Research Proposal

Sikkim Manipal University

A thesis proposal submitted to business administration masters program

On

June, 2010

Addis Ababa

By Habtamu Denbel

Id No. 540811356

Under supervision of Prof. C. Rao

LIST OF CONTENTS

CONTENT PAGE

CHAPTER ONE 1

1. INTRODUCTION 1

1.1 BBACKGROUND 1

1.2 PROBLEM STATEMENT 3

1.3 OBJECTIVES 4

1.3.1 General Objective....................................................41.3.2 Specific Objectives...................................................5

1.4 RESEARCH QUESTIONS 5

1.5 SIGNIFICANCE OF THE STUDY 5

1.6 SCOPE OF THE STUDY 6

1.7 DESCRIPTION OF STUDY AREA 6

CHAPTER TWO

2. Literature Review 2.1 Definitions and concepts 2.2 Features of MSEs 2.3 History of MSEsh 2.4 The role of MSEs 2.5 Empirical Literature 2.6 Challenges facing MSEs 2.6.1 Lack of clear and pragmatic nation Policy 2.6.2 Lack of access to capital and credit 2.6.3 Lack of premises and land 2.6.4 Lack of sufficient marketing and promotion support 2.6.5 Lack of coordination 2.6.6 Lack of adequate business development service 2.7 Opportunities for MSEs 2.8 Government polices and MSEs CHAPTER THREE3. Research methodology 3.1 Research design 3.2 Source of Data 3.3 Sampling techniques 3.4 Data collection method 3.5 Data analysis

REFERENCES

ANNEX-A-QUESTIONAIRES

List of Acronyms/Abbreviations

AGOWA: African Growth Opportunity Act

BDS: Business Development Services

CSA: Central Statistics Authority

DDMFI: Dire Dawa Micro Finance Institution

DDMSEs: Dire Dawa Micro and Small Enterprises Development Agency

FDRE: Federal Democratic Republic of Ethiopia

FeMSEDA: Federal Micro and Small Enterprises Development Agency

ILO: International Labor Organization

MoTI: Ministry of Trade and Industry

MSEs: Micro and Small Enterprises

CHAPTER ONE

1. Introduction

1.1 Background The world is rapidly becoming urban; in 2001, half of its population

(three out of six billion) is living in urban areas, by 2025; this

proportion will have increased to two- thirds. The current urbanization

rate is particularly high in the poorest countries. In sub Saharan- Africa,

for instances, the urban population is growing at 6% per year, and will

double in the next 12 years (Mike Albu, 2001). This urban growth in the

world prevailed by rapidly growing number of poverty, combined with

slow economic growth in the formal sector have faced a large portion

of population to enter self-employment (World Bank, 1998).

According to, ILO (2002) informal enterprises represent nearly half or

more of the total non-agricultural employment in all regions of the

developing world. It ranges from 48% in North Africa, to 51%in Latin

America, 65%in Asia and 72%in sub-Saharan Africa (Mulu

Gebreeyesus, 2007).

As a result, today the governments of both industrialized and

developing countries give a great deal of attention to assist MSEs,

which are a crucial for stimulating economic development. Thus, the

industrial policies of developing countries are revise to encourage and

promote small-scale enterprises (Abraham, 1997).

In Ethiopia 38.79 percent of the population is below poverty line. A

survey conducted by the central statistics authority (2005) indicates

that unemployment rate for the country is 20.6 while that of the rural

area is only 2.67.Inaddition, Ethiopian urban centers are characterized

by a poorly developed economic base, a high level of unemployment

and a worrisome incidence of poverty’s a result of weak economic

growth, weak environmental linkages, short comings in human,

material, lack of access to credit and inadequate strategic and

participatory planning(MWUD,2006).

Based on the nation wide sample survey conducted in 48 major

towns, by the central statistical Authority (CSA), in may 1997, showed

that there are 584, 913, and 2,731 informal sector activity operators

and small scale manufacturing industries respectively, that absorb

739, 898 labor force. The survey revealed that micro enterprise on an

average engages one person, and the average annual operating

surplus is about birr 1300(FeMSEDA, 1997).

Regarding the diversity of the informal sector activity (Micro

enterprise), the survey indicated that a large number of informal sector

operators are concentrated in a limited area of activities i.e. 47% in

manufacturing, 42% in Trade, Hotel and Restaurant activities. About

6% in community and personal services and the rest 5% are involved

in Agriculture, hunting, forestry and fishing, mining and quarrying,

construction and transport activities. On the other hand, the survey in

small scale manufacturing industries showed that the small

manufacturing industries are mainly engaged in the manufacture of

food, fabricated metal, furniture, and wearing apparels. These sub-

sectors constitute more than 85% of the surveyed small scale

manufacturing industries (FeMSEDA, 1997).

The situation in Dire Dawa city; the tighter control system markedly

minimized contraband trade and most of the people involved in this

illegal activity turned to be unemployed. The defective education

policy of the former regime produced vast school leaver unemployed.

Nowadays, the unemployment condition worsened deepening poverty

condition in the city which is manifested by increased number of

marginalized groups like street- children, beggars, commercial sex

workers, and addicts, juvenile delinquents (economy study team).

According to CSA(2004),there where 29,899 unemployed persons of

age ten years and over in Dire Dawa city of which 21,232 are females

with unemployment rate of 46.6% and 8,667 are males with

unemployment rate for Dire Dawa reaches 33.5% , which is higher

than the national urban un employment rate of 22.9%.

To turn this situation, the provisional administration of Dire Dawa

introduced a wide range of fundamental reform programs. As part of

this reform the regional integrated development programs was

prepared in 2005/6 for five years period (2005/6-2010/11). In this

program, development and promotion of MSEs was taken as the main

strategy to reduce unemployment rate in the urban area. According to

IDP (2006), nine important projects have been prepared. These

programs include training, cooperative formation, technology transfer;

research and development, capacity building, construction dressed

stone pavement roads, access to finance, business development

service, provision of input for MSEs, provision of working and selling

premises.

However, the success of Dire Dawa Micro and Small Enterprise is

encountered by different challenges. Some are like weak coordination

among stakeholders (micro finance, housing project), lack of land for

urban agriculture, lack of clear defined linkage with kebeles MSEs.

This study intends to assess the challenges and prospects of Dire Dawa

MSEs and to examine whether programs are working effectively or not.

1.2 Problem Statement In most developing countries, small business face a wider range of

constraints and problems and they are unable to address the problems

they face on their own, even in effectively functioning market

economics. The constraints relate, among others, to the legal and

regulatory environment, access to markets, finance, business

information, business promises (at affordable rent), the acquisition of

skills and managerial expertise, access to appropriate technology,

access to quality business infrastructure, and in some cases

discriminately regulatory practices (Mike Albu, 2001).

In Ethiopia’s situation, since these have not been any organized policy

and support systems that cater for the sector, MSEs have been

confronted by various problems which are of policy, structures and

institutional in nature. To start with, lack of smooth supply of raw

materials, and lack of working premises were the major bottlenecks for

small scale manufacturing industries to commence their activities,

(FeMSEDA, 1997).

Similarly, the MSEs of Dire Dawa City also facing a number of

challenges. These are problem of working and selling premises,

business skill and training, financial constraint, technology and

technical constraints and inadequate infrastructure were the leading

problems facing the MSEs sector. This study will focus on challenges

and prospects of MSEs in the city (IDP, 2006).

1.3 Objectives

1.3.1 General Objective The study intends to identify and analyze challenges and prospects of

micro and small enterprises in Dire Dawa city With regard to, existing

situation and assistance programs of MSEs.

1.3.2 Specific Objectives The study would also try:

To examine the existing situation of MSEs (in credit service,

working premises, technology/ technical supports and

inadequate infrastructure )

To examine the potential challenges which affect the formation

growth and expansion of MSEs.

To assess the program of MSEs.

To forward possible interventions for policy on MSEs

1.4 Research Questions Are the majority of MSEs have provided credit service, working

premises, technology/ technical support and adequate

infrastructure?

What challenges do MSE operators face in growing their

business?

How is the MSEs assistance program performing?

How should an enabling business environment for stimulating

the MSEs sector be created?

1.5 Significance of the Study The role of micro and small enterprises in employment and income

generation is increasingly recognized and has become a major playing

field for policy makers by enhancing growth and alleviating poverty.

Specifically, MSEs engage in manufacturing, services and urban

agriculture have the greatest advantage in contribution of decreasing

rate of unemployment. However, MSEs face so many problems on their

day-to-day activities. This study identifies the general problems and

some of specific challenges that the enterprise faces would be fertile

grounds by having a better insight to those challenges of MSEs. The

findings under those selected kebeles also be useful for officials works

in the sectors of MSEs, and the valuable suggestions after the findings

is useful in adjusting the necessary enabling environment, institutional

and opportunities which favor the development and improvement of

MSEs.

1.6 Scope of the Study The scope of this study is limited mainly to manufacturing, service and

urban agriculture of MSEs in three kebeles 02, 04, and 07 of Dire Dawa

city. Main issues will be covered in areas of challenges, prospects and

assessing programs of MSEs sustainability.

1.7 Description of Study Area DireDawa is the second largest city next to Addis Ababa in Ethiopia. It

was one of the fast growing cities in Ethiopia owing to its strategic

location on the train way line, which connect the capital Addis Ababa to

the Djibouti port. This has been sensible in the early 60’s when small

and medium scale industries start flourishing and real to urban

migration increases the urban population. It is a primary trading

center.

Location: Dire Dawa administration council is located between 90 27

N and 90 49 N latitude and 420 19’ E longitude. East Hararge

administrative zone of Oromia regional state borders it in the south

and southeast, and Shinile zone of Somalia regional state in the north,

east, and west. Dire Dawa city is accessible by airplane, train, and car,

and is about 525 km road distance to the east Addis Ababa and 311

KMs to the west of Djibouti port. The total area of the region is about

128, 802 ha, out of this urban account for 2, 684 ha (2%) and the

balance 98% is forward population.

Climate: the region is predominantly low land and has a mean

monthly temperature of 24.8c.The average elevation is about 1500-

2000 meter above see level and the average annual rain fall is about

623mm.

Population: Based on, the 2007 census conducted by the central

statistical agency of Ethiopia, Dire Dawa has a total population of 342,

827 of whom 171, 930 were men and 170, 897 women; 232,854 or

67.92% of the population are considered urban in habitants, with an

estimated area of 1,213.20 square kilometers, there were 75,693

household in D.D administration council with an average of 4.5 persons

per household. The major ethnic groups in D.D include the Oromo

(46.08%) Amhara (20.09%), Somali (24.24%), Gurage (4.54%), Hareri

(1.08);the remaining 3.97% of the population consists of all other

ethane groups.70.9% of D.D Dawns are musilim,25.6% orthodox

Christian , 2.8% protestant,0.4% catholic, and 0.3% followers of other

regions.

Administration: Dire Dawa is a chartered city and has two tires of

government structure; administrative council and kebele level. There

are 9 urban and 25 rural kebeles.

Economy: Dire Dawa is industrial and commercial town due to its

nearest location to Djibouti and relatively economic development.

According to CSA (1997) report on small scale manufacturing industrial

puts Dire Dawa the third major town, next to Addis Abeba and Mekele.

Chapter Two

2. Literature Review

2.1 Definitions and concepts

The definition of MSEs various from country to country and even can

vary with one country. Many developing countries apply based on

specific parameters, which include factors such as the number of

employees, asset, capital, sales turnover, etc. This definition clearly

identifies specific target groups for any preferential treatment of the

various actors in the MSEs.

Recognizing that, there are no standard definitions of MSEs. How ever,

some developing countries are presents here and define this fact.

China: has defined the micro enterprises have 1-5 employees and

small enterprises 8-100 employees.

Egypt: the recent micro and small establishments law (2005) has

defined the micro enterprises as the ones that employ less than 10

workers, which the small enterprises employs 10-49 workers.

Malaysia: are defined the micro enterprises as the ones that employ

less than 5 workers or those enterprises with sales turn over less than

RM 250,000 ,and small enterprises employs 5-50 workers or with sales

turn over between RM 250,000 and less than RM 10 million.

Malawi: in Malawi MSEs defined based on number of employees and

sales turn over. Defined as micro enterprises has 1-4 employees or

with sales turn over up to 120,000and small enterprise has 5-20

employees or with sales turn over between 120,001 to 4 million.

In case of Ethiopia, there is lack of uniform definition at the national

level to have a common understanding of the MSEs. Given by the

Ministry of Trade and Industry (1997) defines MSEs enterprises

according to the paid up capital. And also the central statistics

authority (CSA) uses number of employment is as follows:

Micro enterprises: - are those business enterprises with a paid up

capital of not exceeding birr 20,000 and excluding high technology

establishment. Those business activities are independently owned and

operated have a small share of the market, are managed by the

owner, and employing 5 or less employees

Small enterprise:- are those business enterprises with a paid up

capital of above birr 20,000 and not exceeding birr 50,000 and

excluding high technology, consultancy firms and other high

technology establishment. Those business activities, which have the

first three features of micro enterprises employing 6-49 employees.

Medium Enterprise: - Those business enterprises with a paid up

capital of above birr 500,000 and including high technology

consultancy firms and other high technology establishment. Those

business activities have a large share of the market are managed by

managers and employing 50up to 99 employees. (FEMSEDA, 1997).

Informal sector

In advance industrialized countries, all enterprises in including micro

enterprises must have by law a legal entity. How ever, this is not the

case with many developing countries. Practically all micro enterprises

and some small-scale enterprises can operate in the economy,

although they do not have legal entity. They are known as the informal

sector (Hepi T, 2001).

The 1992 International labor office (ILO) study on Kenya used the term

“informal sector” to describe a set of activities, which had been

neglected in previous economic analysis and policies. Hence, it is more

useful to identify the informal sector on the bases of size of

establishment, measured by number of employees. A working

definition of the informal sector is adopted to cover micro (Zero to nine

employees) and small enterprises (10-40employees) to serve as a

criterion to determine the beneficiaries. There are three types of

workers in the informal sector: working owners, paid workers, and un-

paid family workers .most enterprises employ, fewer than five workers

in addition to the owner. The owner the overall level of employment

per establishment is on average about 1.7 workers including the owner

(World Bank, 1994).

According to the ILO, enterprise is characterized by the facility of

access to activities, the urbanization of local resources. The family

ownership of enterprises, the restricted scale of operations, and

techniques with high intensity of work force, qualifications acquired

through apprenticeship out side of the education system and markets

beyond any regulation.

Moreover, the concept of informal sector in Ethiopia based on the

Central Statistical Authority conducted a nation wide urban informal

sector survey in January 2003. It defined the sector as home based, or

individual activity operated by the owner with few or no employees,

unregistered and operating on a very small scale and with a low level

of organization very low level productivity and income, have little or no

access to organized markets, to credit institutions, to modern

technology, to formal training and to many public services and

amenities; beyond social protection, labor legislation and protective

measures at the work place .in addition, the households operators at

least one member must be engaged in productive activity and number

of persons engaged (if any)including the operator must be less than

10.

2.2 FEATURES OF MSEs

MSES are to be finding in every economy, in advanced industrialized as

well as in developing countries. According the industrial pyramid, in

every economy there are only few large enterprises followed by a large

number MSEs, and at the bottom, there is a very large number of

MSEs. This basic industrial scale structure remains even if an

economically backward country develops in to an economically

advanced country. Only there is more dynamism in terms of entries

and exists among the group of MSEs. In addition, many MSEs go easily

bankrupt but instead a large number of new MSEs springs up (Lepi T,

2001).

Like wise, according to Tarmidi (1999), MSEs are mange by their own

owners and are family business and therefore their success depends

on the entrepreneurial and managerial capabilities of the owners. And

generally they are weak in terms of mentality, education motivation in

exploring opportunities, access to technology and capital.

Entrepreneurial behavior is a key accelerating the generation,

dissemination and application of innovative ideas. Entrepreneurship is

regard as a strategic assets owning to its non-constable nature Arzeni

1999 in Yu, 2001. The dynamic of small manufacturing firms in Hong

Kong were principally attributed to adoptive entrepreneurship.

Entrepreneurial vision is the key to determine the future of the firms.

This implies that since owner’s entrepreneur leads most micro

enterprises their experience and socio economic backgrounds limit the

capabilities of these firms. Most entrepreneurs of small firms often gain

their industry experience from their previous employment and start

their own firm’s vir-spin off (Yu, 2001).

The term business environment encompasses a wide range of policies

affecting the economic setting of firms. Chief among these are the

regulatory environment, provision of infrastructure, and access to

primary inputs such as, finance, labor, and land (Lall and Taye, 2005).

However, there is no consensus over what a sound investment climate

for small enterprise growth look like. The issue of whether the same or

different investment climate is need for large and small enterprise still

debated among experts and policy makers.

Since, the nineteenth century more elaborated theories had been use

to explain the success of MSEs. Some of these recent views include

flexible specialization. The industry based on the manufacturing of

custom-made products by use of multi purpose technology and flexible

production methods operated by skilled workers. In flexible

specialization, a firm relies on other firms that specialize in the

manufacturing of certain components on sub process and concentrates

on its own sub component and process serving its own requirements

and that of others as well. Inter firm sub contracting is the basis of

sectored specialization.

2.3 History of MSE Before the British Industrial Revolution of the eighteen and early

nineteenth centuries, and even during its initial phase, manufacturing

industries took place either in workers’ cottage or in small workshops.

The potential for raising industrial productivity by increasing labor

division and linking the process with market availability can achieved

through the production process, which is broken down in to smaller

component parts and system (Hallberg 2000)

But later on the born of steam power and power loom became

dominate the role of small scale manufactories and followed by Great

Britain, France, Germany, the USA, Russia etc used large factories to

industrialize their countries. A partial exception large factory approach

was Japan, which began to modernize the Meiji Restoration of 1868 but

continued for several decades to rely heavily on small scale industries

with traditional bases. After colonies independence, following the

European model, Most Latin America and some Africa countries

identified industrialization for aspiration of economic development

(Snodgross & Biggs, 1996)

However, the employment crisis of the 1970s forced an ideal blue print

for the promotion of small-scale enterprises and industries. Such

programmes become standard components of every national

development plan. As to Snodgrass and Biggs (1996), major causes for

such promotions were:

Though large amount of capital resources are allocated to large-

scale industries, a growing share of employment is still in the

small enterprise.

The growing understanding of government policies that changed

from large-scale and capital intensive industries to policies that

are more neutral might induce more efficient use of scarce

capital and improved the distribution of income through small-

scale enterprises.

The promotion of industries seen as part of the rural-led or

agricultural-led development strategy that increasingly

advocated for its applicability in low-income agriculture countries

as an alternative to the more traditional approach emphasizing

industrialization and urbanization.

The promotion of small-scale industries seen as, a response to

the growing concern of rising unemployment. This promotion

also, favoring the participation of female labor force. More over,

the lobar absorption of agriculture was very low and it did not

attract the growing number of educated first time job seekers.

All these issues were seen in the 1970s” employment crisis” ,which

might be ameliorated by a class of enterprises that would absorb

workers whom the government and large private enterprises were

unable to employ.

To sum up, the conventional development strategy that was favors of

large scale industries was criticized due to failure of achievement of

equitable growth and efficiency in production. According to Tegegne

and Helm Sing (2005), this change in the world, economy climate in

late 1970s and 1980s results the importance of MSEs. Taking the

example of sub Saharan Africa in which the work force is abundant and

largely engaged in the agriculture and related activates, the emphasis

is naturally given to MSEs in the urban areas mainly focusing on

creation of employment opportunity to majority of labors absorption.

The history of small enterprises has been one the most controversial

stories in economic development in the world. The role of small

enterprises in the economy has frequently been undermined and even

misinterpreted. In the past, small businesses were believed to impede

economic growth by attracting scarce resources from their larger

counter parts(Act and Audretch,1993).starting from the industrial

revolution up to the scale were considered as the driving force of

growth and development(Act,2003). The emergence of computer

based technology in production, administration, and information has,

how ever, reduced the role of economies of scale in many sectors. Acts

and Audretch (1993) have shown a shift towards an increased role for

small enterprises.

The transitional government of Ethiopia and later the federal

democratic republic of Ethiopia, after the downfall of the Derg has

declared free market economy to be its policy, and the economy

transferred from command economy to free economy. To reverse the

economic decline and worsening poverty situation in the country with

the ultimate goal putting the economy on the long term growth path,

the government of Ethiopia has implemented structural adjustment

program in 1992 and also, in order to address the social cost of

adjustment program the government has been introduced a safety net

program as a component structural adjustment program.

2.4 The Role of MSEs

In the developing country context, the link between small enterprise

and poverty alleviation takes particular significance. In the context of

economic liberalization, deregulation and thus global economic

integration, small enterprises are often viewed as the best way to

overcome poverty and inequality in developing countries (Raynaold &

Forstater, 2002). Moreover, a number of reasons emerge to support

this view such as small enterprises tend to be more labor intensive,

there by contributing to increasing employment opportunities and

income generation. And with a high proportion of small industrial

enterprise have proved to have more equitable income distribution.

Meed, (1998), in Rogersm (2001) states that make a critical

contribution to assisting large numbers of people to survive at times

when there is no better option.

According to the survey of statistical abstract (1995) cited by Ministry

of Trade and Industry (1997) in successful developing countries, MSEs

by virtue of their size, location, capital investment & their capacity of

generate greater employment have proved their powerful the

propellant effect for rapid economic growth. The MSEs is also known as

an instrument in bringing about economic transition by effectively

using the skill and talent of the people without requesting high level

training, much capital and sophisticated technology.

The MSEs sector is also described as the natural home of

entrepreneurship. It has the potential to provide ideal environment for

enabling entrepreneurs to optimally exercise their talent and to attain

in their personal and professional goals. In all successful economies,

MSEs as seen as an essential spring board for growth, job creation &

social progress. The small business enterprise is also seen as an

important force to generate employment and more equitable income

distribution, active completion, exploit niche markets, and enhance

productivity and technical change and through the combination of all

of these measures to stimulate economic development. While we can

not deny the importance of large industrial and other enterprise for the

growth of Ethiopia economy, there is ample evidence to suggest that

the labor absorption capacity of the small business enterprise is high,

the average capital cost per job created is usually lower than in big

business, and its role in technical & other innovation activities is vital

for many of the challenges facing Ethiopia (FEMSEDA; 2004).

2.5 Empirical Literature

Studies has recently been conducted in a number of countries that

provide a framework for better understanding of patterns of enterprise

births, survival or closure, and growth. These studies of small firm

dynamics are important, because they provide insights into the

feasible and desirable patterns of growth in out put and employment

(Hiedholm and Paiker, 1989), as pointed out by Mead and Lielholm

(1998), empirical evidence on new business starts in developing

countries, through limited in number makes clear that new small

enterprises are being established as a substantial rate. The result of

those studies revealed that the annual rate at which new enterprise all

started in the served countries average over 20% ranging from just

below 200% in Kenya, to over 30% in Botswana. These surprisingly

high figures are substantially above 10% rates typically high figures

are substantially above 10% rates typically reported for small

enterprises in industrial countries. As indicted in many literatures,

relatively little is known about the factors driving the MSEs new start

rate. However, a recent study focusing on MSEs in Zimbabwe indicates

that determinants of new starts differ between high & low return

activities.

For high return activities, initial capital requirements, experiences of

the entrepreneur and the level of regulations are all inversely related

to new start rates for low returns activities, the rate new starts is

reflect (inversely) only to the aggregate level economic activity for

these firms; the lower level of aggregate economy the higher rate new

starts. Lielhom and parker(1989) indicates that excess demand for the

goods of a small firms and excess supply of labor, capital or other

inputs to be responsible in stimulating firm starts in Africa. Somewhat,

more empirical evidence exists on the closure rate of small firms in

developing countries (Liedholm and Mead, 1999). They also noted that

most empirical studies have indicated that mortality rates are inversely

related to firm size, which means closure rates decline as on move to

large size categories of firms. Nevertheless, one of the relationships

found most consistently in empirical studies of firm’s dynamics is

between firm closure and the age of the firm. Virtually, all the

empirical studies indicates that there is a strong inverse relationship

between the age of the firm and the failure rate. Indeed, most

disappearances occur during the early years of a firm’s existence.

Liedholm and Mead (1999) hold that empirical relationships between

new start rate of MSEs firms and other variables have not been

systematical examined in any developing country. Empirical evidence

on new business starts in developing countries makes clear that new

MSEs are being established at a substantial rate. Moreover, it is

indicated in study works conducted on MSEs in Africa that vast

majority of new firms being created are one-person establishments.

2.6 Challenge Facing MSEs

In most developing countries, MSEs face a wide range of challenges

and they are often unable to address the problems they face on their

own even ineffectively functioning market economics. For instance,

cited in Botswana full report (2001) Describes as, Human capital

constraints, lack of an entrepreneurial tradition, Insufficient backward/

forward linkages, competitive pressures constraints of market demand,

financial constraints, lack of premises, Technology/Technical

constraints, Institution constraints and Information and ICTS

constraints.

Paul Lehlohonolo (sep, 2004), the most common problems of MSEs are

lack of managerial skills, use of obsolete equipment, through lack of

capital and perhaps ignorance of new technologies, which heads to

lower productivity and poorer product quality, lack of financial records

and collateral to secure finance and poor access to markets for their

out put. Problems that are more specific or pronounced in a developing

country context include; lack of demand and product diversification

inadequate infrastructure, and limited access to raw materials

(Rogerson, 2001).

According to the CSA report (1994-1995), the major obstacles

experienced by small-scale manufacturing industries were the irregular

and erratic supply of raw materials and a shortage of suitable working

premises. The lack of working premises was also found to present

difficulties for the informal sector operators who, faced with insufficient

capital, were often impeded from the start.

It suggested that the problems of raw material shortages, lack of

working capital and effective marketing, which face small

manufacturing industries, result in the failure of this business to

expand. Where as the same set of problems, when experienced by

informal sector operators, have the effect of preventing their

expansion almost from the beginning of their operations. For instance,

the results of the survey on “Urban informal sector activities” showed

that out of the 584, 913 informal sector activity operator, about 50%

replied that their first major difficulty when starting their operation was

the lack of sufficient initial capital. According to their responses, this

problem becomes more critical when they intended to expand their

businesses.

2.6.1 Lack of clear and pragmatic national policy

In June 2000, the ILO recognizes the role of small and medium- sized

enterprises and recommends broad policy orientations conducive to

their growth. An appropriate policy environment can be considers a

crucial ingredient of strategies to create more and better jobs through

small enterprise development.

Some authors insist on the need for policies to privilege small

enterprises so as to enable them to compete with larger enterprises

and explore their employment creation potential, the dominant opinion

is that there are o generally valid reasons for economic policies to

favor any specific size class of enterprises.

Small scale enterprises in developing countries reported significantly

more problems than did large firms in almost all dimensions of the

institutional frameworks access to information about policy changes,

the predictability of judiciary, discretionary bureaucracy and corruption

(Abraham, 1997).

According to Gebrehiwot and Wolday (2001), there have been serious

attempts by the government to liberalize and improve the policy and

regulatory environments of the MSEs. However, the information at the

grass root level indicates that there is a divergence between policies

and directives issued and their implementation on the ground.

Generally, despite the strategies such as the above mentioned and

other rules & regulations that are in vigor in theory, most

interventionist policies regarding MSEs are in appropriate and

impractical. For examples, most government’s policies have a

tendency over regulation and limit the growth of private sector

enterprises and they are over bureaucratized and unfriendly to support

small enterprises.

2.6.2 Lack of access to capital and credit

Lack of adequate investment capital, lack of sufficient loan, inefficient

financials market in terms of facilitating financial resources to

entrepreneurs are the major obstacles in doing business, particularly in

the micro and small enterprises. Most MSEs are highly risky ventures

involving excessive administrative costs and lack the experience in

dealing with financial institutions and do not have a track record of

credit worthiness with banks. Since most banking, institutions are

reluctant to provide small enterprises with loan and credit, most MSEs

is unable to secure collateral requirements. Because of absence in

financing, the creation of new enterprises and the growth and survival

of existing ones will be impeding. Access to finance is a major

bottleneck for the rapid growth & financial needs of small-scale

enterprises.

Most MSEs do not have access to micro finance institutions & most

banks are reluctant to avail credit facility to small enterprises unless

they have acceptable collateral, agreed on high interest rate and

consensus of short repayment period (Assefa, 1997). The standard of

loans appraisal, the long delay the banks takes to sanction loans

unfavorable disposition towards small loans and the limited collateral

requirement, which is over 100% of the loan amount, are the major

obstacles that small- scale enterprises all facing at present. In addition,

the interest rate by most micro finance institutes, which is higher than

the lending rate of formal banks, inhabits the effectiveness in

addressing the needs of micro enterprises. The difficulty of access to

capital is certainly one of the major problems that affect the quantity

and quality of investments made by these enterprises.

2.6.3 Lack of premises and land

For micro and enterprises lack of premises in unquestionably a serious

problem most micro operators do not get access to suitable locations

where they can get enough space for their machinery and equipments,

storage and access to markets. The issue of acquisition and

transaction cost has become very prohibitive to the emergence of new

enterprises and to the growth and survival of existing ones. The issue

of land provision and the land system has greatly constrained the

chance of MSEs which aspire to start up business.

2.6.4 Lack of sufficient marketing and promotion

support

Lack of market information as well as lack of markets has also been

the major impediments to the development MSEs in Ethiopia owing to

lack of market research and information many of small scale industries

often concentrate in the production of similar commodities, which puts

them in the intense competition with one another. There are lack of

sufficient institutional facilities that nurture the promotion, growth and

development of micro and small enterprises. Marketing their products

effectively as well as accessing and acquiring information on business

opportunities are the major bottlenecks that small and micro

entrepreneurs face all over the country. As a result, the design &

quality of products of MSEs are below standard. In addition, lack of

marketing skills, weak infrastructural facilitates renders small business

to uncompetitive (Assefa, 1997).

2.6.5 Lack of coordination

The other factor that hinders growth and expansion of micro and small

enterprises is the effectiveness with which they interact with large or

similar firms. In other words, formal and informal linkages or business

cooperation through networking are not common. large public

enterprisers and the few foreign affiliates do not outsource some of

their operations to local MSEs. The legal and institutional mechanisms

to enforce contractual obligations and government policy to design

appropriate incentive mechanism to encourage the expansion of

business linkages/sub contracting managements is at its infant stage

(Assefa, 1997).

2.6.6 Lack of adequate business development service

Business development services (BDS) include a wide variety of non-

financial service. According to Hall Berge (2000), BDS include labor and

management training, extension, consultancy and counseling;

marketing and information services, technology development and

diffusion; and mechanisms to improve business linkages through sub

contracting, franchising, and business cluster. This kind of service can

enhance the managerial and entrepreneurial ability of MSEs.

Most micro and small enterprises in developing countries face a

general lack of knowledge, entrepreneurial and managerial capacity,

and marketing experience, lack of skilled labor. which in turn leads to

problems in production, due to the unfamiliarity of workers with rapid

changing technology, lack of coordination of production process, and

inability to trouble shoot failures on machinery and/or equipments is a

critical problem that micro and small enterprises are facing since they

can not afford to employ specialist in the fields of planning, finance

and administration, quality control, and those with technical

knowledge.

2.7 Opportunities for MSEs

The problems faced by small enterprises and their role in the economy

governments donor agencies non-governmental organization (NGOs)

and the private sector have involved themselves with small enterprises

support and development in various capacities over the years. The

services designed to support and develop small enterprises can be

broadly focuses in to financial service and business development

services (Rutherford et al, 2002).

In Ethiopia also micro enterprises are generally considered to be the

domain of poor urban dwellers. Cognizant of the potential in

employment of creation and generation of income to the poor,

governments are advocating the importance of these enterprises and

using the as a strategy for enhancing development and growth. The

Federal government of Ethiopia focused on the expansion of MSEs in

urban development, because such enterprises will play the key role in

urban poverty reduction and bringing accelerated and sustainable

development. In addition micro and small enterprise activities have

absorbed a large number of an employed people. Therefore, support

for MSEs has to include skill upgrading programs for MSEs operators

and strengthening the use of appropriate modern technologies that

boost their capacity to create long-term jobs (FeMSEDA, 1997).

Government could encourage micro and small enterprises in particular

handicrafts and cottage industries create preferential access to

markets with some developing countries. Include the following:

The African growth and opportunity Act (AGOA), given to export

tax and quota free to the US market.

Every thing but armament (EBA) scheme that European Union

offer.

Preferences given to, Ethiopia from bilateral agreement with

Canada and Japan.

Increasing attraction of Ethiopia residing abroad to be involved in

MSEs. They can play a role in market assessment and promotion

activities acting as agents, distributions/importers, retailers and

consumers.

The changing foreign policy of the country, and the roles in

promoting and facilitating export trade. Now a days, trade is

getting due attention no less than political issues. With their

regard, the governments focus to strengthen commercial

attaches is highly desirable.

2.8 Government polices and MSEs

The importance of MSEs as a vehicle to address the challenges of

unemployment economic growth and equity was not properly

acknowledged in Ethiopia. In recognition of the socio economic role of

the sector and its potential contribution to the country’s economic

development, the development of the micro and small enterprise

sector is becoming a subject of national importance. Recently the

government began to pay due attention to the promotion and

development of MSEs. Moreover, a different strategy has developed.

These are as follows:

In November 1997, the federal government of Ethiopia

developed a strategy for the development and promotion of MSEs. The

primarily objective of the strategy is to create enabling environment

for MSEs. Given such an enabling environment, it is expect that

hundreds and thousands of MSEs will themselves be responsible for

the operation, growth and progress of their enterprises. In addition to

this basic objective, the national MSEs strategy has the following

specific objectives:-

- Facilitate economic growth and bring about equitable development

- Create long term jobs

- Strengthen cooperation between MSEs

- Provide the basis for medium and large scale Enterprises

- Promote export

- Balance preferential treatment between MSEs and bigger

enterprises

The national MSE strategy outlined the various supports, include with

regard to creating an enabling legal framework and stream ling

regulatory conditions that hinder the coming up of new and expansion

of existing MSEs. In addition, to facilitating access to finance, provision

of incentives, promotion of partnerships, training, access to

appropriate technology, access to market, access to information and

advice, infrastructure and institutional strengthening of the private

sector associations and chambers.

The strategy further made it clear that major organs to be involved in

the implementation of the strategy are Ministry of Trade and Industry,

Regional Bureau Federal MSE development agency, Regional MSE

development agencies, or the designated organs, NGOs and business

associations.

Industrial Development strategy: the strategy stresses the

importance of encouraging graduates of the education system to

create their own business. Those who will be successful can gradually

develop to be the owners of middle and large companies. So the sector

is conducive to create developmental investors. The strategy further

emphasized that the participation of MSEs should not be restricted only

to industry sector. Their participation should also cover areas like

modern agriculture, trade, service etc (IDP, 2006).

Urban Development strategy, the policy outlines the need to shift

the urban governance from the administrative attitude to one of urban

entrepreneurialism. Where by private enterprises and the communities

are recognized as key partner of local development. One of the

policies, that strategy proposed from this perspective is to support

MSEs and establish centers for the development of entrepreneurship

through: enabling the regional MSEs and industry bureau to provide

the following services: Advisory service in terms of product

marketing ,accessing new markets, preparing project profile, modern

management, sales and after sales service ,encouraging out sourcing

and public procurement ,encourage proactive import substitution, and

“buy local “campaigns and strategies etc(IDP,2006).

The Dire Dawa context: provisional administration trade and

industry Bureau is establish the Dire Dawa micro and small

Development Agency. The Agency prepared business plan for five

sectors including: construction, woodwork and metalwork, tailoring and

weaving, food and food related items, and fruit and vegetables trade.

In addition, established and MSEs forum. The forum constitutes

representatives of various government organizations and its main

objective is to discuss on the overall problems of MSEs in Dire Dawa, to

analyze specific problems of each enterprise and propose rectifying

measures (IDP, 2006).

The above strategy shows that Federal and Regional government are

fully committed to support the MSEs and will create and strengthen

supportive facilities and allocate the scarce public resources to be

channeled in the most effective way to bring about rapid

developmental change and growth. However, MSEs particularly in Dire

Dawa face various problems to start up new ones and to operate the

existing once. The major problems are lack of marketing, finance,

working and selling place, skill and experience, coordination among

concerned institutions and information, attitudinal and infrastructure

facilities.

Chapter three

3. Research methodology

3.1 Research design

This study will use both primary and secondary data. The research

design is mainly based on descriptive and statistical Analysis.

3.2 Sources of data

To get more representative information concerning the challenges and

prospects for MSEs, the study will make use of both primary and

secondary data sources. The primary data will be collects through

questionnaires; personal observation and interviews with MSE

operators, and secondary data are collected documents and reports

from Dire Dawa Micro Small Enterprises agency and micro finance,

internet, paper and books available in the library and journals.

3.3 Sampling techniques

The studies will conduct in three kebeles of Dire Dawa Administration.

Those engage mainly in the manufacturing, service and urban

agriculture and respected officials from Dire Dawa MSEs agency,

cooperative office and Dire Dawa microfinance. The sample size does

not include street vending, repair motor vehicles and forestry. Hence,

the studies takes sample size of 113 operators and 3 officials from Dire

Dawa MSEs, 3 from cooperative office and 2 officials from Dire Dawa

micro finance will select using an appropriate sampling technique.

In the selected areas, there are 1125 micro and small enterprises

operators of these 259 engage in manufacturing industry, 810 service

and 56 in urban agriculture. The list of MSEs operators are obtained

from Dire Dawa city administration kebeles. The sectors are select

using convenient sampling techniques and sample size is 10% of for all

strata.

Moreover, it is stratify according to situation of sub sector using

systematic sampling. Based on that table 3.1 below indicates the

sample size each stratum of sectors.

Table 3.1 Stratified sampling for MSEs operators

Source own computation, 2010

Therefore, the respondents selected based on stratified sampling will

be manufacturing 26 out of 256, service 81 out of 810 and urban

agriculture 6 out of 56. The reason behind choosing random sampling

is for sake of providing an equal chance of inclusion for selected

sectors of the sample.

3.4 Data collection method

The necessary data will be collect through questionnaire, structural

interview and different documents from Dire Dawa administration and

MSEs agency. That is, the collection of data incorporates both primary

and secondary data. In order to include facts and opinion towards the

challenges and prospects of MSEs from operators and officials, both

close ended and open-ended question as well as structural interview

are use.

Since the study is including respondents with relatively low academic

status, the questionnaires are translated to local language to Amharic,

so certain in conveniences and communication barriers will be avoided.

Category of

operators

Number

Ni

ni

=Ni(10%)

Sample

Manufacturing 259 25.9 26

Service 810 81 81

Urban

Agriculture

56 5.6 6

Total 1125 112.5 113

To successfully collect the necessary information through

questionnaires from the MSEs enterprises. The researcher select data

collectors and will give them for one day training concerning

techniques before starting their work. Hence the actual data collection

from MSEs enterprises is held for four weeks, where each data

collector at least gather the require information from respondents a

day. Where as, the types of information, which is collect from

structural interview and questioner from officials, is conduct by

researcher. In addition to this, during the period of data collection, the

researcher holds a continuous monitoring and supervisions, to ensure

the quality of the data collects by those data collectors

3.5 Data analysis

The study will use both qualitative and quantitative approaches to

analyze collecting data. Which are obtain through open and close-

ended questionnaires, interview and observation are analyze using

descriptive methods of data analysis that including percentages and

ratios, and it is present with the help of graph, figures, tables and

charts. In addition to this the data are interpret with the help of excel.

References

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(www.erf.og/cms/get file.php? id = 347)

Questionnaire for Data Collection

Socio economic Background

Part-One

1. Sex of the operator a) Male b. Female

2. Age of the operator a) <18 b) 18-30 c) 13-45 d) over 46

3. Marital Status a) Single b) Married c) Widow d) divorced

4. Family size a) 0-3 b) 4-5 c) 6-11 d) above 11

5. Education level a) Illiterate b) can read & write

c) 1-4 elementary d) 5-10 secondary

e) Diploma 10-12 f) Above 12 Degree

Part- Two

1. Type of business sector

a) Manufacturing (wood and metalwork)

b) Service (wholesale, retail trade)

c) Urban agriculture

f) Other

2. When has the enterprise established?

a) Less than one year ago b) 1-2 years

c) 2-5 years d) greater than 5 year

3. How did you choose your particular field?

a) To get more market potential b) To develop skill /knowledge

c) Lack of other alternative d) Influence by family

e) Other

4. Enterprises establishment

a) Sole proprietorship b) Partners

c) Cooperative d) family based

5. In your opinion which types of enterprise more advantageous ?

6. What is the reason about your choice?

7. If you are working in cooperative, what problems you faced?

8. What employment status you employed in your business?

a) Educated labor b) Illiterate labor

c) Family member d) un - employed labor (Youth) TVET

9. What is the contribution of your business in city development?

a) Create job opportunity b) Transfer knowledge

c) Facilitate economic growth (by paying tax) d) other

Part three: Challenges of the enterprises

A. Finance Related

1. How much was your start up capital?

a) Less than Birr 500 b) 501-1500 Birr

c) 1501 to 5000 d) 5001-20,000 Birr

e) Above Birr 20,000

2. How did you get initial capital?

a) Borrowing from relative & friends b) Borrowing from Micro finance

c) From NGOs d) personal saving

3. What kind of problems do you face when getting credit?

a) Lack of collateral b) Problems among cooperatives

c) Problems of credit service d) lack of information (get

finance)

4. If getting from microfinance, is the amount of loans adequate?

a) Yes b) No

5. If No, how much do you suggest?

6. Do you have saving? a) Yes b) No

8. If yes, where do you saving?

a) Dire Dawa Microfinance b) Bank c) In the house d) Other

9. What is the source of capital for your saving?

a) From business profit b) From micro finance

c) Other

10. How much do you have in your account? (If you have saving)

B. Access to working place & physical infrastructure

1. Is it appropriate your work place for infrastructure?

a) Yes b) No

2. If yes, what type of infrastructure?

a) Electricity b) Water c) Telephone

d) Road f) Other

3. If No, what impact brings on your business?

4. Does your enterprise have enough places for running the business?

a) Yes b) No

5. If yes, how did you get the working place?

a) By Renting b) By city administration (gov’t)

c) Family’s resident d) other

6. If you got from city administration. How was the procedure of

transferring the work place?

a) Bureaucratic b) good c) very good

7. From where are you finding input for your enterprises?

a) Local market b) from rural

c) From other city (like Harer & Addis Ababa)

d) From producer e) other place

8. Is any problem to get inputs?

a) Not accessible (available) b) High cost

c) Shortage of finance d) other (transport, quality, inflation

etc)

9. How is your business performance?

a) Increase b) constant c) fluctuate d)

decreases

10. If your answer in Q. #9 decreases, what is the reason?

a) Constraint of market problem b) High competition in the market

c) Poor production quality d) other reason

c) Managerial skill and training

1. Do you have enough skill to carry out your business?

a) Yes b) No

2. If yes, what type of skills does you has.

a) Marketing b) Managerial

c) Technical d) Book keeping (accounting)

3. Which institution gave you training?

a) City administration (TVET)MSEs) b) NGOs

c) Private sector d) other

4. What benefit do you get from the training?

a) Improve the quality of the production b) Increase profit

c) Effectively efficient manage the business

d) Facilitate my interaction with customer and supplies

5. If don’t take the training, why?

a) Not necessary

b) No opportunity to get training

c) Not got training related with my business

6. Identify the major problems of your enterprise and rank them

1.

2.

3.

4.

7. What are the possible solutions for the problems?

1.

2.

Part four: Government Assistance programs

A. For operators

1. Did you get support? A) Yes B) No

2. If yes, which institution supports you?

a) City administration b) NGOs

c) Community (Edir) d) other

3. What type of support did you got?

a) Training b) credit

c) Counseling d) Land for urban agriculture

e) Market place

f) Other or two or above from the list

B. For Government officials

Questions to interview key information from officials in the study

area

1. What kind of MSEs activities provided by the Agency?

2. How many operators benefited from the MSEs agency

Could you mention in a given table (1998-2000 E.C)

Activities

engaged

Provide service

Market place Credit Material Land Training

Plan Achieve

ment

Plan Achieve

ment

Plan Achieve

ment

Plan Achie

ve

ment

Plan Achiev

e

ment

Manufacturing

Service

Urban

agriculture

Total

3. How do you found the performance of the enterprise?

a) Strongly increasing b) Increasing

c) At constant (no change) d) Decreasing

e) Strongly decreasing

4. Currently, what are the challenges of the MSEs agency?

a) Lack of human resource b) Lack of clear rules & regulation

c) Lack of enough budget

d) Lack of coordination among relevant stakeholder e) other or

5. What remedy action do you take to reduce the challenge that

hinder the performance of MSEs office

a) Request the administration Additional budget

b) Better to implement business-processing reengineering (BPR)

c) Establish coordination net work system among stakeholders

d) Try to improve rules & regulation to hinder the works is

e) Other solution