Private Sector

The private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.It is also sometimes called the citizen sector.

The sector plays a crucial role in economic development. Amazon, YouTube, and Apple are all examples of companies in this sector. Some economies have a large portion of industrial units in the private sector and employ a considerable number of people. It plays a vital role in economic development and employment generation.

• The private sector is run by individuals or firms and not the government. Some of its types include sole proprietorship, company, and partnership firms.
• The capital for the private business is arranged by the business owners, shareholders, bank loans, or any combinations of the above.
• As opposed to the public sector that the government operates, the primary objectives of the private sector are profit maximization and acting in the best interest of the stakeholders.
• Although focused on profit maximization, private firms help economic development by enhancing the GDP, employment rate, per capita income, infrastructural facilities, etc.

All economies grow by hearing about private sector companies. National economies are primarily made up of private and public sectors that need to work in harmony for a nation’s welfare. As explained before, private sector companies are not owned by the government and are privately owned. The business conducted under the sector is also known as a private business.

Since the sector’s primary objective is business generation and profit maximization, customer satisfaction becomes a must for survival. For the consumers, private held companies offer an enormous variety of goods and services at different rates to satisfy their needs and wants effectively. For example, consumers can choose from McDonald’s, Taco Bell, Starbucks, and Krispy Kreme in a mall.

Due to the high availability of alternatives at the same rate, consumers have the advantage of switching to a competitor if private sector organizations underperform. As a result, the cut-throat competition has created a fast-paced and performance-oriented momentum in the sector over the years.

Depending on the requirements of an economy, the spread between the two is decided. There are primarily three kinds of economies – free market, central and mixed. The free market is the capitalist economy where the private sector is in full play, such as in the US.

Command or socialist economies hold state control over business, such as in China, Cuba, and the former Soviet Union. In contrast, a mixed economy has a mixture of the two. For example, India, a developing country, has a mixed economy to balance profit-making and social welfare.

Let’s look at the major features of this sector.

• Individuals and incorporations operate in this sector. It functions under various means, such as companies, partnerships, sole proprietorships, NGOs, etc. We will talk about it in detail later in the article.
• Private sector organizations are funded by owners, shareholders’ funds (equity), bank loans (debt), or any combination.
• Certain main objectives of a private business are profit maximization, business generation, and customer and brand expansion. The profit is either distributed amongst the members or reinvested in the business for further growth.
• For companies, the business goals also involve acting in the stakeholders’ best interest. Stakeholders could be customers, shareholders, employees, local laws, etc. Customer satisfaction is a must for survival. Likewise, shareholders need a higher return on their investment. Local laws require a business to be law-abiding and tax-paying.
• Barring some industries, private sector companies and enterprises dominate most economies in many nations. As per a 2019 World Economic Forum report, the private sector contributed 60% to China’s GDP.

They are majorly categorized into three types. Each formation has its benefits and legalities depending on the number of employees, funding source, business scale, and government regulations.

1. Sole Proprietorship: A business owned, incorporated, and sustained by one person. The proprietor can employ others to conduct and manage the business. It bears an unlimited liability towards the business debts.
2. Partnerships: In partnerships, two or more people conduct a business. It has fewer legal complications than a company. The partners are subjected to unlimited personal liability for the business debts.
3. Companies: It is created to fulfill organizational goals. A company is often funded by debt equity. It enjoys a separate legal identity and has certain rights. The owners of a company are called shareholders. These people invest capital and are the prime decision-makers for business-related matters.

Employees usually work under a board of directors. The directors are responsible for carrying out the business of a company based on the decisions taken by the shareholders in the Annual General Meeting, which helps in private sector development.

The private sector has a lot of importance in society and the national economy.

• Employment: Private firms employ a major portion of the skilled resources and hence private sector jobs act as the backbone of employment services in many nations. As per a 2013 World Bank Report,  the private sector provided around 90% of jobs in developing countries. Moreover, these jobs provide innumerable benefits like frequent pay-raise, easy switching, diverse job description, and responsibilities.
• Development: Although government companies focus on national development, this sector’s role in a country’s development often goes understated. Private sector development helps in developing industrial areas, plants, and job hubs, and they also develop the areas around them. For example, as per a 2017 study, the private sector’s share in providing jobs had been over 90% in India, while it also contributed over 75% to domestic capital formation. They enhance the GDP, per capita income, infrastructure, and quality of life.
• Better Goods and Services: The sector is responsible for providing essential goods and services at a competitively low cost. The lack of monopoly has made these amenities accessible to most country citizens.
• Welfare: Private firms have always stepped in the time of need. May it be a disaster or a virus outbreak, they have come up with various solutions to serve the citizens to end their woes. In response to Covid-19, private businesses have been giving monetary support and donating life-saving instruments to the health industry. It has massively helped citizens and governments around the globe.
• CSR: Although the private sector has often been called out for how it had achieved profit maximization in the past. Corporate Social Responsibility (CSR) has been a result of this. CSR is a mandatory practice for private firms as it ensures that they give back to society in terms of welfare. CSR programs have uplifted many underprivileged sections of society. It has also provided sustainable business growth.
• Innovation: The intense competition forces companies to develop newer technologies and ways to cut down resource wastage. Also, to satisfy the customers better, companies create innovative products and services that have improved the quality of life.

Let us look at some examples to understand the concept.

Example #1

Some of the leading private firms globally are Google, Amazon, Apple, etc. The private sector of any nation forms a crucial working opportunity for its citizens. As a result, citizens can get jobs in private sector companies in large numbers. Some industries that boast of many private firms are –

• Hospitality
• Aviation
• Real Estate
• Automobile
• Healthcare
• Media

Example #2

The private sector in the US saw a steady surge in the employment creation process. However, the wages of individuals who changed jobs went down. It is seen that businesses of medium size created the largest chunk of jobs followed by large firms and small businesses.

The private sector is controlled and managed privately by a group of individuals. The government manages the public sector. However, some differences between them are as follows:

This has been a guide to the Private Sector and its meaning. We explain it with examples, advantages, roles, and disadvantages along with types. You may learn more about financing from the following articles –

• Publicly Traded Companies
• Initial Public Offering (IPO)
• Difference Between Private and Public Sector Banks