STRUCTURE-CONDUCT AND PERFORMANCE OF THE INFORMAL METAL

MANUFACTURING INDUSTRY IN ZIMBABWE: IMPLICATIONS TO

STAKEHOLDERS IN THE AGRICULTURAL SECTOR

by

MAKATE CLIFTON

A thesis submitted in partial fulfilment of the requirements for the Master of Science in

Agricultural and Applied Economics

Department of Agricultural Economics and Extension

Faculty of Agriculture

University of Zimbabwe

June 2013

i

CERTIFICATION OF DISSERTATION

The undersigned certify that they have read, and recommend to the Department of Agricultural

Economics and Extension for acceptance, the thesis entitled:

Structure-Conduct & Performance of the informal metal manufacturing industry in

Zimbabwe: Implications to stakeholders in the Agricultural sector

Submitted by Clifton Makate in partial fulfilment of the requirements for the degree of Master

of Science in Agricultural and Applied Economics (MAAE)

Approved:

Major supervisor Co-supervisor

Dr S. Siziba Mr.B.T. Hanyani-Mlambo

Signed.......................... Signed………………..

Date……/……./……… Date……/……./……...

Associate supervisor

Dr. W. Sadomba

Head of Department (Dr J. Mutambara)

Signed……………….

Date……./……./……

ii

DEDICATION

To Mom and Dad

iii

ABSTRACT

There is proliferation of informal activities especially in developing countries yet they still

remain unrecognised and not integrated into national economic development plans. The informal

activities are playing a very crucial role in terms of contribution to GDP and the transformation

of the economy. Of importance to the study is the proliferation of the informal metal fabrication

activities that are contributing to the supply of agricultural technologies (equipment, implements,

and tools) in Zimbabwe. There is a shortage of intermediate technologies by the new crop of

poor resource endowed farmers (smallholder farmers) following a new agrarian reform that

replaced large-scale commercial farmers with smaller family run farms. Also the collapse of the

formal industry that traditionally supported large scale farmers with farming equipment and

implements worsened the shortages. The main objective of the study was therefore to assess the

efficiency of the informal metal manufacturing industry and drawing implications for

stakeholders in the agricultural sector. As suggested in economic theory the study used the

Structure, Conduct and Performance (S-C-P) framework to assess efficiency of the industry and

also in drawing implications of results to smallholder farmers. The study is based on data from

200 micro and small to medium informal metal manufacturing enterprises gathered through

surveys in five major cities Harare, Bulawayo, Mutare, Rusape and Chitungwiza and secondary

data from the ministry of Small to Medium Enterprises’. Results of the survey show that the

informal metal industry is competitive. The industry is not highly concentrated i.e. firms in the

industry lack market power. Products in the industry are standardized and there is discipline in

the market in general. In terms of behaviour in markets, firms practice close to marginal cost

pricing, collusive behaviour in production and marketing is minimal. Moreover, the industry is

succeeding in generating benefits for consumers. This is so because firms in the industry are

profitable, prices in the industry are lower compared to prices on same products by formal

competitors, customer satisfaction is high and there is no consumer exploitation in the market.

Also, the industry was found to have great potential as indicated by the profitability of firms.

Both firm behavioural factors and firm specific factors were found to influence performance in

the industry. The conclusion was that the informal metal industry is making a positive and

efficient contribution in the supply chain of agricultural materials to smallholder agriculture.

Farmers being major customers in the industry are better off in sourcing agricultural materials

from the industry because of the good and guaranteed customer services, lower prices amongst

others services. As recommendations the researcher suggests government should integrate

informal metal fabrication activities in national economic development plans in order to enhance

benefits from the sector to the rest of the economy. Owners of the metal fabrication enterprises

should work on improving operations in their businesses, i.e. keeping records, and improve on

general management. They should focus more on their pricing methods, type of products they

produce, and they should stay in business for longer periods so as to influence their performance

positively.

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ACKNOWLEDGEMENTS

A lot of people have contributed greatly towards the success of this thesis. Firstly, I would like

to express my sincere gratitude to my dear supervisors Dr S Siziba and Mr H.Mlambo within the

department of Agricultural Economics and Dr W. Sadomba within the Centre for Applied Social

Science department who have always had great confidence in me and my work and provided me

guidance and support without reservation throughout the writing process. I would not have made

it without their tremendous effort, knowledge and wisdom. Thank you very much.

Secondly, I would also want to thank the Centre of Applied Social Science (CASS) for their

research project that led to the Collection of Data for carrying out this study. To my colleagues,

the quality of this work would have been compromised if it was not for the sense of competition

and purposefulness that you have always shown throughout, thank you.

Thirdly, I would also want to thank the Germany Academic Exchange Services (DAAD) for

their financial support during the time of my study, thank you.

Last but not least I would like to thank my family for their unconditional love and support

throughout the period of my study. Without you, I would not have completed this challenging

task and long journey. Thank you!

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CONTENTS

DEDICATION ...................................................................................................................................... ii

ABSTRACT ......................................................................................................................................... iii

ACKNOWLEDGEMENTS ................................................................................................................ iv

CONTENTS ........................................................................................................................................... v

LIST OF TABLES ............................................................................................................................ viii

LIST OF FIGURES ............................................................................................................................ ix

LIST OF ACRONYMS ......................................................................................................................... x

CHAPTER ONE: INTRODUCTION.................................................................................................. 1

1.1 BACKGROUND ............................................................................................................................. 1

1.2 RESEARCH PROBLEM ................................................................................................................ 6

1.3 RESEARCH QUESTIONS ............................................................................................................. 8

1.4 RESEARCH OBJECTIVES ............................................................................................................ 8

1.5 RESEARCH HYPOTHESES .......................................................................................................... 9

1.6 JUSTIFICATION OF STUDY ....................................................................................................... 9

1.7 ORGANISATION OF STUDY .................................................................................................... 10

CHAPTER TWO: LITERATURE REVIEW .................................................................................. 11

2.1 INTRODUCTION ......................................................................................................................... 11

2.2 DEFINITION OF KEY TERMS ................................................................................................... 11

2.3 STUDY CONCEPTUAL FRAMEWORK ................................................................................... 14

2.4 STRUCTURE CONDUCT AND PERFORMANCE (S-C-P): AN OVERVIEW ........................ 16

2.4.1 Literature on the overview...................................................................................................... 16

2.4.2 Problems of the s-c-p approach in estimation ........................................................................ 20

2.4.3 Criticism of the approach ....................................................................................................... 22

2.5 STRUCTURE-CONDUCT-PERFORMANCE: EMPIRICAL STUDIES AND EXAMPLES .... 24

2.5.1Examples of S-C-P of industries ............................................................................................. 24

2.5.2 Previous studies on structure conduct and performance of industries .................................... 25

2.6 FACTORS AFFECTING SMALL ENTERPRISE’S PERFORMANCE. .................................... 29

2.7 INSIGHTS FROM THE LITERATURE ...................................................................................... 31

CHAPTER THREE: RESEARCH METHODS............................................................................... 33

3.1 INTRODUCTION ......................................................................................................................... 33

3.2 DATA SOURCES ......................................................................................................................... 33

3.3 SAMPLING .................................................................................................................................. 33

3.4 METHODS AND TOOLS FOR DATA COLLECTION ............................................................. 34

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3.5 DATA, PROCESSING AND ANALYSIS ................................................................................... 35

CHAPTER FOUR: OVERVIEW OF THE INFORMAL METAL INDUSTRY .......................... 40

4.1 INTRODUCTION ......................................................................................................................... 40

4.2 OVERVIEW OF INFORMAL SECTOR SITES CHARACTERISTICS .................................... 40

4.3 SOCIO-ECONOMIC PROFILES OF FIRM OWNERS .............................................................. 40

4.4 FIRMS’ CHARACTERISTICS AND OTHER ATTRIBUTES ................................................... 43

4.5 GOODS MANUFACTURED IN THE INDUSTRY .................................................................... 48

4.6 CUSTOMERS IN THE INDUSTRY’S MARKET ...................................................................... 51

4.7 CONSTRAINTS ........................................................................................................................... 52

4.8 SUMMARY OF CHAPTER FINDINGS AND CONCLUSIONS ............................................... 53

CHAPTER FIVE: STRUCTURE, CONDUCT AND PERFORMANCE OF FIRMS IN THE

INFORMAL METAL INDUSTRY ................................................................................................... 55

5.1 INTRODUCTION ......................................................................................................................... 55

5.2 COMPETITIVENESS OF THE INDUSTRY............................................................................... 55

5.2.1 Market Concentration ............................................................................................................. 55

5.2.2 Nature of conditions of entry into the industry ...................................................................... 56

5.3 BEHAVIOUR OF FIRMS IN THE INDUSTRY ......................................................................... 58

5.3.1 Price discovery methods, price setting behaviours and other tactics in pricing ..................... 58

5.3.2 Selling practices and Marketing ............................................................................................. 60

5.3.3 Grading, Advertising, Research and Development ................................................................ 63

5.3.4 Information and Communication Technologies (ICT’s) used in business ............................. 66

5.3.5 Other conduct ......................................................................................................................... 67

5.4 SUCCESS OF THE INDUSTRY IN PRODUCING BENEFITS FOR CONSUMERS .............. 67

5.4.1 Prices as compared to formal competitors and producers’ share of the price ........................ 68

5.4.2 Profitability of firms in the informal metal manufacturing industry ...................................... 70

5.4.3 Expected future performance of informal metal manufacturing firms ................................... 72

5.4.4 Customer satisfaction in the industry ..................................................................................... 73

5.5 FACTORS INFLUENCING PERFORMANCE OF FIRMS IN THE INFORMAL METAL

INDUSTRY ......................................................................................................................................... 74

5.5.1 Descriptive statistics of the sample on variables in regression .............................................. 74

5.5.2 Multiple regression results ..................................................................................................... 76

5.6 SUMMARY OF CHAPTER FINDINGS AND CONCLUSIONS ............................................... 78

CHAPTER SIX: IMPLICATIONS AND RECOMMENDATIONS .............................................. 82

6.1 INTRODUCTION ......................................................................................................................... 82

6.2 IMPLICATIONS ........................................................................................................................... 82

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6.2.1Implications of Informal industry Structure on smallholder farmers ...................................... 82

6.2.2 Implications of Conduct (behaviour of firms) on smallholder farmers .................................. 83

6.2.3 Implications of Performance of the industry on smallholder farmers .................................... 84

6.3 RECOMMENDATIONS .............................................................................................................. 85

6.3.1Recommendations to policy makers ........................................................................................ 85

6.3.2 Recommendations to owners of informal sector enterprises .................................................. 86

6.3.3 Recommendations to farmers ................................................................................................. 87

6.4 AREAS OF FURTHER RESEARCH ........................................................................................... 87

LIST OF REFERENCES ................................................................................................................. 89

LIST OF APPENDICES ..................................................................................................................... 97

Appendix 1: Firm Owners’ Questionnaire .......................................................................................... 97

Appendix 2: Consumer Interview Guide ........................................................................................... 101

Appendix 3: Observation Guide ........................................................................................................ 102

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LIST OF TABLES

Table 1.1 Members in the formal agricultural implements and equipment supply chain ......... 2

Table 3.1 Major areas included in the study ............................................................................ 34

Table 3.2 Sample distribution and composition ...................................................................... 34

Table 3.3 Classification of industry based on market concentration ....................................... 36

Table 3.4 Variables and measurement ..................................................................................... 39

Table 4.1 Summary statistics of the firm owners’ socio-economic attributes ........................ 41

Table 4.2 Firm age statistics .................................................................................................... 43

Table 4.3 Firm employment statistics 2010-2013 ................................................................... 46

Table 4.4 Values of additional investments made to the firms in USD$ ................................ 47

Table 4.5 Type of products produced in the informal metal industry ..................................... 49

Table 4.6 Agricultural product categories in the informal metal industry .............................. 50

Table 5.1 Summary statistics on total capital costs of starting the firm .................................. 56

Table 5.2 Summary statistics on Grading, Advertising and Research and Development ....... 63

Table 5.3 Comparison of formal and informal prices on selected products ............................ 68

Table 5.4 Producer’s share of the price statistics .................................................................... 69

Table 5.5 Descriptive statistics on net profits from 2010-2012 .............................................. 70

Table 5.6 Descriptive statistics on the Tobin’s q ratio calculations ........................................ 73

Table 5.7 Descriptive statistics on regression variables .......................................................... 75

Table 5.8 Multiple regression results on factors influencing performance ............................. 76

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LIST OF FIGURES

Figure 2.1 Illustration of the Conceptual framework .............................................................. 16

Figure 2.2 Inter-linkages between Public policy and S-C-P elements .................................... 24

Figure 4.1 Experience of firm owner when firm was started .................................................. 42

Figure 4.2 Age distribution of firms in the informal metal industry ....................................... 44

Figure 4.3 Sources of capital to start the firm ......................................................................... 45

Figure 4.4 Firm ownership types in the informal metal industry ............................................ 45

Figure 4.5 Employment by gender from 2010-2013 ............................................................... 47

Figure 4.6 Types of goods manufactured ................................................................................ 49

Figure 4.7 Customers in the informal metal industry’s market ............................................... 52

Figure 5.1 Distribution of worth of capital used to start firm ................................................. 57

Figure 5.2 Price discovery methods ........................................................................................ 59

Figure 5.3 Price setting behaviours in the informal industry .................................................. 59

Figure 5.4 Ways of selling products ........................................................................................ 61

Figure 5.5 Marketing strategies employed by firms in the industry ........................................ 62

Figure 5.6 Criteria used for grading products ......................................................................... 64

Figure 5.7 Modes of advertising used ..................................................................................... 65

Figure 5.8 ICT’s used in business ........................................................................................... 66

Figure 5.9 Product returns by customers ................................................................................. 67

Figure 5.10 Reasons for charging lower prices than those of formal competitors .................. 68

Figure 5.11 Distribution of profits in the year 2010 ................................................................ 70

Figure 5.12 Distributions of profits in 2011 ............................................................................ 71

Figure 5.13 Distributions of profits in 2012 ............................................................................ 71

Figure 5.14 Distributions of profit margins of firms in the informal metal industry .............. 72

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LIST OF ACRONYMS

ADMA: Agricultural Dealers and Manufactures Association

CR Concentration Ratio

CZI Confederation of Zimbabwe Industries

FTLR Fast Track Land Reform

GDP Gross Domestic Product

GNU Government of National Unity

HHI Herfindal-Hirshchan Index

ICT Information and Communication Technology

MDG’s Millennium Development Goals

MIS Management Information Systems

MR Marginal Revenue

NGO Non-Governmental Organisation

OECD Organisation for Economic Cooperation and Development

OLS Ordinary Least Squares

POTRAZ Postal and Telecommunications Regulatory Authority of Zimbabwe

ROA Return On Assets

SCP Structure Conduct Performance

SME’s Small to Medium Enterprises

SSA Sub-Saharan Africa

TC Total Cost

TR Total Revenue

USD United States Dollars

ZIMSTATS Zimbabwe Statistical Agency

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CHAPTER ONE: INTRODUCTION

1.1 BACKGROUND

The unstable economic environment that has prevailed for the past decade or so has had a

devastating effect on much of the economic activities in Zimbabwe. Dating back to the year 2000

when Zimbabwe embarked on the fast track land reform programme up to the period just before

the introduction of the multi-currency system1, serious changes have been felt in the country as

a whole. The period up to 2008 saw increasing quasi-fiscal activities by the Reserve bank of

Zimbabwe. A lot of stakeholders strongly believe that these quasi-fiscal activities contributed

greatly to the further decline in economic activity. It is within the same period and for the first

time the country experienced hyperinflation2. Official macroeconomic statistics as reported by

the Zimbabwe National Statistics Agency (ZIMSTATS) show inflation figures between the

years 2000 and 2008 as follows: 55.2% in year 2000,112.22% in 2001,198.93% in 2002,

598.75% in 2003, 132.75% in 2004, 585.84% in 2005, 1281,11% in 2006, 66212,3% in 2007

and 2310000000% in 2008. The harsh hyper-inflationary environment that prevailed during this

time forced lots of companies in both manufacturing and service industries to operate below their

normal capacities with many of them shutting down completely. The effects of the inflationary

environment were however worse in the 2006 to 2008 period. In addition, the combination of

inflation and a fixed exchange rate regime that was in place is believed to have led to the

resurgence of the black market3, a decline in capacity utilisation within the informal

manufacturing sector and a landslide fall in production. As a result there were shortages of

almost all goods and services. However, it is important to note that with the birth of the

1 The system in which Zimbabwe officially abandoned its own currency in favor of foreign currencies like the U.S.

dollar, South African rand, British pound, Botswana pula among other recognized currencies. 2 Hyperinflation is when the general prices of goods and services in the economy rises at a rate of 50% or more per

month as a result of the near total collapse of a country’s monetary system, and thus rendering its currency almost

worthless. 3 A black market or underground economy is the market in which illegal goods and services are traded.

2

Government of National Unity (GNU) that saw the introduction of the multicurrency system, the

formerly unstable macroeconomic environment stabilized. Most notably is the stabilization of

prices and the significant decline in underground economic activity. The multicurrency system

meant the official use of foreign currencies like the United States (U.S) dollar, the South African

(S.A) rand, and the Botswana pula among other currencies which were formally illegal in

Zimbabwe. This forced much if not all of the underground activity in foreign currency to

disappear. There is not much evidence however of an improvement in activity in the

manufacturing sector as most companies are still closed with few of them operating below

capacity. The trends in the macroeconomic environment as highlighted above gives us enough

evidence and justification to strongly believe that our hypothesis as to why there is a very low

level of activity in the formal industries even up to this date. Of particular interest in this study

is the diminished role of formal players in the agricultural equipment and implements supply

chain. In Zimbabwe, the main players in this supply chain of agricultural equipment and

implements are members of the Agricultural Dealers and Manufacturers’ Association (ADMA)

and the Irrigation Institute of Zimbabwe. In table 1.1 below, we give a list of the members and

the products they supply:

Table 1.1 Members in the formal agricultural implements and equipment supply chain

ADMA MEMBERS IRRIGATION INSTITUTE MEMBERS

Company Products Company Products

Hastt Zimbabwe Animal drawn ploughs Tube and pipe

industries

Irrigation piping and fitting,

borehole casings

Sabata Holdings Combine harvesters,

tractors

Turnall fibre cement Pressure pipes

Zimplow Animal drawn ploughs Dore and Pitt Pipes, and fittings, pumps,

borehole drilling equipment

William Bain and

Co

Tractors and

spares,trailers,water carts

Irrig8 Irrigation equipment and

design

AgVenture Crop protection equipment Moving water

industries

Irrigation pipes

Brown

engineering

Tobacco curing equipment,

fans,trailers

Wright rain Filtration pumps,sprinklers

Precision grinders Land preparation equipment

e.g. ploughs and disc

harrows+ crop processing

equipment

Waterflo engineering Borehole pumps,borehole

drilling equipment

3

Mounted tractors Tractors, spares Conchrane pumps Centrifugal pumps for

irrigation

Farmec Tractors Almin metal industries Aluminium irrigation tubes

Source (Mafu, 2011)

The roles of the major players given in the table above have declined mainly due to the economic

downturn (Mafu, 2011). The current operating capacities of players mentioned above are given

in the 40% to 50 % region. Some of the direct challenges that the above players are currently

facing include the following: loss of market share due to competition from cheap imported

equipment, reduced demand for products due to unaffordability by customers, lack of access to

long-term financing by farmers which affects their purchasing power, Shortage of skilled labour

due to skills flight, low productivity due to lack of working capital, dilapidated and antiquated

machinery due to inability to recapitalise, lack of export incentives causing uneven playing field

on the export market as competitors like South Africa have packages of those incentives, high

costs of raw materials e.g. steel and , high costs of transport to regional markets

The above mentioned challenges still hamper operations in production and marketing activities

by the major players in the agricultural equipment and implements supply chain. As a result,

there is evidence of shortages of some essential equipment and implements demanded by the

small holder farmers in the formal market. In addition, some of the equipment and implements

found on the formal market are not affordable to the farmers due to higher prices and lack of

long-term financing by the smallholder farmers. The birth of the Fast Track Land Reform

(FTLR) program of 2000 also led to an increase in the number of the smallholder farmers. This

resulted in an increased demand for the equipment and implements as the newly resettled farmers

lack these essential inputs to carry out their farming activities. This poses problems for the

Zimbabwean agriculture particularly to the resettled and or the rest of small holder farmer since

the implements and equipment constitute/are essential inputs for a successful farmer.

4

One of the questions an individual may ask will be, why the emphasis on the smallholder

agriculture sector? This sector plays an essential role in ensuring food security, economic growth

and employment creation (Made, 2010). It is characterized by diversified farming of crops and

livestock production. Food crops are grown right alongside cash crops, for example maize,

cotton and vegetables. The crops grown by these smallholder farmers can be grouped as follows:

plantation crops (sugar cane, coffee, tea), horticultural crops (fruits and vegetables), and general

field crops (maize, wheat, cotton, sunflower, millets, groundnuts, sugar beans). Livestock is

categorized into three major areas of production: beef, dairy and small livestock (e.g., poultry,

goats, sheep, and pigs).

The short description given above shows that the smallholder sector is an equally vital sector to

Zimbabwean agriculture as evidenced by a balanced set of activities that include essential crop

(cereal and cash crops) and livestock activities. Moreover, due to the multitudes of functions

involved, the smallholder sector also offers the greatest potential for reviving agricultural and

economic development in Zimbabwe. This sector is however, faced with a number of challenges

that limit production and even marketing of agricultural produce. Chief amongst the problems

is the lack of adequate equipment, implements and other essential tools to use in their production

activities as mentioned earlier. The reduced role played by the dealers in the supply chain of

farm equipment and implements is to blame for the shortage in supply of the essential input.

Another question a lot of stakeholders may still want to ask is; Why the emphasis on Agriculture?

In brief: Agriculture still remains a major sector to the economy of Zimbabwe as it is the main

source of livelihoods and one of the major employers. Year 1998 Statistics show that agriculture

contributed about 15% of Gross Domestic Product (GDP) and 60% of raw materials. In addition;

the sector provided 70% of employment + livelihoods and 40% of merchandise exports with

tobacco being the most important in the same year Mudimu et al, (1999). In 2011, agriculture

5

contributed about 20.4% to GDP with the service sector and industry contributing about 54.9%

and 24.6% respectively GDF, (2012).

The researchers believe that the diminished roles of players in the agricultural equipment and

implements supply chain have greatly affected Zimbabwean agriculture. We know that capital

equipment is one of the potential factors that can raise productivity. It therefore means that we

can safely blame the low activity by the dealers in the supply chain to the dwindling levels of

productivity experienced by the small holder farmers. Considering the fact that agriculture has

very strong linkages with almost every sector within the economy as we mentioned earlier,

problems hindering growth of the sector therefore affects the rest of the economy.

However, there is ample evidence worldwide of the growth of the underground economy also

known as the informal economy especially in developing economies Zimbabwe included. In

theory it is believed that there is a strong positive relationship between the economic downturn

of a country and the growth of the informal sector in that country and this has been found true

for Zimbabwe as well (Chidoko et al, 2011). Several other studies have been done for Zimbabwe

giving evidence of the growth of the informal activities. (See Chidoko and Makuyana, 2012)

By definition, the informal sector refers to the market-based production of goods and services,

whether legal or illegal that escapes detection in the official estimates of GDP Smith, (1994). Of

importance in Zimbabwe is the growth of the informal metal manufacturing and service sector

that the researcher believes is contributing to the agricultural equipment and implements supply

in Zimbabwe. The informal metal manufacturing sector by definition becomes now those micro

and small to medium unregistered firms and business operations that focus on metal fabrication

activities that escape detection in the official estimates of GDP. The sector however, produces a

variety of other metal products besides agricultural equipment and implements which include

building materials, industrial tools, equipment, machinery and much other household equipment.

6

We strongly believe that this sector is helping a lot in closing the gap that is left in the market

by the contraction in operation by formal players in the supply chain. Moreso, we further believe

that this underground market is also serving as a cheaper alternative source of implements and

equipment for the smallholder farming community in the country. Adding to the above, we

further hypothesize that the informal metal fabrication activities are playing a very important

role in the agricultural implements and equipment supply chain.

1.2 RESEARCH PROBLEM

Evidence from literature indicates that smallholder farmers in Zimbabwe are facing numerous

challenges in their production activities. One of the problems is the lack of adequate farming

equipment, implements and tools to boost their production. The lack of well-functioning

agricultural equipment and implements supply chain for the small holder farmers is contributing

and worsening the problem. Food and Agricultural Organisation (FAO) studies have also

provided some evidence to confirm this problem. One of the studies by FAO contends that

despite some decades of developmental efforts in Sub-Saharan-Africa (SSA), the lack of a proper

functioning input supply chain for small to medium sized farms has resulted in acute farm power

shortages (FAO, 2009). Consequently, this negatively impact on agricultural production and

rural livelihoods. Chief amongst the causes of lack of a proper functioning supply chain of farm

equipment is the diminished role of the major dealers in the supply chain as discussed above.

It is also important to note that the problems of acute power shortages are also a result of lack of

adequate finance to meet the costs of acquiring the equipment and implements from the formal

dealers in the supply chain i.e. Farmec, Zimplow, Hastt Zimbabwe, Dore and Pitt just to mention

a few (FAO,2005). In addition, it is worth mentioning also that the pricing of most of the

equipment and implements in the formal market is worsening the shortages as the prices are not

affordable to the resource poor farmers. The problem is mainly affecting the smallholder farmers

7

particularly the newly resettled farmers that are known to be resource poor. Both crop production

and livestock production have been affected as a result. Investigations into the impact of farm

power shortages have shown that it is a key component of inadequate livelihoods. A reduced

availability of this vital input into agricultural production systems is a source of poverty in Sub-

Saharan Africa (FAO, 2005). Attempts have been made at national level to solve the problem.

Availing finance to the farmers has been one of them but attempts have been less successful

because of other problems.

However, with evidence of growth of informal metal fabrication activities in Zimbabwe since

independence the researcher believes that the sector might be playing an important role in the

supply chain of agricultural equipment and implements amongst many other roles. The

developmental problem would therefore be to predict the growth pattern and path of the informal

sector especially the metal fabrication sector. This has a bearing on meeting the technology i.e.

equipment, tools and implements need of the smallholder farming sector and in turn productivity

growth of the sector. As a result growth within the smallholder sector may improve prospects of

meeting Millennium Development Goals (MDG’s) i.e. improvement in food supply and thus a

reduction in hunger.

The corresponding research problem is to assess the growth prospects of the informal metal

industry. To do this, microeconomic theory suggests verifying /assessing the structure, conduct

and performance of the industry.

The major contribution of this study is to assess the structure, conduct and performance of the

metal informal industry. The results of the SCP have important implications on the production

and supply of farm equipment, implements and tools as well as other metal products for the

smallholder farming community. The study results provide policy design material. To the best

8

of my knowledge, no such study has been done before and this was the justification for carrying

out this research.

1.3 RESEARCH QUESTIONS

The research will be guided by the following questions

i. How is the informal metal industry structured?

ii. How is business conducted in the informal metal industry?

iii. How successful are firms in the informal metal industry in producing benefits for

consumers?

iv. What are some of the factors that influence performance of small to medium firms in the

informal metal industry?

1.4 RESEARCH OBJECTIVES

Broadly the study seeks to determine the structure-conduct and performance of small to medium

firms in the informal metal industry in Zimbabwe and draw implications to the production and

supply of agricultural equipment and implements and various other metal products.

The research will have the following as the specific objectives:

i. To determine the structure of the informal metal industry i.e. the factors that determine

the competitiveness of the industry.

ii. To identify the patterns of behaviour adopted the by small to medium firms in the

informal metal industry to adjust to the markets in which they sell.

iii. To determine the performance of the informal metal industry i.e. the success of the

industry in producing benefits for consumers.

iv. To determine some of the factors that influence performance of firms in the informal

metal industry.

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1.5 RESEARCH HYPOTHESES

The study will have the following research hypotheses:

i. The informal metal industry is perfectly competitive. I.e. there are very low barriers to

entry and exit, there are many micro-and small to medium firms, no product

differentiation and the costs of starting businesses are very low.

ii. Conduct in the informal metal industry takes the form primarily of price based

competition. Advertising, research and innovation, product differentiation are not

common practices.

iii. Firms in the informal metal industry are successful in producing benefits to customers

i.e. they set prices lower prices than those of formal competitors and are making profits

at the same time.

iv. Firm performance is determined/influenced by the conduct and structure of the market.

I.e. structure and conduct factors significantly influence firm’s performance.

1.6 JUSTIFICATION OF STUDY

An understanding of the structure, ways of conducting business and the general performance of

the informal metal industry will be very important. The understanding is vital in the assessment

of the importance of the informal metal industry in production and supply of agricultural

equipment and implements and various other products. The analysis is vital to various

stakeholders i.e. the smallholder farmers, owners of the micro and small to medium enterprises

in the informal sector and policy makers. To the farmers the analysis will help them in decision

making. From the analysis smallholder farmers can get well informed on whether to rely on the

informal metal industry as their source of agricultural equipment, tools and implements and other

metal products. Issues like pricing, quality of produce and variety of products, customer service

etc. will be vital in making the decision. The farmers can usefully make the conclusions from

10

the analysis to their benefit in making the input procurement decisions from the informal sector.

The analysis will be also of importance to the owners of the enterprises themselves. An

understanding of the structure of the informal metal industry, the conduct and the performance

of the informal metal industry will help them in decision making also. Owners of the micro

enterprises can use findings to adjust their ways of doing business and improve profitability.

Firm owners can work on various elements in their businesses i.e. research and development,

pricing, advertising etc. to improve their performance. In addition, the analysis will also be

important to policy makers. Results from the analysis provide policy design material. The

Ministry of Small to Medium Enterprises’ (SME’s) for example can use the results of the

analysis to intervene in the informal metal industry in trying to enhance benefits from the sector

to the rest of the economy. Furthermore, because of the strong linkages agriculture has with the

rest of the sectors of the economy, results from this study will be crucial in steering the economy

in the right direction in terms of employment, GDP growth and better standards of living.

1.7 ORGANISATION OF STUDY

The rest of the study is organized as follows; chapter 2 gives a review of the relevant literature,

chapter 3 discusses the research methods used in the study. Characterization i.e. an overview of

the informal metal industry follows in chapter 4. Chapter 5 details the structure-conduct-

performance of the informal metal manufacturing industry as well as give the factors influencing

firm performance in the industry. Lastly, chapter 6 gives an important discussion about the

implications of the S-C-P results to stakeholders in the agricultural sector, policy

recommendations as well as some areas for further study.

11

CHAPTER TWO: LITERATURE REVIEW

2.1 INTRODUCTION

In this section, we provide a review of the relevant literature on the subject matter. The chapter

begins by defining some key terms used in the study followed by a general overview of the

analytical approach (Structure-Conduct and Performance) adopted by the study. The overview

covers things like the origins of the analytical approach, applicability of the approach to

industrial organisation, the linkages amongst industry structure-conduct and performance, the

use of econometric modelling and regression analysis in figuring out correlations amongst

variables in a Structure-Conduct-Performance(S-C-P) framework, the problems of the approach

and its major critics, and ways of dealing with some of the problems with the approach. The

chapter again gives a review on studies in industrial organisation in which the Structure-

Conduct-Performance approach have been applied in studying various industries. After the

empirical studies on structure conduct and performance the chapter also gives a review of the

factors that affect performance of small to medium sized firms in a structure- conduct and

performance framework. A conceptual framework for the study is also given in the literature

review section. The conceptual framework will provide a general guide to the study. Insights

drawn from the literature will round-up the literature review chapter.

2.2 DEFINITION OF KEY TERMS

The informal sector

There is no universally agreed definition of an informal sector, but generally it is defined in

terms of its characteristics. According to Nattrass (1987) cited by Mahadea (2001), the informal

sector comprises ‘of all people outside formal wage employment in the officially recognised and

regulated sector, as well as all enterprises which function outside government rules and

regulations and which operate on a small scale using labour-intensive technology’. In Africa, the

12

informal sector provides 44% of the Gross National Product, in Middle and Eastern Europe about

20% and in OECD countries about 12% (Gerxhani, 2003). In this study, the informal sector will

be defined as comprising mostly people who are self-employed and operating outside

government rules and regulations. The terms informal economy, informal work, informal sector,

informal economic activity, informal industry, informal firms will be used interchangeably.

Informal businesses are businesses that are not formally registered or at least violate one or more

regulations (licensing, minimum wage, tax evasion and sanitation among others) of the central

or local authorities (Jerkins, 1997). Harper (1984) mentions that informal businesses in

developing countries are notoriously difficult to count let alone to measure individually.

On the other hand Musabayana (1996) observed that most informal businesses are small, mobile

and labour intensive. He observed further, that most of them employ traditional methods of

production, occupy temporary or mobile facilities and are small in size. Jerkins further argued

that owing to these characteristics, informal business operators are less likely to enjoy credit

from formal lending institutions. This therefore means that they cannot extend credit to their

own customers. Santos (1989) observed the following characteristics of formal and informal

business operators: Informal businesses are family based while large scale businesses are capital

intensive and bureaucratic, and that customer relations are personal in the informal while it is

impersonal in the formal enterprises.

Thomas (1992) and Schneider and Enste (2000) pointed out that the nature and characteristic of

informal businesses are dynamic and the concept of informal business sector is still in debate.

They highlighted that the most difficult thing in debate is to make an agreement in setting definite

boundaries between informal and formal sector. Peatie (1987) and Bromley (1990) argue that

informal businesses are characterised by being individualistic in nature. Bromley (1990) refers

to them as family self-employment. He pointed out that the nature of informal sector is a

13

necessary survival strategy in countries that lack social safety nets such as unemployment

insurance or where wages especially in the public sector and pensions are low and such is the

case with Zimbabwe.

There are no clearly stated figures on the unregulated sector. Intensive fabrication also takes

place under this sector. Players in the sector comprise of flea markets operators, carpenters,

manufacturers and suppliers of agricultural produce, food traders etc. no matter what economic

activity takes place in the formal sector has its corresponding activity in the informal sector.

Informal entrepreneur can be found in both rural and urban centres, including growth points

Metal fabrication- is the building of metal structures by cutting, bending, and assembling

processes or simply the manipulation of metal from one state to another.

Structure-Conduct-Performance(S-C-P) - is an analytical approach that is used to study how

the structure of the market and the behaviour of sellers of different commodities and services

affect the performance of markets, and consequently the welfare of the country as a whole.

Structure in this model refers to the environment of the industry in which the firm is operating

i.e. how producers or sellers interact with other producers, with buyers and also with potential

entrants. The structure also defined the product in terms of the potential number of variants in

which the product can be produced. The major elements of the structure describe the ways in

which markets depart from the conditions that describe perfect competition. The elements

include number of competing firms in the industry, homogeneity of products, costs of starting

the business, barriers to entry, vertical integration, diversification and other factors.

Conduct referred to the set of strategies that the firms implement to gain competitive advantage

over its rivals or in simple terms the behaviour/actions of the firms in the market or industry.

Conduct also includes the decision the firms make and the ways in which the decisions are taken.

14

Significant aspects and elements of conduct in the model included the following: pricing and

price setting behaviour, advertising and product development, research and development, Plant

investment, Legal practice, mergers, cartels, collusion etc.

Performance in the model referred to the success of the industry in producing benefits to

consumers. The essential question was whether firms’ operations enhance economic welfare.

The firms’ outcomes ought to be efficient avoiding wasteful usage of scarce resources in

satisfying consumer demands. On the other hand performance in the model had two dimensions

performance of the individual firms and performance of the metal industry as a whole. Important

aspects of performance include profitability, market growth, price levels, product quality,

technical progress etc.

Firms and industries-individual business units involved in metal fabrication activities in the

informal sector will be taken as firms and a group of those business units will make the industry.

The industry will be defined in terms of the metal products and the producers of the metal

products will be considered as members of the industry.

2.3 STUDY CONCEPTUAL FRAMEWORK

The structure-conduct-performance approach was developed by Mason and Bain in the 1930’s

based on the neoclassical theory of the firm. It was designed to understand the correlations

among a firm’s structure/environment, behaviour and performance. The framework since then

is known as the Structure-Conduct-Performance(S-C-P) Model. Bain decomposed a market into

three main categories namely; structure, conduct and -performance. The paradigm argues that

industry performance (the success of the industry in producing benefits to consumers) depends

on the conduct (behaviour of sellers in the market) which in turn depends on the structure (factors

that determine the competitiveness of the market) of the relevant industry.

15

An important addition to the structure-conduct-paradigm is the idea of an industry’s basic

conditions Aleksandrova and Lubys, (2004). In this case the paradigm becomes the Basic

conditions-Structure-Conduct-Performance paradigm. The basic conditions shape the market

and the industry structure. These are however, exogenous and they operate on two fronts that are

both on supply and demand side of the market. On the supply side the basic conditions covers

issues like location and ownership of raw materials, nature of the technology, degree of labour

unionisation, product durability, legal framework, scale economies, scope economies etc. on the

demand side the basic conditions are basically the price elasticity of demand, availability of

substitutes, the rate of growth, purchase methods, market characteristics of the product, cyclical

and seasonal character of demand (viability over time).

The framework can be well understood when outlined in the form of a diagram showing all the

elements in the S-C-P framework and the correlations as shown in figure 2.1 below:

16

Source Aleksandrova and Lubys (2004)

conceptual framework will guide the whole study.

2.4 STRUCTURE CONDUCT AND PERFORMANCE (S-C-P): AN OVERVIEW

2.4.1 Literature on the overview

A lot of literature on the general overview of the structure, conduct and performance framework

is provided by Sawyer, 1985, Ferguson, 1993, Schmalansee and Willig, 1989. Most of the ideas

given in this overview refer to the work of the above mentioned authors. The overview refers

much to the structure conduct and performance as a framework used to study the economics of

industries and firms.

S-C-P is a framework widely used in industrial economics (Sawyer, 1985). Industrial economics

is defined as the application of microeconomic theory to the analysis of firms, markets and

industries (Ferguson, 1988). The Structure-Conduct-Performance is therefore an approach used

to study industrial economics/organisation. The approach is descriptive and it provides an

overview of the entire field of industrial economics. In this approach key to understanding and

Basic Conditions Supply-Technology, raw materials, product

characteristics, business attitudes Demand-Price elasticity, substitutes, rate of growth, cyclical & seasonal characteristics

Policy Subsidies, SME policies, international trade rules,

regulation

Performance Production & allocative efficiency, technological progress, full employment, equity, profitability,

productivity

Conduct Pricing behaviour, product strategy&

advertising, research & innovation, investment

Market structure Number of sellers & buyers, product

differentiation, barriers to entry, cost structures, vertical integration, diversification

Figure 2.1 Illustration of the Conceptual framework

17

assessing the performance of an industry in terms of growth profitability and or efficiency for

example is found in the structure of the industry. The structure of the industry includes features

like ease of entry and exit, the size and number of firms , the elasticity of demand for the output

of that industry etc. the conduct of firms cover things like price setting behaviour, attitudes to

rivals and the various ways firms conduct their business activities. The conduct of firm, which

is expected to be heavily conditioned by the structure of their industry, generates the performance

for the industry. The notion that the structure of an industry largely conditions the activities of

the firms involved and thereby the performance of the industry means that emphasis is placed

on the nature of the industry rather than on the nature of the firms in the industry.

A possible starting point in deriving the structure-conduct-performance approach is the theories

of markets i.e. theories of perfect competition and monopoly. The structural features of perfect

competition are a large number of firms of roughly equal size with free entry and exit into the

industry. Under perfect competition in the long run equilibrium price equals marginal cost and

also equals average cost, and profits are at a normal level. On the other extreme end under a

Monopoly, the industrial structure is one firm with high barriers to entry and the general outcome

is that marginal cost (MC) is equated to marginal revenue (MR), price is above marginal cost

(MC) and there are supernormal profits for the monopolist. These two market models provide a

description of the extreme cases i.e. an infinite number of firms versus one firm and free entry

and exit versus blockaded entry. The position of any industry can be located along the same

spectrum by looking at the structure of that industry in terms of the number of firms, ease of

entry etc. and from that the performance of that industry predicted, particularly in respect of

profitability. It is postulated that as we move from industries with a large number of firms to

industries with only a few firms, profitability will rise from the normal level towards the super-

normal level of monopoly (Sawyer, 1985).

18

The general idea above can be formulated by taking the Cournot model of Oligopoly, under the

Cournot model it is assumed that each firm makes output decision in the belief that its rivals will

keep their output constant (Daughety, 1988). Taking the simple case of a linear demand function,

so that price 𝜌 = 𝑎 + 𝑏𝑄 (1)

, where Q is the output of the industry, which is assumed to be a homogenous product, p is the

price and d, b, are coefficients. There are n firms of equal size in the industry. For firm i with

output qi, profit 𝜋 = 𝑝. 𝑞𝑖 − 𝑑. 𝑞𝑖 (2)

Where d is the constant unit cost of production. The maximisation of profits yields a first order

condition 𝑑𝑑𝑞𝑖

⁄ = 𝑏. [𝑑𝑄

𝑑𝑞𝑖⁄ ] . 𝑞𝑖 + 𝑎 + 𝑏𝑄 − 𝑑 = 0 and the Cournot assumption that each

firm believes that other firms hold their output constant gives 𝑑𝑄

𝑑𝑞𝑖⁄ = 1. summing over all n

firms gives𝑄 = 𝑛[𝑑 − 𝑎]

[𝑛 + 1]𝑏⁄ , and then 𝑝 =[𝑎 + 𝑛𝑑]

[𝑛 + 1]⁄ under conditions of perfect

competition price equals marginal cost , so 𝑝 = 𝑑, and then 𝑄 = 𝑑 = 𝑎, under monopoly, in the

above 𝑛 = 1, and then 𝑝 =[𝑎 + 𝑑]

2⁄ and 𝑄 =[𝑑 − 𝑎]

2𝑏⁄ , this analysis indicates that as the

structure of an industry moves from perfect competition to monopoly, that is from n at infinity

through to, 𝑛 = 1, so price and output change from perfectly competitive level to the monopoly

level. The use of more general models does not alter this basic conclusion but draws out the

importance of other factors. Schmalansee pointed out that the use of more general models retains

the assumptions of firms producing a homogenous product, but the assumption of heterogeneous

goods would not change the basic results but complicate the analysis (Schmalansee, 1989).

The two extreme markets, perfect competition and monopoly differ in two major dimensions of

structure i.e. number and relative size of firms and also the extent of barriers to entry into the

industry. Barriers to entry into an industry for example comprise all the factors which lead to

new entrants into the industry being at a disadvantage as compared to the existing firms. One

19

factor is the existence of economies of scale which means that a new entrant would have to

produce on a relatively large scale, increasing supply by a significant amount and thereby

depressing price by a significant amount. Another factor is the ability of existing firms to produce

and distribute at lower costs than the new entrants for example through access to cheaper raw

materials, accumulated knowledge of that particular industry etc. the extent of product

differentiation and advertising is also another factor. New entrants have to incur costs to

overcome the loyalty of consumers to existing products.

The linkage of structure to performance runs through the conduct of the firms in the industry.

The conduct of firms can be considered in terms of their objectives. The motivation assumed for

firms under both monopoly and perfect competition is short-run profit maximisation and

generally retained for the analysis of Oligopoly. If the industrial structure determines or has a

bearing on performance, then governments concerned with the aspects of industrial performance

particularly aspects of price changes, technical progress, productivity and maybe employment

levels would seem to have a potentially powerful instrument of policy at their disposal. The route

through which industrial performance could be changed will be through making changes to the

industrial structure. If on the other hand, structure has little influence on performance, then there

would be little economic purpose in seeking to change industrial structure.

It is important to note also that most though not all, econometric estimation in industrial

economics relates to a single equation of the form:

𝑦𝑖 = 𝑎0 + 𝑎𝑖𝑥1𝑖 + 𝑎2𝑥2𝑖 + ⋯ + 𝑎𝑛𝑥𝑛𝑖 + 𝑢𝑖 (3)

Where y is the variable which is being explained and x1, x2…, xn the variables which are believed

to determine y and u is a random variable. The subscript i refers to either industry, market or

firm i so that for example, yi is the observed value of y for industry, market, firm i. the presence

of the random variable can arise mainly due to the fact that a relevant variable can be omitted or

20

inexact measurement of the variables involved may occur. Ordinary least squares estimation is

mainly applied to figure out the relationships between structural variables and performance for

the industry/market and various firms. It is however important to note that the use of ordinary

least squares estimation of a single equation poses a number of problems in the context of

industrial economics (Sawyer, 1985).

2.4.2 Problems of the s-c-p approach in estimation

According to Sawyer, (1985), Schmalansee,(1989) and Ferguson, (1993), the following are the

problems of the SCP approach in estimation:

Unavailability of data-The problem is that many of those variables which theory indicates

should be included are excluded because of lack of data or the impossibility of measuring the

variables. In structure profitability relationships, for example variables such as elasticity of

demand and effective competition are relevant but difficult to measure. When a potential

explanatory variable is omitted for example, then the degree of explanation achieved in terms of

R2 is thereby reduced. The crucial problem with omission is that it may affect the coefficient and

apparent statistical significance of the other variables.

Use of proxy variables-The use of proxy variables in an attempt to measure a relevant variable

is another problem noted. For example, if product differentiation has been considered a relevant

variable to be included in the determination of profitability the precise measurement of product

differentiation has so far been proved impossible and a number of attempts have been made to

allow for it in the estimated equations (sawyer, 1985). One attempt that has been made by

researchers has been to argue that the level of product differentiation across industries is

associated with the ratio of advertising to sales, and that advertising to sales ratio can be used as

proxy for the degree of product differentiation (Schmalensee, 1989). This has proved to have

some problems though, firstly there is unlikely to be an exact relationship between product

21

differentiation and the advertising-sales ratio and secondly interpretation of estimated

coefficients in regression maybe made difficult since advertising may have a direct effect on

profitability. Another approach that can be used is the use of subjective judgement combined

with dummy variables. The use of subjective judgement poses problems Sawyer, (1985).

Predictions-Another potential problem is the fact that the theory makes predictions about

equilibrium outcomes, but there is no guarantee that the actual observations relate to a situation

of equilibrium. Disequilibrium may occur in some industries/markets. In terms of structure-

profitability relationship, this would mean that some industries would be earning profits at the

equilibrium level and others would have profits below the equilibrium level. However

disequilibrium may be more likely to occur in some types of industries than others. One can

claim for example that high concentration industries adjust to equilibrium more rapidly than low

concentration industries, and hence the departure from equilibrium may be more pronounced in

low concentration industries than high concentration industries (Sawyer, 1985). The situation in

this example leads to the dispersion of random terms being larger for low concentration

industries than in high concentration industries and this situation is known as heteroscedasticity

Sawyer, (1985).

Relationships-Another problem noted was that of describing whether relationships are

continuous or discontinuous. The idea that the relationship is discontinuous could arise

from a classification of industries as either basically competitive or basically monopolistic,

with their profitability determined accordingly. Thus although industries vary in their level

of concentration and barriers to entry they can be assigned to one or other of the two

polar cases. In contrast the idea that the relationship is a continuous one would mean that

as industrial structure varies between the competitive through to monopoly, so profitability

gradually changes (Schmalensee,1989)

22

Terminology-Another prominent problem noted in the literature is that, in terms of the

terminology used in expressing econometric relationships i.e. x variable (independent variables)

influencing y variables (dependent); the dependent variable may in turn influence some of the

dependent variables. This kind of causality leads to what is also known as the endogeneity

problem. In the structure –profitability relationships it is argued that, for example, that whilst

advertising intensity influences profitability, profitability also influences advertising intensity

(Sawyer, 1985).

The various problems discussed above indicate that econometric testing of theories in the sphere

of industrial economics is not a straightforward matter. Even when theories are well specified,

there are numerous problems to be overcome before a satisfactory econometric test can be

applied to theory.

2.4.3 Criticism of the approach

The structure-conduct and performance paradigm is a useful approach that has been used by

many to study firms, markets and industries. It however, faces some criticism Church and Ware,

(2000). Sawyer, (1985), Church and Ware, (2000) and Ferguson, (1988) gave the following

critics on the structure-conduct and performance approach:

The S-C-P approach is too simple; it ignores many linkages which exist between the elements

of structure, conduct, and performance. It is also argued that the simple one way causation from

S-C-P is not the only relationship that exists or may exist between or amongst the variables. For

example, it was argued by some economists that conduct is very often not entirely determined

by structure. The argument is that firms have a wide level or degree of discretion over their

conduct and the decisions they make have an effect on the conduct of the industry and indeed

the basic conditions. Strategic behavior by firms makes it difficult to rely on the SCP paradigm.

Through merger and acquisition decisions firms can change the market structure. Mergers and

23

acquisitions reduce the number of firms and increase the size. Advertising and branding change

consumer attitudes and hence can act upon the elasticity of demand of the basic conditions.

Advertising may also increase barriers to entry. Not only does concentration affect advertising

in an industry but a reverse effect may also apply. Technical progress induced by research and

innovation has feedback effects on cost and demand conditions. Research into new product can

also serve to build an entry barrier. Predatory pricing techniques may drive out firms altering the

structure as well. Thus one response by industrial economists has been to re-write the S-C-P

Paradigm to acknowledge these complex links between Structures, Conduct and Performance

that were missing earlier. Some economists have questioned the predictive power of the SCP

Paradigm on the grounds that the feedback affecting structure is stronger than the influences

running from Structure-Conduct-Performance for example in huge profit industries Performance

influence Conduct as profits will be used for research and developments and advertising. Profits

may also attract entry which may affect structure. Top performers tend to gain market power at

the expense of rivals.

In addition the structure-conduct-performance paradigm has been greatly criticized as the role

of public policy is not explicitly included. In certain circumstances markets fail to satisfy

consumer needs. Government in response to the failure may then intervene and attempt to

improve the market performance. The measures taken can affect basic conditions, market

structure, conduct and performance. For example, Government through POTRAZ can affect the

number of sellers in the industry and firms may also influence the Government to achieve higher

profits. Public policy-taxes, price controls also affects basic conditions, performance, structure

and even conduct of firms. The inter-linkages can be well understood diagrammatically as shown

in figure 2.2 below:

24

Figure 2.2 Inter-linkages between Public policy and S-C-P elements

Source (Church and Ware, 2000)

2.5 STRUCTURE-CONDUCT-PERFORMANCE: EMPIRICAL STUDIES AND EXAMPLES

This section of literature reviews some studies that applied the S-C-P approach in studying

industries, markets and firms. The review gives an overview of the research methods, the

analysis and findings of the various studies. Some examples in terms of structure conduct and

performance of different industries are also given in this section.

2.5.1Examples of S-C-P of industries

The Structure–Conduct-Performance approach to analysing the performance of firms and

industry has been applied in several studies. Some general examples of the S-C-P mentioned in

the industrial organisation literature by Schmalansee and Willig, (1989) include: the construction

industry. In the construction industry the basic conditions include technology which is largely

simple and there are few economies of scale and on the demand side, demand is sensitive to

economic cycles. On the structure, entry into construction is relatively simple and hence a larger

number of small enterprises/firms. In terms of conduct there is little scope for product

differentiation, a firm would simply build to specifications. Conduct takes the form primarily of

price based competition. In terms of performance the construction industry shows fluctuating

Basic

Conditions

Market Structure Conduct Performance

Public Policy

Taxes, subsidies, international

trade, price controls, antitrust

25

profits combined with a relatively limited rate of investment and technological development

compared with other industries.

Another example is the beer industry. In the beer industry large plants are cost effective and thus

have economies of scale. There are economies of scale in advertising and marketing beer. There

are barriers to entry into the retailing of beer which require licensing. Economies of scale in the

beer industry mean that the firms are large so that the industry is oligopolistic. Licenses are said

to compel breweries to integrate forward and own their own pubs so as to ensure sales outlets.

Integration in the beer industry creates another barrier to entry because it means that the

wholesale market for beer is very limited in size since the most beer would by-pass the wholesale

market and thus make it becomes difficult for a new product to find customers. In terms of

conduct the beer industry is characterized by price competition, vigorous competition in terms

of the development of new products, brand promotion and entertainment and various other ways.

In terms of performance the beer industry shows good profits generally partly because of

advertising and marketing efforts and very low competition.

2.5.2 Previous studies on structure conduct and performance of industries

Several studies have applied the S-C-P approach. The procedures have been carried out for

several industries, products and commodities. The objective of the studies was to investigate the

factors that influence structure conduct performance of specific industries and the

interrelationships between the structural and conduct variables within the firms and the overall

performance. The studies provided background information to the analysis carried out in this

study.

Kizito (2011) applied the structure conduct and performance approach to study the Agricultural

Market Information Systems (MIS) firms in sub-Saharan Africa. The study focused on three

main questions: the first question was: what evidence is there that supports the premises that

26

second-generation agricultural (MIS) models are likely to meet user needs and become

financially sustainable relative to first generation models? The second question was: how have

different MIS models tried to address the design issues of any MIS and what are the relative

advantages of different models of MIS in addressing the challenges? The third question was on

what factors affect the reception of improved agricultural market information amongst

smallholder farmers in Mozambique and how does the reception of improved market information

affect their marketing behavior? The key findings to the study were that: there is heterogeneity

among MIS in terms of their structure and conduct design issues and also whether or not an MIS

is government based explains very little in terms of its performance. It was found that what

matters are the mandate, financial and managerial autonomy, funding strategy, quality control

methods, and feedback methods of the MIS. All MIS types were found to be heavily depended

on donor funding for sustainability. It was found that there is a rapidly evolving market

environment in terms of market actors and Information and Communication Technologies (ICT)

availability and usage. Findings also indicated that it is difficult to analyze the key design issues

of MIS independent of overall environment in which they operate. The econometric analysis

used a two-year panel household data set for four provinces in Mozambique, and the results

indicated that the generic factors that influence the reception of improved agricultural market

information include involvement in the growing of marketable staples, access to alternative

information and communication technologies, and access to market and extension services.

Specific factors include: growing of maize, large and small groundnuts, owning a radio, presence

of a cellphone network in the village, proximity to a road with public transport, membership to

farmer associations, access to extension services, level of education, the agro ecological zone of

households, and distance to village administrative post. Holding other factors constant, reception

of market information was found to increase profitability of market participation by 34%

27

Chia-Chi Lee (2010) studied on the causal correlations among market structure, conduct, and

performance of the Certified Public Accountancy (CPA) industry using data from Zhong zheng

district in Taiwan, Republic of China. The study used the structure-conduct-performance theory

to explore the causal correlations among the market structure of the certified public accountant

industry, the conduct and the operation performance of accounting firms. The study used

stepwise regression analysis to find out the important factors of these three dimensions. The

empirical findings confirmed that there exist causal correlations among market structure,

conduct, and operation performance of accounting firms, not just a single direction relationship.

Gu-Shin Tung et-al (2010) applied the structure, conduct performance framework to the hotel

industry. The paper presented a SCP model to approximate causes and effects among the tourist

hotel industry in Taiwan. Previous literature and studies could not confirm the causality of the

hotel industry, and therefore the paper developed a comprehensive model based on realistic data

of hotels in Taiwan which allowed the analysis of the system through three simultaneous

equations, market share, advertising, and profitability. Using a sample of 360 Taiwanese

international tourist hotels, from 1995-2006, three stage least squares results showed that: two-

way causes and effects exists between the market structure and strategic behavior, which was

detected from the incentive pattern of the SCP model, a brand positive effect showed on the

market share and, firm’s profitability was found to influence market share significantly.

Byeongyong and Weiss (2005) tested the traditional structure conduct-performance model and

the efficiency structure hypothesis to examine the relationship among the market structure and

performance in property-liability insurance companies. The efficiency terms in the analysis were

estimated using the stochastic frontier analysis and the analysis supported the efficiency structure

hypothesis. Results of the study found that the efficient firms charged lower prices than

competitors thereby causing them to capture larger market shares leading to increased market

concentration

28

Edwards et-al (2005) used the Market Structure Conduct Performance (SCP) approach using

stochastic frontier analysis. In this study use of efficiency measures as proxy for performance to

test the market structure-conduct-performance hypothesis were explored. They utilized Battese

and Coelli specification, to estimate frontier production function and Structure Conduct

Performance equations with efficiency and output measures as dependent variables. Results of

the study disclosed that average haul, average load and market concentration significantly

influenced efficiency of firms with two to eight years within each firm.

The overall objective of the study by Allen, Shaik,Myles, and Muhammad (2005) was to

approximate whether the structure of the market , market share plus profits of the food products,

truck carriers were based on the Structure Conduct Performance hypothesis or the modern

efficient structure hypothesis? The results of the study supported the modern efficient structure

hypothesis and did not match the Structure Conduct Performance hypothesis. Therefore the

results from the analysis were found to be useful to all stakeholders in the trucking industry in

finding economic forces that influence profitability of the firms that make up the industry at the

conduct level. Other firm managers and or firm owners could also use the results of the analysis

in formulating strategies so as to take advantage of weaknesses of competitors. The results of

the study therefore provided users with information that can be used to take advantage of

opportunities in the trucking industry to meet the needs of the shippers.

Maudos (1998) assessed the correlations between market structure and performance in the

banking industry of the Spanish. In the study three different measures of efficiency were used.

The three different measures were: half normal, normal-truncated and exponential. Results

obtained from the analysis revealed that market share is an insufficient proxy for efficiency.

Alley (1993) had a hypothesis that Japanese banking performance was a result of efficiency and

that it should be identified by the modern efficiency structure hypothesis as opposed to the

29

structure conduct performance hypothesis. In the model the researcher estimated the degree of

collusion in the Japanese banking industry and found that there was a significant degree of

collusion. The overall findings in the analysis comply with the structure performance hypothesis

as a superior ways of describing the Japanese banking sector

Another study by Smirlock and others in 1984 tested the structure performance hypothesis using

Ordinary Least Squares (OLS) regression of the firm’s profitability as opposed to the structure

conduct performance hypothesis with a proxy variable for efficiency. Firm’s profitability was

measured by the Tobin’s q which is the firm’s market value divided by replacement value of

assets. The variables used in this analysis to represent the traditional SCP hypothesis were market

concentration, entry barriers and growth rates. The proxy variable used in the analysis for relative

efficiency was the firm’s market share. Results of the analysis by Smirlock and others also

supported the efficient structure hypothesis.

2.6 FACTORS AFFECTING SMALL ENTERPRISE’S PERFORMANCE.

Understanding performance and factors affecting performance is one of the key areas discussed

in business economics literature (Audretsch, 2000; Kimura, 2002). The identification of small

to medium firm’s performance is meaningful in that, it gives knowledge on present features of

the small to medium firms’ performance, and that firms will use the knowledge to verify

priorities, track their positions and improve on performance Neely, (1998). Knowledge on

SME’s performance can also be used by the SME’s to formulate strategies, communicating

goals, make decisions and motivate employees (Schmitz and Platts, 2003). This knowledge is

increasingly important to the metal informal manufacturers also as competition posed by formal

players is growing by day.

Factors that determine firm performance are diverse in literature. There is no generally accepted

list of factors in explaining the firm’s performance that is business success or failure Lussier,

30

(1995). Historically, arguments that explain factors that determine firm performance lie in the

structure-conduct and performance framework. The framework argues that the performance of

firms is determined by conduct of firms in the market, which then is influenced by the structure

of the market. Within the structure–conduct-performance framework Rodgers, (2000) postulates

that higher levels of industry concentration and a firm’s market share, corresponds to higher

profitability or vice versa. Many factors however have been identified to relate to firm

performance.

Previous studies on factors affecting micro and small to medium firm’s performance

A study by Wengel and Rodriguez (2006) on the export performance of Indonesian SME’s, used

firm size, age and foreign share in capital structure of the firm as predictor variables. Another

author by the name Sarder et al, (1997) studied performance of SME’s in Bangladesh and used

firm age, management experience, initial investment, competition, industry sector, and time

passed after getting financial support as independent variables. Wynarczyk (et al 2005) used

employment size, age, ownership, supply chain characteristics, and partnership of firms as

independent variables.

Strategic management studies argue that firm-specific factors are more important as compared

to any other factors in influencing firm performance (McGahan and Porter, 1997). Ownership

structure was found to strongly influence performance. In addition Dourma et al., (2003) found

that companies with foreign corporate shareholdings are endowed with superior advantages in

various dimensions, including technological, marketing, and marketing and managerial skills,

and hence, would give a positive impact on firm performance. A study of British medium sized

firms in 1992 by Brooks bank and others revealed that firms which give a higher priority to

marketing as compared to other business functions achieve higher performance.

31

In addition a study by Muchabaiwa et al.,(2011) on the determinants of small and medium sized

firms failures in Zimbabwe revealed that lack of general knowledge on business management,

unavailability of credit, import competition and high costs of raw materials are the major causes

of SME’s failure in Zimbabwe.

Garrigos Simon et al., (2005) in their study on Spanish hospitality firms used two indicators of

performance, which are (return on assets, return on investment and return on sales) and growth

(in sales, market share, and wealth creation), and also two intangible performance measures, that

include competitive position and stakeholder satisfaction. McNamee et al., (1999) in their study

on Irish small businesses used growth (in sales volume and employment) and profitability (return

on assets, return on sales, and profit per employee) as measures of firm performance.

2.7 INSIGHTS FROM THE LITERATURE

The chapter provided an overview of the application of the structure-conduct and performance

framework in studying firms, industry and or markets. The model applies microeconomic theory.

From the review the approach is highly descriptive and provides an overview of the entire field

of industrial economics. The review has tackled most of the aspects in the S-C-P model from the

variables to the methodologies and the conclusions drawn from the studies. The review has

shown that the S-C-P framework can be applied to any market, firm or industry regardless of

size, formality or informality. The approach can therefore be used to understand micro and small

to medium sized firms in the metal industry.

There is also some evidence from the review that no research has particularly focused on

application of the SCP to study informal metal industries in Zimbabwe. There is therefore need

to apply the concept to study informal metal fabrication industry in Zimbabwe. This will be

important in assessing the industry in its provision of services to the general public. Of much

32

importance will be the implications of the results to stakeholders in the agricultural sector. The

research will fill this information gap.

33

CHAPTER THREE: RESEARCH METHODS

3.1 INTRODUCTION

There are several steps to identify the structure, conduct, and performance of the metal informal

manufacturing industry, such as: sampling the target population, Collecting data, Processing

data, and analysing the result from processing data and this is going to constitute the bulk of this

chapter.

3.2 DATA SOURCES

The analysis relied on both primary and secondary data. Secondary data sources were used for

reference purposes in the study, as benchmarks against which the findings of the study were to

be tested and also as the sole source of information in testing some hypotheses. Primary data

was used together with some secondary data to test some hypotheses in the study.

3.3 SAMPLING

Multi-stage sampling method was used in the survey. Major cities including Harare,

Chitungwiza, Rusape, Bulawayo and Mutare were selected as the main clusters. Purposive

sampling was used in identifying areas dominated by informal metal manufacturing activities

within the clusters. Study units within the selected areas were selected by simple random means.

The study was based on a sample of 200 informal metal manufacturing firms. The sample of the

informal metal manufactures used for this analysis was homogenous. The firms were almost of

the same size and were involved in the same metal fabrication activities. The focus on one firm

category was done to minimise bias.

The tables 3.1 and 3.2 show the areas that were covered in the survey and the percentage of

respondents from each area.

34

Table 3.1 Major areas included in the study

City Areas covered

Harare Mbare (Magaba),Gazaland,Mbudzi

Mutare Green market, Dangamvura

Rusape Mabvazuva, Rusape musika area,Vengere

Bulawayo Makokoba, Renkini industrial area

Chitungwiza Makoni

Source, (survey results, 2013)

Table 3.2 Sample distribution and composition

City Frequency Percentage (%)

Harare and Chitungwiza 100 50

Bulawayo 40 20

Mutare 40 20

Rusape 20 10

Total 200 100.0

Source, (survey results, 2013)

From table 3.2 above, Fifty percent (50%), twenty percent (20%), twenty percent (20%) and ten

percent (10%) of the respondents were from Harare and Chitungwiza, Bulawayo, Mutare and

Rusape respectively. Specific areas researched within the clusters (cities) are as shown in the

table 3.1 above.

3.4 METHODS AND TOOLS FOR DATA COLLECTION

Methods of collecting data included both formal and informal surveys, rapid assessments, direct

observation, formal and informal meetings and personal visits to the target groups under study.

The survey method was however the main method used for gathering data for the study. This

particular method was chosen due to resource constraints. The structured questionnaire was used

as the main technique of capturing the quantitative data needed for the study. All the relevant

firms in the analysis were surveyed using a structured questionnaire. The questionnaire was the

main tool used here in capturing quantitative data because of its strength in capturing empirical

data Kothari (1990). The questionnaire was divided into two main sections. The first section

consisted firm and firm owner demography and the second section consisted of questions

pertinent to firm structure, conduct and performance

35

However, for the qualitative data requirements the main methods used were direct observation,

and interviews. Face to face interviews were conducted with key informants. Interviews were

used as a supplementary source of information for the research. Moreover, interviewing is very

useful for collecting a wide range of data from factual demographic data to highly personal and

intimate information relating to person’s opinions, attitudes, values, beliefs past experiences and

future intentions Dekeba, (2012). In addition, when qualitative information is required or

probing is necessary to draw out fully then interviewing is required. Interviewing was therefore

used because of its strengths as mentioned above. Observation guide and the interview guide

were used as the instruments for qualitative data collection.

The instruments were pre-tested and corrected for errors before the survey which took place in

February and March 2013.

3.5 DATA, PROCESSING AND ANALYSIS

Data used for the analysis was collected from 200 informal metal manufacturing firms across

the country. Data collected was checked for errors, edited and coded prior to analysis. Data was

transcribed into computer software prior to analysis. SPSS version 20 and EXCEL for windows

were mainly used for analysing data from the questionnaire. Descriptive statistics and regression

analysis were performed in this study. Descriptive statistics constituted the bulk of the analysis.

Cross tabulations, frequencies, percentages made the bulk of the descriptive analysis. For the

descriptive analysis, histograms, bar charts, pie charts, line graphs and several other presentation

forms were used. Regression analysis was used to identify some of the important factors that

influence individual firm’s performance in the informal metal industry. Some specific elements

in the study were measured or estimated as follows:

36

Concentration measures

In order to classify the market of the informal metal industry market concentration ratios and the

Herfindahl-Hirschman index (HHI) were used. Concentration was used as it is helpful in

understanding how much market share is concentrated in the hands of a small number of firms

and also because of its limited data requirements Porter, (1998). The HHI index was used to

complement the CR ratios since it is considered better in the sense that it gives more weight to

large sized firms and it reflects the distribution of market shares of firms Hause, (1997).

Concentration ratio is simply the percentage of industry output that a specific number of the k

largest firms have. Concentration for k largest firms was calculated by adding up the market

shares of the k firms. This can be represented as

CRK=S1 + S2 +S3 +S4+……+SK, (4)

Where Si is the market share of the ith firm, alternatively, it can be expressed in a more compact

form as follows;

𝑪𝑹𝒌 = ∑ 𝑺𝒊𝒌𝒊=𝟏 (5)

Where CRK is the K firm concentration ratio, and Si is the percentage market share of the ith firm,

CR2, CR4, and CR8 were calculated for this study. Sales volumes per year were used as a proxy

for market shares for the firms and were also used to calculate the concentration ratios for firms

in the industry. Year 2012 figures were used. Classification of the industry based on the market

concentration ratios was as follows:

Table 3.3 Classification of industry based on market concentration

CR4 Interpretation of market structure

CR4=0 Perfect competition

0<CR4<40 Effective competition or Monopolistic Competition

40CR4<60 Loose oligopoly or Monopolistic competition

60CR4 Loose oligopoly or dominant firm with a competitive fringe

90CR1 Effective monopoly(near monopoly) or dominant firm with a competitive fringe

Source, Gwin, (2001)

37

In this study three concentration ratios were calculated CR2, CR4 and CR8 in order to classify

the industry. If CR2, CR4 and CR8 were found to be closer to or equal to zero it would mean

there is perfect competition or the industry is close to perfect competition i.e. very small sized

firms without market power. If ratios CR2, CR4, CR8 were to fall between 0 and 40% it would

mean effective competition or monopolistic competition implying that there will be many small

sized firms with slight competitive edge on the market. Again if ratios fall in the range of 40-

60% it would mean a market with monopolistic competition or loose oligopoly. If ratios are

greater than 60% it would mean a loose oligopoly or a dominant firm with a competitive fringe.

On the far extreme if CRI (market share for a single firm) is greater than 90% it would mean a

near monopoly.

Calculation of the HHI index was done by summing the squares of individual market shares of

all the firms in the industry. This is represented as:

𝐻𝐻𝐼 = ∑ 𝑆𝑖2𝑁

𝑖=1 (6)

Where 𝑆𝑖2=the square of the market share of the ith firm measured as that firms’ output divided

by total output and 𝑁=the number of firms in the market. A variant measure of the HHI squares

the percentage share of the market in deriving the indices. The study used the general method of

just summing the squared market shares for the firms in the industry. Interpretation of the results

using the HHI index are as follows: if the value of the sum of squared firm market shares are

close to zero it means there are large number of small sized firms and if its equal to one there

will be a monopoly.

Measurement of profits

Profits were measured as the difference between sales revenue (TR) and total costs (TC) of

production i.e. 𝜋 = 𝑇𝑅 − 𝑇𝐶 (7)

38

Where 𝜋 = 𝑝𝑟𝑜𝑓𝑖𝑡 and TR and TC are total sales revenue and Total cost respectively. Firms

were to be considered as doing well if they had positive profits and doing badly when having

negative profits (losses).

Calculation of profit margins

Profit margins were calculated as the ratio of profit to sales revenue multiplied by 100. i.e.

𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =𝑃𝑟𝑜𝑓𝑖𝑡

𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒× 100 (8)

Year 2012 figures for profit and sales revenue were used to calculate the profit margins of firms

in the industry. The profit margins were calculated to see how much of every dollar of sales

firms in the informal metal industry retains in earnings.

Calculation of Tobin’s q ratio

The Tobin’s q was calculated as the rate of market value of assets of the firm to the replacement

value of the assets. i.e.

𝑇𝑜𝑏𝑖𝑛′𝑠 𝑞 =𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠

𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 (9)

The ratio was calculated so as to predict the potential of the firms in the industry and the industry

itself at large. If the ratio was found to be less than 1 it would mean a bad result for the industry

i.e. firms lack potential, if the ratio was equal to 1 it would mean equilibrium, and if the ratio

was greater than 1 it would mean excessive potential of the firm.

Factors affecting SME performance

To identify the factors that affect SME performance in the informal metal manufacturing

industry the researcher used multiple regression analysis. The regression model was made up of

nine independent variables and a dependent variable. Profit was the proxy variable for firm

performance. The variables were specified as follows:

39

Table 3.4 Variables and measurement

Variable Definition Measurement

Profit PROFIT Profits of firm as proxy for performance (2012 profits)

Age of firm Agefirm Number of years of the firm from the start-up year to

2013

Experience of owner Exp Years of experience of owner when he/she started firm

Education Edu Level of education of firm owner 1-atleast secondary

education, 0= Otherwise

Gender of owner Gender Sex of firm owner 1=Male , 0= Female

Price determination Pdm Method of determining prices 1= bargaining with

customers, 0= Otherwise

Grading Grd Grading of output, 1=Yes, 0= No

Contracting with clients Contrct Contracting with clients by the firm 1=Yes, 0=No

Collective action Collctactn Collective action by firms in business 1= Yes, 0=No

Type of products Typpdct 1=Agricultural, 0 ,Otherwise

Model specification

Performance =F (age, experience, education, gender, price determination, grading, contracting

with clients, collective action in business and type of products produced).

𝑃𝑅𝑂𝐹𝐼𝑇 = 𝛽0 + 𝛽1𝐴𝑔𝑒𝑓𝑖𝑟𝑚 + 𝛽1𝐸𝑥𝑝 + 𝛽2𝐸𝑑𝑢 + 𝛽3𝐺𝑒𝑛𝑑𝑒𝑟 + 𝛽4𝑃𝑑𝑚 + 𝛽5𝐺𝑟 +

𝛽6𝐶𝑜𝑛𝑡𝑟𝑐𝑡 + 𝛽7𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑣𝑎𝑐𝑡𝑛 + 𝛽8𝑇𝑦𝑝𝑝𝑑𝑐𝑡 + 𝜖 (10)

40

CHAPTER FOUR: OVERVIEW OF THE INFORMAL METAL INDUSTRY

4.1 INTRODUCTION

To gain insight into the informal metal industry, a number of aspects were examined. This

chapter presents some of the aspects examined in the informal metal industry in Zimbabwe. The

results are presented in six main subsections: General overview of informal sector sites, socio-

economic profiles of the firm owners, firm characteristics and other attributes, goods

manufactured in the industry, the major customers and constraints. The seventh subsection

provides a summary of the findings.

4.2 OVERVIEW OF INFORMAL SECTOR SITES CHARACTERISTICS

Informal metal manufacturing enterprises were found to dominate in urban centres. This was

probably due to proximity to major raw material sources and probably high demand of products

in urban areas. In the urban centres the informal sector sites were found to be located in insecure

contested open spaces that lack well-constructed facilities. Most of the infrastructures were poor

and looked very old. Most of the facilities were not appealing at the time of the survey. The

conditions were almost the same in the towns surveyed. Moreover, within the sites informal

metal manufacturing activities were crowded and it was evident that space was a challenge. The

problem of space was however, greatest in Harare and Mutare whilst in Bulawayo and Rusape

space was not a big problem.

4.3 SOCIO-ECONOMIC PROFILES OF FIRM OWNERS

The summary statistics for the sample are presented in the table 4.1 below. Results show that the

majority of the firm owners interviewed were predominantly male (98%). Only 2% of the

respondents were female. In areas like Bulawayo Rusape and Mutare 100% of the respondents

were male. However, in Harare and Chitungwiza 4% of the respondents were female firm

owners. In-terms of marital status, results show that 80% of the respondents were married, 17%

were still single at the time of the survey, 2% were widowed and 1% of the respondents were

41

divorced. This implies that most of the people in the informal sector are family men and women

with huge responsibilities of raising their families. Mean age of the firm owners was about 33

years of age. Minimum age of firm owners in the metal industry recorded was 19 years and the

maximum age recorded was 69 years. Most respondents i.e. 84% of the firm owners were found

to be less than 40 years of age. Only 16% of the respondents were above 40 years of age. The

survey results show that much of the firm owners in the informal metal industry are young and

economically active with only 3% being over fifty years of age. The table below summarises

most of the characteristics of the respondents included in the survey.

Table 4.1 Summary statistics of the firm owners’ socio-economic attributes

Gender of operator(N=200)

Male (%) 98

Female (%) 2

Marital status(N=200) Percent (%)

Single never married 17

Married 80

Divorced 1

Widowed 2

Age of operator and experience(N=200)

Mean age of operator 32.91 years

Minimum age 19 years

Maximum age 69 years

Age distribution (%)(N=200)

19-30 years 46%

31-40 years 38%

41-50 years 13%

50 years+ 3%

Mean number of years of experience when firm was started 2.3645 years

Highest level of formal education attained(N=200) Percent (%)

None 0

Primary school 4

Secondary school 75

Vocational training 18

University education 3

Skills and training(N=200)

Sources of skills Percent (%)

Government vocational training centres 18

Private vocational centres 6

NGOs 0.5

Other informal operators(on-job training) 70.5

Other 5

Source, (survey results, 2013)

42

Age of respondents and experience

Survey results also show that firm owners in the informal metal industry started their businesses

with at least 2.4 years of experience on average. However, the majority (52%) of the firm owners

started their firms with less than 2 years of experience and only a few (10%) started their firms

with at least 6 years of experience in the metal industry. Results imply that a lot of people without

experience of metal fabrication can start their own businesses in the metal fabrication industry.

The distribution in terms of years of experience of owners when they started their businesses is

shown in figure 4.1 below:

Figure 4.1 Experience of firm owner when firm was started

Educational attainment and sources of skill acquisition

The firm owners’ level of education was generally high, with 75% having attained secondary

school education, and 18 % having attained vocational training. Only 4% of the survey

respondents had only primary school level education. Moreover, the sample was composed of

(3%) respondents with university education. The majority (70.5%) of the firm owners obtained

their work related skills from other informal operators. Only about 18% of the firm owners got

0%

10%

20%

30%

40%

50%

60%

0-1.9years 2-3.9years 4-5.9years 6+ years

Percent(%) 52% 25% 13% 10%

Pe

rce

nta

ge(%

)

Experience of firm owner when he/she started the firm

43

their work related skills from government vocational training centres. Other respondents (6%)

pointed out private vocational centres were their source of skill acquisition, and 0.5% pointed

out Non-Governmental Organisations (NGO’s) as their source of work related skill acquisition.

Results on educational attainment in general imply that literacy levels of firm owners which are

the metal fabricators are extremely high within the industry.

4.4 FIRMS’ CHARACTERISTICS AND OTHER ATTRIBUTES

Age of firms

The mean age of firms in the informal metal industry was found to be 6.1 years. This implies

that most of the firms in the informal metal industry were started in the period 2007 to 2008.

This implies that most of the firms in the industry are generally still young. This again

corresponds to the earlier thinking that growth of informal sector operations is positively

correlated to harsh economic environments. The result confirms the earlier thinking since during

the mentioned period the Zimbabwean economy was facing serious macroeconomic challenges.

In terms of the distribution, 49% of the firms had less than five years of age, 31% of the firms

fell between 5 and 10 years of age, 10% fell within 15 and 20 years of age and only 3% were

older than 20 years of age. The table 4.2 below show some of the statistics.

Table 4.2 Firm age statistics in years

N Mean Mode Max Min Range Std.Dev.

200 6.11 3 25 0.6 24.4 5.06

Source, (survey results, 2013)

From table 4.2, the statistics confirm the fact that most of the firms in the informal metal industry

were found to be relatively young with mean age of 6.1 years. The standard deviation from the

mean was large (5.06) indicating that data points were not so clustered around the mean.

Minimum age of firms in the metal industry recorded was 0.6 years (about 7 months). On the

other extreme maximum age of firms in the metal industry recorded was 25 years. Nearly half

44

of the firms (49%) were less than five years of age, on the other extreme only 3% of the firms

were greater than 20 years of age. The distribution of firm age is shown in figure 4.2 below

Figure 4.2 Age distribution of firms in the informal metal industry

Sources of capital to start firm

Capital sources in the informal metal industry were found to be as shown in figure 4.3 below.

The majority (59%) of the informal business owners in the metal industry started their businesses

using their own savings. Of the 200 respondents 32% of them used loans from friends and family

to start their businesses. Results also show that bank loans, government loans, loans from money

lender and loans from donor agencies are not common sources of funding in the informal

industry. This is indicated by the low percentages of respondents who noted the sources as their

sources of capital when they started their businesses. The results imply that informal firm

operators usually rely with their own savings as sources of funding. The use of borrowed funds

is not a common practice. Figure 4.3 below summarises the findings on sources of capital for the

informal metal fabricators when they started their small to medium businesses.

45

Figure 4.3 Sources of capital to start the firm

Types of firm ownership in the informal metal industry

Survey results showed that most (74%) of the firms in the informal metal industry were private

firms. This implies that most of the firms in the informal industry have a single owner. However,

18% of the firms were found to fall under partnership and 8% of the firms were household

enterprises. Results imply that most of the people in the informal metal industry are indigenous

people operating their own small businesses. The figure below gives a summary of the findings

in terms of the type of ownership of the firms

Figure 4.4 Firm ownership types in the informal metal industry

Own savings59%

Bank loan2%

Loan from friends/family

32%

Government loan2%

Loan from donor agency

1%

Loan from money lender

4%

Source of Capital to start the firm

74%

18%8%

Type of firm ownership in the informal metal industry

Private Patnership Household enterprise

46

Firms’ employment

Number of employees per firm (employment) of micro and small to medium firms in the

informal metal industry was found to be low. On average current (year 2013) employment was

found to be about three (3) employees per firm. The trend of employment since year 2010

showed almost the same result. In 2010 on average each firm employed about three (3)

employees, in 2011 and 2012 the average was about two (2) employees per firm. The standard

deviation from the mean was approximately one (1) employee throughout the years. The

minimum number of employees recorded per firm was one person per firm in all the three years

from 2010 up to 2013. The single employee per firm implied that the owner of the enterprise

was the only employee at a particular firm. The maximum number of employees per firm was

found to be seven (7) in 2013, and six (6) in 2010, 2011, and 2012. The table 4.3 below

summarises the statistics.

Table 4.3 Firm employment statistics 2010-2013 Year N(Firms) N(Labour) %(female) %(male) Mean Std Dev. Min Max

2011 154 378 11 89 2.45 1.401 1 6

2011 184 430 10.2 89.8 2.34 1.234 1 6

2012 200 488 9 91 2.44 1.373 1 6

2013 200 492 7.7 92.3 2.46 1.452 1 7

Source, (survey results, 2013)

Gender and employment

The majority of the employees in the informal metal industry were found to be men. This was

evidenced by larger percentages of male employees from 2010 to 2013. In the year 2010, 89%

of the total employees from the 154 firms were male with only 11% being female employees. In

the year 2011 there was a slight increase in the percentage of male employees to 89.8% and a

slight fall in the percentage of female employees to 10.2%. The number of firms that gave

statistics for the year 2011 also rose to 184. The same trend applied for the year 2012 and 2013

with male employees dominating in the informal metal industry. In general male labourers are

on the increase in the industry and female worker are gradually falling. The figure below

summarises the trend.

47

Figure 4.5 Employment by gender from 2010-2013

Investment

Data were collected on the value of additional investments made to the firms in the past three

years. The data specifically captured values of additional investments in buildings, vehicles and

capital investments. From the analysis it was found that most of the firms rarely invested in

buildings. Of the firms that had spent on additional investments to the firms above 80% of them

spent on additional capital investments. In general, the levels of additional investments made to

the firms in the industry were found to be very low. The table below show the descriptive

statistics on value of additional investments made by the firms for the three years 2010, 2011

and 2012.

Table 4.4 Values of additional investments made to the firms in USD$ N Min Max Sum Mean Std Dev.

2010 Buildings 158 0 5.000.00 55.400.00 350.63 1.063.12

Vehicles 158 0 5.000.00 122.800.00 777.22 1.530.29

Capital 158 0 1.200.00 33.600.00 212.66 276.59

Total 211.800.00 1340.51

2011 Buildings 180 0 8.000.00 97.000.00 538.89 1.652.76

Vehicles 182 0 4.000.00 37.600.00 206.59 714.11

Capital 182 0 2.000.00 34.980.00 192.2 368.63

Total 169.580.00 942.10

2012 Buildings 198 0 15.000.00 152.800.00 771.72 2.099.32

Vehicles 200 0 4.000.00 78.000.00 390.00 1.011.70

Capital 200 0 2.500.00 32.800.00 164.00 344.14

Total 263.600.00 1.331.30

Source, (survey results, 2013)

89.00% 89.80% 91% 92.30%

11% 10.20% 9% 7.70%

2010 2011 2012 2013

Employment by gender percent male percent female

48

From the table it is shown that values of spending by firms towards additional investments for

their firms were low. On average, firms spent close to 1.340.00 USD$, 942.00 USD$ and USD$

1.331.30 per year in 2010, 2012 and 2013 respectively towards additional investment to their

firms. Investments in buildings were mainly in the form of temporary shelters built at the firms.

No permanent buildings were allowed in most of the firm location sites throughout the country.

Firms rarely invested in vehicles as shown by the low average spending figures towards vehicles.

Capital investments were the most common form of investment made to firms but again the

averages spending figures were low as shown in the table above. Capital investments were more

common due to the frequent repairs of equipment and replacement of faulty machinery at their

firms. In general, a lot of the firms in the industry rarely added investments to their businesses.

The main reason for not adding much to investments is the fear to raise costs of production.

4.5 GOODS MANUFACTURED IN THE INDUSTRY

The results of the survey indicate that most of the firms manufacture building material and

agricultural materials. Of the 200 firms 75% of them manufactured building materials. The bulk

of building materials were door and window frames. The results also show that 71% of the firms

included in the survey produced agricultural materials. The agricultural materials produced

included agricultural equipment, implements, tools and some agricultural machinery. Other

manufactured goods included household equipment, industrial equipment and other general

tools. In addition 42% of the firms produced household equipment, 45% produced industrial

equipment and machinery and 42,5% produced general tools. Important to note is however, the

fact that most of the firms produced a combination of products. Within the combination of

products produced by the firms building materials and agricultural materials constituted the bulk

of the products produced. The table 4.9 and figure 4.8 below presents the major types of products

produced in the informal industry.

49

Table 4.5 Type of products produced in the informal metal industry

Goods Manufactured Do you

manufacture?

No Yes Total

Building Materials Count 50 150 200

% of Total 25 75 100

Agricultural Equipment, implements, tools and or Machinery Count 58 142 200

% of Total 29 71 100

Industrial Equipment and Machinery Count 110 90 200

% of Total 55 45 100

Household equipment Count 116 84 200

% of Total 58 42 100

Tools Count 115 85 200

% of Total 57.5 42.5 100

Source, (survey results, 2013)

The information in table 4.9 above was used to construct the figure 4.8 below showing the

proportions of the goods manufactured. As noted in the text above agricultural materials and

building materials constitute the bulk of the goods produced though over 90% of the firms

produce a combination of products.

Figure 4.6 Types of goods manufactured

Agricultural products produced in the industry

Of interest to the study of the informal industry is the production of metal products relevant for

smallholder agriculture in Zimbabwe. This therefore led the researcher to have a bias on

75%71%

45% 42% 42.50%

Building Materials AgriculturalEquipment,

implements, toolsand or Machinery

IndustrialEquipment and

Machinery

Householdequipment

Tools

50

agricultural products produced in the industry despite the various other metal products produced.

As a result the researcher through the whole process of research identified and categorised some

of the main agricultural products from the sector. The table is not exhaustive but highlight some

of the common agricultural materials produced in the industry. The identified materials were

classified according to use as in the table 4.6 below:

Table 4.6 Agricultural product categories in the informal metal industry

Uses Type of equipment/product

A. Land preparation

equipment

Mouldboard ploughs animal and tractor drawn harrows,

ridgers, rippers and tillers, disc harrows, hoes, picks, spades

and other simple garden tools

B. Planting equipment Fertiliser spreaders, planters, seeders

C. Fertilising equipment Cultivators with topdressing units

D. Harvesting equipment Grain threshers, diggers i.e. potato diggers

E. Transport equipment Scotch carts, tractor trailers, wheel barrows

F. Packaging equipment Tobacco bailers

G. Livestock feeding

equipment

Feeding troughs for small livestock and chickens

H. Irrigation equipment Irrigation pipes, hydrant valves, irrigation pumps, sprinklers,

watering cans, water tanks, borehole equipment etc.

I. Processing equipment Grinding mills, tobacco curing equipment, potato peelers,

beef masters (butchery equipment)

J Other Sickles, gates, etc.

K. Spares Bolt and nuts, washers, chains, mouldboard share etc.

Source, (survey results, 2013)

The equipment classified in the table include both animal and tractor drawn equipment. It is

important to note that the bulk of the equipment is animal drawn. Animal drawn equipment are

the equipment that are drawn using oxen or donkey draught power and includes mouldboard

ploughs, harrows, cultivators, planters and scotch carts among others. Tractor drawn implements

and equipment are also produced but they are less common. Tractor drawn equipment is the

equipment and or implements drawn using the tractor as draught power and includes disc

harrows trailers to name just a few.

51

Other equipment produced in the sector include processing equipment (i.e. tobacco curing

equipment, grinding mills, butchery equipment), irrigation equipment, livestock feeding

equipment, spares and other hand implements including sickles as indicated in the table.

4.6 CUSTOMERS IN THE INDUSTRY’S MARKET

Most of the firm owners pointed out farmers as their main customers. Farmers were pointed out

as regular customers in the industry mainly due to the fact that larger volumes of sales in the

industry coincides with harvesting periods of major crops like tobacco, cotton, tea, potatoes and

maize. Forty-five (45) percent of the customers in the industry’s market were found to be

farmers. Tobacco farmers were pointed out as the major customers in Harare and Chitungwiza

areas which was exactly what we expected since all the tobacco auction floors are in Harare. In

Mutare and Rusape cotton farmers, tea, potato and some horticultural farmers were noted as

major customers. The case for Bulawayo was different, ordinary individuals and some formal

enterprises were the major customers noted.

Approximately thirty (30) percent of the customers were found to be other individuals not

necessarily farmers. Other customers identified were enterprises in the formal sector (13%),

informal enterprises (6%) and other e.g. cooperatives and or NGO’s. figure 4.9 give a summary

of the different customers in the market. It was interesting to find out that there are some formal

players who get manufactured products from the informal metal industry for resale on the formal

market.

52

Figure 4.7 Customers in the informal metal industry’s market

In line with customers, it was found that customers have products they usually buy from the

informal metal industry. Firm owners confirmed that consumers usually buy agricultural

materials (48%), building materials (36%) and household equipment (11%).

Consumers were reported also to have access to market information in the market and the main

sources of market information were: word of mouth (76%), printing flyers (51%), newspapers

and magazine adverts (27%), radio and television adverts (3%) and internet (1.4%)

4.7 CONSTRAINTS

The study revealed that lack of credit, power cuts, expensive raw materials and high interest

rates on borrowed funds were the main problems faced by the informal metal manufacturing

enterprises. Statistics however, show that the main problem was that of lack of finance with 48%

of the enterprises noting it as their major problem. Power cuts was also a major problem as 32%

of the firms noted power-cuts as a major hindrance to progress in their manufacturing activities.

High costs of raw materials and high interest rates on borrowed funds were also some of the

problems noted though a few respondents highlighted them as problems with 11% and 9% noting

them as major problems respectively.

farmers45%

formal enterprises

13%

informal enterprises

6%

other individuals(not

farmers)30%

other(e.g cooperatives,NG

O's etc)6%

Customers

53

4.8 SUMMARY OF CHAPTER FINDINGS AND CONCLUSIONS

From the general overview of the informal metal industry in Zimbabwe the study reveals that

informal metal manufacturing activities are dominant in urban centres and the areas lack well-

constructed facilities interms of infrastructure, males dominate the industry from being major

firm owners (98% male owners) and major employees (>89% male employees). The industry is

again dominated by economically active population (15-65years of age) with the average age

being 32.9 years and over 90% of the population in the industry between 19 and 65 years of age.

People participating in the industry are mainly married people with 80% of the people being

married. Firm owners in the industry are educated with 96% of them having attained at least

secondary education. Informal firm operators started their businesses within the industry without

much experience of metal manufacturing. The main source of skills acquisition by the firm

operators are other informal operators already in the business. The survey show that 70.5% of

current operators obtained their skills from other informal metal manufactures. In addition the

main sources of funding for firms in the industry when they started operations was own savings

and loans from friends and family. Firms in the industry are generally young with average

number of years for firm being 6.1 years. The majority (74%) of the firms are private firms with

a few household enterprises and partnerships. Firm employment is low with average

employment per firm being 2 employees. Lack of credit/finance, power-cuts, high interests on

borrowing funds and high costs of raw materials are the main problems faced by informal metal

manufacturing enterprises. Level of investment is low possibly due to the informality nature of

the business and possibility of risks. In terms of production the categories of products to expect

from the industry are: building materials, agricultural materials, industrial equipment and

machinery and household equipment. Of all the manufactured goods/products building materials

and agricultural materials are dominant. Estimates from the survey indicate about 75% of the

firms produced building materials and 71% agricultural materials amongst other products they

54

produced. The agricultural materials produced fall in the following categories: land preparation

equipment, planting equipment, and fertilising equipment, transport equipment, livestock

feeding equipment, agro processing equipment, irrigation equipment and packaging equipment.

Farmers are the dominant customer in the market of the metal products. Survey results show that

45% of the customers nationwide were farmers. Other customers were found to be the general

public not necessarily farmers, other informal firms and formal firms in the same line of business.

In addition consumers have access to market information about prices.

55

CHAPTER FIVE: STRUCTURE, CONDUCT AND PERFORMANCE OF FIRMS IN THE

INFORMAL METAL INDUSTRY

5.1 INTRODUCTION

The chapter presents findings of the study on four aspects: The competitiveness of industry, the

behaviour of firms in the industry’s market, the performance of firms in the industry and the

performance of the industry as a whole in producing benefits to consumers and also on the

factors influencing firm performance in the informal metal industry.

5.2 COMPETITIVENESS OF THE INDUSTRY

To carry out an assessment on the competitiveness of the informal industry’s market

concentration measures were used as indicated in chapter three. A two-firm concentration ratio

(CR2), a four-firm concentration (CR4) and an eight-firm concentration ratio (CR8) including

the Herfindahl-Hirschman index (HHI) were calculated. An assessment of the barriers to entry

was done also though not much emphasis was put on them since barriers to entry and exit are

difficult to measure from cross sectional data (Porter, 1998). Below is a presentation on the

findings of the study on competitiveness of the industry:

5.2.1 Market Concentration

Computation of the concentration ratios CR2, CR4 and CR8 gave the following results: 𝐶𝑅2 =

∑ 𝑆22𝑖=1 =0.0615, 𝐶𝑅4 = ∑ 𝑆4

4𝑖=1 = 0.1107, 𝐶𝑅8 = ∑ 𝑆8

8𝑖=8 =0.182. The concentration ratio for

the two largest firms (CR2) was found to be 0.0615, implying that of the 200 firms only 6.15%

of the market share was in the hands of two largest firms. Concentration ratio for 4 largest firms

(CR4) was 0.1107 implying that about 11.07% of the market share was in the hands of four

largest firms. Again CR8 was found to be 0.182 meaning that about 18% of the market share

was owned by eight largest firms in the industry. The results show that the concentration is very

low in the industry.

56

An alternative measure the (HHI) index gave almost the same result. HHI was found to be equal

to 0.01077 which is again close to zero. The results of the Concentration ratios and the HHI

index are consistent confirming that there are a large number of small sized firms in the informal

metal industry. This is so since CR2, CR4 and CR4 for the industry were found to be less than

40% and HHI index was 0.01077 which is close to zero. The results imply close to perfect

competitive model of the informal metal industry.

5.2.2 Nature of conditions of entry into the industry

Capital costs of entry

The costs of entry in the industry are generally low. Statistics on the initial capital requirements

for the firms already in the industry were found to be very low. The statistics in the table5.1

show that on average the initial capital requirements were worth USD$473,00. The modal cost

was found to be USD$250, minimum capital requirements cost recorded was zero and the

maximum was USD$2000.

Table 5.1 Summary statistics on total capital costs of starting the firm in Usd

N=200 Statistics

Mean Mode Minimum Maximum Range Std.Deviation Std. Error of Mean

473.34 250 0 2000 2000 417.596 41.76

Source, (survey results, 2013)

The distribution of costs of capital requirements show that the majority of firms in the informal

metal industry started their firms using less than USD$500. About 70% of firm owners

confirmed they incurred low capital costs to start their firms.

57

Figure 5.1 Distribution of worth of capital used to start firm

The distribution also show that only 24% of the firm owners incurred capital costs between

USD$500 and USD$1000. Moreover, only 6% incurred capital costs above USD$1000. The

results imply that capital requirements are not a barrier for potential entrants in the industry.

Licensing requirements in the industry

Survey results show that the majority of the firms did not pay any high licence fees before they

started operating their enterprises. From the survey 95% did not pay licence fees to enter into

the industry. Only 5% of the respondents paid licences at entry and those were the ones who

worked in council designated areas. However, all the firms (100%) of the firms were not

registered with the registrar of companies. The results also give a reflection on the ease of entry

in the industry. No licence fees are needed for new entrants to start their own enterprises in the

informal metal industry.

Entry barriers against women

Despite the absence of high licence fees payments at entry, absence of practices that limits

participation of other informal manufacturers in the industry and the low capital costs of entry,

participation of women in the industry is very low. After carrying out an assessment it was found

that there exist some cultural practices that limit participation of women in the industry. The

nature of production itself, the working conditions and environment including the nature of work

0%

20%

40%

60%

80%

0-500$ 501-1000$ 1000+$

Pe

rce

nta

ge(%

) o

f re

spo

nd

en

ts

Amount in USD$

Total cost of starting the firm in USD$

Percent(%)

58

which is considered too physical are the main barriers against women participation. The job was

named “job for men” by a few women who were interviewed for some comments.

5.3 BEHAVIOUR OF FIRMS IN THE INDUSTRY

This section presents the practices performed by firms in the industry in order to implement their

competitive strategies and to create competitive advantage. The analysis looked at things like

price determination(discovery) in the industry, price setting behaviours, coordination in

business, selling practices e.g. marketing strategies, levels of advertising and also research and

innovation in the industry. Results from the analysis are presented below:

5.3.1 Price discovery methods, price setting behaviours and other tactics in pricing

Survey results show that firms in the industry relied primarily on three price discovery methods.

Price discovery methods found common were: after bargaining with customers, fixing a constant

percentage mark-up on cost and, determining prices according to what competitors charge in the

industry. The most common method of price discovery however was that of fixing a constant

percentage mark-up on cost of production. Fifty two (52) percent of the firms use this method in

determining prices in the informal industry’s market. Informal haggling (bargaining) between

seller and buyer is the second most widely used method of price discovery. Thirty eight (38%)

percent of the traders in the informal market used bargaining as their price discovery method.

Only 10% of the firms determined prices according to what other competitors in the same

industry paid. The firms who used competitors’ prices arrived at selling prices of their products

through active consultations among other traders of similar products. The method was however,

complemented with some other cost-plus mark-up computations fine- tuned by some

assessments of the market situation. The figure below shows the results from the survey on price

discovery methods.

59

Figure 5.2 Price discovery methods

In general the behaviour of setting prices in the informal industry’ market is open market. Supply

and demand influence prices in the industry’s market. Cases of collusion in determining prices

for their goods were not common. Interviews carried out during the survey confirmed that only

7% of the firms practised the behaviour of colliding in order to set prices. In addition price

discrimination is again a less common practice in the industry. Only 2% of the firms were found

to discriminate prices. The figure 5.3 below shows the price setting behaviours in the informal

industry.

Figure 5.3 Price setting behaviours in the informal industry

In addition to the price setting behaviours and the price discovery methods survey results show

that some of the firms in the informal metal industry use aggressive tactics such as exclusionary

after bargaining with customers

by fixing a contant percentage on cost

according to competitors prices

38%

52%

10%

Price determination methods

open marketcollide with otherfirms/producers

descriminateprices

Price setting behaviour 91% 7% 2%

0%

20%

40%

60%

80%

100%

Pe

rce

nt

Price setting behaviours

60

pricing and predatory pricing in trying to gain competitive edge on the market. Fourteen percent

(14%) of the firms in the sample used predatory and or exclusionary pricing4.Such practices are

performed by some informal metal manufactures though very few firms practice the tactics.

5.3.2 Selling practices and Marketing

Group marketing of output was found to be a less common practice. Most of the firms were

found to be independent in making marketing decisions. The results of the survey show that 71%

of the firms do not market their products as groups with other producers. Only 29% of the firms

were found to make joint decisions with other informal players in the industry when it comes to

marketing of their products. The result also confirms that levels of collusion in the informal

market are limited. In conjunction with selling practices the study also found that at least three

channels were followed in selling produce by informal metal manufacturers. Selling through a

sales person, selling through export, and, selling products directly at the firm were the three

channels followed. The majority of the firms however, sell their products directly at the firm

(91%). Selling directly at the firm was reported to be cost saving since no transport cost were

needed to move products to other market places. Only a few firms employed sales persons as a

way of selling products. In most of the cases rewards to the sales person were made on

commission bases. From the survey only 22% of the firms employed salespersons as one of their

ways of selling products. Exportation of products as a way of selling products is not a common

practice within the industry. Only a small portion of the firms (2%) exported their products.

Export destinations noted for some of the metal products from the industry were South Africa

and Mozambique. The figure 5.4 below presents some of the ways of selling products noted in

the informal industry.

4 Exclusionary and predatory pricing are temporary practices by firms of selling their products below survival or

market prices to undermine or eliminate existing competition

61

Figure 5.4 Ways of selling products

In addition to the selling practices by informal firms it was also found that some of the firms

have contracts with some of their clients. Thirty one percent (31%) of the firms in the informal

metal industry were found to have contracts with some of their clients. Contracting with clients

was mainly done by informal firms who relied on formal enterprises as their customers. The

majority (61%) however, were found not to have contracts with their clients. Contracting with

clients was not a common practice as it was noted that securing contracts with some prospective

clients needed proof of firm registration. In the case of many informal firms securing contracts

with some prospective clients was impossible as the firms are not registered.

Marketing strategies

In conjunction with marketing of products an examination of strategies used in marketing was

carried out and several strategies were found. The following marketing strategies are used by

players in the industry:

Sell directly at firm

Sell through export

Sell through sales person

91%

2%

22%

9%

98%

78%

Ways of selling productsYes No

62

Figure 5.5 Marketing strategies employed by firms in the industry

From the figure 5.5 above the most common marketing strategy in the industry is Displaying.

Most of the firms display their products at the firm; statistics show that 97% of the firms use the

strategy. Displaying products at the firm is most common mainly because the strategy is

convenient as it integrates roles at the firm. The strategy was reported to save time, labour and

costs as one person could perform multiple tasks i.e. welding (production) and selling

successfully at the firm. In addition quite a number of the firms (40%) use after sales service as

their marketing strategy. On after sales service firms offer periodic or as required maintenance

and repair of equipment they supplied to clients. The strategy is found to be effective by the

firms since it attracts more customers for the firms.

Pricing, advertising, promotion and branding are also common strategies used though lower

proportion of firms use them. Only 22% of the firms use pricing as their marketing strategy, 20%

use advertising, 7% use promotion, 1% use branding and none of the firms use packaging as a

marketing strategy. Pricing as a strategy is a less common practice, firms use prices through

making some adjustments to increase sales and gain competitive advantage. Twenty percent of

firms use advertising as one of their marketing strategies. The strategy was not very common in

the industry probably because of the additional costs associated with the strategy. Promotions

were found not to be a common strategy again with only 7% of the firms employing the strategy

on the market. This could be because most of the firms in the industry are still young and growing

1% 0%20% 22%

97%

7%

40%

99% 100%80% 78%

3%

93%

60%

Branding Packaging Advertising Pricing Displaying Promotion After salesservice

Marketing strategies Yes NO

63

and therefore carrying out promotions will stand as a threat for business survival as they incurred

additional costs. Packaging was found not to be employed as well as a strategy possibly because

of the nature of products the industry produces. Branding also was a less common strategy due

to the same reasons of incurring additional costs.

5.3.3 Grading, Advertising, Research and Development

The table below shows some statistics on grading premiums, spending on advertising and

spending on research and development to be discussed later in text.

Table 5.2 Summary statistics on Grading, Advertising and Research and Development

N Max Min Mean Std dev.

Premiums from grading (%) 200 50 2 18.05 11.591

Spending on advertising(USD) 40 1200 60 645.00 345.81

Spending on research and

development (USD)

44 2400 100 718.18 627.65

Source, (survey results, 2013)

Grading and premiums for grading

Grading of produce was seen as a common practice in the industry. Survey results show that

63% of the firms have grades for their products. A smaller percentage of the firms (37%)

however, didn’t have any grades for their products. For those firms who grade their products the

following criteria are used: Size of product (33%), Material used to make product (79%),

Combination of the two methods (25%).

The figure 5.6 below presents the proportions on the criteria for grading used by firms in the

informal metal industry

64

Figure 5.6 Criteria used for grading products

The figure shows that grading is mainly done based on the material used to make product.

Seventy nine percent (79.4%) of the firms use the criterion to grade their products. Only 33% of

firms who have grades for their products used size of the manufactured product and 25% of the

firms used both methods in coming up with grades for their products. The results imply that

quality of the metal products is mainly determined by two factors which are, type of material

used to make product and the size of the manufactured good.

Respondents representing firms were further asked if they got premiums from grading. The

results show that firms get some marginal premiums from having grades for their products.

Results show that on average a premium of 18.05% is obtained by producing higher grade

products. From the table 5.2 above statistics show that minimum percentage premium for

producing higher grades was 2% and the maximum was 50%. The standard deviation was 11.591

which indicate slightly higher variations of scores from the average. The statistics however,

imply that firms in the informal metal industry have some incentives for grading since producing

higher grade products attracts positive returns.

Advertising

Level of advertising was generally low as indicated by a small percentage (20%) of the firms

who used advertising as a marketing strategy. The research went on to assess the levels of

33.30%

79.4%

25%

66.70%

20.60%

75%

Size of product Material used to make product Both

Criteria used for gradingYes No

65

spending towards advertising of firms that used advertising as their marketing strategy. On

average it was found that firms used USD$645.00 per year towards advertising expenditure.

Statistics on advertising expenditure per year are shown in table 5.2

It is shown in the table 5.2 that spending towards advertising is generally low as indicated by

some firms who spent only USD$60.00 per year. The maximum spending per year recorded was

USD$1.200.00 per year (which is about USD$100.00 per month) which again show that levels

of spending towards advertising expenditure are low. Advertising in the industry is done in

various forms. Advertising is done through local newspaper adverts, by word of mouth, through

flyers, business cards and posters. The following figure presents on the modes of advertising

used in the industry:

Figure 5.7 Modes of advertising used

From the figure above distribution of flyers (70%) and word of mouth (60%) are the frequently

used modes of advertising by firms. Some firms use posters (42.5%), some distribute business

cards (20%) and some firms use newspaper adverts for advertising. 27.5% of the firms use the

newspaper for advertising.

Research and development

Research and innovation like advertising is again not a very common practice in the metal

informal industry. Survey results show that only 22% of the firms in the industry spend on

newspapers word of mouth flyers business cards posters

no 72.50% 40% 30% 80% 58.50%

yes 27.50% 60% 70% 20% 42.50%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

pe

rce

nta

ge(%

)

Modes of advertising

66

research and development. Spending on research and development however, was found to be

slightly higher as compared to spending on advertising. On average firms spend about USD$718

per year towards research and development. Statistics on Research and development spending

are as in the table 5.2

The statistics in the table show that research and development spending is low with maximum

spending per year recorded being USD$2.400.00 (USD$200.00 per month). Minimum recorded

expenditure was USD$100.00 Spending on research and development is however, higher than

on advertising. The results imply that firms in the informal industry do not dwell much on

research and development probably due to resource limitations and the nature of their businesses

activities. Since, most of the firms operate in illegal places and are not licenced spending heavily

on research and development remains low since owners are afraid of the uncertain future of their

enterprises.

5.3.4 Information and Communication Technologies (ICT’s) used in business

Information and communication technologies used in the industry include mobile phones,

internet and computers. Almost all (98%) firms in the industry use mobile phone technology in

business. Only 24% used internet technology and 8% use computers in their businesses.

Figure 5.8 ICT’s used in business

computers mobile phones internet

no 92% 2% 76%

yes 8% 98% 24%

0%

20%

40%

60%

80%

100%

120%

Axi

s Ti

tle

ICT's use in business

67

The figure 5.8 above presents the ICT’s used in business. Mobile phone technology is the main

mode of communication used with customers, clients and any other stakeholders to their

businesses. Internet is also used in communication though less frequently. Social networks like

Facebook, whatsapp and the use of emails are other ways of communication. The use of

computers is still very low in the industry though.

5.3.5 Other conduct

Figure 5.9 Product returns by customers

As indicated in the figure 5.9 above, return of defective or faulty products by customers is

welcome in the industry as 91% of the firms pointed that product returns are welcome to their

firms. Only a few firms (9%) indicated that product returns are not welcome. The results imply

that customer service in the sector is quite good and consumers are guaranteed of quality on

products.

5.4 SUCCESS OF THE INDUSTRY IN PRODUCING BENEFITS FOR CONSUMERS

Performance of the industry in producing benefits to consumers was measured in various ways.

Some of the ways recommended in literature are price levels, producer share of the price,

profitability, profit margins, customer satisfaction, etc. The study focused on profits, prices,

customer satisfaction, profit margins, and producer share of the price to assess the performance

of the industry. This sub-section presents the results on the success of the industry in producing

benefits to consumers

yes91%

no9%

Product returns by customers allowed

68

5.4.1 Prices as compared to formal competitors and producers’ share of the price

Study findings reveal that prices in the informal industry are lower when compared with those

of main competitors in the formal sector selling the same products. A comparison of formal and

informal prices of some of the products produced in the industry revealed that prices in the

informal industry were generally lower. Comparison was done using average prices obtained

from the respective industries formal and informal on three products as shown in the table below.

Table 5.3 Comparison of formal and informal prices on selected products

Products Formal rice(Average)

in USD$

Informal

price(Average)

in USD$

Informal prices

(%) lower

Scotch cart 650.00 500.00 23.1

Mouldboard

plough

140.00 105.00 25

Wheelbarrow 65.00 50.00 23.1

Source, (survey results, 2013)

From the table the prices collected for the three products showed that informal prices were

generally lower as compared to prices by formal competitors. By calculating the margins of

difference from the sample of product prices it was shown that informal prices were atleast 23%

lower. In addition all the survey respondents (100%) representing the firms pointed out that

prices they charge are lower than those of formal competitors producing the same products in

the formal industry. The main reasons that were given for charging lower prices are as shown in

the figure below:

Figure 5.10 Reasons for charging lower prices than those of formal competitors

16%

62.70%

16% 5.30%0%

20%

40%

60%

80%

i do not pay taxes my labour costs arelower

my customers are lessrich

quality of my productsis lower

Main reason for charging lower prices than those of formal competitors

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From the figure the major reason for charging lower prices was that the firms feel their costs of

production are lower as compared to formal players. Some of the reasons stated were that their

customers are poor (16%); they do not pay taxes (16%) and that the quality of their produce is

lower (5.3%). The results imply that firms in the industry are well informed of the world

surrounding them and they understand the situation and purchasing powers of their customers.

The reasons that were mentioned also show that informal firms consider an array of factors

before coming up with a price for their products. They try to suit their prices with the needs of

their customers and themselves.

Producers’ share of the price

Producers’ share of the price in the study was measured as the proportion of the price paid by

consumers that gets to the producer. On average producers were found to get 90% of the price

charged on a product. Statistics in the table below presents the results.

Table 5.4 Producer’s share of the price statistics

Statistics

Producer share

Min Max Mean Std.Deviation N

60% 100% 89.54 9.736 200

Source, (survey results, 2013)

As indicated in the table the minimum producer share of the price recorded was 60% and the

maximum was 100%. Producers’ share of the prices is large and the result is not surprising since

firms incur low marketing costs. The result gives a reflection on the costs associated with their

marketing in the industry. The firms mainly market their products at the point of manufacture

and therefore as a result not much of marketing costs are incurred. In addition middlemen and

salespersons have no big role to play in their marketing as results indicated earlier that most of

the firms sell their produce at farm gate.

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5.4.2 Profitability of firms in the informal metal manufacturing industry

The micro and small enterprises in the informal metal industry are profitable. Net profits

calculated for the years 2010, 2011 and 2013 from the survey data confirm the result. The

descriptive statistics for profits for the three years are as shown in the table 5.5 below:

Table 5.5 Descriptive statistics on net profits from 2010-2012

(USD) N Range Minimum Maximum Mean Std. Deviation

profits 2010 154 29900 100 30000 4111.818 5301.016

profits 2011 180 29850 150 30000 4286.222 5257.624

profits 2012 200 29850 150 30000 4051 4761.294

Source, (survey results, 2013)

Statistics in the table show that firms on average get at least USD$4.000.00 a year (about

USD$300.00 a month) as profit. Survey results show that average profit in year 2010 was

USD$4.111.80, USD$4.286.00 for year 2011 and USD$4.051.00 for year 2012. The standard

deviations are quite large implying that the means might not be a good reflection of the profits

across the whole industry. Distributions of the profits across the years might show a better

reflection of the situation. The figures below show the distribution of profits in 2010, 2011 and

2012.

Figure 5.11 Distribution of profits in the year 2010

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Figure 5.12 Distributions of profits in 2011

Figure 5.13 Distributions of profits in 2012

From the distributions it is shown that most of the firms earned profits that are less than

USD$5000 a year. Very few firms earned large profits i.e. profits greater than USD$20000 a

year. Distributions of profits in the graphs above also show that there was no much difference in

terms of profits earned by firms for the given years. Average profits earned and the general

distribution of firm profits in 2010, 2011 and 2012 were almost the same as shown in the graphs

above.

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In addition to the profits earned by firms profit margins for the firms included in the sample were

also calculated using year 2012 profits only. Profit margins measure how much out of every

dollar of sales a firm actually keeps in earnings. Profit margins were calculated as a ratio of profit

divided by sales revenue for a particular year multiplied by 100 as indicated in the research

methods section. Results of the calculation show that on average firms in the informal metal

industry keep at least 47 cents out of every dollar of sales. The figure below shows the

distributions of the profit margins in the industry.

Figure 5.14 Distributions of profit margins of firms in the informal metal industry

The distribution shows that most firms’ profit margins fall between 40% and 80% and this again

show that firms in the industry are profitable and they retain at least 40% of their sales’ values

as profits.

5.4.3 Expected future performance of informal metal manufacturing firms

Tobin’s Q ratio is a proxy measure of firms expected future performance. The ratio measures the

ratio of the current value of firm assets to the replacement value. Results from the calculation of

the Tobin’s q ratio show that the firms in the industry are not very far from equilibrium (q=1).

Calculations show that the average value for the ratio (q) is 0.98. It is less than one but since it

is very close equilibrium (q=1) we can conclude that the industry’s expected future performance

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seem to be good. This implies that firms in the industry are more likely to succeed in future and

investments in the industry will be meaningful since they are likely to generate the cost of assets

invested. The table below show statistics on the Tobin’s Q ratio.

Table 5.6 Descriptive statistics on the Tobin’s q ratio calculations

N Minimum Maximum Mean Std. Deviation

Tobin’s Q 200 .40 2.70 .9834 .28639

Source, (survey results, 2013)

From the table the minimum ratio is 0.4 and the maximum is 2.70. The standard deviation is

0.29 which is relatively low implying that the mean is a good reflection of the situation in the

industry in terms of the Tobin’s Q ratio.

5.4.4 Customer satisfaction in the industry

Firms in the informal metal industry feel that customers are satisfied with their products. When

firm representatives were asked whether they think customers are satisfied with their products

all firm representatives gave a yes response. The main reasons given were that customers keep

on coming to buy their products and that there are few cases where customers complain about

their products and services. In addition a few customers interviewed at the time of the survey

also said they are satisfied with products and services from the informal metal industry. Thirty

five (35) out of forty (40) customers interviewed (87.5%) said they are satisfied with the products

and services from the informal industry. Main reasons for their satisfaction given were that:

i. Products from the industry are cheap compared to formal competitors.

ii. Products from the sector are durable

iii. Firms in the informal industry offer after sales services for some of their equipment

iv. Consumers can influence design on specific products they want to buy from the informal

industry. For example consumers can specify dimensions for a scotch cart they want

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firms to produce for them. In addition consumers can bring their own material to make

some products.

v. There is room for returning defective products

The given reasons confirmed the fact that customer satisfaction is generally high in the industry.

5.5 FACTORS INFLUENCING PERFORMANCE OF FIRMS IN THE INFORMAL METAL

INDUSTRY

In addition to the examination of performance of the industry it was necessary to examine some

of the main drivers of performance amongst firms in the metal industry. Factors influencing

individual firms’ performance were considered mainly due to the reasons mentioned in the

literature review section. The study examined factors within the structure-conduct-performance

framework and also other firm specific factors in order to determine what influenced

performance of informal metal manufacturing enterprises. Multiple regression analysis was

applied with profit as the dependent variable and nine independent variables as shown in table

3.4 in chapter three. The intention was to test whether the hypothesis that the structure and

conduct variables significantly influence firm performance was true. The whole of this section

present the results of the multiple regression analysis.

5.5.1 Descriptive statistics of the sample on variables in regression

Table 5.7 below show the descriptive statistics of the sample on the dependent and independent

variables. By and large, the profits of the small to medium firms in the metal informal industry

were rather small with a mean of USD$4.051.00 per year, compared to formal industry mean

which is above half a million united states dollars a year (CZI statistics). Looking at the mean

age, we can conclude that most of the small to medium firms are new in the sector since mean

age of firm was 6 years. Firm owners started operations without much experience of the metal

manufacturing business. Mean experience was 2.4 which show that firm owners started

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operations in the metal manufacturing business without a lot of experience of the trade.

Collective action statistics indicate that collective action was not a common practice as indicated

by the mean collective action of 0.27. The statistics also indicate that most of the informal

enterprises produced agricultural products as mean type of product was 0.82. Gender wise it can

be concluded that the industry is dominated by male people i.e. (mean gender =0.98) very close

to 1 indicating that almost all of the participants in the industry are male. Almost all of the

enterprise owners had attained at least secondary education as mean education was 0.96. In

addition grading was seen as a common practice amongst firms in the in the informal metal

manufacturing industry i.e. mean grading was 0.63. Bargaining with customers was not a very

common practice in price determination as shown by mean price determination of 0.38 which is

close to zero. Lastly the statistics also show that contracting with clients was again not common

at the time of the study amongst the informal metal manufacturing firms. The descriptive

statistics in the table 5.7 are based on a sample of 200 informal metal manufacturing firms

included in the survey.

Table 5.7 Descriptive statistics on regression variables

Variables (N=200) Definition Mean Std dev. Min Max

Dependent variable

Profit Profits of firm in Usd 4051 4761 150 30000

Independent variables

Collective action(dummy) Collective action in

business1=yes,0 otherwise

.27 0.445 0 1

Gender of owner(dummy) 1=male,0 female .98 0.14 0 1

Education(dummy) 1=,attained at least secondary

education,0 otherwise

.96 .196 0 1

Contracting with clients(dummy) 1=yes, 0 otherwise .31 .464 0 1

Grading(dummy) 1=yes,0 otherwise .63 .484 0 1

Price determination(dummy) 1=bargaining with

customers,0 otherwise

.38 .487 0 1

Type of products(dummy) 1= agricultural, 0 otherwise .82 .385 0 1

Experience of owner Number of years of

experience

2.36 2.72 .00 12

Age of firm Age in years 6.1 5.05 .60 25

Source, (survey results, 2013)

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5.5.2 Multiple regression results

Correlation tests between variables were performed and at 5% level none of the independent

variables were correlated. The absence of correlation was a good result for multiple regression

analysis since it’s a proof that there was no problem of multi-collinearity. The table 5.8 below

shows the multiple regression results. The R-square value was 0.286%, implying that the

percentage of variation in profits explained by the collection of independent variables was about

29% when rounded to 2 decimal places. Based on the Adjusted R-square we can say that our

model accounted for 26% of the variation in the dependent variable. At 5% level of significance

it was evident that at least one of the independent variables explained variability in performance

measured by profits as the F-value was 9.56 and a p-value 0.000<0.05. The result confirms that

the model was useful.

Table 5.8 Multiple regression results on factors influencing performance

Variables Coefficients Std. Error t sig

(Constant) 5223.722 2693.896 1.939 (.054)

Collctactn(dummy) -1568.777 768.490 -2.041 (.043)

Gender(dummy) -3063.694 2137.382 -1.433 (.153)

Edu(dummy) 414.833 1572.595 .264 (.792)

Contrct (dummy) 2525.291 692.417 3.647 (.000)

Grd (dummy) -1460.175 691.305 -2.112 (.036)

Pdm(dummy) -2928.168 668.048 -4.383 (.000)

Typpdct (dummy) 1417.846 821.223 1.727 (.086)

Exp 375.893 114.294 3.289 (.001)

Agefirm 172.302 63.614 2.709 (.007)

F(p-value) 9.556(.000)

R-squared .286

Adjusted R-square .256

N 200 Significant at 1% level; Significant at 5% level; Significant at 10% level

Source, (survey results, 2013)

Based on the results age of firm, experience of owner when he/she started the business, price

determination method, and contracting with clients, were very significant as indicated by the p-

values <1%. Grading, and collective action were significant also though only at 5% level as

indicated by the p-values >1% but <5%. Type of products produced was just significant at 10%

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level as indicated by a p-value of (.086) > 0.05 but < (.10). Education and gender were not

significant.

The age of firm variable’s significance is consistent with the expectation that performance of the

small to medium firms tends to improve with age. Experience of owner when he/she started the

business was very significant as expected i.e. performance tends to increase with experience of

business operators. The more experienced the enterprise owner, the more likely it is that the firm

will do better. Bargaining with customers as a price determination method had a negative

significant influence on profits. This could be because with room for bargaining with customers,

firms tend to sell more products at lower prices due to negotiations by clients and hence they

tend to have lower profits in the end. Contracting with clients was also very significant and had

a positive influence on firm profits. This could be probably due to the fact that firms who secured

contracts with clients will have more secured market for their output and hence are likely to

perform better as compared with those with an uncertain market for their products. Collective

action in business does not help in business since the industry is perfectly competitive. Grading

was found to affect performance negatively. This could be because firms tend to focus on

producing higher grade products that fetch higher prices hence with the pool of poor customers

they tend to sell less. Type of product was just significant and had a positive influence on

performance. This could be because firms who produced agricultural products tend to sell more

due to the high demand of the products. Education and gender were not significant implying the

two did not explain variation in firm’s performance in the industry.

More interestingly, the coefficients of the significant variables except for grading, price

determination and collective action were large and had positive signs implying that the factors

positively impact on firm performance (to the tune of their respective coefficients as shown in

table 5.8 above) in the informal metal industry. For those with negative signs implied that the

factors negatively influenced on firm performance.

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5.6 SUMMARY OF CHAPTER FINDINGS AND CONCLUSIONS

Structure of the industry

Results of the concentration measures imply that the informal metal industry approaches the

purely competitive model. CR2, CR4, and CR8 were found to be less than 40% and the HHI

index was close to zero. The industry has a large number of small sized firms. In addition barriers

to entry in the industry are very low as indicated by low capital costs of entry and no high licence

fees payment requirements for new entrants. Moreover, products produced in the industry are

standardized i.e. products of one firm are indistinguishable from that of other firms in the

industry. The results of the structure of the industry also imply that customers always have

alternatives to a single firm’s product or service. Low barriers to entry also imply that there is a

limit to the price that a single firm can charge. There is discipline in the market in general due

to low entry barriers in the industry. The hypothesis that the industry is perfectly competitive

could not be rejected based on the results of the analysis.

Behaviour of firms in the industry (Conduct)

Fixing a percentage mark-up on cost used to make product was the main price discovery method.

Informal haggling (bargaining) with customers was found to be the second main price discovery

method in the industry, and determining prices according to what competitors charge was one of

the price discovery methods used. Prices in general were found to be a result of the market forces

of demand and supply. Aggressive tactics in pricing such as predatory pricing and or

exclusionary are not common practices. In terms of marketing most of the firms make

independent decisions when marketing their products. The marketing strategies mainly used by

firms include displaying, after-sales service, pricing, advertising, promotion and branding. It was

equally important to note that the most dominant marketing strategies used by most firms were

displaying after-sales service and pricing. Some of the marketing strategies mentioned were

found not to be commonly used by firms in the industry. Firms in the industry sell their products

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in three ways: 1-selling at the firm, 2-selling through export and 3-selling through sales persons

employed by the firm. However, almost all the firms sell their products at their firms. Exporting

and use of sales personnel were seen not to be common ways of selling their products.

Furthermore, contracting with clients was not found to be a common practice. Grading was found

to be a common practice by many firms and grades were mainly based on size of product,

material used to make product and a combination of both. It was also found that there are

premiums for grading in the industry. On average 18.05% premiums are obtained for producing

higher grades. Advertising, research and innovation are not common practices in the industry.

Less than 23% of the firms were found to spend on advertising and research and development

of the firm. Of the firms that dwell on the two it was found however, that spending towards the

two practices were very low. Moreso, mobile phone technology is the main information

communication technology used by the firms in business. The use of internet and computers are

less common ICT’s used in business. In terms of other conduct, firms in the industry welcome

product returns on defective products.

In summary the results implied that there is no collusive behaviour in price determination i.e.

prices are reflections of supply and demand. Firms practice close to marginal cost pricing. In

addition results imply that uncompetitive behaviours by firms in the industry are very low. The

hypothesis that firms in the industry do not dwell much on Advertising, research and

development could not be rejected.

Success of the industry in generating benefits for consumers

The industry seems to be on-track in bringing satisfaction to consumers. Prices in the industry

are lower as compared to prices of formal competitors producing the same products. Prices are

lower not because firms are exploiting consumers, but because firms in the industry generally

face lower costs of production. Raw material costs and labour costs are lower as compared to

formal players and players don’t pay taxes. The firms in the industry are profitable. This is

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evidenced by positive profits, high producer share of the price and high profit margins. Firms

retain at least 47cents for every dollar of sales as profit. Producer share of the price is high 89.5%

on average. In addition, Tobin’s q ratio was found to very close to 1(0.98) which again show

that the industry has the potential of doing even better. The ratio implies that the industry has

great potential. Future investments in the industry are likely to be meaningful since investments

will generate the costs of assets invested. In addition, success of the industry is evident in

customer satisfaction. Consumers are satisfied with products from the informal industry. Results

on performance of the industry are not surprising since the industry is close to the purely

competitive model. In perfect competition firms have no market power and are price takers. As

a result prices tend to be low, there are no economic profits and there will be efficiency. The

hypothesis that the firms are making positive profits and are succeeding in satisfying customers

could not be rejected based on the findings.

Factors influencing firm performance.

Both firm specific factors and factors within the structure conduct and performance framework

were found to significantly influence performance in the informal metal industry. Firm age,

experience of owner of metal manufacturing, type of products produced by firms, grading of

products, price determination methods and contracting with clients, collective action in business

and grading were found to influence profits in the industry. Price determination, grading and

collective action were found to influence performance negatively whilst all the other significant

factors had a positive influence. The hypothesis that factors within the structure-conduct and

performance influenced performance of small to medium firms could not be rejected at 5% level.

It was however, concluded that not only factors in the structure-conduct and performance

framework influenced performance, but also firm specific factors outside the structure, conduct

and performance paradigm like age and experience of firm owners when business was started.

The results of the analysis are consistent with some studies on the factors influencing small to

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medium enterprise performance. In Thailand, Chittithaworn et al (2010) on the study of factors

affecting business success of SME’s in the manufacturing sector in Thailand concluded that

SMEs characteristics, customer and market, ways of doing business, resources and finance and

the external environment significantly affect performance. In addition, a study by Rosli, (2011)

in Malaysia auto-parts making industry concluded that firm specific factors significantly

influences SMEs performance.

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CHAPTER SIX: IMPLICATIONS AND RECOMMENDATIONS

6.1 INTRODUCTION

The chapter presents the implications of the structure, conduct and performance of firms in the

informal metal manufacturing industry to stakeholders in the agricultural sector. Policy

recommendations drawn and areas for further study are also presented under this chapter. The

main stakeholders considered in drawing implications for the results in this study are the small

holder farmers. Implications are drawn based on the results of the structure, conduct and

performance of firms in the industry and also based on the factors influencing firm performance

in the informal metal industry.

6.2 IMPLICATIONS

6.2.1Implications of Informal industry Structure on smallholder farmers

The informal metal industry in Zimbabwe is characterised by low concentration of sellers of

metal products(i.e. CR2,CR4,CR8 were found to be close to zero and less than 0.4 and HHI close

to zero), low barriers to entry and exit. In other words the results imply that the industry is very

close to the purely competitive model. The classification further implies that there could be

discipline in the market as new entrants can enter anytime without much difficulties, therefore

increasing competition. As a result of competition, efficiency is encouraged amongst market

participants and the outcome is more likely to be lower prices for consumers and good customer

satisfaction. Considering that farmers especially smallholder farmers are amongst major

customers in the industry, they have big advantages in sourcing some of their agricultural

materials from the informal industry since they enjoy benefits of perfect competition. Lower

prices and good customer satisfaction are the more likely benefits. By further considering that

smallholder farmers in Zimbabwe are known to be resource poor the lower prices charged on

agricultural products in the informal industry due to competition are a favourable outcome for

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them also. Farmers can afford to buy more products with their limited incomes in the informal

industry’s market due to the lower prices.

6.2.2 Implications of Conduct (behaviour of firms) on smallholder farmers

Results reflect that prices in the informal industry’s market are a result of interaction of buyers

and sellers. The industry’s structure also confirms that there are a large number of small sized

firms in the industry. This implies that if one firm tries to increase his/her product prices, he or

she sells almost nothing. This means that smallholder farmers buy or can buy agricultural

equipment, implements and other general tools from the informal metal industry’s market at

prices that are close to marginal costs of production.

Firms in the industry lack market power i.e. besides low market concentration it was also found

that the firms do not engage in group marketing and other collusive behaviours in business. This

again confirms that stakeholders in the agricultural sector (the smallholder farmers) can rely on

the informal metal industry as they are more likely to get value for their money. Low market

power implies that firms cannot overcharge customers as they are price takers.

It was also found that consumers can return goods that are damaged or goods that are below

standard. This reflects the level of customer care in the industry and this implies that farmers

sourcing their agricultural materials from the informal metal industry are guaranteed high quality

goods and services.

It was unfortunate to find out that prices in the industry are not displayed. There is a possibility

that firms can charge different prices to different consumers for the same commodity. This

subjects some customers in this case farmers to high costs and less purchases. However, given

that customers have access to market information this is not a major worry for Zimbabwean

smallholder farmers. Farmers can carry out consultations with other firms of the prices of

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products before purchasing since the firms in the informal sector are many and found in specific

areas.

6.2.3 Implications of Performance of the industry on smallholder farmers

In terms of performance it was found that firms earn positive but not excessive profits, profit

margins earned by firms are high, there is customer satisfaction and that most of their products

are always in stock.

Having most of their products always in stock in the industry all other things held constant

implies that smallholder farmers sourcing agricultural materials from the informal industry face

regular and predictable availability of products. Besides products being available always, it was

also found that farmers have an option of putting orders of products they want firms to

manufacture in the industry. In addition farmers like any other customers can influence the

design of the product they want to buy from the industry. Some of the services are not common

in the formal market and therefore an advantage for farmers to use the informal market as their

source of agricultural materials ceteris paribus.

Positive but not excessive profits for the firms and low prices charged again indicate that farmers

are not overcharged in the industry and thus can buy more metal products from the industry

given their fixed incomes. In addition, the high profit margins and positive profits indicate that

the firms can still remain in business and offer the services they are offering to customers in the

long run.

In summary the informal metal industry in Zimbabwe has great potential and is playing a vital

role in the economic transformation of the country through aiding agricultural development.

Supplying vital agricultural technologies efficiently to farmers is a big plus in the prospects of

raising national output, productivity and bringing national development. From this we can draw

policy recommendations that are likely to extent and exaggerate benefits to the farmers and the

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rest of the economy. The section below draws some recommendations that are likely to improve

benefits from the informal industry to stakeholders in the agricultural sector and other

stakeholders.

6.3 RECOMMENDATIONS

As noted in chapter four section 4.2, informal metal manufacturing firms in Zimbabwe were

found to operate in insecure contested spaces mostly in urban centres. Examples of places where

informal firms, included in this survey were found are: in Harare, (Mbare Magaba area, Mbudzi,

and Gazaland, in Mutare (main green market, and Dangamvura green market), in Bulawayo

(renkini msika area, Makokoba), in Chitungwiza (Makoni area), in Rusape (Mabvazuva,

Vengere and Msika areas). Besides being insecure the areas lack adequate infrastructure, general

appeal and well-constructed facilities and often are inadequate to accommodate the bulk of

activities by informal operators. As a result of the lack of appealing and well-constructed

facilities some customers look at the places and structures and see them as a nuisance and choose

not to be associated with them. This is a drawback to informal enterprises as it prohibits them

from reaping maximum economic benefits and also a drawback in their success in producing

benefits for consumers. The challenges therefore affect almost every stakeholder benefiting from

informal sector activities including smallholder farmers. With this in mind the researcher give

the following as recommendations

6.3.1Recommendations to policy makers

The researcher recommends the government through relevant ministries (i.e. the ministry of

SME’s, local government), financial institutions and the private sector community to weigh

possibilities of accommodating informal metal manufacturing enterprises into the country’s

development agenda. Integrating the industry into the national development agenda will enhance

orderly utilisation of urban space; improve the aesthetic appeal of the informal sector sites, and

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even improve business viability and operations. Integrating the industry however, does not entail

complete formalisation of activities as this will deprive the informal enterprises of their current

benefits e.g. low costs and increase chances of closure/failure of the micro to small and medium

firms. In line with incorporating the informal sector enterprises into national agenda there is need

also by government to promote competition within the industry. There is need for government

to keep barriers to entry and exit in the industry low so as to draw concentration of sellers very

close to zero and increase competition. Drawing and keeping the industry very close to perfect

competition will encourage firms to be innovative, encourage improvements to the quality of

service for consumers, create better information for consumers allowing farmers to make more

informed choices, be very efficient in production and therefore a general improvement in

economic welfare. The farming community (farmers) and the rest of stakeholders are more likely

to reap maximum benefits if the industry is perfectly competitive.

6.3.2 Recommendations to owners of informal sector enterprises

To the informal enterprise owners the researcher recommends them to work on improving their

operations. In addition, the researcher further recommends the informal operators to work on

registration of their enterprises as there is a possibility of attracting a big clientele base. There is

need also by the informal firm owners to work on improving their skills in business i.e.

sharpening personal skills and selling skills and know their limitations. Above all the researcher

also urges the informal enterprise operators to dwell on competitive practices in business.

Moreso, the researcher recommends firm operators to use obtained knowledge from the factors

that influence firm performance to track their positions in business, communicate goals as well

as verify priorities. They need as well to use the obtained knowledge to improve their

performance. For example since contracting with clients and type of products produced

positively influence profits, firms can work on the two to improve their earnings. In addition

firm owners need to realize that the more they stay in business the better since firm age

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significantly influenced profitability. Since price determination, grading and collective action in

business were found to have a significant negative influence on profitability, firms can consider

avoiding collective action in business, firms can do away with grading and rather produce

standard products, and also they can choose other methods of price determination as opposed to

bargaining with customers to avoid the negative influence.

In addition, knowledge obtained from the analysis of factors affecting SMEs performance can

be used by the SMEs to formulate strategies, motivate employees and mostly in decision making

also. The researcher again strongly recommends firm owners/operators to use the knowledge

obtained for the benefit of their businesses.

6.3.3 Recommendations to farmers

Basing on the findings of the study, farmers benefit from using the informal metal industry as

their source of agricultural materials (implements, equipment and other general tools). The

industry is performing well and is offering competitive services to customers. Hence farmers are

guaranteed of lower prices, greater variety of products, and good quality of services from the

industry. The researcher strongly recommends farmers to feel comfortable in buying agricultural

materials and any other metal products from the informal sector. Farmers need not to be misled

by the ugly-looking structures that are poorly serviced, aesthetically unfriendly and

environmentally unstable as there is a lot to benefit from informal industry activities. Farmers

are further recommended to consider the informal metal industry when procuring their inputs

(agricultural implements, equipment, and or tools) for their farming activities.

6.4 AREAS OF FURTHER RESEARCH

The emphasis in this study has mainly been on the supply side. More research focusing on the

demand side of the story is needed to complement this study. We focused much on the supply

side where an understanding of the industry was used to draw conclusions on the success of the

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industry in producing benefits for consumers. Little focus was given to the demand side of the

story. Consumers i.e. farmers need to be included in the analysis as their views will complement

judgement of the success of the industry. Farmers are the ones who can comment on things like

the appropriateness of technologies from the industry, durability, affordability and other

attributes of products from the industry.

In addition, there is also need to collect time series data in order, to review the interlink-ages

amongst the structure, conduct and performance of the industry. Factors that influence the

performance of firms are better predicted using time series data than cross-sectional data.

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LIST OF APPENDICES

Appendix 1: Firm Owners’ Questionnaire

Micro and small metal manufacturing sector questionnaire

Firm owners’ questionnaire

Purpose of the survey

The aim of the survey is to carry out an assessment of the informal metal manufacturing industry sub-sector

performance with particular focus on the micro and small enterprises. The information that you are going to provide

is confidential and will be used only for the purposes of this research project. The ultimate goal of this research

project is to influence policy making with a view to develop capacity and promote industrialisation from the grass

roots.

Questionnaire number……………………………………………..

Enumerator………………………………………………………..

Respondent designation at firm…………………………………..

Firm name………………………………………………………..

Location………………………………………………………….

Date of interview………………………………………………….

A. FIRM AND OWNERS’ DEMOGRAPHIC CHARACTERISTICS

1. Age of firm owner………………….years

2. Gender of firm owner 1= male, 2=female

3. Marital status of respondent 1=married, 2=single, 3=widowed, 4=divorced

4. What is your highest level of education?

1. No education 2. Primary school 3. Secondary school 4.vocational training 5. University

education 6. Other (specify)…………..

5. Age of the firm……………………………………..years/months/days

6. How much experience did you have when you started the firm?

(………………………years/months/weeks)

7. What was your source of skill acquisition for your current job at this firm?

1. Government vocational training 2. Private vocational centres 3.NGO’s 4.other informal operators

5.other (specify)…………

8. What was the total cost of starting the firm? USD$........................................................

9. What was the source of your capital to start the firm? (multiple response allowed)

1. Own savings 2. Bank loan 3. Loan from friends/family 4. Government loan 5. Loan from

donor agency 6. Loan from money lender 7. Other(specify)

10. What is the current value of your capital equipment? USD$.....................................

11. What is the replacement value of your capital equipment? USD$..................

12. What type of firm is this?

1. Private 2. Partnership 3. Cooperative 4. Household enterprise

B. FIRM EMPLOYMENT

1. How many of the persons working in your firm are…..

Category Male Female

Owners

98

Family members

Employees

total

2. How many persons working in your firm were?........

Year Gender Category

Owners Family

members

Employees Total

2010 Male

Female

2011 Male

Female

2012 Male

female

C. STRUCTURE OF THE INFORMAL FIRMS

Barriers to entry and exit

1. Are there cultural practices that discriminate against women in controlling and accessing credit and capit

al markets in a way that limits market participation? 1=Yes 2=No

2. If yes what are they?

………………………………………………………………………………………………

3. Are there some cultural practices that limit the participation (or lead to the marginalization) of some man

ufacturers or a section of the population (e.g. women) in the industry? 1=Yes 2=No

4. If yes what are they?

……………………………………………………………………………

5. Are there manufactures, which produce large quantities that can serve a large share or the entire informal

metal industry? 1=Yes 2=No

6. If yes how many are they?

1. Very few 2. Few 3. Almost half 4. Above half 5. Almost everyone

7. Are manufactures required to pay high license fees before they start operating?1=Yes 2=No

8. Do you pay any form of taxes? Export, import, etc. 1=Yes 2=No

Coordination/integration

1. Are you engaged in any form of collective action such as cooperatives or production groups? 1=Yes 2=No

2. If yes where do you usually practice such cooperative action?

1. When acquiring raw materials 2. In production 3. When selling the products 4. Other specify

3. How do you sell your products?

1. Through sales persons 2. Sell directly at the firm 3.other specify

4. Do you have contracts with your clients? 1=Yes 2=No

Product characteristics/ differentiation

1. Do you have grades for your products? 1=Yes 2=No

2. If yes what is the criterion for you grading?

1. Size of product 2. Material used to make product 3. Other specify

D. CONDUCT OF THE INFORMAL FIRMS

Price setting behaviour

1. How are prices determined?

1. After bargaining with customers 2. By fixing a constant percentage on cost

99

3. according to competitors prices 4. Following prices fixed by producer association

5. other (specify)

2. What is the price setting behaviour?

1. Open market 2. Collusion with other producers/firms

3.Discriminate prices

3. Are prices based on grades? 1=Yes 2=No

4. If yes, what percentage premiums do you get for producing higher grade products...%

5. Do you engage in aggressive tactics such as predatory or exclusionary pricing? 1=Yes 2=No

6. How are your prices compared with those of your main competitors in the formal sector that are selling

the same products?

1. Higher 2. Average 3. Lower

7. (If firm prices are higher) why are your prices higher?

1. My equipment is less productive 2. I do not have enough customers

3. I do not have access to credit 4. Quality of my product is better

5. Cost of my supplier is high 6. Other(specify)

8. (If prices are lower) why are they lower?

1. I do not pay taxes 2. My labour costs are lower 3. My customers are less rich

4. Quality of my products is lower 5. Other (specify)

Selling practices, marketing

1. Are prices displayed? 1=Yes 2=No

2. Do you engage in group marketing of your products with other producers? 1=Yes 2=No

3. What is your marketing strategy? (tick as many)

1. Branding 2. Packaging 3. Advertising 4. Pricing 5. Displaying 6. Promotion 7. After sales service

8.Other (specify)

4. Are your products always in stock?

1. Always 2. Sometimes 3. Scarcely

5. Who is your main customer? (tick one)

1. Farmers 2. Formal enterprises 3. Informal enterprises 4. Direct exportation 5. Other

individuals (not farmers) 6. Private sector

6. Do you advertise? 1=Yes 2=No

7. If you advertise how much do you spend on advertising?$USD............per month/year

8. What are your modes of advertising? (circle as many)

1=newspapers, 2=word of mouth, 3=business cards/flyers/posters 4=other(specify)

9. Which of your products do the consumers usually buy?

1. Agricultural implements and equipment 2. Building materials 3. Industrial equipment and

machinery 4. Household equipment and tools 5. Other (specify)

10. Do you think customers are satisfied with your products?

1. Yes 2. No 3.Dont know

11. Can consumers return products/goods that are found defective? 1=Yes 2=No

12. Which of the following ICTs do you use for your marketing?(tick as many)

1. Computers 2. Internet 3. Mobile phones 4. None 5.other (specify)…………

13. Do you spend on research and development in your firm? 1=Yes 2=No

14. If yes how much do you spend per year/month? $USD...................................

E. PERFORMANCE

1. Fill the table below regarding your firm operations in the last three years

Year Value of production sales Total costs of production Cost of raw materials

2010

2011

100

2012

2. Fill in the table the value of additional investments made to the firm in the last three years

Year Buildings vehicles Capital equipment Other

2010

2011

2012

3. What is the profit margin on average from trading per month/year in your firm?...............(calculate from

table find average profit/year)

4. What is the most important thing you do with your profits? (Tick most important use for household needs)

1. Re-invest in this business 2. Re-invest in another business 3.put into savings

4. Give to family in the rural area 5. Use for entertainment 6. School fees

7. Other(specify)

5. What risks do you face in this area?

1. Legal risks 2.production risks 3.labour risks 4. Financial risks 5.other(specify)

Producer share

1. What proportion of price that is paid by consumers gets to the producer.....%

Volumes (quantity) and variety

1. What kind of products do you produce? (circle as many)

1. Agricultural (equipment, implements, tools) 2. Building materials 3. Household equipment 4.

Industrial materials 5. Other (specify)……

2. What proportions of your products are agricultural (implements, equipment, tools

etc.)?……………………%

3. Is there a limit on the amount of commodities consumers can buy from you? 1=Yes 2=No

4. If Yes what is the limit?.................................

5. What is the perception of the population about the quality of your products on the market?

1. Good quality 2. Average quality 3. Poor quality 4. Don’t know

6. Do consumers and traders have access to market information including prices, quantities, grades and

standards of your products that are sold on the market? 1=Yes 2=No 3=Don’t know

7. If yes what are the sources of information?

1. Word of mouth 2.radio and television 3.internet 4. Newspapers/magazines 5.

Other(specify)

101

Appendix 2: Consumer Interview Guide

(Identify a customer on site and ask the following questions)

What products have you bought from this place?

Why do you buy from this particular place?

1=Cheap 2= well stocked 3= high product quality 4=good personal 5=relationship

6=convenient 7=good customer care 8=other (tick as many as possible)

Which suppliers do you prefer to buy from in order of

importance?………………………………………………………………………………………………………

……………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………

………………………………………………………………………………………………

What factors do you consider when buying metal products from this industry?

1=Quality of goods 2= convenience 3=well stocked 4=customer care 5= other (SPECIFY)

How frequent do you purchase goods here

…………………………………………………..

What can you say are the major advantages if any of products purchase from this industry?

102

Appendix 3: Observation Guide

Observation guide for unstructured observations

Informal metal manufacturing enterprises’ evaluation

Location…………………………………………………………….

Date………………………………………………………………….

{Instructions to observer: write down short notes on what you see and comments on what you

hear under the following headings}

1. Sites (location and appeal)

……………………………………………………………………………………………

……………………………………………………………………………………………

…………………………………………………………………………………….

2. Infrastructure e.g. storage facilities, sheds, buildings etc.

……………………………………………………………………………………………

……………………………………………………………………………………………

……………………………………………………………………………………

3. Utilities e.g. water availability, electricity use and availability also check on potential

hazards from say Electricity

……………………………………………………………………………………………

……………………………………………………………………………………………

…………………………………………………………………………………….

4. Spacing adequacy within the sites (check crowding of enterprises within sites)

……………………………………………………………………………………………

……………………………………………………………………………………………

……………………………………………………………………………………