The Expansion of Small Scale Industries in Urban Economies

Walk through any bustling city in Asia, Africa, or Latin America, and you’ll find workshops tucked into narrow lanes, tailors stitching garments in small rooms, food processors working from home kitchens, and metal fabricators hammering away in open-air sheds. These are small-scale industries (SSIs) – and they are far more economically significant than they appear. Operating largely within the urban informal sector, SSIs generate millions of jobs, drive local economic activity, and absorb waves of rural migrants who arrive in cities seeking a livelihood. Yet they do so while facing a persistent set of challenges: no social security, weak labor protections, and limited access to capital. Understanding their growth means understanding how cities actually work economically – not just in theory, but in practice.

What are small-scale industries? 🔗

Small-scale industries are businesses that produce goods or services with relatively modest investment in machinery, labor, and infrastructure. They are defined less by what they make than by how they operate: on a small scale, often informally, and usually with low start-up costs. In many countries, SSIs have been formally reclassified under the broader category of Micro, Small, and Medium Enterprises (MSMEs), but the core characteristics remain the same.

These industries span an enormous range of activities – garment stitching, food processing, furniture making, leather goods, repair services, small-scale construction, electronics assembly, and more. According to the Women in Informal Employment: Globalizing and Organizing (WIEGO) network, a significant proportion of urban informal employment clusters into domestic work, home-based production, street trading, and waste picking – all of which either constitute SSIs or rely on them as part of local supply chains.

What sets SSIs apart in the urban context is their adaptability. They respond quickly to local demand, require minimal regulatory compliance, and can set up with little capital. The informal economy, where most SSIs operate, is broadly defined as economic activity that is neither taxed nor monitored by government. While this status brings flexibility, it also leaves workers and owners outside the protections of formal labor law.

Why small-scale industries grow in cities 🔗

The growth of SSIs in urban areas is not accidental – it is driven by a combination of demographic pressure, inadequate formal sector capacity, and the economics of urban demand.

Rural-to-urban migration 🔗

Cities in developing countries have grown faster than their formal economies can absorb. According to the World Economic Forum, Africa’s working-age population is expected to grow by 450 million between 2017 and 2035, but based on current economic trends, only around 100 million new formal jobs will be created. This gap is filled, in large part, by the informal economy and its small-scale industries. Rural migrants arriving in cities without formal qualifications or urban networks find that SSIs offer immediate entry points into economic life – low barriers, quick income, and skills that can be learned on the job.

The Harris-Todaro model of urban migration, developed in the 1970s, anticipated this dynamic: informal employment functions as an equilibrating force in the urban labor market, absorbing surplus workers who cannot find formal sector jobs. SSIs are the structural outcome of this process playing out across thousands of individual decisions made by migrants and entrepreneurs.

Demand from urban populations 🔗

Dense urban populations generate constant demand for affordable goods and services. Formal sector businesses often cannot serve low-income urban communities cost-effectively – their overhead is too high, their pricing too rigid. SSIs step into this space. A small tailor who works from a market stall, a home-based food producer selling tiffin boxes, or a neighborhood repair shop charging a fraction of what a formal service center would – all of these represent SSIs meeting urban needs that larger enterprises ignore.

This interconnection between formal and informal sectors is often underappreciated. Formal sector employees routinely depend on informal sector services for everyday needs – buying meals from street vendors, using informal transport, hiring domestic help. Money flows from the formal to the informal sector constantly, sustaining millions of SSI workers.

The economic contribution of small-scale industries 🔗

Despite their modest individual scale, SSIs collectively make a substantial contribution to national economies, particularly in the developing world.

Employment generation 🔗

SSIs are among the most powerful engines of employment generation in developing countries. In India, the small-scale sector creates the largest employment opportunities after agriculture, with the MSME sector employing over 110 million people. The sector’s labor intensity – its tendency to use more workers relative to capital – makes it especially valuable in economies with large, young workforces and limited automation.

India’s MSME sector contributes approximately 29-30% to GDP and accounts for around 40-45% of the country’s total exports, making it the second-largest employer after agriculture. SSIs within this sector also generate employment for women, first-generation entrepreneurs, and marginalized communities – contributing to economic inclusion alongside raw employment numbers.

Contribution to GDP and local economies 🔗

Small-scale industries contribute almost 40% of the gross industrial value added in India’s economy, and every million rupees invested in fixed assets in the small-scale sector generates approximately 4.62 million rupees worth of goods and services. These numbers reflect the sector’s extraordinary output relative to its input – a key reason why SSIs matter so much in economies where capital is scarce.

Globally, research across 20 developing countries has found a positive effect of informal employment on economic growth, reinforcing the argument that SSIs are not just a stopgap – they are active contributors to national prosperity. In Sub-Saharan Africa, the informal sector accounts for more than half of all urban jobs, with the formal private sector employing only about 18% of urban workers.

Export earnings and supply chains 🔗

SSIs are not only locally focused – many feed into global supply chains. Direct exports from the small-scale sector account for nearly 35% of India’s total exports, with additional indirect contributions through merchant exporters and component supply to larger manufacturers. Product groups where SSIs dominate exports include garments, leather goods, gems and jewelry, and sports goods – industries built on skilled, labor-intensive, small-batch production.

Challenges facing small-scale industries 🔗

The growth of SSIs is real, but so are the structural obstacles that prevent them from reaching their full potential. These challenges are rooted in the informal nature of the sector itself.

Lack of social security and labor rights 🔗

The most significant and persistent problem for workers in small-scale informal industries is the absence of social protection. For most workers in the informal economy, the lack of social protection is not just a daily hardship – it also blocks their aspirations for decent work, rights, and dignity. They lack access to health insurance, retirement savings, unemployment benefits, and paid sick leave. When illness or injury strikes, there is no safety net.

More than 60% of the global workforce is in informal employment, and the vast majority face serious gaps in decent work conditions. Workers in SSIs are locked into what the ILO describes as a cycle of vulnerability, poverty, and social exclusion – and the absence of social security is a central mechanism keeping them there.

Research on workers in small-scale industries in India highlights a consistent pattern: minimum wage laws frequently do not apply to laborers in the unorganized sector, workers face hazardous conditions due to old or toxic machinery, casual laborers are routinely denied overtime and paid leave, and job insecurity is endemic. The phrase “no work, no pay” describes the lived reality of millions of SSI workers globally.

Limited access to finance 🔗

SSIs struggle to access formal credit because they typically lack collateral, formal registration, or documented credit histories. Traditional financial institutions often overlook the informal sector for exactly these reasons, leaving small businesses dependent on informal moneylenders who charge high interest rates. This restricts their ability to invest in better equipment, expand operations, or buffer against economic shocks.

Innovative platforms are beginning to address this gap. Digital credit scoring tools tailored to gig workers and informal entrepreneurs – like the MESH platform in Africa – are creating pathways to micro-business loans. MESH has reached over 80,000 young African workers in the informal sector, demonstrating what targeted financial inclusion can achieve.

Regulatory exclusion and policy invisibility 🔗

Because SSIs operate outside formal regulatory frameworks, they are often invisible to policymakers. They are excluded from legal protections, do not appear in official GDP calculations in many countries, and are rarely represented in labor negotiations. Although the informal sector provides critical economic opportunities for the poor and has been expanding rapidly since the 1960s, integrating it into formal economic policy remains one of the most persistent challenges in development economics.

The ILO has acknowledged this directly. There is a fundamental mismatch between the realities of the developing world and the legal categories used to protect workers – categories designed for formal employment relationships that simply do not describe how most people in developing economies actually work.

Pathways forward: supporting small-scale industries 🔗

Addressing the challenges facing SSIs does not require eliminating informality – it requires extending protections and support structures into the informal sector itself.

The ILO’s Transition from the Informal to the Formal Economy Recommendation (No. 204, 2015) provides an international framework for this process. It calls for simplified registration processes, social protection schemes accessible to informal workers, and policies that incentivize formalization without penalizing those who cannot immediately comply. Importantly, it recognizes that there is no single solution – countries must adapt strategies to their own labor market conditions.

Access to technology is also reshaping SSI prospects. Digital tools for inventory management, online payments, and market access are lowering barriers to productivity improvement. Future trends indicate that technology and evolving policy frameworks will shape the sector’s role in the global economy, with the most promising outcomes emerging from hybrid approaches that blend informal adaptability with formal protections.

Public-private partnerships are proving effective as well. Collaborations that bring together funding, business expertise, local knowledge, and policy support can scale impact in ways that neither sector achieves alone – creating jobs, extending financial services, and building the institutional infrastructure that SSIs need to grow sustainably.

What do you think? Given that small-scale industries employ hundreds of millions of people globally yet remain largely outside formal labor protections, where should the priority lie – encouraging SSIs to formalize, or extending social security to workers regardless of their employment status? And how much responsibility should governments, as opposed to businesses and communities, bear in bridging the gap between informal economic reality and formal worker rights?

References

1. https://www.wiego.org/informal-economy/
2. https://en.wikipedia.org/wiki/Informal_economy
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7. https://www.dalvoy.com/en/upsc/mains/previous-years/2025/management-paper-ii/role-small-scale-industries-economic-growth
8. https://documents1.worldbank.org/curated/en/099417402142413528/pdf/IDU1e9d2d68a110ad14aaa1af9a110e90bd603f1.pdf
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