BCCA III ED (1) - Compressed

RTMNU BCCA SEMESTER VI Entrepreneurship Development
Entrepreneurship Development
Syllabus
UNIT – I Entrepreneur: Introduction, Evolution of the concept of Entrepreneur, Characteristics of
successful Entrepreneurs, The charms of becoming Entrepreneur, The Entrepreneurial decision process,
Functions of Entrepreneur, Need of Entrepreneur, Types of Entrepreneurs, Distinction between an
Entrepreneur and a Manager, Intrapreneur, social Entrepreneur. Entrepreneurship: Concept of
Entrepreneurship, Growth of Entrepreneurship in India, Role of Entrepreneurship in economic
development. Types of Entrepreneurship, Family Business
UNIT - II Agri-Preneurship: Introduction, Need for developing Agri-Preneurship in India, Opportunities

for developing Agri-Preneurship, Challenges involved in developing Agri-Preneurship. Factors affecting
Entrepreneurship growth: Factors affecting Entrepreneurship, Government Actions. Entrepreneurial
Motivation: Meaning of Entrepreneurial Motivation, Motivational Cycle or Process, and Theories of
Entrepreneurial Motivation. Entrepreneurial Competencies: Meaning of Entrepreneurial Competency,
Major Entrepreneurial Competencies, Developing Entrepreneurial Competencies.
UNIT - III Entrepreneurship Development Programmes (EDPs): Meaning of EDP, Need of EDPs,
Objectives of EDPs, Entrepreneurship Development Programmes in India: A Historical Perspective,
Course contents and curriculum of EDPs, Phase of EDP, Evaluation of EDPs, and Problems of EDPs. Micro
and small enterprises: Small enterprise: Meaning & Definition, Essentials, features & Characteristics,
Relationship between Micro and Macro enterprises, Rationale behind Micro & small enterprises, Role of
Micro enterprise in economic development, Package for promotion of Micro and Small-scale enterprise.
Formulation of Business Plans: Meaning of business plan, Contents of business plan, Significance,
Formulation of business plan, Network Analysis, Common Errors in business plan formulation.
UNIT - IV Project Appraisal: Concept of Project Appraisal, Methods of Project Appraisal, and
Environmental clearance of SMEs. Financing of Enterprise: Meaning and need for financial planning,
Source of Finance, Capital Structure, Capitalization, Term Loans, Sources of short-term Finance, Venture
Capital, Export Finance. Forms of business Ownership: Sole Proprietorship, Partnership, Company,
Cooperative, and Selection of an appropriate form of ownership structure, Institutional Finance of
entrepreneurs: Need for institutional finance, Institutional Finance. Institutional Support to
Entrepreneurs: Need for institutional support, Institutional Support to small Entrepreneurs.
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UNIT – I Entrepreneur
Q: Explain, Evolution of the concept of Entrepreneur.
Ans: The word ‘entrepreneurs’ is derived from the French verb ‘entreprendre’. It means to ‘undertake’ it
originally means that to designate an organizer of musical or other entertainments. Oxford dictionary in
1897 defined it as “the director or a manager of a public musical institution, one who ‘gets up’
entertainment, especially musical performance”. In it the early 16th century entrepreneur was applied
to those who were engaged in military expeditions. In the 17th century it was considered as to cover
civil engineering activities such as construction and notification. It was only in 18th century the word
entrepreneur was used to cover economic aspects. The term entrepreneur is used in various ways and
terms.
The views are broadly classified in three ways.
✔
Risk bearer
✔
Organizer; and
✔
Innovator
As a Risk Bearer:
In 18th century Richard Cantillon an Irish man living in France, was first used entrepreneur and defined
as An agent who buys factors of production at certain prices in order to combine them in to a product
with a view entrepreneurs are risk bearing agents of product.
Knight also described entrepreneur to be a specialized group of persons who bear uncertainty.
Uncertainty can be defined as a risk which cannot be in insured against and is incalculable.
As an Organizer:
Jean Baptiste says “One who combines the land of one the labour of another and capital of yet another
and thus produces a product. By selling the product in the market he pays interest on capital, rent on
land wages to laborers and what remains is his/her profit. Thus he made a clear distinction between the
role of capitalist as a financed and entrepreneurs as an organizer.
As an Innovator:
Joseph A Schumpeter in 1934 in his book “theory of economic development” he says economic
development as a discrete dynamic change brought entrepreneur by instituting new combination of
production i.e, innovations. According to him introduction of new product may occur in any of following
five norms:
1. Introduction of new product in the market
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2. The instituting of new production technology which is not yet tested by experience in the branch of
manufacture.
3. Opening of new market into which the specific product has not previously entered.
4. The discovery of new source of supply raw material
5. The carrying out of the new form of organization of any industry by creating of a monopoly position or
the breaking up of it.
Q: What are the Characteristics of successful Entrepreneurs?
Ans: There are certain characteristics of entrepreneurs which are found usually prominent in them.
They are explained as follows;
1. Hard Work: Willingness to work Hard is the main characteristic of a successful entrepreneur. The
entrepreneurs with dedication towards their work and perseverance can reline their business even from
on verge of failure.
2. Mental ability: Mental ability consists of intelligence and creative thinking. An entrepreneur must be
reasonably intelligent, and should have creative thinking and must be able to engage in the analysis of
various problems and situations in order to deal with them. The entrepreneur should anticipate changes
and must be able to study the various situations under which decisions have to be made.
3. Clear objectives: An entrepreneur should have a clear objective as to the exact nature of the
business, the nature of the goods to be produced and subsidiary activities to be undertaken. A
successful entrepreneur may have the objective to establish the product, to make profit or to render
social service.
4. Desire for High Achievement: The entrepreneurs have a strong desire to achieve high goals in
business. This high achievement motive strengthened them to face the challenges of complex business
world, overcome obstacles, exploit the business opportunities, repair misfortunes and only set up and
run a successful business.
5. Business secrecy: An entrepreneur must be able to guard business secrets. Leakage of business
secrets trade competitions is a serious matter which should be carefully guarded against by an
entrepreneur. An entrepreneur should be able to make a proper selection of his assistants.
6. Highly Optimistic: The successful entrepreneurs are not disturbed by the present problems faced by
them. They are optimistic for future that the situations will become favourable to business in future.
Thus, they can run their enterprises successfully in future.
7. Human relation ability: The most important personality factors contributing to the success of an
entrepreneur are emotional stability, personal relations, consideration and tactfulness. An entrepreneur
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must maintain good relation with his customers if he is to establish relations that will encourage them to
continue to patronize his business. He must also maintain good relations with his employees if he is to
motivate them to perform their jobs at a high level of efficiency. An entrepreneur who maintains good
relations with customers, employees, suppliers, creditors and the community is much more likely to
succeed in his business than the individual who does not invest in maintaining these relations.
8. Communication ability: This ability pertains to communicate effectively. Good communication also
means that both the sender and the receiver understand each other and are being understood. An
entrepreneur who can effectively communicate with customers, employees, suppliers and creditors will
be more likely to succeed than the entrepreneur who does not.
9. Independence: One of the common characteristics of the successful entrepreneurs has been that they
do not like to be guided by others and to follow their routine. They resist to be pigeonholed. They like to
be independent in the matters of their business.
10. Technical knowledge: An entrepreneur must have a reasonable level of technical knowledge. This is
the one ability that most people are able to acquire if they try hard enough.
11. Foresight: The entrepreneurs have a good foresight to know about future business environment. In
other words, they well visualize the likely changes to take place in market, consumer attitude,
technological developments, etc. and take timely actions accordingly.
12. Good Organiser: Different resources required for production are divorced from each other. It is the
ability of the entrepreneurs that brings together all resources required for starting up an enterprise and
then to produce goods.
13. Innovative: Production is meant to meet the customers’ requirements. In view of the changing taste
of customers from time to time, the entrepreneurs initiate research and innovative activities to produce
goods to satisfy the customers’ changing demands for the products. The research institutes/ centres
established by Tata Birla, Kirloskar, etc. are examples of the innovative activities taken by the successful
entrepreneurs in our country
Q: What are the charms of becoming Entrepreneur?
Ans:
The major charms of becoming an entrepreneur are discussed as follows:
1. Opportunity to Create One’s Own Destiny:
Owning a business provides entrepreneurs both the independence and opportunity to do and achieve
what is important to them. Entrepreneurs know that they are the driving forces behind the success of
their business.
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2. Opportunity to Make a Difference:
A perceptible trend which is on increase also noticed among the entrepreneurs is that they start their
business because they see an opportunity before them to make a dent and difference in the cause that
is important to them.
3. Opportunity to reach one’s full potential:
Owning a business gives entrepreneurs a sense of empowerment to do what they can. In his ‘Need
Hierarchy Theory of Motivation,’ Abraham Maslow termed it ‘Self-Actualization’. Thus, doing business
becomes entrepreneurs’ play. It also becomes an instrument for entrepreneur’s self-expression and self-
actualization. They know that the only boundaries on their success are those imposed by their own
creativity, enthusiasm and vision.
Q: Explain the Entrepreneurial decision process
Ans: Entrepreneurship is a process, a journey, not the destination; a means, not an end. To establish
and run an enterprise it is divided into three parts – the entrepreneurial job, the promotion, and the
operation. Entrepreneurial job is restricted to two steps, i.e., generation of an idea and preparation of
feasibility report.
The Entrepreneurial Process
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1. Idea Generation:
To generate an idea, the entrepreneurial process has to pass through three stages:
a. Germination:
This is like seeding process, not like planting seed. It is more like the natural seeding. Most creative ideas
can be linked to an individual’s interest or curiosity about a specific problem or area of study.
b. Preparation:
Once the seed of interest curiosity has taken the shape of a focused idea, creative people start a search
for answers to the problems. Inventors will go on for setting up laboratories; designers will think of
engineering new product ideas and marketers will study consumer buying habits.
c. Incubation:
This is a stage where the entrepreneurial process enters the subconscious intellectualization. The sub-
conscious mind joins the unrelated ideas so as to find a resolution.
2. Feasibility study:
Feasibility study is done to see if the idea can be commercially viable.
It passes through two steps:
a. Illumination:
After the generation of idea, this is the stage when the idea is thought of as a realistic creation. The
stage of idea blossoming is critical because ideas by themselves have no meaning.
b. Verification:
This is the last thing to verify the idea as realistic and useful for application. Verification is concerned
about practicality to implement an idea and explore its usefulness to the society and the entrepreneur.
Q: Explain the Functions of Entrepreneur
Ans: The main functions of an entrepreneur are grouped in three categories:
1. Risk bearing functions,
2. Administrative and decision-making functions, and
3. Distributive functions (responsibility of the organizer).
1. Risk Bearing Functions:
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It is the most important and specific function of an entrepreneur. Every business involves some amount
of risk. The production of goods and services is always related to future demands. The future demand is
uncertain and unpredictable, because it is influenced by the changes in fashion or taste and liking of the
consumers.
The price structure, value of money, climatic conditions and government policies are some other
important factors that affect the demand of a commodity. All these factors are variable and as such an
exact estimation of future demand is a difficult exercise to work out.
Since this unpredictable task is undertaken by the entrepreneur, he has to bear the risk. If his
estimations prove to be wrong, then in the entire business sphere, no other factor of production shares
the loss incurred by the entrepreneur.
It is the main reason why the entrepreneur becomes entitled for the surplus that is remaining with him
from the sale proceeds of the product, after distributing the shares to other factors. This surplus is
termed as profit of the business.
2. Administrative and Decision-Making Functions:
i. Conceiving the Idea of Business:
The entrepreneur conceives the idea of a particular business which suits his nature, skill and resources.
He makes a thorough (intensive and extensive) study of the condition of market and business prospects.
After making a thorough study of economic viability, he decides the business that he has to start.
ii. Estimation of Details of Business and Implementation of the Same:
After arriving at a conclusion about the nature of business, the entrepreneur works out the details of
business, i.e., what, how and when to produce and from where the resources are to be arranged. With
all these estimations, he makes an all-out effort to give a practical shape to his plans, organizes various
factors of production and sets them to function in proper harmony.
iii. Supervision and Control of Business Activities:
The entrepreneur has to supervise and control the day-to-day business activities to accomplish the
business objectives. For this he properly coordinates between various factors of production. As the risk
(success or failure) of business operations directly affect his economy, he keeps a vision and control on
the business affairs and avoids unnecessary expenditures.
He is required to take a numerous decisions and has to get these decisions properly implemented.
iv. Innovation:
Innovation is one of the most important functions of an entrepreneur. An entrepreneur uses

information, knowledge and intuition to come up with new products, new methods of reducing costs of
a product, improvement in design or function of a product, discovering new markets or new ways of
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organization of industry. Through innovation, an entrepreneur converts a material into a resource or

combines existing resources into new and more productive configurations.
It is the creativity of an entrepreneur that results in invention (creation of new knowledge) and
innovation (application of knowledge to create the new products, services or processes).
3. Distributive Functions:
The entrepreneur organizes different factors of production and sets them to work. It, therefore,
becomes his responsibility to make proper allocation of funds for each factor of production, i.e., each
factor of production must be properly remunerated.
The remuneration here refers to an important decision as to what should be the share of each factor of
production in the sale proceeds of the entire product. The remuneration should be just and equitable
and the payment to each factor should be commensurate, so that each factor is fully satisfied.
If the factors of production remain dissatisfied, they will not be able to deliver their best to the
entrepreneur. So, it is the entrepreneur, who has to ultimately suffer. Hence, it is very essential for the
entrepreneur to perform distributive functions with extreme care and caution.
Q: What is the Need of Entrepreneur?
Ans: An entrepreneur is that person that has the drive, fire, determination, knowledge, open-
mindedness and so many other things that is required to be an entrepreneur.
An entrepreneur needs a high ability to learn and a desire to learn. If a person is able to learn in any
situation, even failure, they have the skills necessary to become a successful entrepreneur. Failure can
help expand one's knowledge and understanding of business
Q: Explain the Types of Entrepreneurs.
Ans: Entrepreneurs play a paramount role in today’s market driven economy. Entrepreneur is somebody
who engages in business running anything from multi Crore corporations to street vendors for profit.
They play increasingly important role in sustaining commerce today especially since the mantra now is
that of privatization. Clarence Danhof has classified Entrepreneurs into four types:
Innovative Entrepreneurs: An innovative entrepreneur is one who launches new products, discovers
new markets, establishes new methods of production and restructures the enterprise. Innovative
Entrepreneurs can work only when definite level of progress has been previously accomplished. They
focus on revolutionalisation and development.
Imitative Entrepreneurs: Imitative Entrepreneurs adopt victorious innovations launched by the

innovative entrepreneurs. They duplicate the technology and techniques innovated by others and they
are suitable for underdeveloped countries.
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Fabian Entrepreneurs: Fabian entrepreneurs are exemplified by great caution and skepticism in
experimenting any change in the organization. They imitate only in situations where it becomes
necessary to do so.
Drone Entrepreneurs: Drone Entrepreneurs suffer losses, as they refuse to make any modifications in
the existing production methods.
Following are some more types of entrepreneurs listed by some other behavioral scientists:
1. Solo operators: These are the entrepreneurs who essentially work alone and it needed at all, employ
a few employees. In the beginning most of entrepreneurs start their enterprise like them.
2. Active partners: Active partners are those entrepreneurs who start/carry on an enterprise as a joint
venture. It is important that all of them actively participate in the operations of the business.
3. Inventors: Such entrepreneurs with their competence and inventiveness invent new products. Their
basic interest lies in research and innovative activities.
4. Buyers: These are those entrepreneurs who do not like to bear much risk. Hence, in order to reduce
risk involved in setting up a new enterprise, they like to buy the ongoing one.
5. Lifetime: These entrepreneurs take business as an integral part of their life. Usually, the family
enterprise and businesses which mainly depend on exercise of personal skill fall in this type/category of
entrepreneurs.
Q: Distinction between an Entrepreneur and a Manager, Intrapreneur.
Ans:
Definition of Entrepreneur
An entrepreneur is an individual who conceives the idea of starting a new venture, take all types of risks,
not only to put the product or service into reality but also to make it an extremely demanding
one. He is someone who:
 Initiates and innovates a new concept,
 Recognises and utilises opportunity,
 Arranges and coordinates resources such as man, material, machine and capital,
 Take suitable actions,
 Faces risks and uncertainties,
 Establishes a startup company,
 Adds value to the product or service,
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 Takes decisions to make the product or service a profitable one,
 Is responsible for the profits or losses of the company.
Entrepreneurs are always the market leader regardless of the number of competitors because they
bring a relatively new concept in the market and introduce change.
Definition of Intrapreneur
An intrapreneur is nothing but an entrepreneur within the boundaries of the organisation. An

intrapreneur is an employee of a large organisation, who has the authority of initiating creativity and
innovation in the company’s products, services and projects, redesigning the processes, workflows and
system with the objective of transforming them into a successful venture of the enterprise.
The intrapreneurs believe in change and do not fear failure, they discover new ideas, looks for such
opportunities that can benefit the whole organisation takes risks, promotes innovation to improve the
performance and profitability, resources are provided by the organisation. The job of an intrapreneur is
extremely challenging; hence they are appreciated and rewarded by the organisation accordingly.
From last few years, it has become a trend that large corporations appoint intrapreneur within the
organisation, to bring operational excellence and gain competitive advantage.
Key Differences between Entrepreneur and Intrapreneur
The important distinguishing points between entrepreneur and intrapreneur, are given in the following
points:
1. An entrepreneur is defined as a person who establishes a new business with an innovative idea
or concept. An employee of the organisation who is authorised to undertake innovations in
product, service, process, system, etc. is known as Intrapreneur.
2. An entrepreneur is intuitive in nature, whereas an intrapreneur is restorative in nature.
3. An entrepreneur uses his own resources, i.e. man, machine, money, etc. while in the case of an
intrapreneur the resources are readily available, as they are provided to him by the company.
4. An entrepreneur raises capital himself. Conversely, an intrapreneur does not need to raise funds
himself; rather it is provided by the company.
5. An entrepreneur works in a newly established company. On the other hand, an intrapreneur is a

part of an existing organisation.
6. An entrepreneur is his own boss, so he is independent to take decisions. As opposed to

intrapreneur, who works for the organisation, he cannot take independent decisions.
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7. This is one of the salient features of an entrepreneur; he is capable of bearing risks and
uncertainties of the business. Unlike intrapreneur, in which the company bears all the risks.
8. The entrepreneur works hard to enter the market successfully and create a place subsequently.
In contrast to Intrapreneur, who works for organization-wide change to bring innovation,
creativity and productivity.
Difference between Entrepreneur and Manager
 The key difference between an entrepreneur and a manager is their standing in the company.
An entrepreneur is a visionary that converts an idea into a business. He is the owner of the
business, so he bears all the financial and other risks. A manager, on the other hand, is an
employee, he works for a salary. So he does not have to bear any risks.
 The focus of an entrepreneur lies in starting the business and later expanding the business. A
manager will focus on the daily smooth functioning of the business.
 For an entrepreneur the key motivation is achievements. But for the managers, the motivation
comes from the power that comes with their position.
 The reward for all the efforts of an entrepreneur is the profit he earns from the enterprise. The
manager is an employee, so his remuneration is the salary he draws from the company.
 The entrepreneur can be informal and casual in his role. However, a manager’s approach to
every problem is very formal.
 The entrepreneur by nature is a risk taker. His has to take calculated risks to drive the company
further. A manager, on the other hand, is risk-averse. His job is to maintain the status quo of the
company. So he cannot afford risks.
Q: Explain social Entrepreneur.
Ans: Social entrepreneurs are visionaries who try to bring about positive change in the society by
practically applying their social entrepreneurship ideas and strategies to resolve social problems in the
society. These problems are vast and diverse in nature. They are threats not only limited to a particular
community or region, but they are global in nature, some of the common social issues and problems
are-inadequate education and health facilities and system, environmental threats, declining and
inefficient political systems and governance, poverty, unemployment, inequality based on gender ,caste
and creed; increase in crime rates and so on.
A social entrepreneur is an individual who works with an initiative to develop pioneering ideas and
solutions for the existing social problems and issues faced by the society. They try to resolve these
problems by changing the system of working and mind set of people, by spreading awareness about
how to tackle these problems and issues; and developing social entrepreneurship resources to empower
the community. They try to convince the society as a whole to think on different dimensions and
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directions. Social entrepreneurs develop simple comprehensible ideas which people can understand and
use for the betterment and development of the society. Their aim is to identify and create efficient
change makers or role models, who will in turn motivate the masses to develop their own ideas,
solutions and strategies to resolve these social issues. In short a social entrepreneur is an agent or
mediator who thrives to bring about positive change in the society.
Essential Characteristics of Social Entrepreneurs
1. Curiosity
Social entrepreneurs must nurture a sense of curiosity about people and the problems they face. The
best social entrepreneurs seek to truly understand the needs and desires of the people they serve. Great
social ventures often start through immersive market research, an empathy-centric process through
which social entrepreneurs gain knowledge in the field.
2. Inspiration
In order to design effective solutions, social entrepreneurs must be inspired by the people and problems
they encounter. Inspiration motivates action and helps social entrepreneurs tackle challenges that
others shy away from addressing.
3. Resourcefulness
In the world of social entrepreneurship, key resources, such as human and financial capital, can often be
scarce. Successful social entrepreneurs know how to leverage the resources at their disposal and
develop innovative methods to overcome obstacles.
4. Pragmatism
Changing the world takes time, effort, and experimentation. While visions for massive social change may
provide their inspiration, experienced social entrepreneurs know that they need to take small steps in
pursuit of their goals. Great social ventures are not born overnight!
5. Adaptability
Social entrepreneurs must remain open to solutions. This includes knowing when to pivot and change
their strategies if their initial methods do not succeed. Adaptability and flexibility are integral in the
development of early-stage social enterprises.
6. Openness to Collaboration
While embarking on a quest to change the world may feel lonely, it is important to remember that social
entrepreneurship is a team sport, and other people are willing to help. Social entrepreneurs need to stay
open and attentive to potential partnership and collaboration opportunities. In many cases,
collaborative initiatives and joint-ventures can achieve social/business goals much more effectively than
solo endeavors.
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7. Persistence
Social entrepreneurs take on some of the most daunting challenges our society has to offer. This often
creates a recipe for early-stage failures. However, the successful social entrepreneurs are the ones who
persist past initial setbacks and persevere to deliver effective solutions. Experienced social
entrepreneurs know how to learn from failures, adjust their methods, and make continual strategic
improvements.
Q: Explain Entrepreneurship: Concept of Entrepreneurship,
Ans:
Entrepreneurship is the ability and readiness to develop, organize and run a business enterprise along
with any of its uncertainties in order to make a profit. The most prominent example of entrepreneurship
is the starting of new businesses.
In economics, entrepreneurship connected with land, labour, natural resources and capital can generate
a profit. The entrepreneurial vision is defined by discovery and risk-taking and is an indispensable part of
a nation’s capacity to succeed in an ever-changing and more competitive global marketplace.
Importance of Entrepreneurship:
 Creation of Employment- Entrepreneurship generates employment. It provides an entry-level

job, required for gaining experience and training for unskilled workers.
 Innovation- It is the hub of innovation that provides new product ventures, market, technology,
and quality of goods, etc., and increases the standard of living of the people.
 Impact on Society and Community Development- A society becomes greater if the employment
base is large and diversified. It changes society and promotes facilities like higher expenditure
on education, better sanitation, fewer slums, a higher level of homeownership. Therefore,
entrepreneurship assists the organisation in a more stable and high quality of community life.
 Increase Standard of Living- Entrepreneurship helps to improve the standard of living of a

person by increasing the income. The standard of living means, increase in the number of
consumption of various goods and services by a household for a particular period.
 Supports research and development- New products and services need to be researched and
tested before launching in the market. Therefore, an entrepreneur also dispenses finance for
research and development with research institutions and universities. This promotes research,
general construction, and development in the economy
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Factors Affecting Entrepreneurship
As much appealing the idea of entrepreneurship may seem, there are a few factors to be kept in mind
before choosing when and where to start your business. Some of the factors that affect
entrepreneurship are:
 Political Factors: The market in a place can be capitalistic, communistic or a mixture of both.
Capitalism requires innovation while communism requires entrepreneurs and the political class
to be well connected with each other. Ideally, a country should be capitalistic for
entrepreneurship to flourish in the region.
 Legal Factors: The strength and fairness of the judicial system in a country has a big role to play
in the quality of entrepreneurship. This is because entrepreneurs in many cases might require
the courts to enforce the contracts agreed between two parties. But in many countries, such
contracts are not enforced properly, and this risk prevents the development of
entrepreneurship in those countries.
 Taxation: Governments sometimes resort to excessive taxation as they adopt the policy of
taking from the rich and giving it to the poor. However, the basic principle of entrepreneurship
believes in the survival of the fittest and the excessive taxation rule contradicts it. Hence,
entrepreneurs want to set up businesses in places where there is very little interference from
the government on taxation.
 Capital Availability: Capital is the first requirement to start risky ventures and they might also
require instant capital to scale up the business once an idea becomes successful. Therefore,
entrepreneurship helps the economies to grow in those countries where there is a well-
developed system of providing capital at every stage i.e. seed capital, venture capital, private
equity as well as stock and bond markets.
 Labour and raw materials: Availability of skilled labour and required raw materials at
reasonable prices are an important factor for the launching of a business venture in a region.
Countries like India, Bangladesh and China have witnessed a huge rise in entrepreneurial
activities because of the labour markets being favorable for them.
Q: Explain the Growth of Entrepreneurship in India
Ans:
From times immemorial, the Indian Society has been characterized by a kind of stratification of religious
and regional sections. The Hindu Society projected a type of hierarchy in which the caste groups were
separated from each other on the basis of function. Every member of the society followed the family
occupation. This caused immobility between occupations.
The Bania was a caste that carried on the trading and money lending business, they specialized in trade
and commerce and came from urban areas. In fact, because of their good financial, standing, their
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position was an enviable one in the urban centers. However they ranked third in the caste-hierarchy.
The Brahmins ranked first and Kshatriyas second. The caste system was so rigid, that people were afraid
of ostracisation .But in places where the caste system was relatively loose and the trading caste were
missing, people from other castes, undertook commercial activities and were al so regarded as the
members of the business community. The mid nineteenth century witnessed a fairly developed business
community in India. Saurasthra (now known as Gujarat) was the most developed and urbanized region
in the whole of India. It had a continuous record of foreign trade, which had lasted for centuries. This
tract had a developed Bania (both Hindu and Jain) community and also large trading communities,
popularly known as the Bohras, Khojas and Kacchi, Memone. They were converts from Hinduism.
Trading was their occupation. They mainly dealt in cotton. They also carried out overseas trade. They
had business dealing with Persian Gulf, Arabia and Africa to the west and with Malaya (now know n as
Malaysia), Indonesia to the south and south east coast India. The above trading communities are
responsible for the supply of entrepreneurs in India. Following important communities can take the
credit for the supply of entrepreneurs in India.
The evolutionary process of entrepreneurship activities may be divided into the following broad stages:
1. Hunting Stage: - The primary stage of the evolution of the economic life of man was hunting stage.
Wants were limited and very few in numbers. The family members themselves satisfied problems of
food, clothing and shelter. Producers were the consumers also. Robinson Crusoe, living in the deserted
island, satisfying his own requirements had no knowledge of business. People in some parts of Africa
and India still lead this type of life. In this stage problems of production and distribution were not
complexed since wants were simple and limited.
2. Pastoral Stage: - With the progress of mankind gradually mental understanding developed and people
started realizing that instead of killing animals, they should breed and rear them. Thus cattle breeding
encouraged the use of milk, and they had to think in terms of grazing areas for their cattle. The surplus
milk, meat and other related products were spared of exchange. This stage can be termed as the first
stage of economic development and the beginning of commerce.
3. Agricultural Stage: - In search of grazing areas, they further realized that they should grow plants as
food for animals. They started testing some grain products and slowly developed a taste in plants and
the land was used for cultivation. Groups of persons started living together on their agricultural fields,
which were subsequently converted into small villages with their farms. Free exchange of goods was
started and the activities were also divided to the extent of division of labor at the village level to
complement the needs of each other. Initially each village was self-sufficient, but later they began small
trading activities on barter basis.
4. Handicraft Stage: - In the agricultural stage, people started learning the use of cloth made of cotton
products, and they developed the segments of the workers for different activities. Cottage scale setup
was developed at the village level to nearby villages, and in exchange they brought requirements either
to consume themselves or for their village friends. Since the demand for gold coins, silver coins, skin and
hide etc increased the activities of cobblers, gold smiths, and blacksmiths, laborers also rapidly
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increased, and caste system was also formed on the basis of activities they did. Everybody selected their
job according to their own choice and taste.
5. Present Industrial Stage: - The use of mechanical devices and the commonly acceptable form of
monetary system accelerated the growth of entrepreneurship activities. The progress of science and the
increase in the means of transportation and communication enabled to travel widely and the markets
were developed in the country and abroad.
The Future of Entrepreneurship
Both the Central Government and various State Governments are taking increased interest in promoting
the growth of entrepreneurship. Individuals are being encouraged to form new businesses and are being
provided such government support as tax incentives, buildings, roads, and a communication system to
facilitate this creation process. The encouragement by the central and state governments should
continue in future as more lawmakers are realizing that new enterprises create jobs and increase the
economic output of the region. Every state government should develop its own innovative industrial
strategies for fostering entrepreneurial activity and timely development of the technology of the area.
The states should have their own state-sponsored venture funds, where a percentage of the funds have
to invest in the ventures in the states.
Society’s support of entrepreneurship should also continue. This support is critical in providing both
motivation and public support. A major factor in the development of this societal approval is the media.
The media should play a powerful and constructive role by reporting on the general entrepreneurial
spirit in the country highlighting specific success cases of this spirit in operation.
Finally, large companies should show an interest in their special form of entrepreneurship-
intrapreneurship in the future. These companies will be increasingly interested in capitalizing on their
Research & Development in the hyper competitive business environment today.
Q: What is the Role of Entrepreneurship in economic development?
Ans:
Role of Entrepreneurs in economic development of a country are discussed under the following heading:
1. Employment opportunities
Entrepreneurs employ labour for managing their business activities and provide employment
opportunities to a large number of people. They remove unemployment problem.
2. Balanced Regional Development
Government promotes decentralized development of industries as most of the incentives are granted
for establishing industries in backward and rural areas. Thus, the entrepreneurs to avail the benefits
establish industries in backward and rural areas.
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They remove regional disparities and bring balanced regional development. They also help to reduce the
problems of congestion, slums, sanitation and pollution in cities by providing employment and income
to people living in rural areas. They help in improving the standard of living of the people residing in
suburban and rural areas.
3. Mobilization of Local Resources
Entrepreneurs help to mobilize and utilize local resources like small savings and talents of relatives and
friends, which might otherwise remain idle and unutilized. Thus they help in effective utilization of
resources.
4. Optimization of Capital
Entrepreneurs aim to get quick return on investment. They act as a stabilizing force by providing high
output capital ratio as well as high employment capital ratio.
5. Promotion of Exports
Entrepreneurs reduce the pressure on the country’s balance of payments by exporting their goods they
earn valuable foreign exchange through exports.
6. Consumer Demands
Entrepreneurs produce a wide range of products required by consumers. They meet the demand of the
consumers without creating a shortage for goods.
7. Social Advantage
Entrepreneurs help in the development of the society by providing employment to people and paves for
independent living, they encourage democracy and self-governance. They are adept in
distributing national income in more efficient and equitable manner among the various participants of
the society.
8. Increase per capita income
Entrepreneurs help to increase the per capita income of the country in various ways and facilitate
development of backward areas and weaker sections of the society.
9. Capital formation
A country can attain economic development only when there is more amount of investment and
production. Entrepreneurs help in channelizing their savings and savings of the public to productive
resources by establishing enterprises. They promote capital formation by channelizing the savings of
public to productive resources.
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10. Growth of capital market
An entrepreneur raises money for running their business through shares and debentures. Trading of
shares and debentures by the public with the help of financial services sector leads to capital market
growth.
11. Growth of infrastructure
The infrastructure development of any country determines the economic development of a country,
Entrepreneurs by establishing their enterprises in rural and backward areas influence the government to
develop the infrastructure of those areas.
12. Development of Trader
Entrepreneurs play an important role in the promotion of domestic trade and foreign trade. They avail
assistance from various financial institutions in the form of cash credit, trade credit, overdraft, short
term loans, secured loans and unsecured loans and lead to the development of the trade in the country.
13. Economic Integration
Entrepreneur reduces the concentration of power in a few hands by creating employment opportunities
and through equitable distribution of income. Entrepreneurs promote economic integration in the
country by adopting certain economic policies and laws framed by the government. They help in
removing the disparity between the rich and the poor by adopting the rules and regulation framed by
the government for the effective functioning of business in the country.
14. Inflow of Foreign Capital
Entrepreneurs help to attract funds from individuals and institutions residing in foreign countries for
their businesses.
Q: Explain the Types of Entrepreneurship
Ans:
Small business entrepreneurship
In today’s world, the majority of businesses are still small businesses. In the U.S, 99.7% of all companies
are small businesses and they employ 50% of all non-governmental workers.
They are mostly barely profitable, but they make profits only to make a living and support their families.
Such businesses lack the scale to attract venture capital and they are funded via friends/family or small
business loans.
Examples of small business entrepreneurship include hairdressers, grocery stores, electricians,

carpenters, plumbers, consultants, etc.
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Scalable Startup Entrepreneurship
In this type of entrepreneurship, entrepreneurs start their company believing that their vision can
change the world. Their funding comes from venture capitalists and they hire the best employees.
Finding a scalable and repeatable business model is their goal. Once they find it, further funding from
venture capitalists is required for growing their business.
Scalable startups only make up a small proportion of all businesses due to the risk capital and outsize
returns.
Examples of scalable startup entrepreneurship include Facebook, Instagram, Online shopping for
electronics, etc.
Large Company Entrepreneurship
Large companies through sustaining innovation, offering new products that are variants around their
core products. New products are developed in order to meet with changing customer needs and
advanced technology. Often, companies do this by partnering with or buying innovative companies.
Examples of large company entrepreneurship include Google, Microsoft, Samsung, etc.
Social Entrepreneurship
Social entrepreneurship is where an entrepreneur creates products and services to solve social needs
and problems. Their only goal is to make the world a better place and not to make profits or acquire
wealth. They can be non-profit, profit or hybrid.
Q: Explain Family Business
Ans:
Meaning:
Family business has been as common in the Indian economy like elsewhere in the world, it is perceived
in a common sense. Various terms like ‘family-owned,’ family controlled,’ ‘family managed,’ ‘business
houses,’ and ‘industrial houses’ are used to refer to family business.
Thus, the term family business conjures up different meanings to different people. While some view it as
traditional business, others consider it as community business, and still others mean it as home-based
business.
Characteristics:
a. A group of people belonging to one or more families run one business enterprise.
b. Position in family business is influenced by the relationship the family members enjoy among
themselves.
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c. Family exercises control over business in the form of ownership or in the form of management of the
firm where family members are employed on key positions.
d. Family exercises the influence on the firm’s policy direction in the mutual interest of family and
business.
e. The succession of family business goes to the next generation.
f. Family business in India is largely caste-related.
g. Every caste enjoys a dominant culture which gets duly reflected in their family businesses also.
UNIT - II Agri-Preneurship
Introduction:
Agriculture today faces many challenges, including globalisation and market liberalisation, food price
crises, natural resource depletion, climate change, rapid urbanisation, changing production and
consumption patterns, demographic changes, and so on. Many of these directly or indirectly lead to
changing markets, and create both opportunities and risks for farmers, especially for smallholders,
youth, and women. With a growing recognition of the important role of smallholder agriculture for
economic growth and rural development in many countries, market-oriented agriculture appears more
prominently on the agenda. Agripreneurship is key in this regard.
Agripreneurship refers to entrepreneurship in agriculture. Entrepreneurs are usually creative, take

opportunities and accept risks, and can quickly change business strategies to adapt to changing
environments. They are often innovators. While usually being innovative and creative, farmers often
lack experiences, access to services, people, or markets, and skills to have realistic chances to succeed as
entrepreneurs. In addition, agripreneurs are influenced by external, systemic factors, such as economic
and social barriers, policies, and regulations. While these constraints affect all farmers and especially all
smallholders, women and youth are particularly affected.
Agricultural business, also known as agribusiness, is the farming, management, production, and
marketing of agricultural commodities, such as livestock and crops. The agricultural business field
includes resource management, farming, conservation, ranching, and sales.
Rural advisory services play a crucial role in supporting farmers to become successful agripreneurs. They
provide important information and access to people, markets, and financial services and train the
farmers in the required managerial and other functional skills. Rural advisory services can also influence
policies and regulations to create an agripreneurship-friendly environment, reduce barriers, or change
prevailing values in societies.
An agripreneur may be defined as someone who undertakes a variety of activities in agriculture and its
allied sectors to be agripreneur. An agripreneur may start an agro business, change a business direction,
acquire a business or may be involved in innovatory activity of value addition. Explicit an agriprepneur is
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a risk-taker, opportunist, initiator which deals with the uncertain agricultural business environment of
the firm.
The evolution from agriculture to agribusiness has brought with it numerous benefits. These include;
1. Reduced drudgery for laborers;
2. The release of workers for nonagricultural endeavors
3. A better quality of food and fibers; a greater variety of products
4. Improved nutrition; and
5. Increased mobility of people.
Disadvantages include;
1. Farmers' loss of autonomy
2. Increased production risk
3. Increased market power of agribusiness
4. Increased concentration of production and
5. Insuring instances reduced producer income
Q: What is then need for developing Agri-Preneurship in India?
Ans:
It is time to give due attention to the agripreneurs in India, for making best use of the collective
potential of the farmers across the country.
What are the challenges for any entrepreneur?
• Creating products or services for which s/he must find a market and customers.
• Adapting to changing consumer requirements and technological possibilities.
• Suffering from a poor ecosystem for management advice, mentorship, fund-raising and risk
management.
• Experiencing great psychological stress due to unparalleled unpredictability.
• Attracting social approbation and disapproval if s/he fails.
Why are agripreneurs significant for India?
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• The above challenges are invariably faced by the farmers in India too.
• It is thus right to recognise them as entrepreneurs looking after land, fish, poultry and dairy sectors.
• 170 lakhs of them are working for the economic well-being of 700 lakhs people, assuming four to a
family.
• Farmers are at the heart of employment generation and national economic growth.
• The government must thus acknowledge this and chart out a well formulated plan for the
agripreneurs.
What are the possible reform measures?
• Agriculture minister – The constitutional accountability for agriculture is with the states.
• But farmers and public look to the centre for action, which is why farmers’ livelihood and crop prices
become important in national politics.
• India thus needs an influential agriculture minister, as strong as the finance or home minister.
• Policy – Whenever a coordinated, systems approach to transformation is required, a common

framework goes a long way in helping it.
• But India has no politically approved national agricultural development policy (NADP) in place at
present.
• In contrast, there are national industrial development policy, national SME policy and
entrepreneurship/startup India initiative.
• It is, therefore, in farmers’ interest that India brings in a formal framework and a national agricultural
development policy (NADP).
• Council of Ministers – Farming is not like telecom, roads, electricity and other reform-seeking sectors.
• This is because agriculture has economic, social, political and power dimensions.
• So making crucial decisions in agriculture and for farmers requires active and deep centre-states
cooperation.
• It thus needs a mechanism like the National Development Council or the GST Council.
• In this context, India should consider having a council of ministers exclusively for agriculture.
• Marketing – In the past, farming initiatives were focused on increasing production, which was
important to feed a growing population.
• To conserve the output, which increased gradually, frictional restrictions were placed in the marketing
chain.
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• These included regulations on where farmers can sell, restrictions on exports, taxation at the mandi
level and compulsory government procurement.
• But given the present needs, marketing must be freed up from this web of controls and hindrances, for
utilising the full potential.
• FPOs – A national drive on Farmer-producer organisations (FPOs) is crucial as a vehicle to implement

ideas and modernisation.
• India will be better off with one crore FPOs (like SMEs in the industrial sector) instead of 170 lakhs
individual farmers.
• Farmers must be actively trained to organise themselves into FPOs.
• Technology – India cannot afford to debate old-fashioned technology ideas concerning land, soil,
water, seeds and nutrients.
• A modern and futuristic approach is essential with regard to adoption of modern technologies.
• A national technology policy must be developed and executed with urgency.
Q: What are the Opportunities for developing Agri-Preneurship?
Ans:
Opportunities of Agri-Preneurship
1. Support &Motivation to local people: Rural entrepreneurs have a lot of support from the Rural
people. Rural village people always encourage and give the motivation to the entrepreneurs.
2. Low establishment cost: When compared to the urban areas, rural entrepreneurs’ business
establishment cost is very low. There is no need to construct or facilities huge infrastructure and
buildings.
3. Competitive advantages / Availability of labour: In India seventy percent of the people are living in
the village. Majority of the rural people are depending on the agriculture. The agriculture work is not
available throughout the year. That is the reason why rural entrepreneurs have the competitive
advantage in easily acquiring unskilled and semiskilled labor.
4. Government policies and subsidies: The government of India is continuously monitoring and
introducing the new policies for encouraging the rural entrepreneurship. These policies are very flexible,
innovative, liberalized and giving continues support to rural entrepreneurs. At the same time
government has also announced huge subsidies for promoting the rural entrepreneurship.
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5. Availability of raw materials. Most of the times the rural entrepreneurs are depending upon the
farm based products as raw materials, which are available through-out the year. These raw materials are
available in the rural area that is the reason there is no transportation cost and flotation cost.
6. Cost of production: Rural entrepreneurs cost of production is very low when compared to the urban
industries. The factors of production are available with low cost; automatically the cost of production is
also low. Because of this rural entrepreneurs can sell their goods and services with cheaper cost.
Q: Explain the Challenges involved in developing Agri-Preneurship.
Ans:
Agri-Preneurship has its own drawbacks. Policies such as keeping of land in protection when there is
already an over production and pricing income are two of the greatest threads to rural
entrepreneurship. Due to the remote access and unavailability of knowledgeable labor, commercial
markets and managerial staff are hindered due to the remote locations.
In order to alleviate the problems of rural entrepreneurship, under the government supported
resources for these projects and select only the very best ideas that directly benefit not only the
community but also can compete on a global scale. It is also vital for the success of the rural
communities that the development of each rural project remain in the hand of the local agencies which
in return cooperate with the government to oversee the leading factor that can help develop the rural
areas.
1. Distribution and logistics: Infrastructure contains to be a challenge in rural India. Moreover, the lack
of an efficient distribution network prevents penetration of products/services into rural India.
2. Payment collection: The majority of the rural population is still unbanked. Clearly , non-cash
collection becomes rather unlikely. Cash collection; on the other hand, are messy and difficult to
monitor.
3. Pricing: it is easier to collect in larger amounts as every instance of collection and carrying of cash has
associated cost. Disposable income, through, isn’t always high since the bulk of rural India is agriculture
and income cycle in agricultural are very erratic and not as predictable as in the case of us salaried
individuals.
4. Scaling across geographies: India is a land of many cultures and tradition, the contrast become that
much starker in the case of rural India. Setting up operation on pan-India level present different types of
hurdles in different states ranging from political juggling to downright local factors. Any model where
scalability involves scaling on-ground operations is bound to run into myriad issues as we move from
one state to the next. Add to that the greater differences in consumer tastes and behavior across
geographies then in the relatively more cosmopolitan urban population.
5. Developing inorganic scale: Developing synthetic scale through partnerships typically results in larger
overheads in the rural context. Finding the right partner with reach and presence in villages in difficult to
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start with. More importantly, there are very few players who are strong on these counts across multiple
typically requires partnerships resulting in higher partner management overheads.
Q: What are the Factors affecting Entrepreneurship growth: Factors affecting Entrepreneurship?
Ans:
Economic Factors
Capital, labour, raw materials and market are the main economic factors.
(a) Capital:
Capital is one of the most important prerequisites to establish an enterprise. Availability of capital helps
an entrepreneur to bring together the land of one, machine of another and raw material of yet another
to combine them to produce goods. Therefore, capital is regarded as lubricant to the production
process. Basically, capital is the life blood of any activity. If capital is available, people who have
innovative ideas would like to put them into reality. Without having any obstacles, if capital is available,
it will act as a lifeline to entrepreneurs. So, if capital is available, entrepreneurial activities will increase.
(b) Labour:
The quality and quantity of labour is another factor which influences the emergence of
entrepreneurship. Availability of labour makes entrepreneurship attractive. More than abundantly
available labour, the presence of skilled labour force is very important because such a workforce is
generally less mobile than other resources. If entrepreneurial activities are initiated near areas where
labour is available, then it is easy to carry out the business more comfortably and profitably at low cost.
(c) Raw Materials:
Raw materials are required for establishing any industrial activity and therefore have an influence in the
emergence of entrepreneurship. In the absence of raw materials, neither any enterprise can be
established nor can an entrepreneur emerge. In some cases technological innovations can compensate
for raw material inadequacies. The supply of raw materials is not influenced by themselves but becomes
influential depending upon other opportunity conditions. The more favourable these conditions are, the
more likely is the raw material to have its influence on entrepreneurial emergence.
(d) Market:
It is not only the availability of capital, labour and raw materials but a readily available market that
attracts entrepreneurial activities. Ultimately, it is the market that fetches revenue for any business. If
sufficient market is not there, people will naturally hesitate to do business in a sector where there is no
market. In addition to market opportunities, it is equally important to ensure future market
opportunities for the emergence of entrepreneurial activities.
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2. Social Factors:
Development of entrepreneurship in a society may take place not just because of better economic
factors but because of the presence of positive social factors. The following social factors influence the
development of entrepreneurship in a society.
(a) Social norms and values:
A society sets certain norms and values for the behaviour of people who are part of that society. If
people violate or overstep these norms and values, certain restrictions are likely to be imposed on them.
As a result, many people are forced to accept certain types of jobs and tasks that reflect the social
environment. If the society has an open and flexible approach towards various types of jobs and works,
then people will feel free to do whatever they like and even go in for innovation and creativity. When
there is more openness and flexibility, entrepreneurship will not only emerge but also thrive.
(b) Role models:
Societies that celebrate entrepreneurship and felicitate successful entrepreneurs in a way encourage
many future generations to take up entrepreneurial activities. This is because successful businessmen
prove to be role models for the society at large.
(c) Social pressure:
At times, entrepreneurship can emerge in a society due to social restriction too. If a society is orthodox,
close and imposes a lot of restrictions, then it is likely to backfire. People who are at the receiving end
are likely to react strongly and go in for change. In other words, because of negative pressure, more
number of people would like to become entrepreneurs as a means of improving their status. It has been
noticed that where people were marginalised, they became entrepreneurs just to prove their abilities
and establish an identity in the society.
(d) Respect and Status:
If societies accord recognition and respect to people who dare to do something different and creative, it
proves to be an encouragement for others to do something enterprising. Therein lies the emergence of
entrepreneurship. In the traditional societies, people were looked down upon rather than encouraged
for deviating from the set norms or regular occupation. This means there was no respect for change.
Thus, societies where there is respect and recognition for people to do something different are more
likely to see the development of entrepreneurial activities.
(e) Security:
The view regarding role of social security in encouraging entrepreneurship development is rather
divided. One school of thought is of the view that people are more prone to take entrepreneurial risks in
secure social environments. On the other hand, there are others who argue that entrepreneurship will
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more likely emerge if there are turbulent conditions. In both cases, there is scope for entrepreneurship
development.
3. Psychological Factors
(a) Need Achievement:
According to David McClelland’s theory of need achievement, a constellation of personality

characteristics which are indicative of high need achievement is the major determinant of
entrepreneurship development. Therefore, if the average level of need achievement in a society is
relatively high, one would expect a relatively high amount of entrepreneurship development in that
society. McClelland gives the psychological concept of achievement motivation to account for the
differences in response to similar conditions. Referring to the encouraging impact of achievement
motivation training programmes organised by the Small Industries Extension Training Institute (SIET),
Hyderabad McClelland argues that the need achievement can be developed through the intensive
training programmes.
(b) Withdrawal of Status Respect:
(c) Reformist: He is a person who forements a rebellion and attempts to establish a new society; and’
(d) Innovator: He is a creative individual and is likely to be an entrepreneur.
Hagen maintains that once status withdrawal has occurred, the sequence of change in personality
formation is set in motion. He refers that status withdrawal takes a long period of time – as much as five
or more generations to result in the emergence of entrepreneurship.
Q: Explain Government Actions.
Ans:
The government by its actions or failure to act also does influence both the economic and non-economic
factors for entrepreneurship. Any interested Government in economic development can help, through
its clearly expressed industrial policy, promote entrepreneurship in one way or other. By creating basic
facilities, services and utilities and by providing incentives and concessions, the Government can provide
the prospective entrepreneurs a facilitative socio-economic setting. Such conducive setting minimises
the risks which the entrepreneurs are to face. Thus, the supportive actions of the Government appear as
the most conducive to the entrepreneurial growth. This is true of the Indian entrepreneurs also.
Q: Explain Entrepreneurial Motivation
Ans:
Motivation is the driving force within people that get them to act in the ways they do. Entrepreneurial
motivations are necessary steps of getting individuals to become entrepreneurs. Scholars have
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conducted various researches on entrepreneurial motivations and have come up with several factors
that motivate people to become entrepreneurs.
The standard issue with the concept of “Entrepreneurial Motivation” is that many scholars do not agree
on the all the special characteristics that the entrepreneurs are supposed to possess to function as
entrepreneurs. In fact, there have been noted cases where successful entrepreneurs haven’t been found
possessing many or all the special characteristics identified by experts to become successful
entrepreneurs.
Hence, now a set of several human motivations that influence the entrepreneurial process and have
been identified. It states that that entrepreneurial spirits are not solely the result of human action.
External factors, such as the economy, the availability of business capital, competitors and government
regulations are also important factors in entrepreneurship.
Non-motivational Factors that Influence Entrepreneurship
There are many non-motivational factors that also influence entrepreneurship. Some of the most
prominent of them are as follows −
 Unsatisfactory work environment
 Unwanted career transition
 Positive pull influences
Apart from these, there are many other characteristics such as −
 Established family business
 Childhood
 Family environment
 Education
 Age
 Work history
Some of the most important factors behind entrepreneurship are −
 A desire for applying innovative thoughts
 A desire for independent functioning
 A desire for financial independence
 A desire to achieve personal goals
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Need for Achievement
Entrepreneurs realize that they should engage in activities or tasks where they must share a high degree
of individual responsibility for outcomes. Hence, they need individual skill and effort to design plans that
have moderate or less than moderate risk.
In a nutshell, these individuals know how to deal with situations in which they can achieve results
through their efforts. They also know that by effective utility of available resources helps them to
achieve difficult goals through a timely and transparent feedback mechanism.
Risk-taking Propensity
Risk-taking propensity is one of the most eminent features in the world of entrepreneurship. It is
defined as the willingness to take moderate risks.
This motivational influence on entrepreneurship is the result of the need to have achievements as
people with a high need of achievement are always willing to take moderate risks.
This is because activities with moderate risk are both challenging and achievable at the same time. This
keeps people interested in the potential profitability of the venture, while also motivating them to take
a calculated risk.
Tolerance for Ambiguity
An entrepreneur is someone who is bringing his own vision into a world where such an idea has never
existed. He needs to realize that there will be many loopholes in his idea which may place him in the
grey areas while explaining his concept to others.
An entrepreneur needs to be fully prepared to handle tough questions on his ideas because people need
to feel relaxed and assured that an idea is good before they invest in it. An entrepreneur needs to have a
good amount of tolerance for ambiguity.
Q: Explain Motivational Cycle /Process.
Ans:
Motivation cycle is a transition of states within an person that propels him toward the satisfaction of a
particular need, where motivation itself is considered a hypothesized state. Positive results, caused due
to the actions, further acts as an incentive motivating a person towards the goal.
MOTIVATION CYCLE
Motives have a cyclical nature-they are aroused, trigger behavior, which leads to goal, and after the goal
is reached, they are cut off.
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Wants for something is followed by action to attain a certain desire which leads to get the desired thing.
A person constantly attempts to please his wants and desires following the cycle: need or necessity,
impulse or drive, action, incentive, and satiety or reward. If the need is not satisfied while it is moving in
a cycle it has to move again to find the point. Once it is reached then it is over. A need builds up again;
individual will go through to the same pattern. The circular pattern is known as the motivational
cycle.
 Need/Necessity – is any lack or deficiency which is felt by the organism to be inimical to his
welfare (Chaplin, 1973). The need produces a drive, which is a state of tension that motivates
the organism to act to reduce the tension. The body returns to a more balanced state once the
need is satisfied. The tendency of the body to return to, and remain in a more balanced state is
known as homeostasis, which is very essential for the human survival. There are two categories
of needs: Biological needs (physiological requirements critical to our survival and physical well-
being) examples are food, water, air, oxygen, etc. and the Social needs (needs required through
learning and experience) in relation to the happiness and well-being of the individual example
are the love, power, and etc.
 Impulse/Drive – a state of tension that motivates the organism to act to reduce the tension and
return the body to homeostasis .It energizes the person to act. Drives motivate us to engage in a
wide variety of behaviors to satisfy the needs. A drive is the psychological consequences of a
need.
 Action- activity that triggers the individual to achieve something.
 Incentive- is condition or object that is perceived as satisfier of the need. It is the purpose that
guides the action these are the motivators of behavior. Incentive is a status at which sustained
activity eases. It would be either negative or positive.
 Satiety/Reward –It is the satisfaction or pleasantness resulting from having obtained the
incentive or the desired goal.
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Q: Explain the Theories of Entrepreneurial Motivation.
Ans:
Achievement motivation theory off entrepreneurship
McClelland – Need for achievement, affiliation and power
In the early 1960s McClelland – built on Maslow’s work – described three human motivators. McClelland
(Arnold et al., 2005) claimed that humans acquire, learn their motivators over time that is the reason
why this theory is sometimes called the ‘‘Learned Needs Theory’.. He affirms that we all have three
motivating drivers, and it does not depend on our gender or age. One of these drives or needs will be
dominant in our behaviour.
McClelland’s
elland’s theory differs from Maslow’s and Alderfer’s, which focus on satisfying existing needs rather
than creating or developing needs. This dominant motivator depends on our culture and life
experiences, of course (but the three motivators are permanent)
permanent).. The three motivators are:
• Achievement:: a need to accomplish and demonstrate competence or mastery
• Affiliation:: a need for love, belonging and relatedness
• Power:: a need for control over one’s own work or the work of others
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These learned needs could lead to diversity and variety between employees. More precisely,
prioritization and importance of these motivational needs characterises a person’s behaviour. As we
wrote, although each person has all of these needs to some extent, only one of them tends to motivate
an individual at any given time.
(N-Ach) Achievement motivation – a need to accomplish and demonstrate competence or mastery. It

pertains to a person’s need for significant success, mastering of skills, control or high standards. It is
associated with a range of actions. Individual seek achievement, attainment of challenging (and also
realistic) goals, and advancement in the school or job.
This need is influenced by internal drivers for action (intrinsic motivation), and the pressure used by the
prospects of others (extrinsic motivation). Low need for achievement could mean that individuals want
to minimise risk of failure, and for this reason people may choose very easy or too difficult tasks, when
they cannot avoid failure. In contrast, high need for achievement means that humans try to choose
optimal, sufficiently difficult tasks, because they want to get the chance to reach their goals, but they
have to work for it, they need to develop themselves.
Individuals with high need for achievement like to receive regular feedback on their progress and
achievements; and often like to work alone; seek challenges and like high degree of independence.
Sources of high need for achievement can be: praise for success, goal setting skills, one’s own
competence and effort to achieve something, and it does not depend only on luck; of course positive
feelings and also independence in childhood. McClelland said that training, teaching can increase an
individual’s need for achievement. For this reason, some have argued that need for achievement is not a
need but a value.
N- Affil) Affiliation motivation – a need for love, belonging and relatedness. These people have a strong
need for friendships and want to belong within a social group, need to be liked and held in popular
regard. They are team players, and they may be less effective in leadership positions. High-need-for-
affiliation persons have support from those with whom they have regular contact and mostly are
involved in warm interpersonal relationships. After or during stressful situation individuals need much
more affiliation. In these situations people come together and find security in one another. There are
times when individuals want to be with others and at other times to be alone – affiliation motivation can
become increased or decreased. Individuals do not like high risk or uncertainty.
(N- Pow)Authority/power motivation – a need to control over one’s own work or the work of others.
These persons are authority motivated. There is a strong need to lead and to succeed in their ideas. It is
also needed to increase personal status and prestige. This person would like to control and influence
others. McClelland studied male managers with high need for power and high need for affiliation and
found that managers with a high need for power tended to run more productive departments in a sales
organization than did managers with a high need for affiliation.
It is important to speak about gender differences in need for power. It is said that men with high need
for power mostly have higher aggression, drink more, act in sexually exploitative manner, and
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participate in competitive sports, and also political unrests. At the same time women with higher need
for power show more socially acceptable and responsible manner, are more concerned and caring.
These types of people prefer to work in big, multinational organisations, businesses and other influential
professions.
McClelland argues that strong need for achievement people can become the best leaders – as we wrote
it above. But at the same time there can be a tendency to request too much of their employees, because
they think that these people are also highly achievement-focused and results-driven, as they are. Think
about your teachers and professors! I am sure they all want the best for you, they would like to develop
you, but I do not think you feel the same every time. McClelland said that most people have and show a
combination of these characteristics.
Maslow – hierarchy of needs
This is the earliest and most widely known theory of motivation, developed by Abraham Maslow (1943)
in the 1940s and 1950s.
This theory condenses needs into five basic categories. Maslow ordered these needs in his hierarchy,
beginning with the basic psychological needs and continuing through safety, belonging and love, esteem
and self-actualization. In his theory, the lowest unsatisfied need becomes the dominant, or the most
powerful and significant need. The most dominant need activates an individual to act to fulfill it.
Satisfied needs do not motivate. Individual pursues to seek a higher need when lower needs are fulfilled.
Maslow's hierarchy of needs is often shown in the shape of a pyramid: basic needs at the bottom and
the most complex need (need for self-actualization) at the top. Maslow himself has never drawn a
pyramid to describe these levels of our needs; but the pyramid has become the most known way to
represent his hierarchy.
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1. Physiological needs (e.g. food, water, shelter, sleep)
It includes the most basic needs for humans to survive, such as air, water and food. Maslow emphasized,
our body and mind cannot function well if these requirements are not fulfilled.
These physiological needs are the most dominant of all needs. So if someone is missing everything in
his/her life, probably the major motivation would be to fulfil his/her physiological needs rather than any
others. A person who is lacking food, safety, love (also sex) and esteem, would most probably hunger for
food (and also for money, salary to buy food) than for anything else.
If all the needs are unsatisfied, and the organism is then overruled by the physiological needs, all other
needs may turn into the background. All capacities are put into the attendance of satisfying hunger. Any
other things are forgotten or got secondary importance.
2. Safety and security (secure source of income, a place to live, health and well-being)
If the physiological needs are relatively well contented, new needs will appear, the so called safety
needs. Safety needs refer to a person’s desire for security or protection. Basically everything looks less
important than safety and protection (the physiological needs even sometimes). The healthy and
fortunate adults in our culture are largely satisfied in their safety needs. The peaceful, sure, safety and
unwavering society makes us feel in safety enough from criminal assaults, murder, unbelievable natural
catastrophes, and so on. In that case people no longer have any safety needs as first-line motivators.
Meeting with safety needs demonstrated as a preference for insurance policies, saving accounts or job
security, etc., we think about the lack of economic safety. Children have a greater need to feel safe. That
is the reason why this level is more important for children.
Safety and security needs include: Personal security; Financial security; Health and well-being; Safety
mesh against accidents, illnesses and their adverse impacts.
To tell the truth, in real dangers and traumas – like war, murder, natural catastrophes, criminal assault,
etc. -, the needs for safety become an active, first-line and dominant mobilizer of human beings.
3. Belongingness and love (integration into social groups, feel part of a community or a group;
affectionate relationships)
If both the physiological and the safety needs are fulfilled, the affection, love and belongingness needs
come into prominence. Maslow claimed people need to belong and accepted among their social groups.
Group size does not mean anything: social groups can be large or small. People need to love and be
loved – both sexually and non-sexually – by others. Depending on the power and pressure of the peer
group, this need for belonging may overbear the physiological and security needs.
Love needs involve giving and receiving affections (love is not synonymous with sex – sex is a
physiological need). When they are unsatisfied, a person will immediately eliminate the lack of friends,
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peers and partner. Many people suffer from social nervousness, loneliness, social isolation and also
clinical depression because of the lack of this love or belongingness factor.
4. Esteem (respect for a person as a useful, honourable human being)
In our society most people long for a stable and high valuation of themselves, for the esteem of others
and for self-respect or self-esteem.
Esteem means being valued, respected and appreciated by others. Humans need to feel to be valued,
such as being useful and necessary in the world. People with low self-esteem often need respect from
others. Maslow divided two types of esteem needs: a ‘lower’ version and a ‘higher’ version. The ‘lower’
version of esteem is the need for respect from others: for example attention, prestige, status and loving
their opinion. The ‘higher’ version is the need for self-respect: for example, the person may need
independence, and freedom or self-confidence.
The most stable and therefore the healthiest self-esteem is based on respect from others. External fame
or celebrity and unwarranted adulation won’t cause self-esteem, although you feel better for a while.
5. Self-actualization (individual’s desire to grow and develop to his or her fullest potential)
‘What humans can be, they must be.’ (Maslow, 1954)
Self-actualization reflects an individual’s desire to grow and develop to his/her fullest potential. People
like opportunities, choosing his/her own versions, challenging positions or creative tasks. Maslow
described this level as the ‘need to accomplish everything that one can, to become the most that one can
be’. Maslow believed that people must overcome their other needs – described above -, not only
achieve them. At this level, individual differences are the largest.
As each level is adequately satisfied, we are then motivated to satisfy the next level in the hierarchy,
always new and higher needs are coming. This is what we mean, when the basic human needs are
drawn like a pyramid, a hierarchy. Life experiences, including divorce and loss of job, may cause an
individual to fluctuate between levels of the hierarchy. These five different levels were further sub-
categorised into two main groups: deficiency and growth needs.
Deficiency needs – The very basic needs for survival and security.
These needs include:
• Physiological needs
• Safety and security needs
• Social needs – belongingness and love
• Esteem needs
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It may not cause a physical indication if these ‘deficiency needs’ are not fulfilled, but the individual will
feel anxious and tense. So the most basic level of needs must be fulfilled before a person wants to focus
on the secondary or higher level needs.
Growth needs – Personal growth and fulfilment of personal potential.
These needs include:
• Self-actualisation needs
This hierarchy is not as rigid as we may have implied. For example, there are some humans for whom
self-esteem or self-actualization seems to be more important than love or belonging. The popularity of
this theory of motivation rooted in its simplicity and logic.
Q: Explain Entrepreneurial Competency and Major Entrepreneurial Competencies.
Ans:
Entrepreneurial competencies are the skills necessary for an entrepreneur to
 venture into an enterprise
 organize and manage an enterprise ably and competently
 realize the goal for which the enterprise is established
These competencies help and entrepreneur to successfully venture into an enterprise.
These can be broadly classified under the following categories
 Behavioral competencies
i. Initiative
ii. Systematic planning
iii. Creativity and innovation
iv. Risk taking and Risk Management
v. Problem solving
vi. Persistence
vii. Quality performance
viii. Information management
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ix. Persuation and influencing abilities
 Enterprise launching competencies
 Enterprise managing competencies.
Q: How to Develop Entrepreneurial Competencies.
Ans:
The competency results in superior performance. This is exhibited by one’s distinct behaviour in
different situations. The popular Kakinada experience conducted by McClelland and winter (1969) has
proved beyond doubt that the entrepreneurial competency can be injected and developed in human
minds through proper education and training. Competency finds expression in human behaviour.
How to develop and sharpen the entrepreneurial competency is suggested in the following
method or procedure consisting of four steps:
1. Competency Identification and Recognition
2. Competency Assessment
3. Competency Mapping
4. Development Intervention
A brief description about each of these follows in turn:
1. Competency Identification and Recognition:
Acquisition of a new behaviour like entrepreneurial behaviour begins with understanding, identifying
and recognizing of what entrepreneurial behaviour means. In other words, the first step involved in
developing the entrepreneurial competency is first to identify and recognize the set of competencies
required to effectively behave like an entrepreneur.
2. Competency Assessment:
Once the set of competencies is identified and recognized to behave like an entrepreneur, the next step
is now to see what entrepreneurial competencies the person actually possesses. In other words, the
actual competencies possessed by an entrepreneur are examined against the required set of
competencies to effectively behave or act like an entrepreneur.
Where one stands with respect to a set of required competencies to act like an entrepreneur or what is
the level of one’s competence can be ascertained by asking the relevant questions to a competence.
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3. Competency Mapping:
Now, the actual competencies possessed by an entrepreneur are compared with the competencies
required to become a successful entrepreneur to ascertain the gap in the entrepreneurial competencies
of an entrepreneur (Cooper 2000). This is called in the human resource training and development
lexicon as ‘Competency Mapping.’ In other words, this is just like ‘training needs identification’ in case of
HR training.
4. Development Intervention:
After understanding, internalizing and practicing a particular behaviour or competence, one needs to
make an introspection of the same in order to sharpen and strengthen one’s competency. This is called
‘feedback’.
In simple terms, feedback means to know the strengths and weaknesses of one’s new behaviour. This
helps one know how the new behaviour has been rewarding. This enables one to sustain or give up the
exhibition of a particular behaviour or competence in his future life.
UNIT - III Entrepreneurship Development Programmes (EDPs)
Q: Explain the meaning, need & Objectives of EDPs.
Ans:
Since 1950, a substantial volume of study has gone into the different phases of entrepreneurial
development in India to accelerate the process of industrialization. The study showed that
entrepreneurs are born and can also make their skills sharpened, quality of an enterprise improved and
generated in good number. It is possible to identify individuals in all communities, in rural and urban
areas, among men and women with entrepreneurial talent, to motivate and train them through properly
organized programmes undertaking risk-bearing innovative activities for raising the growth rate in
agriculture, in industry as well as in the service sector.
The Entrepreneurial Development Programmes (EDPs) thus became a new concept for harnessing the
vast untapped human resources. The EDPs are presently one of the most talked about social
development activities which many organizations have taken up in right earnest. It strikes a welcome
note in respect of change in perception and recognition of the critical role the entrepreneurs played in
industrial development by creating potential avenues for self-employment.
While organizing EDPs, it should be remembered that entrepreneurs cannot be created like degree-
holders in a university and that it would be necessary to eliminate those who do not possess the basic
capabilities for entering into business ventures, weed out such persons and help develop latent facilities
of those who possess the potential for becoming entrepreneurs.
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Objectives of EDPs
The important objectives of the Entrepreneurship Development Programmes (EDPs) are to:
 As the quality of entrepreneurship differs from region to region, the type of inputs that a
particular group of entrepreneurs would require should be understood clearly and the training
programmes tailored accordingly.
 Training should be, not only to set up an industrial venture but also to enable the trainee to run
it successfully.
 The focus of EDP should be on the person rather than on the project and this call for proper
counseling facilities available to the trainees.
 These programmes should be conducted in places where necessary infrastructure for training is
available and proximity of the support agencies is assured.
 This would underline the need for proper selection of the trainees.
 It should be ensured that the trainees show interest in setting up industries and that they do
not treat the ED as a stop Ps gap arrangement for taking up a job subsequently. For this
purpose, we should think new techniques to make the process of selection more appropriate.
Poor involvement on the part of the institutions as also trainees and an incorrect selection of
target groups contribute largely to the failure of a number of EDPs.
 One of the objects of training should be on changing the attitude and set of mind of young
people from security-oriented activities to risk-taking through entrepreneurship development.
Besides, some of the other important objectives of the EDPs are to:
Let the entrepreneur himself / herself set or reset objectives for his/her business and strive for their
realization.
Prepare him/her to accept the uncertainty involved in running a business.
Enable him/her to take decisions.
Enable to communicate clearly and effectively.
Develop a broad vision about the business.
Make him subscribe to industrial democracy.
Develop passion for integrity and honesty.
Make him learn compliance with law.
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Need of EDP
 Develop and strengthen their entrepreneurial quality, i.e., motivation or need for achievement.
 Analyse environmental set up relating to small industry and small business.
 Select product.
 Formulate project for the product.
 Understand the process and procedure involved in setting up a small enterprise.
 Know the sources of help and support available for starting a small-scale industry.
 Acquire the necessary managerial skills required to run a small enterprise.
 Know the pros and cons in becoming an entrepreneur.
 Appreciate the needed entrepreneurial discipline.
Q: Explain Entrepreneurship Development Programmes in India: A Historical Perspective
Ans:
India got the political freedom on 15th August 1947, but not the economic freedom. And attainment of
economic freedom i.e., emancipation from poverty and unemployment was the biggest challenge
before the country. The war for economic freedom started in 1950 in the form of planned development.
Then, it was realized that the way to get rid of poverty and unemployment lies in the effective
exploitation of hidden potential in the country. For this the policy makers started advocating the
promotion and development of small- scale industries in the country. As a result, small – sector was
recognized as employment- oriented sector during the early sixties.
The employment-oriented thinking for small sector underwent changes by the end of sixties and now
small sector was recognized as an effective instrument to utilize the entrepreneurial potential remained
hitherto dormant in the country.
Realizing the various problems faced by the entrepreneurs in establishing enterprises, the Government
decided to offer promotional package to the entrepreneurs. Promotional package included financial
help and incentives, infrastructural facilities, and technical and managerial guidance provided through
various supporting organizations of the Central, State and local levels.
This experience made the planners and policy makers realize that facilities and incentives are, of course,
necessary for establishing enterprises, but are not sufficient to solicit adequate response from the
entrepreneurs. Hence, now it was realized that emphasis on human development is a necessary
condition for entrepreneurship development. As such, the serious thinking on entrepreneurship
development began from here.
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Concerted efforts on entrepreneurship development in India started with the establishment of Small
Industry Extension and Training Institute (SIET), now NISIET, in 1962 in Hyderabad. SIET got an
opportunity with support from Harvard University to do pioneering work in entrepreneurship
development in India.
SIET in collaboration with Prof. David C. McClelland of Harvard University conducted 5-years’ training
and research programmes in Rajamundi, Kakinada and Vellur towns of Andhra Pradesh and Tamil Nadu.
McClelland proved that, through proper education and training, the vital quality of an entrepreneur,
which McClelland called ‘need for achievement’ (n’ ach) can be developed.
The fact remains that McClelland’s this successful experiment proved to be a seed for entrepreneurship
development in India which has by now become a movement as EDP (Entrepreneurship Development
Programmes) in the country.
It is against this background now the Government and financial institutions started thinking to develop
entrepreneurship in the country through training programmes. It was the Gujarat Industrial Investment
Corporation (GIIC) which for the first time started a three-month training programme on
entrepreneurship development in 1970.
This programme was designed to unleash the talent of potential entrepreneurs and some selected
entrepreneurs. Special emphasis was given on three aspects:
(i) Establishment of small-scale enterprises,
(ii) Its management, and
(iii) To earn profits out of it. By the latter half of 1970s’, the news of GIIC’s EDP spread to the other parts
of the country also.
A major initiative to foster economic development in the North East India took place with the
establishment of the North Eastern Council (NEC) in 1972. The main objective of the NEC was to
promote economic development of the NER through inter-state plans and bring the NER to the
mainstream of the country. This is a matter of great satisfaction that the NEC has since been seriously
involved in its task of regional development. Two more significant efforts were initiated in 1973 with an
objective to remove the economic backwardness of the region.
One, the establishment of the North Eastern Industrial and Technical Consultancy Organization,
(NEITCO) to impart training on entrepreneurship development, and second, the establishment of the
Entrepreneurial Motivation Training Centers (EMTCs) in its six district headquarters of Assam.
Since EMTC was one of the oldest and noblest initiatives taken in the field of entrepreneurship
development in the country, some mention about the same seems pertinent. The State Planning Board
of the Government of Assam, under the dynamic leadership of the then Chief Minister, took the
initiative in requesting SIET Institute, Hyderabad to be associated with training and research in the field
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of entrepreneurship development in Assam with specific focus on self – employment for the educated
unemployed youth of the State (Mali 2000).
In response to it, the SIET Institute organized two training programmes for three weeks duration each in
1973, for the officers of Government of Assam One training programme was focused on
entrepreneurship development for a selected band of officers from the departments of industry,
agriculture, animal husbandry, public works and other departments and financial institutions of the
Government of Assam.
The training programme included inputs like various methods and techniques of identification and
development of prospective entrepreneurs, development of entrepreneurial personality, and
identification of economic opportunities for setting up small-scale enterprises in the State.
Functional areas of management for establishing and operating small enterprises on sound lines were
also included in the training programmes. Second the another simultaneous training was imparted to
the another group of officers of the industries department to encourage people to establish small-scale
industries, undertake industrial potential surveys, select growth centers, plan infrastructure facilities,
and develop business profiles.
Integrated entrepreneurship development model and plan were evolved as a result of SIET’s experience
and realisation that entrepreneurship development is a multi-disciplinary task, and the long-range plan
should be executed through well coordinated and orchestrated institutional support.
The integrated model of entrepreneurship development proposed by SIET included five main
components, namely:
(i) Local organization to initiate and support potential entrepreneurs till the break-even stage,
(ii) Inter-disciplinary approach,
(iii) Strong information support,
(iv) Training as an important intervention for entrepreneurial development, monitoring and evaluation,
and
(v) Institutional financing.
Initially EMTCs were established in six centers in Assam under the State Planning Board, which were
monitored by 26 officers trained by SIET in May 1973. The team in each centre consisted of multi –
disciplinary talents. It is learnt that in 1979, after a comprehensive evaluation of the performance of
EMTCs by SIET Institute, the programme was transferred from the State Planning Board to the Industries
Department. Three more centers were added to the earlier six locations.
The nine EMTCs where the programme was being implemented were as follows: Mangaldoi (Darrang
District), Silchar (Cachar District), Diphu (Karbi Analong District), Jorhat (Jorhat District), Dhemaji
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(Dhemaji District), Kokrajhar (Kokrajhar District), in 1973, Dibrugarh (Dibrugarh District), Nalbari (Nalbari
District) and Nagaon (Nagaon District), in 1979.
SIET and Small Industry Development Organisation (SIDO) through Small Industry Services Institute (SISl)
and Industrial Development Bank of India (IDBI) and Technical Consultancy Organisations (TCOs) started
organising EDPs.
The encouraging results of these efforts culminated to the establishment of Centre for Entrepreneurship
Development (CED), Ahmedabad in 1979. Here, it is noteworthy that CED, Ahmedabad was the first
centre of its kind wholly committed to the cause of entrepreneurship development.
Inspired and influenced by the success of CED, Ahmedabad; the national-level financial institutions such
as IDBI, IFCI, ICICI and SBI with active support from the Gujarat Government sponsored a ‘Nation
Resource Organisation’, called ‘Entrepreneurship Development Institute of India (EDI)’, Ahmedabad, in
1983.
This institute was entrusted with the responsibility of extension and institutionalization of
entrepreneurship development activities in the country which the Institute has been discharging
successfully.
Almost at the same time of establishment of EDI in 1983, the Government of India established ‘National
Institute for Entrepreneurship and Small Business Development’ (NIESBUD) to coordinate
entrepreneurship development activities in the country.
n course of time, some State Governments with the support from national level financial institutions
established state-level Center for Entrepreneurship Development (CED) or Institute of Entrepreneurship
Development (lED).
By now, the twelve States, viz., Bihar, Goa Gujrat, Himachal Pradesh, Jammu & Kashmir, Karnataka,
Kerala, Madhya Pradesh, Maharashtra, Odisha, Tamil Nadu, and Uttar Pradesh have established either
CED or lED. EDPs in these states were conducted by the TCOs before the establishment of CEDs or lEDs.
According to the study of NIESBUD, some 686 organisations are involved in conducting EDPs in the
country which have imparted training to thousands of people by conducting hundreds of EDPs.
Q: What are the course contents and curriculum of EDPs?
Ans:
The course contents of an EDP are selected in line with the objectives of the EDPs. The training
programme is usually to six weeks’ duration. It consists of the following six inputs:
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General Introduction to Entrepreneurship: First of all, the participants are exposed to a general
knowledge of entrepreneurship such as factors affecting small-scale industries, the role of
entrepreneurs in economic development, entrepreneurial behaviour and the facilities available for
establishing small-scale enterprises.
Motivation Training: The training inputs under this aim at inducing and increasing the need for
achievement among the participants. This is, in fact, a crucial input of entrepreneurship training. Efforts
are made to inject confidence and positive attitude and behaviour among the participants towards
business. It ultimately tries to make the participants to start their own business enterprise after the
completion of the training programme. In order to further motivate the participants, sometimes
successful entrepreneurs are also invited to speak about their experience in setting up and running a
business.
Management Skills: Running a business, whether large or small, requires the managerial skill. Since a
small entrepreneur cannot employ management experts to manage his/her business, he/she needs to
be imparted basic and essential managerial skills in the functional areas like finance, production and
marketing. Knowledge of managerial skills enables an entrepreneur to run his/her enterprise smoothly
and successfully.
Support System and Procedure: The participants also need to be exposed to the support available from
different institutions and agencies for setting up and running small-scale enterprises. This is followed by
acquainting them with procedure for approaching them, applying and obtaining support from them.
Fundamentals of Project Feasibility Study: Under this input, the participants are provided guidelines on
the effective analysis of feasibility or viability of the particular project in view of marketing, organization,
technical, financial and social aspects. Knowledge is also given how to prepare the ‘Project’ or
‘Feasibility Report’ for certain products.
Plant Visits: In order to familarise the participants with real life situations in small business, plant visits
are also arranged. Such trips help the participants know more about an entrepreneur’s behaviour,
personality, thoughts and aspirations. These influence him/her to behave accordingly to run his/her
enterprise smoothly and successfully.
On the whole, the ultimate objective of entrepreneurship training programme is to make the trainees
prepared to start their own enterprise after the completion of the training programme. This is the
measure of success levels of the EDPs.
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Q: Explain the Phase s of ED.
Ans:
An entrepreneurship development programme consists of the following three phases:
 Pre-training Phase
 Training Phase
 Post-training Phase (Follow-up)
These are discussed in turn.
1. Pre-training Phase: The activities and preparations required to launch the training programmed come
under this phase. This phase, accordingly, includes the following:
a) Selection of entrepreneurs.
b) Arrangement of infrastructure.
c) Tie-up of Guest Faculty for the training purposes.
d) Arrangement for inauguration of the programme.
e) Selection of necessary tools, techniques to select the suitable entrepreneurs.
f) Formation of Selection Committee for selecting trainees.
g) Arrangement for publicity media and campaigning for the proramme.
h) Development of application form.
i) Finalization of training syllabus.
j) Pre-potential survey of opportunities available in the given environmental conditions.
2. Training Phase: The main objective of this phase is to bring desirable change in the behaviour of the
trainees. In other words, the purpose of training is to develop ‘need for achievement’, i.e., motivation
among the trainees. Accordingly, a trainer should see the following changes in the behaviour of the
trainees.
a) Is he/she attitudinally tuned very much towards his/her proposed project idea?
b) Is the trainee motivated to plunge into entrepreneurial career and bear risks involved in it?
c) Is there any perceptible change in his entrepreneurial attitude, outlook, skill, role, etc.?
d) How should he/she behave like an entrepreneur?
e) What kinds of entrepreneurial traits the trainee lacks the most?
f) Whether the trainee possesses the knowledge of technology, resources and other knowledge
related to entrepreneurship?
g) Does the trainee possess the required skill in selecting the viable project, mobilizing the required
resources at the right time?
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Some of the questions listed above also answer the basic underlying assumption in designing a suitable
training programme for the potential entrepreneurs. Having trained the trainees, the trainers need to
ask themselves as to how much, and how far the trainees have moved in their entrepreneurial pursuits.
3. Post-training Phase (Follow-up): The ultimate objective of the Entrepreneurship Development

Programme is to prepare the participants to start their enterprises. This phase, therefore, involves
assessment to judge how far the objectives of the programme have been achieved. This is called ‘follow-
up’. Follow-up indicates our past performance; drawbacks, if any, in our past work and suggests
guidelines for framing future policies to improve our performance.
In nutshell, the purpose behind the EDP follow-up is to:
 Review the pre-training work;

 Review the process of training programme; and
 Review past training approach.
Q: Explain Evaluation of EDPs, and Problems of EDPs.
Ans:
Evaluation of EDPs
Hundreds of EDPs are conducted by some 686 organisations to import entrepreneurial training to
participants in thousands. It is observed that out of every four trainees (26%) actually started his/her
enterprise after undergoing entrepreneurial training. However, the expected final start-up rate is slightly
higher around 32%. About 10% trainees are found blocked due to various reasons at various stages in
the process of setting up their enterprises. Nearly 17% have given up the idea of launching a new
enterprise as they are engaged in other activities.
Problems Faced By EDPs
 EDPs suffer on many counts. The problems and lacunae are on the part of all those who are
involved in the process, be it the trainers and the trainees, the ED organization, the supporting
organizations and the state governments. The important problems EDPs face are listed as
follows:
 Trainer-motivations are not found upto the mark in motivating the trainees to start their own
enterprises.
 ED organizations lack in commitment and sincerity in conducting the EDPs. In some cases, EDPs
are used as a means to generate surplus (income) for the ED organisations.
 Non-conducive environment and constraints make the trainer-motivators role ineffective.
 The antithetic attitude of the supporting agencies like bank and financial institutions serves as
stumbling block in the success of EDPs.
 Selection of wrong trainees also leads to low success rate of EDPs.
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Thus, it is clear that the problems are not with the strategy but with its implementation. One way of
evaluating the EDPs is to assess their effectiveness in developing ‘need for achievement’ among the
entrepreneurs. This is also called ‘the qualitative evaluation’ of EDPs. The behaviourial scientists used
the following criteria to assess the effectiveness of EDPs in motivating the entrepreneurs:
 Activity level of the respondents

 New enterprise established
 Total investments made
 Investments in fixed assets made
 Number of people employed
 Number of jobs created
 Increase in profit
 Increase in sales
 Quality of product / service improved
 Quicker repayment of loans
Micro and small enterprises:
Q: Explain; Small enterprise: Meaning & Definition, Essentials, features & Characteristics.
Ans:
Small-scale industries play a key role in the industrialization of a developing country. This is because,
they provide immediate large-scale employment and have a comparatively higher labour/capital ratio;
they need a shorter gestation period and relatively smaller markets to be economic; they need lower
investments. They also offer a method of ensuring a more equitable distribution of national income and
facilitate an effective mobilization of resources of capital and skill which might otherwise remain
unutilized; and they stimulate the growth of industrial entrepreneurship and promote a more diffused
pattern of ownership and location.
A rewarding feature of economic development in India has been the impressive growth of modern
small-scale industries. The small enterprises have by now established their competence to manufacture
a wide variety of sophisticated goods in different product-lines requiring a high degree of skill and
precision. They have made a notable contribution in realizing the principle objectives of expanded
employment opportunities, adoption of modern techniques and dispersal of industries in small towns
and rural areas. This has been possible as a result of the successful implementation of the programme
for assistance of SSIs. The diversified, rapid growth of these industries has made substantial contribution
to India’s economic development in recent years.
Small enterprises represent the fountain head of vitality for the national economy. At the end of the
seventh plan, small-scale industrial sector including village industries accounted for over 55% of the
gross value of output in the manufacturing sector and over 40% of the total exports from the country. It
47
also provided direct employment to 245 lakh people. What is more, certain groups of small enterprises,
such as electronics, engineering and leather have made impressive progress. The small-scale sector has
also achieved a high degree of sophistication and made significant progress in quality upgradation and
standardization. They have also given fillip to entrepreneurship development. Small enterprises are able
to successfully adapt to the changing situations and possess creative strength. Therefore, much is
expected of them as the driving power behind the continued development of the Indian economy.
Although the prospects for SSIs are plenty, the new industrial policy has to a great extent hampered its
sustained growth in the nineties. On the country, the policy is oriented towards development of large-
scale industries, in particular, multinationals based on technology as well as finance imported from
advanced countries, while showing lip sympathy to small-scale sector. The need of the hour is an
appropriate industrial policy conducive for the development of SSIs. The high levels of potential inherent
in small-scale sector are yet to be properly understood and analysed.
Types of Small-Scale Industries
Small-scale industries can be classified into five main types as follows:
 Manufacturing industries, i.e., industries producing complete articles for direct consumption
and also processing industries;
 Feeder industries specializing in certain types of products and services, e.g. casting, electro-
plating, welding, etc.
 Serving industries covering light, repair, shops necessary to maintain mechanical equipment;
 Ancillary to large industries, producing parts and components and rendering services; and
 Mining or quarrying.
Characteristics of Small-Scale Industries
 A small scale unit is generally a one-man show. Even the small units which run by a partnership
firm or company, the activities are mainly carried out by one of the partners or directors. In
practice, the others are simply as sleeping partners or directors who mainly assist in providing
funds.
 In case of small-scale industries, the owner himself/herself is a manager also. Thus, these units
are managed in a personalized fashion. The owner has first hand knowledge of what is actually
going on in the business. He takes effective participation in all matters of business decision
taking.
 Compared to large units, a small-scale industrial unit has a lesser gestation period, i.e. the
period after which the return on investment starts.
 The scope of operation of small industrial undertakings is generally localized catering to the local
and regional demands.
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 Small units use indigenous resources and, therefore, can be located anywhere subject to the
availability of these resources like raw materials, labour etc.
 Small industries are fairly labour intensive with comparatively smaller capital investment than
the larger units.
 Using local resources, small units are decentralized and dispersed to rural areas. Thus, the
development of small-scale industries in rural areas promotes more balanced regional
development, on the one hand, and prevents the influx of jobseekers from rural areas to cities
and urbanizing centres, on the other.
 Last but not the least, compared to large scale units, small-scale units are more change
susceptible and highly reactive and receptive to socio-economic conditions. They are more
flexible to adapt changes like introduction of new products, new method of production, new
materials and new markets, new forms of organization etc.
Q: Explain the relationship between Micro and Macro enterprises.
Ans:
Relationship Between Small & Large Units/ Micro and Macro enterprises
Going through the distinct characteristic of small-scale industries, one should not assume that the both
small and large, are antithetic to each other. In other words, the both cannot sustain in an economy. It
is, fact, true the other way round, and to a great extent, one is often ancillary or complementary to the
other.
The relationship between the small and the large industrial units can be seen in various respects. Yet,
the following are the important ones:
1. Competitive: Small-scale industry cannot compete with large industry in certain circumstances and in
selected products. Examples of such industries are bricks and tiles, fresh baked goods and perishable
edibles, preserved fruits, goods requiring small engineering skill, items demanding craftsmanship and
artistry.
2. Supplementary: Small industry can fill in the gaps between large scale production and standard
outputs caused by large scale units. This is due to this supplementary role of small units, a small tricycle
factory sustained and flourished alongside a large cycle factory in Chennai city.
3. Complementary: Apart from supplementary relationship, small industry has been a complementary
to its large counterparts. In the real world, many small units produce intermediate products for large
units. Such subcontracting relationship between the small and large was particularly marked in the
economic history of today’s industrially developed Japn. As industrialization proceeds, small firms seem
naturally to shift from activities that compete with large firms to complementary ones. Similarly, China
too continues to rely on Mao’s aphorism of “walking on two legs”–one being small and the other large.
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Under complementary relationship, small units function under the tutelage of the large units and enjoy
the advantage of protected market for their products. Then, the flourishment of such small units
remains beyond doubt.
4. Initiative: Attracted by the high profits of large units, small units can also take initiative to produce
the particular product. If succeeds, the small unit grows to large over a period of time. Staley quotes
such initiation that many of the automobile factories started this way in the United States of America. In
our country too, the electronic industry looks like following to this initiative pattern of development.
5. Servicing: Small industries do also install servicing and repairing shops for the products of large units.
In the case of India, such small servicing units can be seen proliferating in respect of large industries like
refrigerators, radio and television sets, watches and clocks, cycles and motor vehicles.
Q: Explain the rationale behind Micro & small enterprises
Ans:
Rationale of Small-Scale Industry Development in India Emphasizing the very rational of small-scale
industry in the Indian economy, the industrial policy Resolution (IPR), 1956 stated:
“They provide immediate large scale employment, they offer a method of ensuring a more equitable
distribution of the national income and they facilitate an effective mobilization of resources of capital
and skill which might otherwise remain unutilized. Some of the problems that unplanned urbanization
tends to create will be avoided by the establishment of small centres of industrial production all over
the country.”
The rationale of small-scale industries so established can broadly be classified into four arguments, viz.,
(1) Employment argument, (2) Equality argument, (3) Decentralisation argument, and (4) Latent
resources argument. Let us discuss these in more details one by one.
Employment Argument
In view of India’s scarce capital resources and abundant labour, the most important argument advanced
in favour of the SSIs that they have a potential to create immediate large-scale employment
opportunities. The increasing emphasis on SSIs in developing countries like India stems largely from the
widespread concern over unemployment hovering in the country. There are many research findings
available which well establish that small-scale units are more labour intensive than large units. In other
words, small units use more of labour per unit of output than investment.
According to a study, while the output-employment ratio is the lowest in the small-scale sector,
employment-generating capacity of small sector is eight times that of the large scale sector. As
mentioned earlier, P.C. Mahalnobis also supports the view that small industries are fairly labour
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intensive. He mentions that with any given investment, employment possibilities would be ten or fifteen
or even twenty times greater in comparison with corresponding factory system.
There are some scholars like Dhar and Lydall who oppose to this employment argument of small scale
industries. They hold the view that employment should not be created for the sake of employment. The
important problem, according to them, is not how to absorb surplus resources, but how to make the
best use of scarce resources. Then, the employment argument becomes an output argument.
Equality Argument
One of the main arguments put forward in favour of the small-scale industries is that they ensure a
more equitable distribution of national income and wealth. This is accomplished because of the two
major considerations: (i) compared to the ownership of large scale units, the ownership pattern in S.S.I.
is more widespread. (ii) their more labour-intensive nature, on the one hand, and their decentralization
and dispersal to rural and backward areas, on the other, provide more employment opportunities to the
unemployed. This results in more equitable distribution of the produce of the small scale units. It is also
held that as most of the small enterprises are proprietary or partnership concerns, the relations
between the workers and the employers are more harmonious in small enterprises than in the large
enterprises.
Here again, Dhar and Lydall have pointed out this equality argument as fallacious. Giving statistical
evidence, they established the fact that wages paid to workers are much less in small enterprises than
the wages paid to the workers in large industries. In India, wages in small industries are about half the
wages paid in large industries. The reason is not difficult to seek. Workers in small enterprises, due to
virtual non-existence of trade unions, are unorganized and, therefore, are easily exploited by the
employers.
There is no doubt that the argument of Dhar and Lydall does have some force. But in an under-
developed country like India, the workers have choice not between a high paid job and a low paid job
but between a low paid job and no job at all. Then, even if small scale units provide low paid jobs, they
would be of virtual importance in an economy like ours where lakhss are already in search of
employment to eke-out their livelihood.
Decentralisation Argument
Decentralisation argument impresses the necessity of regional dispersal of industries to promote

balanced regional development in the country. Big industries are concentrated everywhere in urban
areas. But, small industries can be located in rural and semi-urban areas to use local resources and to
cater to the local demands. Admittedly, it will not be possible to start small enterprises in every village,
but it is quite possible to start small enterprises in a group of villages. The International Perspective
Planning Team also rightly stressed that the focus for industrial development under a dispersal policy
should be neither the metropolis nor the village, but rather the large range of potentially attractive cities
and towns between these two extremes.
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Decentralisation of industrial enterprises will help tap local resources such as raw materials, idle savings,
local talents and ultimately improves the standard of living even in erstwhile backward areas. The most
glaring example of this phenomenon is the economy of Punjab which has more small-scale units than
even the industrially developed state of Maharashtra.
Latent Resources Argument
This argument suggests that small enterprises are capable of mopping up latent and unutilized resources
like hoarded wealth and ideal entrepreneurial ability, etc. However, Dhar and Lydall feel that the real
force of latent resources argument lies in the existence of entrepreneurial skill. They argue that there is
no evidence of an overall shortage of small entrepreneurs in India. Hence, they doubt the force of this
latent resources argument. Their assertion does not appear to be very sound simply because of the fact
that if small entrepreneurs were present in abundance, then what obstructed the growth of small
enterprises?
The emergence of entrepreneurial class requires a conducive environment. The fact remains that small
enterprises provide such environment in which the latent talents of entrepreneurs find self-expression.
Our economic history bears this evidence. The impressive growth in the number of small enterprises in
the post-Independence period highlights the same fact that providing the necessary conditions such as
power and credit facilities, the latent resources of entrepreneurship can be tapped by the growth of
small enterprises only.
Q: What is the role of Micro enterprise in economic development?
Ans:
Small scale industries play an important role for the Economic development in many ways. The roles of
SSIs in economic development of the country are briefly explained below.
1. Small Scale Industries Provides Employment
a) SSI uses labour intensive techniques. Hence, it provides employment

opportunities to a large number of people. Thus, it reduces the unemployment
problem to a great extent.
b) SSI provides employment to artisans, technically qualified persons and
professionals. It also provides employment opportunities to people engaged in
traditional arts in India.
c) SSI accounts for employment of people in rural sector and unorganized sector.
d) It provides employment to skilled and unskilled people in India.
e) The employment capital ratio is high for the SSI.
f)
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2. SSI Facilitates Women Growth
a) It provides employment opportunities to women in India.

b) It promotes entrepreneurial skills among women as special incentives are given to
women entrepreneurs.
3. SSI Brings Balanced Regional Development
a. SSI promotes decentralized development of industries as most of the small scale

industries are set up in backward and rural areas.
b. It removes regional disparities by industrializing rural and backward areas and brings
balanced regional development.
c. It promotes urban and rural growth in India.
d. It helps to reduce the problems of congestion, slums, sanitation and pollution in cities
by providing employment and income to people living in rural areas. It plays an
important role by initiating the government to build the infrastructural facilities in rural
areas.
e. It helps in improving the standard of living of people residing in suburban and rural
areas in India.
f. The entrepreneurial talent is tapped in different regions and the income is also
distributed instead of being concentrated in the hands of a few individuals or business
families.
4. SSI Helps in Mobilization of Local Resources
a. It helps to mobilize and utilize local resources like small savings, entrepreneurial talent,
etc., of the entrepreneurs, which might otherwise remain idle and unutilized. Thus it
helps in effective utilization of resources.
b. It paves way for promoting traditional family skills and handicrafts. There is a great
demand for handicraft goods in foreign countries.
c. It helps to improve the growth of local entrepreneurs and self-employed professionals
in small towns and villages in India.
5. SSI Paves for Optimisation of Capital
a. SSI requires less capital per unit of output. It provides quick return on investment due to
shorter gestation period. The pay back period is quite short in small scale industries.
b. SSI functions as a stabilizing force by providing high output capital ratio as well as high
employment capital ratio.
c. It encourages the people living in rural areas and small towns to mobilize savings and
channelize them into industrial activities.
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6. SSI Promotes Exports
a. SSI does not require sophisticated machinery. Hence, it is not necessary to import the
machines from abroad. On the other hand, there is a great demand for goods produced
by small scale sector. Thus it reduces the pressure on the country’s balance of
payments.
b. SSI earns valuable foreign exchange through exports from India.
7. SSI Complements Large Scale Industries
a. SSI plays a complementary role to large scale sector and supports the large scale
industries.
b. SSI provides parts, components, accessories to large scale industries and meets the
requirements of large scale industries through setting up units near the large scale units.
c. It serves as ancillaries to large Scale units.
8. SSI Meets Consumer Demands
a. SSI produces wide range of products required by consumers in India.

b. SSI meets the demand of the consumers without creating a shortage for goods. Hence, it
serves as an anti-inflationary force by providing goods of daily use.
9. SSI Ensures Social Advantage
a. SSI helps in the development of the society by reducing concentration of income and
wealth in few hands.
b. SSI provides employment to people and pave for independent living.
c. SSI helps the people living in rural and backward sector to participate in the process of
development.
d. It encourages democracy and self-governance.
10. Develops Entrepreneurship
a. It helps to develop a class of entrepreneurs in the society. It helps the job seekers to
turn out as job givers.
b. It promotes self-employment and spirit of self-reliance in the society.
c. Development of small scale industries helps to increase the per capita income of India in
various ways.
d. It facilitates development of backward areas and weaker sections of the society.
e. Small Scale Industries are adept in distributing national income in more efficient and
equitable manner among the various participants of the society.
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Q: What is the Package for promotion of Micro and Small-scale enterprise?
Ans:
Implementation of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. A
"Package for Promotion of Micro and Small Enterprises" was announced in February 2007. This includes
measures addressing concerns of credit, fiscal support, cluster-based development, infrastructure,
technology, and marketing.
This Act seeks to facilitate promotion and development and enhancing competitiveness of
these enterprises. ... The Government has also announced a Policy Package for Stepping up Credit
to Small and Medium Enterprises assuring, inter alia, a 20 per cent year-on-year growth in credit flow
PROMOTIONAL PACKAGE
In fulfillment of the assurance in the NCMP (National Common Minimum Programme), the following
Package is now announced.
1. LEGISLATION
With a view to facilitating the promotion and development and enhancing the competitiveness of micro,
small and medium enterprises, the Micro, Small and Medium Enterprises Development Bill, 2006 has
recently been passed. The Government will take up effective and expeditious implementation of this
legislation in close collaboration with all stakeholders.
The Government will also soon enact a law on Limited Liability Partnerships covering, among others,
micro, small and medium enterprises, with a view, inter alia, to facilitating infusion of equity and
venture capital funding in these enterprises.
2. CREDIT SUPPORT
In line with the Policy Package for Stepping up Credit to Small and Medium Enterprises(SME), the
Reserve Bank of India (RBI) has already issued guidelines to the public sector banks to ensure 20 per
cent yearon-year growth in credit to the SME. Action has also been initiated to operationalise other
elements of the said Policy Package. Implementation of these measures will be closely monitored by the
RBI and the Government. The Small Industries Development Bank of India (SIDBI) will scale up and
strengthen its credit operations for micro enterprises and cover 50 lakh additional beneficiaries over five
years beginning 2006-07. Government will provide grant to SIDBI to augment SIDBI’s Portfolio Risk Fund
for this purpose. Page 4 of 10 MINISTRY OF SMALL SCALE INDUSTRIES AND AGRO & RURAL INDUTRIES
Government will also provide grant to SIDBI to enable it to create a Risk Capital Fund (as a pilot scheme
in 2006-07) so as to provide, directly or through intermediaries, demand-based small loans to micro
enterprises. SIDBI’s direct lending operations will be expanded by increasing the number of branches
from 56 to 100 in two years beginning 2006-07, with a view to catering to the credit needs of more
55
clusters of micro and small enterprises (MSEs). The eligible loan limit under the Credit Guarantee Fund
Scheme will be raised to Rs.50 lakh. The credit guarantee cover will be raised from 75 per cent to 80 per
cent for micro enterprises for loans up to Rs.5 lakh. Accordingly, to strengthen the Credit Guarantee
Fund, the corpus of the Fund will be raised from Rs.1189 crore as on 01 April 2006 to Rs.2500 crore over
a period of five years (with contribution by the Government and SIDBI in the existing ratio of 4:1).
Moreover, to encourage public sector banks and public financial institutions to contribute to the corpus
of the Fund, the feasibility of allowing deduction of their contributions to the Fund for income tax
purposes would be examined. The Fund will continue to be maintained with and managed by the Credit
Guarantee Fund Trust for Small Industries (CGTSI). The Trust will be renamed as “Credit Guarantee Fund
Trust for Micro and Small Enterprises” (CGTMSE).
3. FISCAL SUPPORT
Taking into consideration all the relevant factors, including the new definition of small manufacturing
enterprises, under the Micro, Small and Page 5 of 10 MINISTRY OF SMALL SCALE INDUSTRIES AND AGRO
& RURAL INDUTRIES Medium Enterprises Development (MSMED) Act, 2006, the Government will
examine the feasibility of: 3.1 increase in the General Excise Exemption (GEE) limit and the existing
eligibility limit for GEE; extending the time limit for payment of excise duty by micro and small
enterprises; and 3.3 extending the GEE benefits to small enterprises on their graduation to medium
enterprises for a limited period.
4. SUPPORT FOR CLUSTER BASED DEVELOPMENT
For comprehensive and speedier development of clusters of micro and small enterprises, the existing
guidelines of the Small Industries Cluster Development Programme (SICDP, to be renamed as “Micro and
Small Enterprises Cluster Development Programme” - MSECDP) will be reviewed during 2006-07 to
accelerate holistic development of clusters, including provision of Common Facility Centres, developed
sites for new enterprises, upgradation of existing industrial infrastructure and provision of Exhibition
Grounds/Halls and also for creation and management of infrastructure-related assets in the public-
private partnership mode. The ceiling on project cost will be raised to Rs.10 crore.
5. TECHNOLOGIES AND QUALITY UPGRADATION SUPPORT
Four Training-cum-Product Development Centres (TPDCs) for agro & food processing industries would
be set up at identified existing Small Industries Service Institutes (SISIs) to facilitate promotion and
development of micro and small enterprises in the food processing sector mitigation.
6. MARKETING SUPPORT
The National Manufacturing Competitiveness Programme (NMCP) announced in the Budget Speech of
2006-07 will include components relating to marketing support to MSE. Implementation of the NMCP
will be taken up soon
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Q: Explain the meaning and significance of business plan, what are the Contents of business plan?
Ans:
Meaning:
In simple words, business plan is a written statement of what an entrepreneur proposes to take up. It is
a kind of guide frost or course of action what the entrepreneur hopes to achieve in his business and how
is he going to achieve it. In other words, business plan serves like a kind of big road map to reach the
destination determined by the entrepreneur. Webster New 20th Century Dictionary defines a project as
a scheme, design, a proposal of something intended or devised. Let some important definitions of
business plan be presented.
Mar J. Dollinger has defined the business plan as “the formal written expression of the entrepreneurial
vision, describing the strategy and operations of the proposed venture.” According to Jack M. Kaplan,
“The term business plan means the development of a written document that spells out like a roadmap
where you are, where you want to be, and how you want to get there.”Thus, a business plan or project
report can best be defined as a well evolved course of action devised to achieve the specified objective,
i.e. setting up a small business enterprise within a specified period of time. So to say, business plan is
initially an operating document.
Significance of Business Plan:
Arguments are made for and against writing a business plan. The argument advanced against writing
business plan is that it involves costs especially when some outside consultant or accountant or lawyer is
hired to write the business plan. One of the reasons for not writing business plan is the fear of
prematurely closing off the new venture.
The major argument made in favour of writing business plan is reducing anxieties and tensions in
running business enterprise. Writing business plan is especially useful for the entrepreneurs who require
financial help from the outside sources like banks and financial institutions.
The reason is that the outside sources advance funds to entrepreneurs based on the soundness of their
enterprises as reflected in business plans. In nutshell, writing a business plan is not without its costs and
sacrifices, nonetheless the benefits of it outweigh its costs.
An objective without a plan is just a dream. Until committed to papers intentions are seeds without soil,
sails without winds or mere wishes which do not lead to execution and without execution there is no
payoff. The preparation of a business plan or project report is of great significance for an entrepreneur.
The business plan serves the two essential functions: First and most important the business plan is like a
road map. It describes the direction the enterprise is going in, what its goals are, where it wants to be,
and how it is going to get there. It also enables an entrepreneur to know that he is proceeding in the
right direction. Some hold the view that without well spelled out goals and operational methods/tactics,
most businesses flounder on the rocks of hard times.
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The second function of the business plan is to attract lenders and investors. Although, it is not
mandatory for the small enterprises to prepare business plans, yet it is useful and beneficial for them to
prepare the project reports for various reasons. The preparation of business plan is beneficial for those
small enterprises which apply for financial assistance from the financial institutions and the commercial
banks. It is on the basis of business plan or project report that the financial institutions make appraisal if
the enterprise requires financial assistance or not.
If yes, how much. Similarly, other organisations which provide various assistances such as work shed,
raw material, seed/margin money, etc. are also equally interested in knowing the economic soundness
of the proposal. In most cases, the quality of the firm’s business plan weighs heavily in the decision to
lend or invest funds.
Research evidence reveals that many firms, of course, start without business plans. Speaking
alternatively, their implementation stage starts with no plan, i.e. guide-map. But, most of these firms
realize eventually in the hard rocks, of business environment that they need to recreate their beginnings
and write their business plans at some point down the road.
The fact of the matter is that in todays highly uncertain and competitive business environment, only the
most reluctant entrepreneur with the simplest business concept avoids writing a business plan (Carter,
Gartner and Reynolds 1995). The very significance of business plan can be expressed as “if an
entrepreneur fails to write business plan, he plans to fail in his/her business.”
The business plan is termed by different names by its different intended interest audience. For example,
when presented to a bank, it may be called ‘loan proposal.’ a venture capital group might call it the
‘venture plan’ or ‘investment prospects’ and a common man may term it ‘project report.’ Let it be called
by any name, its basic purpose is the same, i.e. to serve as a road-map in setting up a business
enterprise.
Contents of Business Plan:
Having gone through the significance of business plan, it is now clear that there is no substitute for a
well-prepared business plan or project report and also there are no shortcuts to preparing it. The more
concrete and complete the business plan, the more likely it is to earn the respect of outsiders and their
support in making and running an enterprise. Therefore, the business plan needs to be prepared with
great care and consideration.
A good project report or business plan should contain the following contents:
1. General Information:
Information on product profile and product details.
2. Promoter:
His/her name, educational qualification, work experience, project related experience.
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3. Location:
Exact location of the project, lease or freehold, locational advantages.
4. Land and Building:
Land area, construction area, type of construction, cost of construction, detailed plan and estimate
along with plant layout.
5. Plant and Machinery:
Details of machinery required, capacity, suppliers, cost, various alternatives available, cost of
miscellaneous assets.
6. Production Process:
Description of production process, process chart, technical knowhow, technology alternatives available,
production programme.
7. Utilities:
Water, power, steam, compressed air requirements, cost estimates, sources of utilities.
8. Transport and Communication:
Mode, possibility of getting, costs.
9. Raw Material:
List of raw material required by quality and quantity, sources of procurement, cost of raw material, tie-
up arrangements, if any, for procurement of raw material, alternative raw material, if any.
10. Manpower:
Manpower requirement by skilled and semi-skilled, sources of manpower supply, cost of procurement,
requirement for training and its cost.
11. Products:
Product mix, estimated sales, distribution channels, competitions and their capacities, product standard,
input-output ratio, product substitute.
12. Market:
End-users of product, distribution of market as local, national, international, trade practices, sales
promotion devices, and proposed market research.
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13. Requirement of Working Capital:
Working capital required, sources of working capital need for collateral security, nature and extent of
credit facilities offered and available.
14. Requirement of Funds:
Break-up of project cost in terms of costs of land, building, machinery, miscellaneous assets, preliminary
expenses, contingencies and margin money for working capital, arrangements for meeting the cost of
setting up of the project.
15. Cost of Production and Profitability of first ten years.
16. Break-Even Analysis
17. Schedule of Implementation
Q: Explain Formulation of business plan.
Ans:
Project formulation divides the process of project development into eight distinct and sequential stages.
These stages are:
1. General Information.
2. Project Description.
3. Market Potential.
4. Capital Costs and Sources of Finance.
5. Assessment of Working Capital Requirements.
6. Other Financial Aspects.
7. Economic and Social Variables.
8. Project Implementation.
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The nature of information to be collected under each one of these stages has been given below:
1. General Information:
The information of general nature given in the project report includes the following:
Bio-data of Promoter:
Name and address of entrepreneur; the qualifications, experience and other capabilities of the
entrepreneur; if these are partners, state these characteristics of all the partners individually.
Industry Profile:
A reference of analysis of industry to which the project belongs, e.g., past performance, present status,
its organization, its problems, etc.
Constitution and Organisation:
The constitution and organisational structure of the enterprise, in case of partnership firm, its
registration with the Registrar of Firms; application for getting Registration Certificate from the
Directorate of Industries/District Industry Centre, etc.
Product Details:
Product utility, product range; product design; advantages to be offered by the product over its
substitutes, if any.
2. Project Description:
A brief description of the project covering the following aspects is given in the project report.
Site:
Location of enterprise; owned or leasehold land; industrial area; No Objection Certificate (NOC) from
the Municipal Authorities if the enterprise location falls in the residential area.
Physical Infrastructure:
Availability of the following items of infrastructure should be mentioned in the project report:
(i) Raw Material:
Requirement of raw material, whether inland or imported, sources of raw material supply.
(ii) Skilled Labour:
Availability of skilled labour in the area, arrangements for training labourers in various skills.
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Utilities:
These include:
(i) Power:
Requirement for power, load sanctioned availability of power.
(ii) Fuel:
Requirement for fuel items such as coal, coke, oil or gas, state of their availability.
(iii) Water:
The sources and quality of water required should be clearly stated in the project report.
Pollution Control:
The aspects like scope of dumps, sewage system and sewage treatment plant should be clearly stated in
case of industries producing emissions.
Communication System:
Availability of communication facilities, e.g., telephone, telexes etc. should be stated in the project
report.
Transport Facilities:
Requirements for transport, mode of transport, potential means of transport, distances to be covered,
bottlenecks etc., should be stated in the business plan.
Other Common Facilities:
Availability of common facilities like machine shops, welding shops and electrical repair shops etc.
should be stated in the report.
Production Process:
A mention should be made for process involved in production and period of conversion from raw
material into finished goods.
Machinery and Equipment:
A complete list of items of machinery and equipment’s required indicating their size, type, cost and
sources of their supply should be enclosed with the project report.
Capacity of the Plant:
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The installed licensed capacity of the plant along with the shifts should also be mentioned in the project
report.
Technology Selected:
The selection of technology, arrangements made for acquiring it should be mentioned in the business
plan.
Research and Development:
A mention should be made in the project report regarding proposed research and development
activities to be undertaken in future.
3. Market Potential:
While preparing a project report, the following aspects relating to market potential of the product
should be stated in the report:
(i) Demand and Supply Position:
State the total expected demand for the product and present supply position. This should also be
mentioned how much of the gap will be filled up by the proposed unit.
(ii) Expected Price:
An expected price of the product to be realised should be mentioned in the project report.
(iii) Marketing Strategy:
Arrangements made for selling the product should be clearly stated in the project report.
(iv) After-Sales Service:
Depending upon the nature of the product, provisions made for after-sales service should normally be
stated in the project report.
(v) Transportation:
Requirement for transportation means indicating whether public transport or entrepreneur’s own
transport should be mentioned in the project report.
4. Capital Costs and Sources of Finance:
An estimate of the various components of capital items like land and buildings, plant and machinery,
installation costs, preliminary expenses, margin for working capital should be given in the project report.
The present probable sources of finance should also be stated in the project report. The sources should
indicate the owner’s funds together with funds raised from financial institutions and banks.
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5. Assessment of Working Capital Requirements:
The requirement for working capital and its sources of supply should be carefully and clearly mentioned
in the business plan or project report. It is always better to prepare working capital requirements in the
prescribed formats designed by limits of requirement. It will minimise objections from the banker’s side.
6. Other Financial Aspects:
In order to adjudge the profitability of the project to be set up, a projected Profit and Loss Account
indicating likely sales revenue, cost of production, allied cost and profit should be prepared. A projected
Balance Sheet and Cash Flow Statement should also be prepared to indicate the financial position and
requirements at various stages of the project.
In addition to above, the Break-Even Analysis should also be presented in the project report. Break-even
point is the level of production/ sales where the industrial enterprise shall earn neither profit nor incur
loss. In fact, it will just break even. Break-even level indicates the gestation period and the likely
moratorium required for repayment of loans.
Break-even point (BEP) is calculated as follows:
BEP = F/S-V x 100
where, F = Fixed Cost
S = Sales Projected
V = Variable Costs
Thus, the break-even point so calculated will indicate at what percentage of sales, the enterprise will
break even i.e., no profit, no loss.
7. Economic and Social Variables:
In view of the social responsibility of business, the abatement costs, i.e., the costs for controlling the
environmental damage should be stated in the project. Arrangements made for treating the effluents
and emissions should also be mentioned in the report.
Besides, the socio-economic benefits expected to accrue from the project should also be stated in the
report itself.
Following are the examples of socioeconomic benefits:
(i) Employment Generation.
(ii) Import Substitution.
(iii) Ancillarisation.
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(iv) Exports.
(v) Local Resource Utilization.
(vi) Development of the Area.
8. Project Implementation:
Last but no means the least, every entrepreneur should draw an implementation scheme or a time-table
for his project to ensure the timely completion of all activities involved in setting-up an enterprise.
Timely implementation is important because if there is a delay, it causes, among other things, a project
cost overrun.
In India, delays in project implementation have become a common feature. Delay in project
implementation jeopardizes the financial viability of the project, on the one hand, and props up the
entrepreneur to drop the idea to set-up an enterprise, on the other. Hence, there is a need to draw up
an implementation schedule for the project and then to adhere to it to complete the project in time.
Following is a simplified implementation schedule for a small business project:
The above schedule can be broken up into scores of specific tasks involved in setting up the enterprise.
“Project Evaluation and Review Technique (PERT)’ and “Critical Path Method (CPM)’ can also be used to
get better insights into all activities related to implementation of the project.
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Q: Explain Network Analysis.
Ans:
What is a network? A network is a set of symbols connected with each other with a sequential
relationship with each step making the completion of a project/event. As discussed earlier, a business
plan or project involves various activities to be undertaken to convert it into an enterprise. Delays in the
completion of activities cause, among other things, cost overruns. Hence, there is a need for deciding
the sequential order of all activities of the project so as to accomplish the project economically in the
minimum available time with the limited resources. This is also called “project scheduling”. A number of
network techniques have been developed for project scheduling. Some of them are:
1. Programme Evaluation and Review Technique (PERT)
2. Critical Path Method (CPM)
3. Graphical Evaluation and Review Technique (GERT)
4. Workshop Analysis Scheduling Programme (WASP)
5. Line of Balance (LOB)
However, PERT and CPM are the two techniques the most commonly used in project management.
These are, therefore, discussed in detail.
Programme Evaluation and Review Technique (PERT)
PERT was first developed as a Management Aid for completing Polaris Ballistic Missile Project in USA in
October 1958. It worked well in expediting the completion of the project from 7 years to 5 years. Since
then, PERT has become very popular technique used for project planning and control. In nutshell, it
schedules the sequence of activities to be completed in order to accomplish the project within a short
period of time. It helps reduce both the time and cost of the project.
Steps Involved in PERT: The following steps are involved in PERT technique:
1. The activities involved in the project are drawn up in a sequential relationship to show what activity
follows what.
2. The time required for completing each activity of the project is estimated and noted on network.
3. The critical activities of the project are determined.
4.The variability of the project duration and probability of the project completion in a given time period
are calculated.
The above steps can be illustrated with the help of the following example.
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The Managing Director of XYZ Ltd. is interested in getting his Operating Budget prepared. The project is
decomposed into the following activities:
Job Identification Job Description Activity Time Required
A Forecasting of Sales 1-2 10 Days
B Sales Pricing 2-4 8 Days
C Production Scheduling 2-3 9 Days
D Cost Determination 3-4 7 Days
E Preparation of Budget 4-5 12 Days
Total 36 Days
Advantages of PERT: PERT technique bears the following advantages:
1. It determines the expected time required for completing each activity.
2. It helps complete the project within a given period of time.
3. It helps management handle uncertainties involved in the project and thus, reduces the risk
element in the project.
4. It enables management to make optimum allocation of limited resources.
5. It presses for the right action, at the right point and at the right time in the organisation.
Limitations of PERT:
PERT suffers from the following limitations:
1. PERT network is mainly based on time estimates required for each activity. Or account of wrong
time estimates, the network is bound to become highly unrealistic
2. This technique also does not consider the resources required at different stages of this project.
3. For effective control of a project by using PERT technique requires frequent updating and
revising the PERT calculations. But, this proves quite a costly affair for the organisation.
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Critical Path Method (CPM)
The Critical Path Method (CPM) was first developed in USA by the E.I. Dupon Nemours & Co. in 1956 for
doing periodic overhauling and maintenance of a chemical plant. It resulted in reducing the shut-down
period from 130 hours to 90 hours and saving the company Rs 1 lakhs. The CPM differentiates between
planning and scheduling of the project. While planning refers to determination of activities to be
accomplished, scheduling refers to the introduction of time schedule for each activity of the project. The
duration of different activities in CPM are deterministic. There is a precise known time that each activity
in the project will take.
Let us illustrate the CPM technique with an example of a research project. The following activities are
identified in the project:
Job Identification Job Description Activity Time Required
A Preparation of dealer questionnaire 1-2 1
B 1-4
Preparation of consumer questionnaire
C 2-3
D Dealer Survey 4-5
E 3-6
F Consumer Survey 5-6
Processing and interpretation of Dealer data
Processing and interpretation of consumer

survey data
Now, with the data given in the example, the following diagram can be drawn up:
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Advantages of CPM: The important advantages of CPM technique are:
1. It helps in ascertaining the time schedule of activities having sequential relationship.
2. It makes control easier for the management.
3. It identifies the most critical elements in the project. Thus, the management is kept alert and
prepared to pay due attention to the critical activities of the project.
4. It makes better and detailed planning possible.
Limitations of CPM: The main limitations of the CPM are:
1. CPM operates on the assumption that there is a precise known time that each activity in the
project will take. But, it may not be true in real practice.
2. CPM time estimates are not based on statistical analysis.
3. It cannot be used as a controlling device for the simple reason that any change introduced
i will
change the entire structure of network. In other words, CPM cannot be used as a dynamic
controlling device.
Q: Explain Common Errors in business plan formulation/ Project Formulation
Ans:
Business plan is as important is not so easy. Howev

However,
er, the entrepreneurs often make errors while
formulating project reports and business plans. Here, we are highlighting the errors widely noticed in
project formulation:
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1. Product Selection—it is noticed that some entrepreneurs commit mistakes b selecting a wrong
product for their enterprises. They select the product without giving th attention to product related
other aspects such as size of the product markets, its futu~ demand, competitive position, lifecycle,
availability of required labour, raw material an technology. Hence, when you are selecting a product,
take a comprehensive view.
2. Capacity Utilization Estimates— The entrepreneurs usually make over-optimistic estimates of

capacity utilization. Their estimates are based on completely false premises. The estimates are made in
complete disregard of present-enterprise performance, prevailing market conditions, competitive
atmosphere, the technical snags, etc. A business plan formulated as such falls prey to financial jugglery.
Hence, avoid such temptations whit estimating capacity utilization for your enterprise.
3. Market Study—Product production is ultimately meant for eventual sale. Hence market study of the
product assumes importance. Market study continues to be a grey area but, there are some
entrepreneurs who pass by this component of their business plan completely. Based on their nebulous
ideas and scanty and scattered information on demand and supply of their proposed product, they
conclude that market is just there waiting t be tapped. This is a wrong attitudinal block. Avoid it.
4. Technology Selection- The requirement for technology differs from product to product depending
upon the nature of products. Swayed by the reported profit margins, the entrepreneurs sometimes plan
for a technology not possible to set up within limited financial resources. Thus, in the absence of
technological feasibility, enterprise is fore- doomed to failure. Hence, make sure your technological
feasibility.
5. Location Selection– The entrepreneur often makes two types of errors while selecting location for
their enterprises. First, they are completely swayed by the Government offer of financial incentives and
concessions to establish industries in a particular location. This becomes their sole and overriding
concern completely disregarding other factors like market proximity, availability of raw materials,
manpower and infrastructural facilities. Second, the entrepreneurs select a location for their enterprises
merely because it is their home town or they own ancestral land there which is, however, not an
appropriate location. Make sure you do not fall prey to such temptations.
6. Selection of Ownership Form: Many enterprises fail merely because the ownership form of
enterprises is not suitable. Hence, select a suitable form of ownership taking comprehensive view of the
factors affecting the selection of a form of ownership.
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UNIT - IV Project Appraisal
Q: Explain the Concept of Project Appraisal and Methods of Project Appraisal
Ans:
Project appraisal an exercise whereby a lending financial institution makes an independent and
objectives assessment of various aspects of an investment proposition to arrive at the financing
decision. Appraisal exercise are basically aimed at determining the viability of project and sometimes,
also in reshaping the project so as to upgrade its viability. This is done by allocating the term finance
sought by a promoter.
The factors generally considered by institutions while appraising project technical, financial, commercial,
economic, ecological, social and managerial aspects. This makes it necessary to recognize the inter-
relationship underlying the various aspects of a project. For example, the size of the initial market and
the estimates for demand build-up would determine the means the financing. Location also has an
important bearing on project cost and cost of production. Above all, the management behind the
project has a decisive influence on most of these aspects. These considerations imply that project
appraisal is viewed as a composite process as against the approach of viewing each aspect individually.
Simply speaking project appraisal means the assessment of a project. Project appraisal is made for both
proposed and executed projects. In case of former, project appraisal is called ‘ex-ante analysis’ and in
case of latter ‘post-ante analysis’. Here, project appraisal relates to a proposed project.
Project appraisal is a costs and benefits analysis of different aspects of proposed project with an
objective to adjudge its viability. A project involves employment of scarce resources. An entrepreneur
needs to appraise various alternative projects before allocating the scarce resources for the best project.
Thus, project appraisal helps select the best project among available alternative projects. For appraising
a project, its economic, financial, technical, market, managerial and social aspects are analysed.
Financial institutions do project appraisal to assess its credit worthiness before extending finance to a
project. For a financial institution, project appraisal is a process whereby a leading financial institution
makes an independent and objective assessment of the various aspects of an investment proposition for
arriving at a financial decision and is aimed at determining the viability of a project and sometimes, also
in modifying its scope and content so as to improve its viability. However, sometimes project appraisal
and project evaluation are used interchangeably.
Scope of Appraisal
The appraisal of a project is undertaken by the financial institutions with the twin objectives of
determining the market potential of a project and selecting an optimal strategy. The methods of analysis
vary from project to project. Nevertheless, certain common aspects of study from the angle of
technology and engineering are with a mention:
 Choice of technical process and/or appropriate technology;

 Technical collaboration arrangements, if any;
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 Locational aspects of the project and availability of infrastructural facilities;

 Selection of plant, machinery and equipment together with background, competence and
capability of machinery / equipment suppliers;
 Plant layout and factory buildings;
 Technical engineering services;
 Project design and network analysis for the assessment of project implementation schedule;
 Aspects relating to effluent disposal, management of entry, utilization of by-products etc.;
 Project cost and its comparison with other similar projects, based on technology, equipment,
product mix and time spread;
 Determination of project cost estimates, profitability projections, etc.;
 Sensitivity analysis.
It must be remembered that the different aspects of a project are not independent entities but are
highly inter-related; and a meaningful project appraisal depends upon the appreciation of this
fundamental fact. For example, the size of the total market for a product as its exists now and the year
to year estimates of the future progressive call for expansion of demand would determine planned
capacity of the proposed unit and the phasing of production over the years. These in turn would
influence the project cost and profitability which would determine the means of financing. The cost of
the project and profitability are influenced to a significant extent by its location. Over and above this,
the management behind the project, has a decisive role to play in almost all aspects of the project.
Methods of Project Appraisal
Appraisal of a proposed project includes the following analyses:
1. Economic Analysis
2. Financial analysis
3. Market analysis
4. Technical Feasibility
5. Managerial Competence
These are discussed in turn.
Economic Analysis
Under economic analysis, the aspects highlighted include requirements for raw material, level of
capacity utilization, anticipated sales, anticipated expenses and the probable profits. It is said that a
business should have always a volume of profit clearly in view which will govern other economic
variables like sales, purchases, expenses and alike. It will have to be calculated how much sales would be
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necessary to earn the targeted profit. Undoubtedly, demand for the product will be estimated for
anticipating sales volume. Therefore, demand for the product needs to be carefully spelled out as it is,
to a great extent deciding factor of feasibility of the project concern How to estimate demand for the
project is discussed later in the chapter.
In addition to above, the location of the enterprise decided after considering a gamut of points also
needs to be mentioned in the project. The Government policies in this regard should be taken into
consideration. The Government offers specific incentives and concessions for setting up industries in
notified backward areas. Therefore, it has to be ascertained whether the proposed enterprise comes
under this category or not and whether the Government has already decided any specific location for
this kind of enterprise.
Financial Analysis
Finance is one of the most important pre-requisites to establish an enterprise. It is finance only that
facilitates an entrepreneur to bring together the labour of one, machine of another and raw material of
yet another to combine them to produce goods. In order to adjudge the financial viability of the project,
the following aspects need to be carefully analysed:
1. Assessment of the financial requirements both—fixed capital and working capital— need to be
properly made. You might be knowing that fixed capital normally called ‘fixed assets’ are those tangible
and material facilities which purchased once are used again and again. Land and buildings, plants and
machinery are the familiar examples of fixed assets/capital. The requirement for fixed assets/capital will
vary from enterprise to enterprise depending upon the type of operation, scale of operation and time
when the investment is made. But, while assessing the fixed capital requirements, all items relating to
the asset like the cost of the asset, architect and engineer’s fees, electrification and installation charges
(which normally come to 10 per cent of the value of machinery), depreciation, pre-operation expenses
of trial runs, etc., should be duly taken into consideration. Similarly, if any expense is to be incurred in
remodeling, repair and additions of buildings should also be highlighted in the project report.
2. In accounting, working capital means excess of current assets over current liabilities. Current assets
refer to those assets which can be converted into cash within a period of ate week. Current liabilities
refer to those obligations which can be payable within a period of one week. In short, working capital is
that amount of funds which is needed in day today’s business operations. In other words, it is like
circulating money changing from cash to inventories and from inventories to receivables and again
converted into cash. This circle goes on and on. Thus, working capital serves as a lubricant for any
enterprise, be it large or small. Therefore, the requirements of working capital should be clearly
provided for. Inadequacy of work in capital may not only adversely affect the operation of the enterprise
but also bring the enterprise to a grinding halt.
The activity level of an enterprise expressed as capacity utilization needs to be well spelled out.
However, the enterprise sometimes fails to achieve the targeted level of capacity due to various
business vicissitudes like unforeseen shortage of raw-material; unexpected disruption in power supply,
inability to penetrate the market mechanism, etc. Then, a question arises to what extent an enterprise
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should continue its production to meet all its obligations/liabilities. ‘Break-even analysis’ gives an
answer to it. In brief, break-even analysis indicates the level of production at which there is neither
profit nor loss in the enterprise. This level of production is, accordingly, called ‘break-even level’.
Market Analysis
Before the production actually starts, the entrepreneur needs to anticipate the possible market for the
product. He/she has to anticipate who will be the possible customers for his product and where and
when his product will be sold. This is because production has no value for the producer unless it is sold.
It is said that if the proof of pudding lies in eating, the proof of all production lies in
marketing/consumption. In fact, the potential of the market constitutes the determinant of probable
rewards from entrepreneurial career.
Thus, knowing the anticipated market for the product to be produced becomes an important element in
every business plan. The various methods used to anticipate the potential market, what is named in
‘Management Economics’ as ‘demand forecasting’, range from the naive to sophisticated one. The
commonly used methods to estimate the demand-for a product are as follows:
1. Opinion Polling Method: In this method, the opinion of the ultimate users, i.e. customers of the
product is estimated. This may be attempted with the help of either a complete survey of all customers
(called, complete enumeration) or by selecting a few consuming units out of the relevant population
(called, sample survey). Let us discuss these in some details.
(a) Complete Enumeration Survey: In this survey, all the probable customers of the product are
approached and their probable demands for the product are estimated and then summed. Estimating
sales under this method is very simple. It is obtained by simply adding the probable demands of all
customers. An example should make it clear.
Suppose, there are total N customers of X product and everybody will demand for D numbers of it.
Then, the total anticipated demand will be:
N
 Di
i 1
Though the principle merit of this method is that it obtains the first-hand and unbiased information, yet
it is beset with some disadvantages also. For example, to approach a large number of customers
scattered all over market becomes tedious, costly and cumbersome. Added to this, the consumers
themselves may not divulge their purchase plans due to the reasons like their personal as well
commercial/business privacies.
(b) Sample Survey: Under this method, only some number of consumers out of their total population is
approached and data on their probable demands for the product during the forecast period are
collected and summed. The total demand of sample customers is finally blown up to generate the total
demand for the product. Let we explain it with an example.
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Imagine, there are 1000 customers of a product spread over the market. Out of these, 50 are selected
for survey using stratified method. Now, if the estimated demand of these sample customers is Di, i.e., it
refers to 1 2 3 4…… 50, the total demand for the entire group of customers will be
50
 ni Di  n1D1  n2D2  n3 D3 ....n50D50
where ni is the number of customers in group i, and n1+n2+n3 = 1000.
But, if all the 1000 customers of the group are alike, then the selection may be done on random basis
and total demand for the group will be:
1000
(D1+D2+D3+D4….. D5) 50
No doubt, survey method is less costly and tedious than the complete enumeration method.
(c) Sales Experience Method: Under this method, a sample market is surveyed before the w
product is offered for sale. The results of the market surveyed are then projected to universe in order to
anticipate the total demand for the product.
In principle, the survey market should be the true representative of the national market which is not
always true. Suppose, if Bombay is selected as a sample market, it may not be a true representative of a
small place, say Silchar simply because the characteristic features of Bombay are altogether different
from those of a small town like Silchar. Again, if we select Agra as a sample market, sales in Agra would
be influenced by the size of the floating tourists’ population throughout the year.
(d) Vicarious Method: Under the vicarious method, the consumers of the product are not
approached directly but indirectly through some dealers who have a feel of their customers. The
dealers’ opinions about the customers’ opinion are elicited. Being based on dealers’ opinions, the
method is bound to suffer from the bias on the part of the dealers. Then, the results derived are likely to
be unrealistic. However, these hang-ups are not avoidable.
2. Life Cycle Segmentation Analysis: It is well established that like a man, every product has its own life
span. In practice, a product sells slowly in the beginning. Backed by sales promotion strategies over
period, its sales pick up. In the due course of time, the peak sale is reached. After that point, the sales
begin to decline. After some time, the product loses its demand and dies. This is natural death of a
product. Thus, every product passes through its ‘life cycle’. This is precisely the reason why firms go for
new products one after another to keep the firm alive.
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Based on above, the product life cycle has been divided into the following five stages:
1. Introduction
2. Growth
3. Maturity
4. Saturation
5. Decline
The sales of the product vary from stage to stage and follows S-shaped curve as shown in Figure.
Considering the above five stages of a product life cycle, the sales at different stages can be anticipated.
Technical Feasibility
While making project appraisal, the technical feasibility of the project also needs to be taken into
consideration. In the simplest sense, technical feasibility implies to mean the adequacy of the proposed
plant and equipment to produce the product within the prescribed norms. As regards know-how, it
denotes the availability or otherwise of a fund of knowledge to man the proposed plants and machinery.
It should be ensured whether that know-how is available with the entrepreneur or is to be procured
from elsewhere. In the latter case, arrangement made to procure it should be clearly checked up. If
project requires any collaboration, then, the terms and conditions of the collaboration should also be
spelt out comprehensively and carefully. In case of foreign technical collaboration, one needs to be
aware of the legal provisions in force from time to time specifying the list of products for which only
such collaboration is allowed under specific terms and conditions. The entrepreneur, therefore,
contemplating for foreign collaboration should check these legal provisions with reference to their
projects.
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While assessing the technical feasibility of the project, the following inputs covered in the project should
also be taken into consideration:
(i) Availability of land and site.
(ii) Availability of other inputs like water, power, transport, communication facilities.
(iii) Availability of servicing facilities like machine shops, electric repair shop, etc.
(iv) Coping-with anti-pollution law.
(v) Availability of work force as per required skill and arrangements proposed for training-in-plant
and outside.
(vi) Availability of required raw material as per quantity and quality.
Management Competence
Management ability or competence plays an important role in making an enterprise a success or

otherwise. Strictly speaking, in the absence of managerial competence, the projects which are otherwise
feasible may fail. On the contrary, even a poor project may become a successful one with good
managerial ability. Hence, while doing project appraisal, the managerial competence or talent of the
promoter should be taken into consideration. Research studies report that most of the enterprises fall
sick because of lack of managerial competence or mismanagement. This is more so in case of small-scale
enterprises where the proprietor is all in all, i.e., owner and manager. Due to his one-man show, he may
be jack of all but master of none.
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Q: Environmental clearance of SMEs.
Ans:
The environmental clearance process is required for 39 types of projects and covers aspects like
screening, scoping and evaluation of the upcoming project. The main purpose is to assess impact of the
planned project on the environment and people and to try to abate/minimise the same.
The process consists of following steps:
• Project proponent identifies the location of proposed plant after ensuring compliance with existing
sitting guidelines. If project site does not agree with the sitting guideline, the proponent has to identify
other alternative site for the project
• The project proponent then assesses if the proposed activity/project falls under the purview of
environmental clearance. If it is mentioned in schedule of the notification, the proponent conducts an
EIA study either directly or through a consultant. If the project falls in B category, the project goes to
state government for clearance which further categorize into B1 and B2 projects. B2 projects doe not
require preparation of EIA reports.
• After the EIA report is ready, the investor approaches the concerned State Pollution Control Board
(SPCB) and the State Forest Department (if the location involves use of forestland). The SPCB evaluates
and assesses the quantity and quality of effluents likely to be generated by the proposed unit as well as
the efficacy of the control measures proposed by the investor to meet the prescribed standards. If the
SPCB is satisfied that the proposed unit will meet all the prescribed effluent and emissions standards, it
issues consent to establish (popularly known as NOC), which is valid for 15 years.
• The public hearing is a mandatory step in the process of environmental clearance for certain
developmental projects. This provides a legal space for people of an area to come face-to-face with the
project proponent and the government and express their concerns.
The process of public hearing is conducted prior to the issue of NOC from SPCB. The District Collector is
the chairperson of the public hearing committee. Other members of the committee includes the official
from the district development body, SPCB, Department of Environment and Forest, Taluka and Gram
Panchayat representative, and senior citizen of the district, etc. The hearing committee hears the
objections/suggestions from the public and after inserting certain clauses it is passed on to the next
stage of approval (Ministry of Forest and Environment).
• The project proponent submits an application for environmental clearance with the MoEF if it falls
under Project A category or the state government if it falls under project B category. The application
form is submitted with EIA report, EMP, details of public hearing and NOC granted by the state
regulators.
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• Environmental appraisal: The documents submitted by an investor are first scrutinised by a multi-
disciplinary staff functioning in the Ministry of Environment and Forests who may also undertake site-
visits wherever required, interact with the investors and hold consultations with experts on specific
issues as and when necessary. After this preliminary scrutiny, the proposals are placed before specially
constituted committees of experts whose composition is specified in the EIA Notification. Such
committees, known as Environmental Appraisal Committees have been constituted for each sector such
as River Valley, Industries, Mining etc. and these committees meet regularly to appraise the proposals
received in the Ministry. In case of certain very special/controversial projects, which have aroused
considerable public interest, the committee may also decide to arrange for public hearings on those
projects to ensure public participation in developmental decisions. Announcements for such public
hearing shall be made atleast 30 days before through newspapers. On the basis of the exercise
described in the foregoing paragraphs, the Appraisal Committees make their recommendations for
approval or rejection of particular projects. The recommendations of the Committees are then
processed in the Ministry of Environment and Forests for approval or rejection.
• Issues of clearance or rejection letter: When a project requires both environmental clearance as well
as approval under the Forest (Conservation) Act, 1980. Proposals for both are required to be given
simultaneously to the concerned divisions of the ministry. The processing is done simultaneously for
clearance/rejection, although separate letters may be issued. If the project does not involve diversion of
forest land, the case is processed only for environmental clearance.
Once all the requisite documents and data from the project authorities are received and public hearings
(where required) have been held, assessment and evaluation of the project from the environment angle
is completed within 90 days and the decision of the ministry shall be conveyed within 30 days
thereafter. The clearance granted shall be valid for a period of five years for commencements of the
construction or operation of the project.
Industrial projects located in any of the following notified ecologically fragile/sensitive areas would
require environmental clearance irrespective of the type of project:
• Religious and historic places

• Archaeological monuments
• Scenic areas
• Hill resorts
• Beach resorts
• Coastal areas rich in mangroves, corals, breeding grounds of specific species
• Estuaries
• Gulf areas
• Biosphere reserves
• National parks and sanctuaries
• National lakes and swamps
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• Seismic zones
• Tribal settlements
• Areas of scientific and geological interest
• Defence installations, specially those of security importance and sensitive to pollution
• Border areas (international)
• Airports
PUBLIC HEARING
Involvement of the public is one of the fundamental principles of a successful EIA process. It not only
provides an opportunity to those directly affected by a project to express their views on the
environmental and social impacts of the proposal but also brings about transparency in the
environmental clearance system. Nearly all EIA systems make some sort of provision for public
involvement. This could be in the form of public consultation (or dialogue) or public participation (which
is a more interactive and intensive process of stakeholder engagement).
Most EIA processes are undertaken through public consultation rather than participation. Public
consultation refers to the process by which the concerns of the local people regarding the adverse
impacts of a project are ascertained and taken into account in the EIA study. This concept was legally
introduced in India in the form of ‘public hearing’ in 1997. Since then the public hearing process has
been conducted as a mandatory step of environmental clearance for most projects and activities.
The public consultation process ensures an equitable and fair decision-making process resulting in better
environmental outcomes. The type of consultation, whom to consult during EIA activities, when and
how to do so and who should do it all vary significantly from project to project. This depends on the
needs of the project. However, it is an important component for all kinds of project. This is because
public consultations help allay the concerns of the local community, and reduce inaccurate information
in the EIA report.
Ideally public consultation should start from when the idea of the project is conceived and continue
throughout the course of the EIA. The five main stages when public involvement can take place in the
EIA process are screening, scoping, impact analysis and mitigation, review of EIA quality, and
implementation and follow up.
In India, the role of the public in the entire environment clearance process is quite limited. Public
consultation happens at a very late stage when the EIA report is already prepared and the proponent is
about to present it to the review committee for clearance. This means that the EIA study is unable to
take into account the concerns and issues important to public. Even if the members of the community
raise certain issues in the public hearing process, they have no means of knowing if it actually gets
addressed in the final EIA report as they have no access to it. There are several weaknesses in the public
hearing process as it exists now. Instead of becoming a participatory forum it has become a mere
procedure.
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There was a chance to address some of these weaknesses in the new notification and give more teeth to
the entire public hearing process. However, there is very little improvement in the new notification,
instead it has now added a provision which makes it possible to completely forego the public hearing
process if the situation is not conducive for conducting hearing as felt by the local administration. This
provision can be misused to further limit the role of the public in the entire process.
There have been several cases in the past that have shown that the public hearing process has failed to
meet its objective of effectively involving people in the clearance process. Several means have been
devised to keep the public away such as poor circulation of notice, politics, etc
The process is summarized in above Figure : Environmental clearance process in India.
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Q: Financing of Enterprise: Meaning and need for financial planning
Ans:
Before initiating a new business, the organization puts an immense focus on the topic of Financial
Planning. Financial planning is the plan needed for estimating the fund requirements of a business and
determining the sources for the same. It essentially includes generating a financial blueprint for
company’s future activities. It is typically done for 3-5 years-broad in scope and generally includes long-
term investment, growth and financing decisions.
Objectives of Financial Planning
 Ensuring availability of funds: Financial planning majorly excels in the area of generating funds
as well as making them available whenever they are required. This also includes estimation of
the funds required for different purposes, which are, long-term assets and working capital
requirements.
 Estimating the time and source of funds: Time is a game-changing factor in any business venture.
Delivering the funds at the right time at the right place is very much crucial. It is as vital as the
generation of the amount itself. While time is an important factor, the sources of these funds
are necessary as well.
 Generating capital structure: The capital structure is the composition of the capital of
a company, that is, the kind and proportion of capital required in the business. This includes
planning of debt-equity ratio both short-term and long-term.
 Avoiding unnecessary funds: It is an important objective of the company to make sure that the
firm does not raise unnecessary resources. Shortage of funds and the firm cannot meet its
payment obligations. Whereas with a surplus of funds, the firm does not earn returns but adds
to costs.
Process of Financial Planning
 Preparation of sales conjecture.
 Decide the number of funds – fixed and working capital.
 Conclude the expected benefits and profile ts to decide the number of funds that can be
provided through internal sources.
 This causes us to evaluate the requirement from external sources.
 Recognize the conceivable sources and set up the money spending plans consolidating these
variables.
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Importance of Financial Planning
Financial Planning is the procedure of confining company’s targets, policies, techniques, projects
and budget plans with respect to the financial activities lasting for a longer duration. This guarantees
viable and satisfactory financial investment policies. The importance is as follows-
 Guarantees sufficient funds.
 Planning helps in guaranteeing a harmony between outgoing and incoming of assets with the
goal that stability is kept up.
 Guarantees providers of funds to effortlessly put resources into organizations which provokes
financial planning.
 Financial Planning supports development and expansion programmes which support in the long-
run sustenance of the organization.
 Diminishes vulnerabilities with respect to changing business sector patterns which can be
confronted effortlessly through enough funds.
 Financial Planning helps in diminishing the vulnerabilities which can be a deterrent to the
development of the organization. This aids in guaranteeing security and benefits of the
organization.
Q: Explain the various Source of Finance
Ans
Finance is significant for business because it cannot carry out its operations even for a single day without
finance. It is therefore important to search the sources from where funds can be collected. The selection
of source depends upon the amount of funds required, nature of business, repayment period, debt-
equity mix, etc. The selection of source also depends upon the purposes for which funds are needed.
Funds required for acquiring machine, land & building, etc., should be procured from such sources, the
tenure of which must be between 5 and 10 years. Funds required for more than 1 year but less than 5
years should be financed from medium-term sources. Funds required for meeting day-to-day expenses
should be acquired from short-term sources.
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A firm can obtain funds from a variety of sources which may be classified as follows:
i. Long-term Sources:
A firm needs funds to purchase fixed assets such as land, plant & machinery, furniture, etc. These assets
should be purchased from those funds which have a longer maturity repayment period. The capital
required for purchasing these assets is known as fixed capital. So funds required for fixed capital must
be financed using long-term sources of finance.
ii. Medium-term Sources:
Funds required for say, a heavy advertisement campaign, the benefit of which lasts for more than one
accounting period, should be financed through medium-term sources of finance. In other words
expenditure that results in deferred revenue should be financed through medium-term sources.
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iii. Short-term Sources:
Funds required for meeting day-to-day expenses, i.e. revenue expenditure or working capital should be
financed from short-term sources whose maturity period is one year or less.
iv. Owned Capital:
Owned capital represents equity capital, retained earnings and preference capital. Equity share has a
perpetual life and are entitled to the residual income of the firm but the equity shareholders have the
right to control the affairs of the business because they enjoy the voting rights.
v. Borrowed Capital:
Borrowed capital represents debentures, term loans, public deposits, borrowings from bank, etc. These
are contractual in nature. They are entitled to get a fixed rate of interest irrespective of profit and are to
be repaid on a fixed date.
vi. Internal Sources:
If the funds are created internally, i.e. without using debt, such sources can be termed as internal
sources. Examples of such could be: Ploughing back of profits, provision for depreciation, etc.
vii. External Sources:
If funds are re-used through the sources which create some obligation to the firm, such sources can be
termed as external sources, e.g. lease financing, hire purchase, etc..
Q: Capital Structure
Ans:
The term ‘structure’ means the arrangement of the various parts. So capital structure means the
arrangement of capital from different sources so that the long-term funds needed for the business are
raised.
Thus, capital structure refers to the proportions or combinations of equity share capital, preference
share capital, debentures, long-term loans, retained earnings and other long-term sources of funds in
the total amount of capital which a firm should raise to run its business.
Few definitions of capital structure given by some financial experts:
“Capital structure of a company refers to the make-up of its capitalisation and it includes all long-term
capital resources viz., loans, reserves, shares and bonds.”—Gerstenberg.
“Capital structure is the combination of debt and equity securities that comprise a firm’s financing of its
assets.”—John J. Hampton.
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“Capital structure refers to the mix of long-term sources of funds, such as, debentures, long-term debts,
preference share capital and equity share capital including reserves and surplus.”—I. M. Pandey.
Importance of Capital Structure:
The importance or significance of Capital Structure:
ADVERTISEMENTS:
1. Increase in value of the firm:
A sound capital structure of a company helps to increase the market price of shares and securities
which, in turn, lead to increase in the value of the firm.
2. Utilisation of available funds:
A good capital structure enables a business enterprise to utilise the available funds fully. A properly
designed capital structure ensures the determination of the financial requirements of the firm and raise
the funds in such proportions from various sources for their best possible utilisation. A sound capital
structure protects the business enterprise from over-capitalisation and under-capitalisation.
3. Maximisation of return:
A sound capital structure enables management to increase the profits of a company in the form of
higher return to the equity shareholders i.e., increase in earnings per share. This can be done by the
mechanism of trading on equity i.e., it refers to increase in the proportion of debt capital in the capital
structure which is the cheapest source of capital. If the rate of return on capital employed (i.e.,
shareholders’ fund + long- term borrowings) exceeds the fixed rate of interest paid to debt-holders, the
company is said to be trading on equity.
4. Minimisation of cost of capital:
A sound capital structure of any business enterprise maximises shareholders’ wealth through
minimisation of the overall cost of capital. This can also be done by incorporating long-term debt capital
in the capital structure as the cost of debt capital is lower than the cost of equity or preference share
capital since the interest on debt is tax deductible.
5. Solvency or liquidity position:
A sound capital structure never allows a business enterprise to go for too much raising of debt capital
because, at the time of poor earning, the solvency is disturbed for compulsory payment of interest to
.the debt-supplier.
6. Flexibility:
A sound capital structure provides a room for expansion or reduction of debt capital so that, according
to changing conditions, adjustment of capital can be made.
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7. Undisturbed controlling:
A good capital structure does not allow the equity shareholders control on business to be diluted.
ADVERTISEMENTS:
8. Minimisation of financial risk:
If debt component increases in the capital structure of a company, the financial risk (i.e., payment of
fixed interest charges and repayment of principal amount of debt in time) will also increase. A sound
capital structure protects a business enterprise from such financial risk through a judicious mix of debt
and equity in the capital structure.
Factors Determining Capital Structure:
The following factors influence the capital structure decisions:
1. Risk of cash insolvency:
Risk of cash insolvency arises due to failure to pay fixed interest liabilities. Generally, the higher
proportion of debt in capital structure compels the company to pay higher rate of interest on debt
irrespective of the fact that the fund is available or not. The non-payment of interest charges and
principal amount in time call for liquidation of the company.
The sudden withdrawal of debt funds from the company can cause cash insolvency. This risk factor has
an important bearing in determining the capital structure of a company and it can be avoided if the
project is financed by issues equity share capital.
2. Risk in variation of earnings:
The higher the debt content in the capital structure of a company, the higher will be the risk of variation
in the expected earnings available to equity shareholders. If return on investment on total capital
employed (i.e., shareholders’ fund plus long-term debt) exceeds the interest rate, the shareholders get a
higher return.
On the other hand, if interest rate exceeds return on investment, the shareholders may not get any
return at all.
3. Cost of capital:
Cost of capital means cost of raising the capital from different sources of funds. It is the price paid for
using the capital. A business enterprise should generate enough revenue to meet its cost of capital and
finance its future growth. The finance manager should consider the cost of each source of fund while
designing the capital structure of a company.
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4. Control:
The consideration of retaining control of the business is an important factor in capital structure
decisions. If the existing equity shareholders do not like to dilute the control, they may prefer debt
capital to equity capital, as former has no voting rights.
5. Trading on equity:
The use of fixed interest bearing securities along with owner’s equity as sources of finance is known as
trading on equity. It is an arrangement by which the company aims at increasing the return on equity
shares by the use of fixed interest bearing securities (i.e., debenture, preference shares etc.).
If the existing capital structure of the company consists mainly of the equity shares, the return on equity
shares can be increased by using borrowed capital. This is so because the interest paid on debentures is
a deductible expenditure for income tax assessment and the after-tax cost of debenture becomes very
low.
Any excess earnings over cost of debt will be added up to the equity shareholders. If the rate of return
on total capital employed exceeds the rate of interest on debt capital or rate of dividend on preference
share capital, the company is said to be trading on equity.
6. Government policies:
Capital structure is influenced by Government policies, rules and regulations of SEBI and lending policies
of financial institutions which change the financial pattern of the company totally. Monetary and fiscal
policies of the Government will also affect the capital structure decisions.
7. Size of the company:
Availability of funds is greatly influenced by the size of company. A small company finds it difficult to
raise debt capital. The terms of debentures and long-term loans are less favourable to such enterprises.
Small companies have to depend more on the equity shares and retained earnings.
On the other hand, large companies issue various types of securities despite the fact that they pay less
interest because investors consider large companies less risky.
8. Needs of the investors:
While deciding capital structure the financial conditions and psychology of different types of investors
will have to be kept in mind. For example, a poor or middle class investor may only be able to invest in
equity or preference shares which are usually of small denominations, only a financially sound investor
can afford to invest in debentures of higher denominations.
A cautious investor who wants his capital to grow will prefer equity shares.
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9. Flexibility:
The capital structures of a company should be such that it can raise funds as and when required.
Flexibility provides room for expansion, both in terms of lower impact on cost and with no significant
rise in risk profile.
10. Period of finance:
The period for which finance is needed also influences the capital structure. When funds are needed for
long-term (say 10 years), it should be raised by issuing debentures or preference shares. Funds should
be raised by the issue of equity shares when it is needed permanently.
11. Nature of business:
It has great influence in the capital structure of the business, companies having stable and certain
earnings prefer debentures or preference shares and companies having no assured income depends on
internal resources.
12. Legal requirements:
The finance manager should comply with the legal provisions while designing the capital structure of a
company.
13. Purpose of financing:
Capital structure of a company is also affected by the purpose of financing. If the funds are required for
manufacturing purposes, the company may procure it from the issue of long- term sources. When the
funds are required for non-manufacturing purposes i.e., welfare facilities to workers, like school,
hospital etc. the company may procure it from internal sources.
14. Corporate taxation:
When corporate income is subject to taxes, debt financing is favourable. This is so because the dividend
payable on equity share capital and preference share capital are not deductible for tax purposes,
whereas interest paid on debt is deductible from income and reduces a firm’s tax liabilities. The tax
saving on interest charges reduces the cost of debt funds.
Moreover, a company has to pay tax on the amount distributed as dividend to the equity shareholders.
Due to this, total earnings available for both debt holders and stockholders is more when debt capital is
used in capital structure. Therefore, if the corporate tax rate is high enough, it is prudent to raise capital
by issuing debentures or taking long-term loans from financial institutions.
15. Cash inflows:
The selection of capital structure is also affected by the capacity of the business to generate cash
inflows. It analyses solvency position and the ability of the company to meet its charges.
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16. Provision for future:
The provision for future requirement of capital is also to be considered while planning the capital
structure of a company.
17. EBIT-EPS analysis:
If the level of EBIT is low from HPS point of view, equity is preferable to debt. If the EBIT is high from EPS
point of view, debt financing is preferable to equity. If ROI is less than the interest on debt, debt
financing decreases ROE. When the ROI is more than the interest on debt, debt financing increases ROE.
Q: Capitalization
Ans:
What is Capitalization?
In the business world, capitalization has two meanings. The first meaning, also
called market capitalization, refers to the value of a company's outstanding shares. The formula
for market capitalization is:
Market Capitalization = Current Stock Price x Shares Outstanding
It is important to note that market cap is not the same as equity value, nor is it equal to a
company's debt plus its shareholders' equity (although that too is sometimes referred to as simply the
company's capitalization).
The second meaning of the term relates to the act of accounting for a cost as an asset instead of an
expense.
How Does Capitalization Work?
Let's assume Company XYZ has 10 lakhs shares outstanding and the current share price is Rs9. Based on
this information and the formula above, we can calculate that Company XYZ's market capitalization is 10
lakhs x Rs9 = Rs90 lakhs.
Companies with less than Rs1 crores of market cap are generally regarded as "small cap" companies.
"Large cap" companies usually have at least Rs8 crores of market cap.
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In the second use of the term, let’s assume Company XYZ creates a new drainage system to prevent run-
off rainwater from flooding the neighbor’s business. Because the costs associated with the change
constitute an addition to the property and allows it to use the property as a concert venue, Company
XYZ can capitalize those costs. So, instead of recording the costs as an expense on the balance sheet,
which would lower the company’s net income, Company XYZ records the costs as an asset on the
balance sheet. These assets then depreciate, which has a much smaller effect on net profits.
Why Does Capitalization Matter?
Capitalization reflects the theoretical value of a company, but this is usually not what the company could
be purchased for in a normal merger transaction. One reason for this is that the value of material
nonpublic information, management changes, operating synergies between the acquirer and the
company, and other intangible factors may not be reflected in the stock price or the financial
statements.
In the accounting sense, capitalization is good for companies that want to keep net income as high as
possible; however, it’s not as good for companies that want to pay as little in taxes as possible (business
expenses are tax-deductible; capitalized assets are not).
Q: Explain Term Loans
Ans:
Term Loan: Meaning, Features, Advantages and Disadvantages
Meaning:
Term loan is a medium-term source financed primarily by banks and financial institutions. Such a type of
loan is generally used for financing of expansion, diversification and modernization of projects—so this
type of financing is also known as project financing. Term loans are repayable in periodic installments.
Features of Term Loans:
Term loan is a part of debt financing obtained from banks and financial institutions.
The basic features of term loan have been discussed below:
1. Security:
Term loans are secured loans. Assets which are financed through term loans serve as primary security
and the other assets of the company serve as collateral security.
2. Obligation:
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Interest payment and repayment of principal on term loans is obligatory on the part of the borrower.
Whether the firm is earning a profit or not, term loans are generally repayable over a period of 5 to 10
years in installments.
3. Interest:
Term loans carry a fixed rate of interest but this rate is negotiated between the borrowers and lenders
at the time of dispersing of loan.
4. Maturity:
As it is a source of medium-term financing, its maturity period lies between 5 to 10 years and repayment
is made in installments.
5. Restrictive Covenants:
Besides asset security, the lender of the term loans imposes other restrictive covenants to themselves.
Lenders ask the borrowers to maintain a minimum asset base, not to raise additional loans or to repay
existing loans, etc.
6. Convertibility:
Term loans may be converted into equity at the option and according to the terms and conditions laid
down by the financial institutions.
Advantages of Term Loans:
Term loans are one of the important sources of project financing.
The advantages of term loans are as follows;
i. From Point of View of the Borrower:
Cheap:
It is a cheaper source of medium-term financing.
Tax Benefit:
Interest payable on term loan is a tax deductible expenditure and thus taxation benefit is available on
interest.
Flexible:
Term loans are negotiable loans between the borrowers and lenders. So terms and conditions of such
type of loans are not rigid and this provides some sort of flexibility.
Control:
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Since term loans represent debt financing, the interest of the equity shareholders are not diluted.
ii. From Point of View of the Lender:
Secured:
Term loans are provided by banks and other financial institutions against security—so term loans are
secured.
Regular Income:
It is obligatory on the part of the borrower to pay the interest and repayment of principal irrespective of
its financial position—hence the lender has a regular and steady income.
Conversion:
Financial institutions may insist the borrower to convert the term loans into equity. Therefore, they can
get the right to control the affairs of the company.
Disadvantages of Term Loans:
Term loans have several disadvantages which are discussed below.
i. From Point of View of the Borrower:
Obligation:
Yearly interest payment and repayment of principal is obligatory on the part of borrower. Failure to
meet these payments raises a question on the liquidity position of the borrower and its existence will be
at stake.
Risk:
Like any other form of debt financing term loans also increases the financial risk of the company. Debt
financing is beneficial only if the internal rate of return of the concern is greater than its cost of capital;
otherwise it adversely affects the benefit of shareholders.
Interference:
In addition to collateral security, restrictive covenants are also imposed by the lenders which lead to
unnecessary interference in the functioning of the concern.
ii. From Point of View of the Lender:
Negotiability:
Terms and conditions of term loans are negotiable between borrower and lenders and thus it
sometimes can affect the interest of lenders.
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Control:
Like other sources of debt financing, the lenders of term loans do not have any right to control the
affairs of the company.
Q: Sources of short-term Finance
Ans:
Short-term financing deals with raising of money required for a shorter periods i.e. periods varying from
a few days to one year. There are, however, no rigid rules about the term. It may sometimes exceed one
year but still be called as short-term finance.
Thus, we can conclude that short-term finance may be for a very short period of one to three months or
for longer periods up to one year.
All working capital except that part of it which is necessary for holding a minimum level of raw materials,
stores, finished goods in an industry, is short-term capital. It should be noted that the requirements of
regular or permanent working capital for the business should be financed through sources of medium
and long-term finance.
The main feature of short-term finance is that it is raised and paid back within a shorter period of time.
Main Sources of Short-term Finance
The short-term financial needs of the companies are generally met from the following sources:
1. Trade Credit.
2. Consumer Credit.
3. Installment Credit.
4. Account Receivable Financing.
5. Bank Credit.
6. Other Sources.
Now we shall briefly discuss the various sources of short-term finance.
1. Trade Credit
Just as a firm grants credit to its customers it can also get credit from the manufacturers or wholesalers
or suppliers. It is known as trade or mercantile credit.
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According to Howard and Upton, trade credit may be defined as the credit extended by the seller to the
buyers at all levels of production and distribution processes down to the retailer.
The usual duration of this credit ranges from 30 to 90 days. It is granted to the company or firm on
“Open account” without any security except that of the goodwill and financial standing of the buyer.
Trade credit does not make available the funds in cash but it facilitates the purchase of supplies without
immediate payment. No interest is generally payable on trade credits. But the borrower cannot get any
cash discount. The availability of the trade credit depends upon the buyer’s need for it and also the
willingness of the supplier.
The willingness of the supplier to extend credit is also depending upon the following factors:
1. The financial resources of the supplier.
2. His eagerness to dispose of his stock.
3. Degree of competition in the market.
4. Credit worthiness of the firm.
2. Consumer Credit or Customer Advance
Many times the manufacturers or the suppliers insist on, advance by the customers particularly in case
of special orders or big orders. The customer advance forms part of the price of the products ordered by
him.
Sometimes, the customer also tenders the full price. This is an interest free source of finance. The period
of such credit depends upon the time taken to deliver the goods. The availability of this credit also
depends on the following factors:
1. Competitive conditions in the market — If acute competition prevails, the supplier cannot insist the
buyer to pay an advance.
2. Customs of the trade and usage.
3. Reputation of the supplier.
3. Installment Credit
This is also called consumer credit. Retailers for selling consumer durable generally use it. Here,
however, we use the term “Installment credit” to denote the facility provided by the equipment
suppliers on easy installments as this serves to provide capital to a firm in kind.
Installment includes interest on unpaid sums and is suitably spread so as to enable the purchasing
company to meet them out of current cash flows.
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Commercial banks and financial institutions, now-a-days provide this form of credit on liberal
terms. Hire purchase system is also a modified form of the installment credit. In the hire purchase
system, the title over the machinery or equipment remains with the supplier until the full price amount
is settled.
4. Accounts Receivable Financing
Under this method, a financing company purchases the account receivables from the customers or
money is advanced on the security of the accounts receivable. In short, it is a method of getting credit
by pledging book debts.
In financial accounting, it is denoted as Sundry Debtors or Trade Debtors, and this item appears on the
asset side of the Balance Sheet.
Q: Explain Venture Capital
Ans:
It is a private or institutional investment made into early-stage / start-up companies (new ventures). As
defined, ventures involve risk (having uncertain outcome) in the expectation of a sizeable gain. Venture
Capital is money invested in businesses that are small; or exist only as an initiative, but have huge
potential to grow. The people who invest this money are called venture capitalists (VCs). The venture
capital investment is made when a venture capitalist buys shares of such a company and becomes a
financial partner in the business.
Venture Capital investment is also referred to risk capital or patient risk capital, as it includes the risk of
losing the money if the venture doesn’t succeed and takes medium to long term period for the
investments to fructify.
Venture Capital typically comes from institutional investors and high net worth individuals and is pooled
together by dedicated investment firms.
It is the money provided by an outside investor to finance a new, growing, or troubled business. The
venture capitalist provides the funding knowing that there’s a significant risk associated with the
company’s future profits and cash flow. Capital is invested in exchange for an equity stake in the
business rather than given as a loan.
Venture Capital is the most suitable option for funding a costly capital source for companies and most
for businesses having large up-front capital requirements which have no other cheap
alternatives. Software and other intellectual property are generally the most common cases whose
value is unproven. That is why; Venture capital funding is most widespread in the fast-growing
technology and biotechnology fields.
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Features of Venture Capital investments
 High Risk
 Lack of Liquidity
 Long term horizon
 Equity participation and capital gains
 Venture capital investments are made in innovative projects
 Suppliers of venture capital participate in the management of the company
Methods of Venture capital financing
 Equity
 participating debentures
 conditional loan
The venture capital funding process typically involves four phases in the company’s development:
 Idea generation
 Start-up
 Ramp up
 Exit
Step 1: Idea generation and submission of the Business Plan
The initial step in approaching a Venture Capital is to submit a business plan. The plan should include
the below points:
 There should be an executive summary of the business proposal
 Description of the opportunity and the market potential and size
 Review on the existing and expected competitive scenario
 Detailed financial projections
 Details of the management of the company
There is detailed analysis done of the submitted plan, by the Venture Capital to decide whether to take
up the project or no.
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Step 2: Introductory Meeting
Once the preliminary study is done by the VC and they find the project as per their preferences, there is
a one-to-one meeting that is called for discussing the project in detail. After the meeting the VC finally
decides whether or not to move forward to the due diligence stage of the process.
Step 3: Due Diligence
The due diligence phase varies depending upon the nature of the business proposal. This process
involves solving of queries related to customer references, product and business strategy evaluations,
management interviews, and other such exchanges of information during this time period.
Step 4: Term Sheets and Funding
If the due diligence phase is satisfactory, the VC offers a term sheet, which is a non-binding document
explaining the basic terms and conditions of the investment agreement. The term sheet is generally
negotiable and must be agreed upon by all parties, after which on completion of legal documents and
legal due diligence, funds are made available.
Types of Venture Capital funding
The various types of venture capital are classified as per their applications at various stages of a
business. The three principal types of venture capital are early stage financing, expansion financing and
acquisition/buyout financing.
The venture capital funding procedure gets complete in six stages of financing corresponding to the
periods of a company’s development
 Seed money: Low level financing for proving and fructifying a new idea
 Start-up: New firms needing funds for expenses related with marketingand product development
 First-Round: Manufacturing and early sales funding
 Second-Round: Operational capital given for early stage companies which are selling products,
but not returning a profit
 Third-Round: Also known as Mezzanine financing, this is the money for expanding a newly
beneficial company
 Fourth-Round: Also calledbridge financing, 4th round is proposed for financing the "going public"
process
A) Early Stage Financing:
Early stage financing has three sub divisions seed financing, start up financing and first stage financing.
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 Seed financing is defined as a small amount that an entrepreneur receives for the purpose of
being eligible for a start up loan.
 Start up financing is given to companies for the purpose of finishing the development of
products and services.
 First Stage financing: Companies that have spent all their starting capital and need finance for
beginning business activities at the full-scale are the major beneficiaries of the First Stage
Financing.
B) Expansion Financing:
Expansion financing may be categorized into second-stage financing, bridge financing and third stage
financing or mezzanine financing.
Second-stage financing is provided to companies for the purpose of beginning their expansion. It is also
known as mezzanine financing. It is provided for the purpose of assisting a particular company to expand
in a major way. Bridge financing may be provided as a short term interest only finance option as well as
a form of monetary assistance to companies that employ the Initial Public Offers as a major business
strategy.
C) Acquisition or Buyout Financing:
Acquisition or buyout financing is categorized into acquisition finance and management or leveraged
buyout financing. Acquisition financing assists a company to acquire certain parts or an entire company.
Management or leveraged buyout financing helps a particular management group to obtain a particular
product of another company.
Advantages of Venture Capital
 They bring wealth and expertise to the company
 Large sum of equity finance can be provided
 The business does not stand the obligation to repay the money
 In addition to capital, it provides valuable information, resources, technical assistance to make a

business successful
Disadvantages of Venture Capital
 As the investors become part owners, the autonomy and control of the founder is lost
 It is a lengthy and complex process
 It is an uncertain form of financing
 Benefit from such financing can be realized in long run only
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Exit route
There are various exit options for Venture Capital to cash out their investment:
 IPO
 Promoter buyback
 Mergers and Acquisitions
 Sale to other strategic investor
Q: Explain Export Finance.
Ans:
It is no exaggeration to say that finance is the lifeblood of any business. As an exporter, funds received
through your financing channels may be used in the preliminary stage while incurring capital
expenditures. You will, of course, need to find the funds needed to make the business production-ready
for day-to-day working capital requirements or to meet unforeseen contingencies.
There are different sources of export finance for exporters to meet their requirements for capital. It is
up to you to select a source of finance suitable for your needs, ensuring that it fits the long-term
strategy for financing your export business.
Why Export Finance
However, before deciding on how to source export finance, you must identify why exactly you need the
funds. There are various reasons why you may need investments:
To set up a new Export Business
For building a new export business, you will require financial support. Whether you plan to acquire
existing businesses like manufacturing units, renovate and modernize your business units, or
expand/improve your plants and equipment so that you are ready to target the international market,
financing requirements will always be a consideration.
For Business Expansion
At other times, the growth of your export business may require you to tap additional funds, for which
you may have to arrange for large-scale finance. For example, say you decide to expand into a
new export market, or set up additional offices to cater to new export lines.
For Working Capital
Often, business development and daily operations will constitute your biggest requirements for finance,
also known an working capital. To accept new business, you need funds to accommodate the buyer’s
credit period, accessible through loan products like pre shipment finance. There may also be a working
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capital requirement to arrange for inventory at times. Having enough cash enables you to compete in
the market and muster the financial clout to take up new ventures.
Need for Export Finance
As discussed earlier, as an exporter, you may need export finance at various stages of your business
cycle, including:
 Pre Shipment
 Post Shipment
 Finance against collection of invoices and at multiple stages of the working capital cycle
 Finance needed in case of the suspension or removal of export subsidies and benefits
Types of Export Finance
Depending on your requirements, there are various forms of financing available for exporters, from long
term and short term loans to additional credit lines. Below are some of the more common tools you can
use to finance your export operations.
Pre Shipment Finance
Pre Shipment finance is provided when an exporter needs funds before the shipment of products or
goods. Funds are required for purchasing raw materials, processing of raw materials into finished goods,
packaging goods etc.
 Packing Credit: You can avail pre-shipment finance from your financier against an export order
received from the importer in the form of Packing Credit. Once the funds are received from the
overseas buyer, the concerned export packing credit amount will be adjusted and loan will be
closed against that order.
 Business Loan: You can utilize a loan to purchase raw materials or to undertake the
manufacturing of your product.
Post Shipment Finance
After you have shipped the products and raised an invoice from the importer, you will have to see
through the credit period until you receive payment from your buyer. You may need working capital for
this period to fulfill other orders. This can be resolved with post shipment finance from the following
sources:
 Bill Discounting and Invoice Factoring : You can approach your bank or a financial institution
and present your invoice to them for faster liquidation. The banker or the financial institution
could purchase, collect, or even discount the bill. For example in Invoice Factoring you can
submit your invoice along with certain other documents to Drip Capital, which advances up to
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80% of the invoice value within 24 hours. On maturity of the invoice, the importer pays Drip
Capital, which then settles the remaining amount after accounting for the agreed-upon fee.
Export finance against the collection of bills : Banks generally agree to finance export bills
which are repaid by guaranteeing companies in case of default. These lenders provide financial
support of around 90% of the FOB (freight-on-board) value of the export.
 Letter of Credit Discounting : Banks are often ready to finance against Letter of Credit (LC) as
there is an inborn security in an confirmed LC that the issuing bank will make the payment in
case of default.
 Supplier's Credit & Buyer's Credit : There are also two distinct forms of financing you can tap -
supplier’s credit, where the exporter’s bank finances the exporter with the full amount of the
invoice while the importer can make payment in instalments to the exporter’s banker; and
buyer’s credit, where the importer is given credit under the line of credit by your banker, thus
facilitating your export transaction
Q: Forms of business Ownership
Ans:
A key first step for any entrepreneur is setting up an organization that will be used to formally embark on the
business journey, but many new business owners struggle to identify the best way to move forward. These
are the most common ways to organize a business, from the simplest through the most complex.
Sole proprietorship
A sole proprietorship is the most basic form of business ownership, where there is one sole owner who is
responsible for the business. It is not a legal entity that separates the owner from the business, meaning that
the owner is responsible for all of the debts and obligations of the business on a personal level. In exchange
for that liability, the owner keeps all the profits gained from the business. This form of business ownership is
easy and inexpensive to create and has few government regulations, making it a more flexible type of
ownership with complete control at the discretion of the owner. In addition, profits are taxed once, and there
are some tax breaks available if the business is struggling. Sole proprietorships often are limited to the
resources the owner can bring to the business. For these reasons, sole proprietorships are often most
appropriate during the early stages of a business where the owner has little capital/resources to work with
but also has few debts to pay.
Partnership
Partnerships are very common with friends going into business together
Partnerships are a form of business ownership where two or more people act as co-owners. There are two
forms of partnerships, which are General Partnerships and Limited partnerships, differentiated primarily by
the liability coverage by the owners. In a general partnership, all owners of the business have an unlimited
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liability in the business (the same as a Sole Proprietorship). For a limited partnership, at least one of the
partners has a limited liability, meaning they are not personally responsible for the debts of the business.
Regardless of the type of partnership, they are relatively easy and cheap to create, have few government
regulations and are only taxed once, like a sole proprietorship. The added benefit of a partnership is the
combination of knowledge and resources that are brought to the table thanks to the additional owners.
Profits do have to be shared between owners and there is always the potential for conflicts to arise between
partners over business decisions. This type of ownership is often useful in the early stages of the business
where multiple people are involved. Due to the sharing of profits and the additional resources, this type of
ownership is often expected to yield higher growth rates then a sole proprietorship.
Corporations/Company
Unlike the previous two examples, Corporations are a form of ownership that is a legal entity separate
from its owners. This creates a limited liability for all owners, but results in a double taxation on profits
(first as a corporate income tax, then as a personal income tax when the owners take their profits).
Corporations tend to have an easier time raising capital then sole proprietors or partners in large part
due to the greater sources of funding made available to them, such as selling stock. However, this does
result in greater government regulations for corporations, such as requirements for more extensive
record keeping. In addition, setting up a corporation is much more difficult, requiring more resources
and capital to cover expenses and create legal documentation. This ownership form is best suited for
fast growing or mature organizations that have owners looking for limited liability.
Co-operative
Cooperatives are organizations that are owned and controlled by an association of members. This form
of ownership allows for a more democratic approach to control where each share is worth the same
amount of votes, similar to a corporation with common stock. It also offers limited liability to its owners
and equal profit distribution based on ownership percentage. Disappointingly, the democratic approach
to decision making results in a longer decision making process as participation from all association
members is required. Conflicts between members can also arise that can have a big impact on the
efficiency of the business. Co-operatives are often used when individuals or businesses decide to pool
resources to achieve a common goal or satisfy a common need, such as employment needs or a delivery
service.
Q. Explain how to Select an appropriate form of ownership structure?
The selection of a suitable form of ownership organisation is an important entrepreneurial decision

because it influences the success and growth of a business — e.g., it determines the decision of profits,
the risk associated with business, and so on. As different forms of private ownership organisation differ
from each other in respect of division of profit, control, risk, legal formalities, flexibility, etc.
Therefore, a thoughtful consideration should be given to this problem and only that form of ownership
should be chosen. Since the need for the selection of ownership organisation arises both initially, while
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starting a business, and at a later stage for meeting the needs of growth and expansion, it is desirable to
discuss this question at both these levels.
For a new or proposed business, the selection of a suitable form of ownership organisation is generally
governed by the following factors:
1. Nature of business activity:
This is an important factor having a direct bearing on the choice of a form of ownership. In small trading
businesses, professions, and personal service trades, sole-proprietorship is predominant.
Examples are Laundromats, beauty parlours, repair shops, consulting agencies, small retail stores,
medicine, dentist accounting concerns, boarding-house, restaurants, speciality ships, jobbing builders,
painters, decorators, bakers, confectioners, tailoring shops, small scale shoe repairers and
manufactures, etc. The partnership is suitable in all those cases where sole proprietorship is suitable,
provided the business is to be carried on a slightly bigger scale.
Besides, partnership is also advantageous in case of manufacturing activities on a modest scale. The
finance, insurance, and real estate industries seem to be suited to partnership form of organisation.
Some of the financial businesses that find this form advantageous are tax, accounting, and
stockbrokerage firms, and consulting agencies.
Service enterprises like hotels and lodging places; trading enterprises, such as wholesale trade, large
scale retail houses; manufacturing enterprises, such as small drug manufacturers, etc. can be
undertaken in the form of partnership. Manufacturing contains the highest percentage of companies
among all industries. Similarly large chain stores, multiple shops, super-bazaars, engineering companies
are in the form of companies.
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2. Scale of operations:
The second factor that affects the form of ownership organisation is the scale of operations. If the scale
of operations of business activities is small, sole proprietorship is suitable; if this scale of operations is
modest — neither too small nor too large — partnership is preferable; whereas, in case of large scale of
operations, the company form is advantageous.
The scale of business operations depends upon the size of the market area served, which, in turn,
depends upon the size of demand for goods and services. If the market area is small, local, sole-
proprietorship or partnership is opted. If the demand originates from a large area, partnership or
company may be adopted.
3. Capital requirements:
Capital is one of the most crucial factors affecting the choice of a particular form of ownership
organisation. Requirement of capital is closely related to the type of business and scale of operations.
Enterprises requiring heavy investment (like iron and steel plants, medicinal plants, etc.) should be
organised as joint stock companies.
Enterprises requiring small investment (like retail business stores, personal service enterprises, etc.) can
be best organised as sole proprietorships. Apart from the initial capital required to start a business, the
future capital requirements—to meet modernisation, expansion, and diversification plans —also affect
the choice of form of ownership organisation.
In sole proprietorship, the owner may raise additional capital by borrowing, by purchasing on credit, and
by investing additional amounts himself. Banks and suppliers, however, will look closely at the
proprietor’s individual financial resources before sanctioning loans or advances.
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Partnerships can often raise funds with greater ease, since the resources and credit of all partners are
combined in a single enterprise. Companies are usually best able to attract capital because investors are
assured that their liability will be limited.
4. Degree of control and management:
The degree of control and management that an entrepreneur desires to have over business affects the
choice of ownership organisation. In sole proprietorship, ownership, management, and control are
completely fused, and therefore, the entrepreneur has complete control over business. In partnership,
management and control of business is jointly shared by partners.
They have equal voice in the management of partnership business except to the extent that they agree
to divide among themselves the business responsibilities.
Even then, they are legally accountable to each other. In a company, however, there is divorce between
ownership and management. The management and control of company business is entrusted to the
elected representatives of shareholders.
Thus, a person wishing to have complete and direct control of business prefers proprietary organisation
rather than partnership or company. If he is prepared to share it with others, he will choose partnership.
But, if he is just not bothered about it, he will go in for company.
5. Degree of risk and liability:
The size of risk and the willingness of owners to bear it is an important consideration in the selection of
a legal form of ownership organisation. The amount of risk involved in a business depends, among
other, on the nature and size of business. Smaller the size of business, smaller the amount of risk.
Thus, a sole proprietary business carries small amount of risk with it as compared to partnership or
company. However, the sole proprietor is personally liable for all the debts of the business to the extent
of his entire property. Likewise, in partnership, partners are individually and jointly responsible for the
liabilities of the partnership firm.
Companies have a real advantage, as far as the risk goes, over other forms of ownership. Creditors can
force payment on their claims only to the limit of the company’s assets. Thus, while a shareholder may
lose the entire money he put into the company, he cannot be forced to contribute additional funds out
of his own pocket to satisfy business debts.
6. Stability of business:
Stability of business is yet another factor that governs the choice of an ownership organisation. A stable
business is preferred by the owners insofar as it helps him in attracting suppliers of capital who look for
safety of investment and regular return, and also helps in getting competent workers and managers who
look for security of service and opportunities of advancement. From this point of view, sole
proprietorships are not stable, although no time limit is placed on them by law.
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The illness of owner may derange the business and his death cause the demise of the business.
Partnerships are also unstable, since they are terminated by the death, insolvency, insanity, or
withdrawal of one of the partners. Companies have the most permanent legal structure. The life of the
company is not dependent upon the life of this member. Members may come, members may go, but the
company goes on forever.
7. Flexibility of administration:
As far as possible, the form of organisation chosen should allow flexibility of administration. The
flexibility of administration is closely related to the internal organisation of a business, i.e., the manner
in which organisational activities are structured into departments, sections, and units with a clear
definition of authority and responsibility.
The internal organisation of a sole proprietary business, for instance, is very simple, and therefore, any
change in its administration can be effected with least inconvenience and loss. To a large extent, the
same is true of a partnership business also. In a company organisation, however, administration is not
that flexible because its activities are conducted on a large scale and they are quite rigidly structured.
Any substantial change in the existing line of business activity — say from cotton textiles to sugar
manufacturing — may not be permitted by law if such a provision is not made in the ‘objects clause’ of
the Memorandum of Association of the company.
Even when it is permitted by the Memorandum, it might have to be endorsed by the shareholders at the
general meeting of the company. Thus, from flexibility point of view, sole proprietorship has a distinct
edge over other forms.
8. Division of profit:
Profit is the guiding force of private business and it has a tremendous influence on the selection of a
particular form of ownership organisation. An entrepreneur desiring to pocket all the profits of business
will naturally prefer sole proprietorship.
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Of course, in sole proprietorship, the personal liability is also unlimited. But, if he is willing to share the
profits partnership is best. In company organisation, however, the profits (whenever the Board of
Directors decides) are distributed among shareholders in proportion to their shareholding, but the
liability is also limited. The rate of dividend is generally quite low.
9. Costs, procedure, and government regulation:
This is also an important factor that should be taken into account while choosing a particular form of
organisation. Different forms of organisation involve different procedure for establishment, and are
governed by different laws which affect the immediate and long-term functioning of a business
enterprise. From this point of view, sole proprietorships are the easiest and cheapest to get started.
There is no government regulation. What is necessary is the technical competence and the business
acumen of the owner.
Partnerships are also quite simple initiated. Even a written document is not necessarily a prerequisite,
since an oral agreement can be equally effective. Company form of ownership is more complicated to
from.
It can be created by law, dissolved by law, and operate under the complicated provisions of the law. In
the formation of a company, a large number of legal formalities is to be gone through which entails, at
times, quite a substantial amount of expenditure.
For example, the cost incurred on the drafting of the Memorandum of Association, the Articles of
Association, the Prospectus, issuing of share capital, etc. This cost is however, small in case of private
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companies. Besides, companies are subjected to a large number of anti-monopoly and other economic
laws so that they do not hamper the public interest.
The consideration of the various factors listed above clearly shows that:
(a) These factors do not exist in isolation, but are interdependent, and they are all important in their
own right. Nevertheless, the factors of nature of business and scale of operations are the most basic
ones in the selection of a form of ownership.
All other factors are dependent on these basic considerations. For instance, the financial requirements
of a business will depend on the nature of business and the scale of operations planned. To take an
example, if a business wants to set up a trading enterprise (say, a retail store) on a small scale, his
financial requirements will be small.
(b) The various factors listed above are only major factors, and in no case they constitute an exhaustive
list. Depending upon the requirements of the business and the demands of the situation and sometimes
even the personal preference of the owner, the choice of a form of ownership is made.
(c) The problem in choosing the best form of ownership is one of analysing and weighing relative
advantages and disadvantages to find the one that will yield the highest net advantage. And for that,
weights may be assigned to different factors depending upon their importance in each form of
organisation, and the organisation that obtains the maximum weights may be ultimately selected.
Q: Explain: Institutional Finance of entrepreneurs:
Ans:
Finance is one of the essential requirements of any enterprise. Before actually setting up their units,
small entrepreneurs need to know very clearly about the type and extent of their financial
requirements. Integral to financial
Commercial banks
An institution which accepts deposits, makes business loans, and offers related services. Commercial
banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These
institutions are run to make a profit and owned by a group of individuals, yet some may be members of
the Federal Reserve System. While commercial banks offer services to individuals, they are primarily
concerned with receiving deposits and lending to businesses.
Commercial banks play a number of roles in the financial stability and cash flow of a countries private
sector. They process payments through a variety of means including telegraphic transfer, internet
banking and electronic funds transfers. Commercial banks issue bank checks and drafts, as well as accept
money on term deposits.
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Commercial banks also act as moneylenders, by way of installment loans and overdrafts. Loan options
include secured loans, unsecured loans, and mortgage loans. A secured loan is one where the borrower
provides a certain property or asset as collateral against the loan. The main condition of these loans is
that if the loan remains unpaid, the bank has the right to use the property in any way they like to realize
the outstanding amount. Unsecured loans have no collateral and therefore command higher interest
rates. There are a variety of unsecured loans available today and these include credit cars, credit
facilities such as a lines of credit, corporate bonds, and bank overdrafts.
Activities of Commercial Banks:
The modern Commercial Banks in India cater to the financial needs of different sectors. The main
functions of the commercial banks comprise:
 Transfer of funds
 Acceptance of deposits
 Offering those deposits as loans for the establishment of industries
 Purchase of houses, equipments, capital investment purposes etc.
 The banks are allowed to act as trustees. On account of the knowledge of the financial market of
India the financial companies are attracted towards them to act as trustees to take the
responsibility of the security for the financial instrument like a debenture.
 The Indian Government presently hires the commercial banks for various purposes like tax
collection and refunds, payment of pensions etc.
 The term commercial bank is used to differentiate these banks from investment banks, which
are primarily engaged in the financial markets. Commercial banks are also differentiated from
retail banks that cater to individual clients only.
Other Financial institutions:
Industrial Development Bank of India (IDBI):
IDBI Bank Ltd. is today one of India's largest commercial Banks. For over 40 years, IDBI Bank has essayed
a key nation-building role, first as the apex Development Financial Institution (DFI) (July 1, 1964 to
September 30, 2004) in the realm of industry and thereafter as a full-service commercial Bank. As a DFI,
the erstwhile IDBI stretched its canvas beyond mere project financing to cover an array of services that
contributed towards balanced geographical spread of industries, development of identified backward
areas, emergence of a new spirit of enterprise and evolution of a deep and vibrant capital market.
Headquartered in Mumbai, IDBI Bank today rides on the back of a robust business strategy, a highly
competent and dedicated workforce and a state-of-the-art information technology platform, to
structure and deliver personalized and innovative Banking services and customized financial solutions to
its clients across various delivery channels.
Initially it was setup as wholly owned subsidiary of RBI/. In February 1976, the IDBI was made an
autonomous institution and its ownership passed on from RBI to Government of India.
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The IDBI provides assistance to SSIs through its schemes of refinance and to a limited extent, through its
bills rediscounting scheme. As it is not feasible for IDBI to reach a large number of SSIs scattered all over
the country, the flow of its assistance to this vast number has therefore, been indirect in the form of
refinancing of loans granted by the banks and State Financial Corporation’s (SFCs).
You have already read about the functions of IFCI and SFCs. These institutions met the financial
needs of different sectors of industry, showed a steady growth in their operations and contributed
substantially to the industrial development of the economy. However need was felt for a central
coordinating agency to be ultimately concerned with all problems relating to long and medium term
financing of industry and to act as an apex industrial financing and developmental agency.
IDBI is now the principal financial institution for coordinating the working of institutions
engaged in financing, promoting or developing industry, assisting the development of such institutions
and providing credit and other facilities for the development of industry. Thus the role of IDBI may be
stated as under:
(1) As an apex financial institution, it coordinates the working of other financial institutions.
(2) It assists in the development of other financial institutions.
(3) It provides credit to large industrial concerns directly.
(4) It undertakes other activities for the development of industry.
Objectives
The main objectives of IDBI are to serve as the apex institution for term finance for industry in India. Its
objectives include:
(1) Co-ordination, regulation and supervision of the working of other financial institutions such as IFCI,
ICICI, UTI, LIC, Commercial Banks and SFCs.
(2) Supplementing the resources of other financial institutions and thereby widening the scope of their
assistance.
(3) Planning, promotion and development of key industries and diversifications of industrial growth.
(4) Devising and enforcing a system of industrial growth that conforms to national priorities.
Function:
The IDBI has been established to perform the following functions-
 To grant loans and advances to IFCI, SFCs or any other financial institution by way of refinancing
of loans granted by such institutions which are repayable within 25 year?
 To grant loans and advances to scheduled banks or state co-operative banks by way of
refinancing of loans granted by such institutions which are repayable in 15 years?
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 To grant loans and advances to IFCI, SFCs, other institutions, scheduled banks, state co-
operative banks by way of refinancing of loans granted by such institution to industrial concerns
for exports.
 To discount or rediscount bills of industrial concerns.
 To underwrite or to subscribe to shares or debentures of industrial concerns.
 To subscribe to or purchase stock, shares, bonds and debentures of other financial institutions.
 To grant line of credit or loans and advances to other financial institutions such as IFCI, SFCs, etc.
 To grant loans to any industrial concern.
 To guarantee deferred payment due from any industrial concern.
 To guarantee loans raised by industrial concerns in the market or from institutions.
 To provide consultancy and merchant banking services in or outside India.
 To provide technical, legal, marketing and administrative assistance to any industrial concern or
person for promotion, management or expansion of any industry.
 Planning, promoting and developing industries to fill up gaps in the industrial structure in India.
 To act as trustee for the holders of debentures or other securities.
Subsidiaries
The following are the subsidiaries of IDBI.
 Small Industries Development Bank of India (SIDBI)

 IDBI Bank Ltd.
 IDBI Capital Market Services Ltd.
 IDBI Investment Management Company
Industrial Financial Corporation of India Ltd (IFCI): The IFCI which was established in 1948, provides
financial assistance to industrial concerns for a period not exceeding 25 years. It also guarantees loans
raised by industrial concerns in the open market and underwrites issues of shares and debentures. It
grants financial assistance to industrial concerns in the corporate and cooperative sectors.
IFCI was established as a statutory corporation on 1st July 1948 by a special Act of Parliament, IFCI Act,
1948. It was converted into a public limited company on July 1, 1993. Its main object is to provide
medium and long term credit to eligible industrial concerns in corporate sectors of the economy,
particularly to those industries to which banking facilities are not available.
Objectives
The primary role of IFCI is to provide ‘direct financial assistance’ on medium and long term basis to
industrial projects in the corporate and co-operative sectors. Over the years, the scope of activities of
the corporation has widened. The objectives of the corporation are stated below.
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(a) To provide long and medium-term credit to industrial concerns engaged in manufacturing, mining,
shipping and electricity generation and distribution.
(b) The period of credit can be as long as 25 years and should not exceed that period;
(c) To grant credit to a single concern up to a maximum amount of rupees one crore. This limit can be
exceeded with the permission of the government under certain circumstances;
(d) Guarantee loans and deferred payments;
(e) Underwrite and directly subscribe to shares and debentures issued by companies;
(f) Assist in setting up new projects as well as in modernisation of existing industrial concerns in medium
and large scale sector;
(g) Assist projects under co-operatives and in backward areas.
Functions
The main functions of IFCI are as under:-
 Granting loans and advances for the establishment, expansion, diversification and
modernization of industries in corporate and co-operative sectors.
 Guaranteeing loans raised by industrial concerns in the capital market, both in rupees and
foreign currencies.
 Subscribing or underwriting the issue of shares and debentures by industries. Such investment
can be held up to 7 years.
 Guaranteeing credit purchase of capital goods imported as well as purchased within the
country.
 Providing assistance, under the soft loans scheme, to selected industries such as cement, cotton
textiles, jute, engineering goods, etc.
 Providing technical, legal, marketing and administrative assistance to any industrial concern for
the promotion, management and expansion of the industrial concern.
 Providing equipment (imported or indigenous) to the existing industrial concerns on lease under
its ‘equipment leasing scheme’.
 Procuring and reselling equipment to eligible existing industrial concerns in corporate or co-
operative sectors.
 Rendering merchant banking services to industrial concerns.
In 1995-96, 67% of the total financial assistance distributed by IFCI was in the form of rupee term loans,
while foreign currency loans accounted for approximately 17% of total financial assistance. Thus the two
types of assistance accounted for a total of 84% of the total financial assistance by IFCI. The remaining
16% of financial assistance was in the form of underwriting, direct subscription, guarantees and
equipment leasing.
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State Financial Corporations (SFCs):
IFCI was established to cater to the financial needs of industrial concerns in large scale corporate and co-
operative sectors. Small and medium sized enterprises were outside the purview of IFCI. To meet the
financial needs of small and medium enterprises, the government of India passed the State Financial
Corporation Act in 1951, empowering the State governments to establish development banks for their
respective regions.
Under the Act, SFCs have been established by State governments to meet the financial requirements of
medium and small sized enterprises. There are 18 SFCs at present.
Objectives
The objectives of state financial corporations are as under:
 Provide financial assistance to small and medium industrial concerns. These may be from
corporate or co-operative sectors as in case of IFCI or may be partnership, individual or joint
hindu family business. Under SFCs Act, “industrial concern” means any concern engaged not
only in the manufacture, preservation or processing of goods, but also mining, hotel industry,
transport undertakings, generation or distribution of electricity, repairs and maintenance of
machinery, setting up or development of an industrial area or industrial estate, etc.
 Provide long and medium-term loan repayable ordinarily within a period not exceeding 20
years.
 Grant financial assistance to any single industrial concern under corporate or co-operative
sector with an aggregate upper limit of rupees sixty lakhs. In any other case (partnership, sole
proprietorship or joint Hindu family) the upper limit is rupees 30 lakhs.
 Provide financial assistance generally to those industrial concerns whose paid up share capital
and free reserves do not exceed Rs.3 crore.
 To lay special emphasis on the development of backward areas and small scale industries.
The functions of SFCs are:
 Grant of loans and advances to or subscribe to debentures of, industrial concerns repayable
within a period not exceeding 20 years, with option of conversion into shares or stock of the
industrial concern.
 Guaranteeing loans raised by industrial concerns which are repayable within a period not
exceeding 20 years.
 Guaranteeing deferred payments due from an industrial concern for purchase of capital goods
in India.
 Underwriting of the issue of stock, shares, bonds or debentures by industrial concerns.
 Subscribing to, or purchasing of, the stock, shares, bonds or debentures of an industrial concern
subject to a maximum of 30 percent of the subscribed capital, or 30 percent of paid up share
capital and free reserve, whichever is less.
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 Act as agent of the Central government, State government, IDBI, IFCI or any other financial
institution in the matter of grant of loan or business of IDBI, IFCI or financial institution.
 Providing technical and administrative assistance to any industrial concern or any person for the
promotion, management or expansion of any industry.
 Planning and assisting in the promotion and development of industries.
Small Industries Development Bank of India (SIDBI): With a view to ensuring larger flow of financial
and non-financial assistance to the small scale sector, the Government of India set up the small
industries bank of India (SIDBI) under a special act of the parliament in October 1989 as a wholly owned
subsidiary IDBI. The bank commenced its operations from April 2, 1990 with its head office in Lucknow.
The SIDBI has taken over the outstanding portfolio of the IDBI relating to the small scale sector worth
over Rs 4,000 crores. The authorized capital of SIDBI is Rs 250 crores with an enabling provision to
increase it to Rs1,000 crores.
The important functions of SIDBI are as follows:
 To initiate steps for technological up gradation and modernization of existing units.

 To expand the channels for marketing the products of SSI sector in domestic and international
market.
 To promote employment oriented industries especially in semi urban areas to create more
employment opportunities and there by checking migration of people in urban areas.
The SIDBIs financial assistance to SSI’s is channelized through the existing credit delivery system
comprising straight financial corporations, state industrial development corporation, commercial banks
and regional rural banks. The SIDBI introduce to new schemes during 1992-1993; equipment finance
scheme for providing direct finance to existing well run small scale units taking up technology up
gradation or modernization and refinance for resettlement of voluntarily workers of NTC. The other new
scheme launched was venture capital funds exclusively for small scale units, within an initial corpus of Rs
10 crore. It enrolled itself as an institutional member of OTC exchange of India (OTCEI) SIDBI also
provides financial support to national small industries corporation for providing leasing, hire purchase,
and marketing support to industrial units in the small scale sector.
SIDBI was set up by an Act of Parliament, as an apex institution for promotion, financing and
development of industries in small scale sector and for coordinating the functions of other institutions
engaged in similar activities. SIDBI extends direct/indirect financial assistance to SSIs, assisting the entire
spectrum of small and tiny sector industries on All India basis.
The range of assistance comprising financing, extension support and promotional, are made available
through appropriate schemes of direct and indirect assistance for the following purposes:-
 Setting up of new projects

 Expansion, diversification, modernization, technology up gradation, quality improvement,
rehabilitation of existing units
 Strengthening of marketing capabilities of SSI units.
115
 Development of infrastructure for SSIs and

 Export promotion.
 Direct Assistance Schemes
SIDBI directly assists SSIs under Project Finance Scheme, Equipment Finance Scheme, Marketing
Scheme, Vendor Development Scheme, Infrastructural Development Scheme, ISO-9000, Technology
Development & Modernisation Fund, Venture Capital Scheme, assistance for leasing to NBFCs, SFCs,
SIDCs and resource support to institutions involved in the development and financing of small scale
sector.
These Schemes are mainly targeted at addressing some of the major problems of SSIs in areas such as
high tech project, marketing, infrastructural development, delayed realisation of bills, obsolescence of
technology, quality improvement, export financing and venture capital assistance.
Promotional and Development Activities
SIDBI is actively involved in promoting tiny and small scale industries by means of its promotional and
developmental activities through suitable professional agencies for organizing Entrepreneurship
Development Programmes, Technology Up gradation & Modernization Programmes, Micro Credit
Schemes and assistance under Mahila Vikas Nidhi to bring about economic empowerment of women
specially the rural poor by providing them avenues for training and employment opportunities.
State Industrial Development Corporation (SIDCs): The State Industrial Development Corporation
(SIDCs) was incorporated under the Companies Act, 1956, in the sixties and early seventies as wholly-
owned State Government Undertakings for promoting industrial development.
The main functions of SIDCs are to provide assistance in the form of term loans, underwriting direct
subscription to shares/debentures and guarantees, they also undertake a variety of promotional
activities like preparation of feasibility reports, conducting industrial potential surveys, entrepreneurship
development programmes and developing industrial estates. Some SIDCs also offer a package of
developmental services such as technical guidance, assistance in plant locations and co-ordination with
other agencies. In line with the changing environment, many SIDCs are making efforts to diversify and
entering into the fields of equipment leasing, merchant banking, venture capital and mutual funds.
There are 28 SIDCs in the country. Aggregate to assistance sanctioned by all SIDCs during 1994-95
amounted to Rs. 1511 crore and disbursements accounted for Rs 984 crore.
116
Q: Explain Institutional Support to Entrepreneurs: Need for institutional support
Ans:
Starting a business or industrial unit say enterprise in short requires various resources and facilities.
Finance has been an important resource to start and run an enterprise because it facilitates the
entrepreneur to procure land, labor, material, machine and so on from different parties to run his/her
enterprise. Hence, finance is considered as “life blood” for an enterprise. Government through its
financial institutions and nationalized banks has come forward to help small entrepreneurs provide
them funds.
Admittedly, finance is an important resource but not the only condition to run an enterprise. In order to
start any economic activity; a minimum level of prior built-up of infrastructural facilities is needed.
Financial assistance and concessions cannot, in any case, adequately compensate for the deficiencies of
infrastructure such as transport and communication. This is one of the reasons why industries have not
been developing in backward areas in spite of financial assistance and concessions given by the
Governments to the entrepreneurs to establish industries in backward areas. Creation of infrastructural
facilities involves huge funds which the small entrepreneurs do lack. In view of this, various Central and
State Government institutions have come forward to help small entrepreneurs in this regard by
providing them various kinds of support and facilities.
Availability of the institutional support helps to make the economic environment more conducive to
business or industry. Now, what follow in the subsequent pages is the various kinds of support and
facilities provided by various institutions to the entrepreneurs to help them establish industries.
Q: Explain Institutional Support to small Entrepreneurs.
Ans:
Institutional supports to small entrepreneurs:
National Small Industries Corporation Ltd (NSIC): The National Small Industries Corporation Ltd (NSIC),
an enterprise under the Union Ministry of Industries, was set up in 1955 to promote aid and foster the
growth of small scale industries in the country. NSIC provides a wide range of services, predominantly
promotional in character to small scale industries. Its main functions are:
 To provide machinery on hire-purchase scheme to small scale industries.

 To provide equipment leasing facility.
 To help in export marketing of the products of small scale industries.
 To participate in bulk purchase programme of the Government.
 To develop prototype of machines and equipments to pass on to small scale industries for
commercial production.
 To distribute basic raw material among small scale industries through raw material depots.
117
 To help in development and upgradation of technology and implementation of modernization

programmes of small scale industries.
 To impart training in various industrial trades.
 To set up small scale industries in other developing countries on turn-key basis.
 To undertake the construction of industrial estates.
Small Industries Services Institutes (SISI):
The Small Industries Services Institutes (SISIs) are set up to provide consultancy and training to small
entrepreneurs –both existing and prospective. The activities of SISIs are coordinated by the Industrial
Management Training Division of the DCSSI’s office. There are 28 SISIs and 30 branch SISIs set up in
State capital and other places all over the country.
The main functions of SISIs include:
 To serve as interface between Central and State Governments.

 To render technical support services.
 To conduct Entrepreneurship Development programmes.
 To initiate promotional programmes.
The SISIs also render assistance in the following areas:
 Economic consultancy/Information/EDP Consultancy

 Trade and market information
 Project profiles
 State industrial potential survey
 District industrial potential surveys
 Workshop facilities
 Training in various trade/activities
District Industries Centers (DIC):
The District Industries Centers (DICs) programme was started on May 8, 1978 with a view to provide
integrated administrative framework at the district level for the promotion of small scale industries in
rural areas. The DICs are envisaged as a single window interacting agency with the entrepreneur at the
district level. Services and support to small entrepreneurs are provided under a single roof through the
DICs. They are the implementing arm of the Central and State Governments of the various schemes and
programmes. Registration of small industries is done at the district industries centers. The SEEUY/ PMRY
for employment generation are also implemented by the DICs.
The organizational structure of DICs consists of one General Manager, four Functional Managers and
three Project managers to provide technical service in the area relevant to needs of district concerned.
Management of the DICs is done by the state Governments. The scheme has now been transferred to
118
the states and from the year 1993-94, funds will not be provided by the Central Government to the
States for running the DICs.
Functions:
The DICs role is mainly promotional and developmental. To attain this, they have to perform the
following main functions:
 To conduct industrial potential surveys keeping in view the availability of resources in terms of
material and human skill, infrastructure, demand for product etc. To prepare techno-economic
surveys and identify product lines and then to provide investment advice to entrepreneurs.
 To prepare an action plan to effectively implement the schemes identified.
 To guide entrepreneurs in matters relating to selecting the most appropriate machinery and
equipment, sources of its supply and procedure for procuring imported machinery, if needed,
assessing requirements for raw materials etc.
 To appraise the worthiness of the various proposals received from entrepreneurs.
 To assist the entrepreneurs in marketing their products and assess the possibilities of
ancillarisation and export promotion of their products.
 To undertake product development work appropriate to small industries.
 To conduct artisan training programmes.
 To function as the technical arms of DRDA in administrating IRD and TRYSEM programmes.
State Small Industries Development Corporation (SSIDC): The State Small Industries Development
Corporation (SSIDC) were set up in various States under the Companies Act 1956, as State Government
Undertakings to cater to the primary development needs of the small, tiny and village industries in the
State/ Union Territories under their jurisdiction. Incorporation under the Companies Act has provided
SSIDCs with greater operational flexibility and wider scope for undertaking a variety of activities for the
benefit of the small sector.
The important functions performed by the SSIDCs include:
 To procure and distribute scarce raw material

 To supply machinery on hire purchase system
 To provide assistance for marketing of the products of small scale industries.
 To construct industrial estates/sheds, providing allied infrastructure facilities and their
maintenance.
 To extend seed capital assistance on behalf of the state government concerned.
 Provide management assistance to production units.
Small Scale Industries Board (SSIB):
The government of India constituted a board namely, Small Scale Industries Board (SSIB) in 1954 to
advice on development of small scale industries in the country. The SSIB is also known as Central Small
Industries Board. The range of development work in small scale industries involves several
119
departments/ministers and several organs of the Central/State Governments. Hence, to facilitate co-
ordination and inter-institutional linkages, the Small Scale Industries Board has been constituted. It is an
apex advisory body constituted to render advice to the government on all issues pertaining to the
development of small scale industries.
The Industries Minister of the Government of India is the chairman of the SSIB. The SSIB comprises of 50
members including State industry Minister, some members of Parliament, Secretaries of various
Departments of Government of India, financial institutions, public sector undertakings, industry
associations and eminent experts in the field.
120

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RTMNU BCCA SEMESTER VI Entrepreneurship Development

UNIT - II Agri-Preneurship: Introduction, Need for developing Agri-Preneurship in India, Opportunities

Q: Explain, Evolution of the concept of Entrepreneur.

The views are broadly classified in three ways.

1. Introduction of new product in the market

4. The discovery of new source of supply raw material

Q: What are the Characteristics of successful Entrepreneurs?

Q: What are the charms of becoming Entrepreneur?

The major charms of becoming an entrepreneur are discussed as follows:

1. Opportunity to Create One’s Own Destiny:

2. Opportunity to Make a Difference:

3. Opportunity to reach one’s full potential:

Q: Explain the Entrepreneurial decision process

The Entrepreneurial Process

Feasibility study is done to see if the idea can be commercially viable.

It passes through two steps:

Q: Explain the Functions of Entrepreneur

Ans: The main functions of an entrepreneur are grouped in three categories:

1. Risk bearing functions,

2. Administrative and decision-making functions, and

3. Distributive functions (responsibility of the organizer).

1. Risk Bearing Functions:

2. Administrative and Decision-Making Functions:

i. Conceiving the Idea of Business:

ii. Estimation of Details of Business and Implementation of the Same:

iii. Supervision and Control of Business Activities:

Innovation is one of the most important functions of an entrepreneur. An entrepreneur uses

organization of industry. Through innovation, an entrepreneur converts a material into a resource or

Q: What is the Need of Entrepreneur?

Q: Explain the Types of Entrepreneurs.

Imitative Entrepreneurs: Imitative Entrepreneurs adopt victorious innovations launched by the

Q: Distinction between an Entrepreneur and a Manager, Intrapreneur.

 Initiates and innovates a new concept,

 Recognises and utilises opportunity,

 Take suitable actions,

 Faces risks and uncertainties,

 Establishes a startup company,

 Adds value to the product or service,

 Takes decisions to make the product or service a profitable one,

 Is responsible for the profits or losses of the company.

An intrapreneur is nothing but an entrepreneur within the boundaries of the organisation. An

Key Differences between Entrepreneur and Intrapreneur

2. An entrepreneur is intuitive in nature, whereas an intrapreneur is restorative in nature.

5. An entrepreneur works in a newly established company. On the other hand, an intrapreneur is a

6. An entrepreneur is his own boss, so he is independent to take decisions. As opposed to

Difference between Entrepreneur and Manager

Q: Explain social Entrepreneur.

Essential Characteristics of Social Entrepreneurs

Q: Explain Entrepreneurship: Concept of Entrepreneurship,

 Creation of Employment- Entrepreneurship generates employment. It provides an entry-level

 Increase Standard of Living- Entrepreneurship helps to improve the standard of living of a

Factors Affecting Entrepreneurship

Q: Explain the Growth of Entrepreneurship in India

The Future of Entrepreneurship

Q: What is the Role of Entrepreneurship in economic development?

2. Balanced Regional Development

3. Mobilization of Local Resources

8. Increase per capita income