Why Do Small Firms Fail to Graduate to Medium and Large Firms in Pakistan * (ISSUES IN MANUFACTURING SECTOR‪)‬

I. INTRODUCTION Small-scale manufacturing industries in Pakistan have grown at a rate of more than eight percent during the Seventies and the Eighties. The rapid growth in the presence of the heavily subsidised large-scale manufacturing sector suggests relatively higher levels of efficiency in the small-scale industries but surprisingly enough very few small enterprises have graduated to medium and large-scale enterprises. The inability of the small firms to graduate raises serious questions about the level and the sources of efficiency in the small-scale industries. While some of the small-scale industries may be efficient because the divisibility of technology and the processes leads to specialisation in sub-processes at the small scale, yet the efficiency in a number of industries may be more apparent than real; the inefficient enterprises may have survived just by avoiding taxes or exploiting labour. Obviously, such firms would find it difficult to expand to the size where tax and labour regulations would apply. On the other hand, the failure of even the efficient firms to graduate to medium or large firms indicate that the growth of small industries may have been constrained by some extraneous factors as well.