conditions. Any organized program of sectoral expansion and operational improvement should be based not only on assisting the medium to large scale firms but also on strengthening the SSI segment. SSI growth and efficiency can be promoted through increased credit availability and technical assistance. Mergers and cooperatives should also be encouraged to eliminate or reorganize very small marginal producers in favor of the scale economies achievable by relatively large (but still small- scale) production units. In the marketing area, ancillary linkages and  - 19 - subcontracting can be fostered through a subcontracting exchange to take advantage of the distribution capabilities, nationally and internationally, of larger manufacturing and trading companies. The Garment Industry Overview 53. Unlike the other segments of textile sector, the garments/making-up industry is undeveloped. However, it can be expected that the factory produc- tion of garments in the organized sector will continue to erode the large share of the clothing market now held by the less efficient home and artisan production. Garments and made-up articles represent a small, though fast growing share of Turkish exports. Starting from token levels in 1970, exports increased to US$60 million in 1977. There is potential for further expansion of garment exports within existing market constraints. Subsector Strategy 54. The Government emphasizes exports of finished goods. But, in addition, there is also a growing potential to supply efficiently the domestic ready-made market through sub-contract production for large volume distribu- tion firms, such as chain stores. The strategy to achieve these objectives should be to improve productivity and to upgrade the quality of output in the industry. This would involve in particular: (a) modernization in certain segments of the sector (especially dyeing, printing and finishing where there is substantial obsolete equipment) to ensure the right quality of fabrics used in garments; (b) extension of technical assistance and training; and (c) fostering new entry, growth of existing establishments to attain efficient sizes, and sub-contracting. The recent Bank loan to the private textile sector is expected to contribute to the alleviation of some of these problems. Structural changes are not difficult to achieve in this segment of industry, because economical production scales vary widely and hover within relatively low levels of output that can be attained by medium size firms. Also, being a highly labor-intensive industry, capital requirements are relatively much lower and, as a result, more affordable by less well-off industrialists. Promotion of cooperative arrangements, particularly with respect to procurement and marketing, creation of trading companies which could stimulate the development of an extensive network of sub-contractors and thereby link and help upgrade the performance of the small units, and encouragement of weaving and knitting establishments to integrate forward to garment/ making-up, deserve full consideration. IX. OBJECTIVES AND STRATEGY FOR SMALL-MEDIUM SCALE INDUSTRY DEVELOPMENT Contribution of SMI to Industrial Development 55. The SMI sector plays an important role in the Turkish economy in terms of employment, output, processing locally produced materials, and  - 20 - saving/earning foreign exchange. Furthermore, a modern SMI sector can contribute considerably to the country's industrial development, can promote structural shifts (e.g., by enhancing the share of intermediate and capital goods in industrial output), while active support of small-medium scale but efficient manufacturing enterprises could also have other tangible socio- economic advantages (e.g., greater scope for initiative and the development of technical and managerial skills; supply of a good part of low-priced mass consumption goods; adaptation of production techniques to the country's particular circumstances; promotion of more equitable distribution of income; reduction of regional imbalances and urban concentration; etc.). Despite the problems enumerated earlier, SMI generally remains viable, is retaining its relative importance and is actually increasing it in many industries, as is evidenced by the noticeable increase in the number and size of firms in the past decade or so. 56. It should be stressed in this connection that scale economies, often viewed as a factor debilitating SMI efficiency, have been taken unwitt- ingly or uncritically for granted. Observations of the size distribution of many "non-process" industries in developed countries indicate that a large diversity of sizes exists at any one time and has persisted over time, suggesting that there is no unique optimum size for an "industry". This can be attributed to the multitude of individual activities in each subsector and the particular circumstances of each firm, as determined by technology and adaptability of equipment (e.g., use of multi-purpose machines), varying factor proportions (e.g., through longer shifts or more shifts), degree of vertical integration, managerial capability, structure of demand and product- mix, factor prices, location, or particular strength compensating for dis- advantages in other areas (e.g., greater flexibility and adaptability to market changes). In view of the uniqueness of the surrounding circumstances, scale economies can be meaningfully ascertained only at the product level. Certainly there are, say, engineering products that require high levels of production and large size of firm. But the decision whether or not more or less capital-intensive processes are entailed, or whether larger or smaller scale is required can be resolved only by considering individual products and not on a priori determination. This implies further that minimum economical size and overall project viability (in economic and financial terms) should be established case by case through project appraisal by competent financial intermediaries. Moreover, even where scale economies are important (e.g., the automobile industry), this does not mean that the large firm produces every single part or component that goes into the final product. Normally, a major percentage of the components is subcontracted to smaller firms, because inter alia they can be produced more efficiently. Urban Employment Generation 57. In view of SMI's multi-faceted potential as outlined in paras. 36 and 55, support of SMI in the suggested judicious and eclectic manner is an efficient way to use scarce resources. In devising a strategy and the requisite policy framework for SMI development, two major and complementary objectives stand out: (a) employment generation in the urban areas, an arduous task whose accomplishment is heavily conditioned on economizing  - 21 - capital in the process of industrial investment (para. 4); and (b) alleviation of the problems constraining the growth and development of SMI, the latter amounting essentially to concerted efforts at modernization 1/ and improving efficiency. A policy framework to foster urban employment, including the decentralization of industrial location, was suggested in parat 4-7. 58. The strategy should be to achieve an appropriate balance between larger and smaller (but efficient) establishments, more and less capital- intensive techniques, in accordance with the country's factor endowment-- a symbiotic relationship in which the activities of small and large firms conform to their respective comparative advantages. 2/ It is noteworthy that in the 1960's the proportion of employment in establishments with 200 or less workers was 51% in France, 53% in Sweden, 54% in Japan, 58% in the Netherlands, 61% in Switzerland, and 66% in Italy. This attests to the viability, comple- mentary role in industrial development, and fitting position of SMI in every country's industrial structure. The historic lesson is that a bimodal indus- trial structure composed of mutually supportive large and small firms has worked, has become highly productive, and is economically and socially desirable. Efficiency Improvement and Growth 59. An equally important objective is the need to improve efficiency and to foster the growth of SMI. This can be achieved primarily through modernization of equipment; improvement of the performance of small-medium manufacturing establishments through well-conceived and properly tailored financial and technical assistance programs, including skill upgrading and accelerated training; and by inducing structural changes (e.g., cooperative arrangements and consolidation of smaller enterprises as appropriate), export orientation, and adaptation to new circumstances, rather than protecting inefficient firms and out-of-date methods of production from the competition of more modern methods. Industrial development in Turkey has progressed to the point where future growth of SMI depends on increasing adoption of modern efficient production processes, specialization in production, improved product designs and higher product quality, modern management methods, and developing closer linkages with larger manufacturing firms either as sub-contractors or ancillaries for the provision of parts, components and sub-assemblies or with large scale trading establishments serving either the national or export markets. 60. In light of the adove, the introduction of more sophisticated and specialized equipment at this stage of Turkey's development should not be discouraged. However, this does not mean to imply an indiscriminate choice of highly capital-intensive techniques and equipment. Given the scarcity 1/ It is noteworthy that replacement of obsolete equipment helps preserve existing jobs, which otherwise might have been eliminated. 2/ The issue is not promotion of small versus large establishments, or indiscriminate support of SMI for the exclusive purpose of alleviating unemployment at any cost.  - 22 - of capital and foreign exchange and the comparatively lower wages in Turkey by U.S. or European standards, a conscious effort should be made to adopt, to the extent possible, appropriate technologies suitable to the local cir- cumstances. This would involve for the Government: (a) to allow factor (i.e. capital and labor) prices to reflect their true costs; and (b) to take upon itself the task of ascertaining, promoting, demonstrating and disseminating appropriate technologies. Financial intermediaries could also play a useful role in guiding prospective borrowers. The Ministry of Industry, properly strengthened and assisted, could be assigned the task of advising on matters of technology, inter alia, in the course of approving certificates of encouragement. 61. Transformation and growth of the small workshop into a modern factory is important for the dynamic development of the industrial sector. Support to SMI would enable the most efficient and dynamic enterprises to grow in size and to graduate to higher size brackets which are now thinly populated. It is notable that much of the increase in size of SMI establish- ments in Turkey, as well as in other countries, derives from the internal growth of enterprises attained in phases of successive expansions and less from mergers. Although mergers and other cooperative arrangements should be encouraged, every attempt should be made to facilitate the individual growth of the more dynamic and promising SMIs. Much small firm growth is likely to result from second generation owner-managers as they succeed the family firm, which is a continuing process. The latter, contrary to the owner-manager with an "artisan" identity, are more likely to have a conventional middle-class background and education and, therefore, a more modern "managerial" view of economic activity and acceptance of the dominant business ideology which stresses growth and efficiency. Imbued with such principles, they are likely to be more receptive to such ideas as the expansion of the firm, the profess- ionally managed business, external borrowing; would probably display less strong element of paternalism which minimizes dependence on others inside or outside the firm; and would be more appreciative of the administrative necessity to use more consultative leadership style to delegate and to negotiate with professionally trained people brought in from outside. 62. In essence, the strategy should be to direct private investment and to expand support primarily to SMIs with relatively high probability of survival and success and conducive to promoting the gradual integration of the SMIs with the rest of the industrial sector. Viability and self- sustained growth of SMI are most likely to be attained, it would seem, by focusing on industrial activities with promising growth potential and char- acterized by rather low economies of scale, catering to specialized or low- priced market niches, or displaying complementarity with activities undertaken by larger firms in the form of ancillary or sub-contracting arrangements, or provision of services. At the enterprise level, the establishment with a realizable potential for growth, and consequently for continuing viability, is likely to be the one in which there is some degree of specialization of management functions. Such a conscious approach, effected through the appraisal and lending procedures of financial intermediaries, would ensure acceptable economic and financial rates of return on investment, and that SMIs fill interstices, command an interlocking position within the industrial structure, and that they constitute vital parts of a functionally integrated whole.  - 23 - X. RECOMMENDATIONS Policy Measures 63. In the past, measures supportive of SSI were prompted primarily by social considerations (e.g., concessionary loans to industrial estates and cooperatives). The Government now may wish to take a more positive, developmental attitude and to begin addressing more vigorously problems constraining the growth of SMI, by devising and implementing realistic policy measures. An array of issues that need to be acted upon have been identified and suggestions for the Government's consideration as to how they could be approached have been made earlier. Certain measures, mostly within the domain of the administrative decision-making process, which command relatively higher priority are summarized below for convenience. Data Base (i) Improve the system of data generation, processing and analysis by: (1) devising a more operational definition of SMI in the light of present realities (para. 2); (2) building up the requisite data base on SMI at a sufficiently disaggregated level, and ensure a constant flow and processing of statis- tical information; and (3) taking a well-designed census of the SMI to establish the present status of the sector (paras. 8-10). Employment Generation (ii) To accelerate the rate of job creation in manufacturing: (1) foster the development of viable SMI, which is normally characterized by relatively low capital/labor ratios (paras. 36, 56, 58); (2) adjust factor prices to reflect better the relative scarcities of capital and labor to facilitate the adoption of appropriate technologies (para. 5); and (3) assess and redesign the existing incentives in order to foster low-cost private investment to the small and inter- mediate urban centers where the incidence of unemployment is higher (paras. 6-7). (iii) To foster the adoption of appropriate technologies, in addition to adjusting factor prices as suggested in (ii) above: (1) strengthen the Ministry of Industry to advise on matters of technology, inter alia in the course of approving Certificates of Encouragement; and (2) encourage financial intermediaries to inform and guide prospective borrowers (para. 60). Export Promotion (iv) Restructure the present export incentives system to pro- vide greater rewards to superior export performers; modify  - 24 - eligibility criteria to include smaller firms, provided they combine to reach a minimum absolute value of exports; extend the incentive to intermediate suppliers of exporters (para. 20). (v) Improve the effectiveness of export credits by: (1) making them more accessible to smaller exporters; and (2) allowing exporters to utilize local banks to process applications to minimize contacts with Government agencies (para. 21). Promotion of Subcontracting (vi) To promote ancillary and sub-contracting arrangements between SMI and large engineering firms, particularly in the automo- tive and consumer durable fields: (1) institute appropriate measures to ensure standardization of models and components; (2) direct the Standards Institute to develop product standards and to grant a quality seal of approval; (3) develop a system of foreign exchange allocation based on the contribution to value added not only of the final exporter but also of the indirectly contributing suppliers; (4) instruct the Chambers of Industry to devise a workable scheme for allocating imported raw materials between large firms and ancillaries; and (5) adopt measures (suggested in Vol. II, para. 12.34) to secure the involvement of the public sector (paras. 23, 34). Miscellaneous (vii) In the sawn-wood industry, take steps inter alia to increase the availability of raw materials to the private sector (paras. 50-51). (viii) Devise appropriate measures: (1) to encourage investment and commercial banks to increase financing to medium scale manufacturing enterprises, particularly in smaller regional urban centers (para. 7); and (2) consider ways to increase the supply of equity capital, including the advisability of setting up leasing/hire-purchase schemes which reduce SMI's capital requirements. (ix) Project requirements of vocational skills as well as needs for skill upgrading through the 1980's, and expand existing programs or institute new ones to meet these needs (see paras. 13, 31). Technical Assistance 64. At this stage, the Government's efforts should concentrate on improving the effectiveness of the pilot program at Gaziantep and the estab- lishment of I or 2 regional extension offices, along the lines suggested in paras. 28-30.  - 25 - Studies 65. It is suggested that the following studies be commissioned. (a) In view of the need to foster the reorganization of very small producers by encouraging them inter alia to establish cooperatives, SPO should take the lead in commissioning a study which (1) would assess the present system and identify its shortcomings; and (2) would make specific recommendations as to how such a reorganization could be approached and implemented. The study should also consider other comple- mentary measures which could help reorganize the SSI sector (e.g., mergers), including the requisite policy framework in the light of Turkish circumstances. The potential role of financial intermediaries should also be examined. (b) Commission carefully designed studies to identify capital goods and high technology items that could be produced by SMI. The Marmara Institute for Science and Technology could be entrusted with the task under the direction and support of SPO and the Ministry of Industry and Technology (para. 45). (c) Undertake a basic study of the footwear industry, under the auspices of TSKB/Sumerbank/Ministry of Industry, to the end of formulating an integrated national program of rehabili- tation and reorganization of the sector, and preparing a comprehensive Action Plan. The study should also suggest a course of action concerning the restructuring of the leather tanning segment of the industry, including realistic options for possible relocation (paras. 48-49). 66. It would be useful if industrial sector studies undertaken by TSKB or other agencies paid greater attention to the potential and problems of SMI, as appropriate. In general, such studies should take an holistic approach, in the sense that they should examine the potential role of firms covering the entire spectrum of sizes, i.e. large, medium, and small, promoting the develop- ment of the industry under review, and should also suggest ways to forge links among them.