FERDOWS, L. Artigo 4 - American Journal of Small Business - Start-up Of Small Manufacturing Ventures In Developing Countries*

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American Journal of Small Business, Vol. V, No. 2, Fall (Oct-Dec), 1980
Start-up Of Small Manufacturing Ventures
In Developing Countries*
KASRA FERDOWS,
The European Institute of Business Administration (INSEAD)
ABSTRACT
Most entrepreneurs wishing to set up a small manufacturing venture
in a developing country underestimate the amount of time and funds
required for hringing the plant on-stream. Study of the establishment of
forty small and medium size manufacturing plants in Iran from 1972 to
1975 showed that contrary to one's intuition, the degree of this under-
estimation has no relation with the plant's technological or logistic
complexities. Rather, a few other variables related to the management of
the start-up project itself are the keys. Most important are certain
attributes of the entrepreneur in charge of the project.
INTRODUCTION
Most entrepreneurs wishing to set up a small manufacturing venture
in a developing country underestimate the amount of resources required
for bringing the plant on-stream. Often the actual time, money and
personal energy spent on such a project tum out to be signiflcantly more
than expected. Why does this underestimation occur? Which factors
influence its magnitude? How can one minimize the unfavorable effects of
this underestimation? The objective in this article is to answer these
questions.
The author has been unable to flnd any study which addresses these
issues. Only some of the studies which have examined the cost of
technology transfer have some relevance to the subject here. Since starting
a manufacturing venture in a developing country inevitably involves some
technology transfer, some of the cost components of technology transfer are
related to plant start-up.
UNCTAD in a 1970 report [l,p.711] emphasizes the importance of
identiflcation and measurement of the elements of the cost of technology
transfer. The same report states that, "It is not clear whether the cost
differentials in the transfer of technology for similar industries in various
developing countries are related to the level of development of the country
concerned and/or to the organizational form (direct investment, joint
venture, or semi-puhlic or public enterprise) employed in the transfer
process. [An] identiflcation of the costs and the factors which influence
* This article has been referred by three editorial members.
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American Journal of Small Business, Vol. V, No. 2, Fall (Oct-Dec), 1980
them [would] furnish a meaningful basis for the consideration of national
and international policies to reduce them." Teece, in a 1976 study
[2,p.75-97] identifies three primary factors: (a) the number of previous
start-ups by the transferor, (b) the number of years of manufacturing
experience in the transferee's organization, and (c) the age of technology.
Teece's study, viewing the issue mainly from the viewpoint of multination-
als, concludes that suppliers prefer to transfer tested technology to
experienced recipients. Wallender [3] places the emphasis on the manage-
rial resources of the recipient firm and concludes that the key in the
successful transfer of technology lies in the stage of managerial develop-
ment of the user's firm.
The findings of these studies, however, are not necessarily applicable
here because they address mostly large projects and large enterprises. To
examine the start-up problems of small manufacturing ventures in
developing countries, new empirical data had to be collected.
Case histories of the establishment of 40 privately owned small and
medium size' manufacturing plants in Iran provided the data for this
investigation. The plants, selected randomly from a variety of industries,
had started commercial production between 1972 and 1975. Data was
gathered by site visits, interviews with the principal managers/entrep-
reneurs, examination of companies' internal documents, analysis of project
feasibility studies, and review of follow-up reports held by the banks which
financed the projects.
EXHIBIT 1 — START-UP TIME AND COST OVERRUNS
Time Overrun
Cost Overrun
Nil*
13
23
Mod*
7
10
High*
20
7
Total
40
40
Significance level (t-test) for both time and cost overruns < 0.005.
* Notes:
1. Classiflcation of overruns into these three categories is based on the discrepancy
between planned (estimates in feasibility report or original start-up plan) and actual
values as follows:
Nil: "Actual" less than 110% of "planned."
Moderate (Mod.): "Actual" between 110% and 140% of "planned."
High: "Actual" more than 140% of "planned."
2. A plant is considered on-stream when the first batch for commercial sale is produced;
going on-stream is the culmination of many start-up activities such as feasibility
analysis, securing finances, land acquisition, site development, construction of
building, acquisition and installation of machinery, hiring and training of workers
and factory management personnel, securing suppliers of product parts and raw
materials, pilot run production and debugging, and preparation for commercial
production.
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American Journal of Small Business, VoL V, No. 2, Fall (Oct-Dec), 1980
The data confirmed the existence of the underestimation bias. As
shown in Exhibit 1, half of the forty manufacturing start-ups surveyed in
this study incurred long delays; seven had moderate delays; only 13
finished on schedule. Similarly, seven projects had a high cost overrun and
ten a moderate one. Only four of the remaining 23 projects spent less
money than planned — none significantly less. The first task was to look
into the "successful start-ups" (i.e., those plants which were brought
on-stream without time or cost overrun).
FACTORS INFLUENCING OVERRUNS
Intuition said that the successful projects probably involved simple
plants. By "simple" one might be referring to a certain set of plant
characteristics such as its size, type of product, degree of vertical
integration, percentage of machinery supplied locally, product's domestic
value added, and number of direct production workers employed. For
example, one might have expected to find the plants of the successful
projects to be generally smaller than those of the less successful ones.
Surprisingly, that was not the case. Close examination of the data
showed that no specific conclusions regarding any of these factors could be
drawn. The results for five of the more important plant characteristics —
size of investment, location of plant site, percentage of domestic machin-
ery, local product value added, and plant value added (a crude measure of
the degree of vertical integration) — are presented in Exhibit 2. Statistical
tests — or a cursory look — show no significant dependence.
There are, of course, many other important plant characteristics to be
analyzed, but the existing data strongly suggest that, contrary to its
intuitive appeal, the degree of success in a manufacturing start-up cannot
be predicted on the basis of the plant's technological or logistical
characteristics."" For example, time and cost overruns expected in a small
home appliance plant are not necessarily more, or less, than time and cost
overruns expected in a small food processing plant.
The difference between successful and unsuccessful manufacturing
start-ups, therefore, lay in factors other than those related to the plant
characteristics. Amongst such factors are those related to the management
of the start-up project itself: for example, the role and the reputation of the
major supplier of machinery, degree of subcontracting employed, availabil-
ity of utilities on site, availability of funds during the start-up period, and
perhaps some specific attributes of the entrepreneur involved. (List of
these attributes later.) Here the successful start-ups did show some
important patterns (Exhibit 3). But, again many factors which one
expectedto affect start-up significantly did not seem to make much
difference. For example, no particular role of the major supplier of plant
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American Journal of Small Business, Vol. V, No. 2, Fall (Oct-Dec), 1980
EXHIBIT 2 — EFFECTS OF PLANT CHARACTERISTICS ON
START-UP TIME AND COST OVERRUNS
PLANT CHARACTERISTIC
1. Investment in Plant:'
Less than $1 Mn.
$1 Mn. to $2 Mn.
More than $2 Mn.
2. Plant Site — Commuting Time from Capital City:
Within one Hour
Possible in one day
Overnight stay necessary
3. Percent of Domestic Equipment (value):
Less than 10%
10% to 20%
More than 20%
4. Percent of Product's Domestic Value Added:^
Less than 40%
40% to 60%
60% to 80%
More than 80%
5. Percent of Product's Value Added in Plant^:
Less than 20%
20% to 40%
More than 40%
Time Overrun
Nil Mod. Hi
4
5
4
6
4
3
6
5
2
1
3
5
4
IN
 CO
 00
(N
 CO
 IN
3
1
3
3
3
1
IN
 
O
 
IN
 CO
1
5
1
5
5
10
7
4
9
9
6
5
3
4
7
6
4
9
7
Cost Overrun
Nil Mod. Hi
00
 
00
 
-
.
]
8
5
10
8
9
6
1
5
10
7
3
10
10
4
1
5
3
3
4
6
3
1
2
1
3
4
1
4
5
0
4
3
5
1
1
4
2
1
3
1
1
2
3
3
1
Chi-square tests show no significance.
Notes: 1. Investment in land and site development, building, machinery, transportation,
installation, and shakedown.
2. These percentages refer to total manufacturing costs.
equipment, ranging from a fairly detached seller-installer to a rather
involved designer-seller/procurer-installer, seemed to have significantly
contributed to the success, or lack of success ofthe start-up (see Exhibit 3,
Characteristic 1). Similarly, no particular degree of subcontracting,
ranging from the entrepreneur doing almost everything himself (i.e.,
negligible subcontracting) to subcontracting almost everything
(approaching a "turnkey" contract) showed any clear success pattern.
(Exhibit 3, characteristic 2)
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American Journal of Small Business, Vol. V, No. 2, Fall (Oct-Dec), 1980
EXHIBIT 3 — EFFECTS OF PROJECTS MANAGEMENT
CHARACTERISTICS ON START-UP TIME
AND COST OVERRUNS
PROJECT MANAGEMENT CHARACTERISTICS
1. Role of Machinery Supplier:'
Designer-seller-installer
Advisor-seller-installer
Seller-installer
2. Subcontracting:'
None
Civil work only
Plant design and civil work
3. Owner's experience in the industry:
Considerable
Moderate
Short
4. Owner's ability to mobilize funds:
^Considerable
Moderate
Low
5. Reputation of Machinery Supplier:
Highly reputable
Average
Not well known
Time Overrun
Nil
1
5
6
1
7
3
6
5
2
4
8
1
4
9
0
Mod.
1
0
3
1
5
0
4
1
2
CM
 CO
 (N
0
6
1
Hi
CM
 
00
 
00
CO
 
CO
 
eo
4
8
8
5
9
6
3
10
7
Cost Overrun
Nil
1
8
11
3
13
4
9
8
6
7
9
7
6
16
1
Mod.
1
4
2
0
7
2
2
3
5
2
7
1
en
 
en
 
o
Hi
2
1
4
2
5
0
3
3
1
2
4
1
1
4
2
Chi-square tests show no significance; only Characteristic 5 suggests a relationship.
Notes: 1. Machinery suppliers in six projects acted in various other roles.
2. Subcontracting in four projects were different from categories listed above.
Entrepreneur's Roles
The most apparent common denominator among successful projects
was a particular set of attributes amongst their entrepreneurs (i.e., those
who had the primary responsibility for execution ofthe start-up activities).
Among these attributes, three stand out:
(a) Constant first-hand monitoring of progress — In each of the
successful projects in the sample, the entrepreneur put forth a considerable
effort in monitoring the details of work which was underway. He seemed
to have been constantly up-to-date on the actual day-to-day progress of
everj^ctivity. He seldom relied solely on the subordinates' oral or written
reports; often went after first-hand knowledge himself. For example, these
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American Journal of Small Business, VoL V, No. 2, Fall (Oct-Dec.), 1980
entrepreneurs visited the site frequently, personally went to government
agencies or banks, and dealt directly with the subcontractors. The close
monitoring obviously taxed their time and emotional energy heavily —
but they appeared to go through it willingly.
(b) Swift reaction — The time lag between emergence of a problem
and remedial action was generally shorter in successful projects. Through
personal involvement, the entrepreneur was able to detect existing and
potential problems faster. Furthermore, he had the organizational author-
ity and fiexibility to make fast, sometimes on-the-spot, decisions. This was
particularly important since the subordinates were often reluctant to bring
up a problem in its early phases. They either felt they could solve it
themselves, or simply did not appreciate the full impact of the delay in
solving that problem. In some other cases, the difficulty arose because a
subordinate, not having sufficient authority, had to take many problems to
an entrepreneur who was not often immediately accessible.
Examples of each of these cases were many. In a chemical plant, when
a critical control valve was found to be damaged during installation, one of
the entrepreneurs (who had been closely following the installation) simply
got on the plane to Europe the next day and returned with a new one
within three days. In another case, entrepreneurs in a textile plant,
sensing that cement was becoming increasingly scarce in the city, pushed
into the black market and procured sufficient quantity for their contractor
to finish the plant on schedule. Another case involved an entrepreneur in a
food processing plant. While he was visiting a trade fair in Europe, he saw
a machine similar to one he had ordered for his plant from a different
supplier. His order could not be delivered until the next year. He
immediately purchased the demonstration unit and subsequently cancelled
his original order.
(c) Sensitivity to delays — Entrepreneurs in successful projects
generally showed a high degree of sensitivity to delays. Normally they
were not reluctant to spend more if they felt that by doing so they would
avoid delays. Most of the subordinates (and entrepreneurs themselves) in
the successful projects in the sample worked against established short-
term target dates. (These dates were not necessarily related to those set in
the original start-up plan). In the case of activities not on the "critical
path," usually the full "slack" would not be taken.^ That is, these
entrepreneurs tended to be on the safe side so far as the timing was
concerned. Of course, this meant earlier outlays of funds, but these costs
were generally accepted as an insurance against potential delays.
Furthermore, they did not hesitate to spend what appeared to be a
considerable sum to get a potentially troublesome job done faster. In the
control valve example mentioned previously, the cost of an air ticket to
Europe was almost double the cost of the valve itself — but to the
entrepreneur that was an irrelevant comparison. What did matter was
that a potentially expensive delay was avoided.
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American Journal of Small Business, Vol. V, No. 2, Fall (Oct-Dec), 1980
Entrepreneurs in successful projects seemed to have maintained this
outlook throughout the start-up work. In many instances, what seemed
like an extravagant expenditure at the time eventually turned out to be a
less costly alternative. A good example was the case of a carpeting plant.
The two entrepreneurs in that plant had estimated their daily loss due to
delay in the opening of their plant to be around $3,000. They were,
therefore, ready to spend what seemed to be a lot of money to avoid delays
or to gain time. The project was finished almost four months ahead of the
originally estimated19 months, with 22% less than overall planned
expenditures!
This hypersensitivity to delay rarely seemed to result in cost overrun.
Again, as shown in Exhibit 4, only one of the thirteen projects which met
or beat time schedule had a moderate cost overrun. The rest were all
within projected costs.''
To summerize, successful entrepreneurs appeared to be constantly on
the look-out for existing and potential problems, had the flexibility,
authority, and ability to move swiftly and decisively to alleviate many of
the hitherto unforeseen problems, and showed considerable sensitivity to
delays.
Entrepreneur's Background:
Surprisingly, the entrepreneur's experience in the particular industry
did not seem to increase the chance of success significantly. Data in
Exhibit 3 (Characteristic 3) show that time and cost overruns in projects
whose investors had the most experience in the corresponding industries
were not clearly lower than in other projects; nor were the overruns clearly
higher in the case of investors with less experience in their industries.
Again, contrary to its intuitive appeal, abundance of funds during
start-up period did not seem to increase the likelihood of success
EXHIBIT 4 — INTERDEPENDENCE BETWEEN STARTUP
TIME AND COST OVERRUNS
Time
Cost
Nil
Mod
High
Total
Nil
12
1
0
13
Mod
3
2
2
7
High
8
7
5
20
Total
23
10
7
40
Chi-square significance: p<0.05.
18
American Journal of Small Business, Vol. V, No. 2, Fall (Oct-Dec), 1980
significantly. The data (Exhibit 3, Characteristic 4) show that a greater
ability of the owner(s) to mobilize funds in excess of the original bank
loan(s) did not necessarily result in more successful start-up. On the other
hand, deficiency in this ability did hurt the chances of success. Only one of
the twelve successful start-ups was accomplished by owners who did not
seem to have personal or additional institutional back-up financial
reserves.
Note that the owners' ability to mobilize funds may have no
relationship with the amount of funds left at the entrepreneur's discretion
during the start-up. Regardless of the owners' financial strength, the
successful entrepreneurs in the sample seemed to have had easy (organiza-
tional) access to sufficient working funds throughout most of the start-up
period.
Machinery Supplier's Reputation
As mentioned earlier, success during start-up was not significantly
affected by any particular role assumed by the major supplier of plant
equipment. But a positive correlation did appear to exist between
reputation of the supplier (as judged by the entrepreneurs and others) and
a successful start-up. As shown in Exhibit 3 (Characteristic 5), machinery
suppliers in the successful projects were generally well established and
enjoyed a good reputation in the trade. The successful entrepreneurs
preferred dealing with reputable suppliers wherever possible, in spite of
the fact that these suppliers normally charged anywhere from 5 to 25%
higher prices than industry average. In fact, none of the twelve successful
entrepreneurs dealt with a company as a major supplier whose machinery
was significantly cheaper than industry average. Conversely, almost every
project in the sample which relied on cheap machinery suppliers for a
major portion of its equipment ran into start-up problems.
Undoubtedly, one reason for the emergence of this pattern is that
reputable suppliers are generally better equipped and more willing to help
entrepreneurs formulate an accurate start-up plan. Also, evaluation of the
suppliers' reputation may have been infiuenced by their performance in
the very projects studied. But in general, successful entrepreneurs
appeared to be willing to pay the extra price of dealing with suppliers who
were more dependable, who required less monitoring and follow-up efforts,
and who seemed to run into fewer unforeseen problems and delays.
The Planning Approach
Despite their sensitivity to timetables and schedules, most successful
entrepreneurs did not have formal master schedules. Except in two cases,
common project planning models — such as PERT or CPM^ — were either
not employed at all or, if employed, not seriously adhered to. In fact, most
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American Journal of Small Business, VoL V, No. 2, Fall (Oct-Dec.), 1980
of the entrepreneurs — with successful start-ups or with time and cost
overruns — neither invested heavily in, nor followed, a master project
schedule. Instead, they typically scheduled their work incrementally —
that is, to use Lindblom's phrase [4,p.79-88], they "muddled through" the
start-up work. The overall or "master" schedule prepared at the time of
feasibility analysis was gradually set aside and not updated; consequently,
its usefullness as a guide for the entrepreneur's course of action
deteriorated rapidly.
The intriguing question is why most of the successful entrepreneurs,
too, followed this pattern in their planning. In my opinion, there are three
reasons:
(a) The Uncertain Environment — Setting up a manufacturing plant
in a developing country requires a great deal of interaction with an
environment which changes at a rather rapid rate in directions which are
difficult to predict. Government policies and regulations, price and
availability of resources required during the start-up (e.g., manpower,
construction materials), competitive situation in the raw materials,
supplies and sales market, and general level of services rendered by the
country's infrastructural institutions (e.g., transportation companies, utili-
ties suppliers) may all vary considerably while a plant is being erected.
Such variations, which are essentially beyond the control of entrepreneurs,
frustrate efforts to produce accurate plans. Projection of environmental
trends beyond a short planning horizon is more complex and expensive
than most entrepreneurs seem to be able or willing to do. In other words,
entrepreneurs seem to view the benefit of the information potentially
available from an in-depth analysis of long-term environmental trends to
be less than its cost. Their breakeven planning horizon usually appears to
be far shorter than full duration of the start-up period.
(b) The Newness of Activities — Estimation of the amount of
resources required to accomplish many activities involved in setting up a
new manufacturing plant in a developing country is, in itself, difficult.
Often, no previous experience from a comparable job is available to the
entrepreneur. Even for a specialist, the task is a complex one because
experience from a similar project elsewhere can seldom be transplanted
onto a new site, country, set of entrepreneurs, labor force, and culture. Too
many factors infiuence the outcome. Too many outsiders — government
bureaucrats, for example — can make entrepreneurs' predictions go
wrong. Thus, rather than strenuously attempting to predict resource and
time requirements for each activity, entrepreneurs appear to lean towards
a policy of "crossing the bridge when coming to it."
(c) The Interdependence of Activities — A related reason to (b) above
is the high degree of interdependence of manufacturing start-up activities:
machinery cannot be installed until a building is more or less completed;
electrical lines cannot be brought into the plant unless official permission
for industrial activity is obtained; technicians sent by a machinery
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American Journal of Small Business, Vol. V, No. 2, Fall (Oct-Dec.), 1980
supplier would be wasting time if machinery is not released from customs
on time.
Given the uncertainties surrounding completion of an earlier activity,
entrepreneurs are generally reluctant to make firm commitments of
resources to subsequent activities; hence, a detailed plan of action is
usually drawn up only for the near future.
CONCLUSION
Successful executionof a manufacturing start-up plan in a developing
country depends essentially upon the entrepreneur. A successful entrep-
reneur is able to push the start-up work forward and keep it on schedule
and within budget regardless of the plant's technological or logistical
characteristics. He does this by being flexible, monitoring progress closely,
reacting to problems quickly and decisively, and being hypersensitive to
delays. He does not usually follow an elaborate master plan; instead, he
muddles through the start-up work — always attentively, always ready to
change course, always pushing.
Sound project feasibility analysis is still needed; obviously, the project
should be viable, and the initial course should be set wisely. For example,
selection of a reputable machinery supplier, even at an extra cost, is
usually a wise decision. But to turn a feasibility plan into reality, there
are more ways than following a refined master start-up plan. Strict
application of the widely accepted network models — such as PERT — is
not necessarily a superior planning approach in this situation. Many
successful entrepreneurs in developing countries plan their way through
the start-up work incrementally. A partner, an investor, a banker, a
foreign expert, or a government official, who forces such an entrepreneur
to apply sophisticated planning techniques not only may not be helping
him, but may in fact be hindering the progress of the project. Such
pressure often results in the entrepreneur's pretending that he is following
a sophisticated planning model when in reality he continues to apply his
sharp business instinct to get the work done his way. He needs a certain
degree of organizational and financial latitude to do his job; if he becomes
a subject of mistrust and his latitude is taken away, he is likely to run into
more difficulties — hence, worsening the mistrust.
A viable feasibility plan is a prerequisite to successful start-up of a
small manufacturing venture in a developing country — but no guarantee.
The entrepreneur is the key. Perhaps that is one reason why in the
developing countries sometimes resources, are allocated to projects more on
the basis of the individuals involved rather than the merits of the projects
themselves.
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American Journal of Small Business, Vol. V, No, 2, Fall (Oct-Dec), 1980
FOOTNOTES
' Classified according to the size of total investment. For these projects, the range was
$0.2 to 9.5 million with the median $1.4 million. For more detailed breakdown, please refer to
Exhibit 2 (Plant Characteristic Number 1).
^ This proposition is indirectly supported by the findings of the previously mentioned
studies [1][2][3]. Only one of Teece's [3] conclusions — that the cost of technology transfer is
inversely related to the age of technology — appears to be incompatible with this
proposition's broad implications. But this incompatibility may be mostly due to the fact that
Teece has examined large projects, some of which may have been publicly owned, whereas
this study has focused on small and medium size ventures owned by private investors,
principally. There are, naturally, practical limits on the technological and logistical
characteristics of a plant started up by a private investor or entrepreneur in a developing
country: seldom would he venture into untested technology, locate his plant in a particularly
remote area, or undertake an obviously unprofitable project for the country's general welfare.
The Government, on the other hand, may.
' See project planning literature for definitions. For example, see Edward W. Davis,
"Resource Allocation in PERT Network Models — A Survey," Journal of Industrial
Engineering, Volume XVII, No. 4.
* Teece (3,p.91) has suggested a theoretical U-shape curve for technology transfer
time-cost trade-off: i.e., as the project duration is increased the project cost is first lowered
(negatively-sloped range) but after reaching a minimum point, it is increased (positively-
sloped range). My study suggests that for small and medium size plants in developing
countries, the practical time-cost trade-off is mostly positive — i.e., it is limited to the
positively-sloped portion of Teece's curve.
REFERENCES
1. UNCTAD, "The Transfer of Technology," Journal of World Trade Law, 4, (September-
October 1970).
2. Teece, David J., The Multinational Corporation and the Resource Cost of International
Technology Transfer, Ballinger, 1976.
3. Wallender III, Harvey W., Technology Transfer and Management in the Developing
Countries: Company Cases and Policy Analysis in Brazil, Kenya, Korea, Peru, and
Tanzania, Ballinger, 1978.
4.'Lindblom, C.E., "The Science of "Muddling Through,'" Public Administration Review,
Vol. 19.
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