Private Sector

Article byHarsh Sachdeva
Reviewed byDheeraj Vaidya, CFA, FRM

Private Sector Meaning

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.

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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.

Key Takeaways

Private Sector Explained

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 companiesPrivate Held CompaniesA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. read more 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.

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Features

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

Types

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.

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  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 directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more. 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.

Role

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

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  • 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 incomePer Capita IncomeThe per capita income formula depicts the average income of a region computed by dividing the total income of that area by the total population of the region. It is used to figure out the average income of a city, provision, state, country, etc.read more, 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.

Examples

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.

Private Sector Vs Public Sector

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:

Private sectorPublic Sector
It is managed privately by individuals or groups.It is managed by the government.
It is more profit-oriented.It is more welfare-oriented.
Product and service availability is more.Product and service availability is less.
Many alternatives increase competition.Fewer alternatives, so less competition.
Customer satisfaction is a must.Customer satisfaction is not the primary factor.

Frequently Asked Questions (FAQs)

Why does the private sector do better?

Private provision is reportedly more effective than public provision, according to evidence from low- and middle-income nations. It functions better as it constantly evolves without too much government intervention. In addition, private providers frequently have more latitude in hiring new employees, lower pay scales, and marketplace-like conditions.

What privileges does a private company have?

Having a private company, individuals get the freedom to acquire, own, utilize, and dispose of property in the private enterprise system. This ownership privilege extends to real assets like buildings and equipment and intangible ones like inventions.

Do NGOs belong to the private sector?

The term “NGO” is commonly used to describe typically non-profit, private groups that function independently of the government. The majority of them belong to the private sector. While volunteers primarily support some NGOs, others have paid personnel.

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 –