BG109 Industrial+Cooperation+between+Korea+and+Ethiopia (Dong-Joo,+Joo)

KIET Occasional Paper No.
109
November 2019
Industrial Cooperation between

Korea and Ethiopia:
Focusing on Small & Medium-sized Enterprise
Edited by DONG-JOO JOO

Authors and Project Team
Dong-joo Joo
Senior Research Fellow, Korea Institute for Industrial Economics and Trade
Jooyoung Yang
Associate Research Fellow, Korea Institute for Industrial Economics and Trade
Eunsong Lee
Research Associate, Korea Institute for Industrial Economics and Trade
Amare Matebu
Lead Researcher, Policy Study Institute, Ethiopia
Netsanet Jote
Senior Researcher, Policy Study Institute, Ethiopia
Dereje Rahmet
Researcher, Policy Study Institute, Ethiopia
Sisay Sintayehu
Sirack Kassahun
Korea Institute for Industrial Economics and Trade (KIET)

Sejong National Research Complex
370 Sicheong-daero, Sejong-si, 30147, Korea
Tel : 82-44-287-3114
Fax : 82-44-287-3333
URL : http://www.kiet.re.kr
KIET Occasional Paper No.109

Industrial Cooperation between Korea and Ethiopia:
Focusing on Small & Medium-sized Enterprises
Published on November 27, 2019 in Korea by KIET
Ⓒ 2019 KIET
ISBN 979-11-89910-81-5 93320
Contents
Abstract ······································································· 11
Chapter 1. Introduction ··················································· 13
1.1 Objective of the Study····················································13
1.2 Ethiopia as an Emerging African Market ······························16
1.3 Why Focus on SME Cooperation?······································20
Chapter 2. Recent Economic Status and Challenges in

Ethiopia························································· 26
2.1 Macro Economic Development and Performance in Ethiopia ······27
2.1.1 Economic Growth in Ethiopia ··································27
2.1.2 Inflation ····························································32
2.1.3 Employment and Unemployment in Ethiopia·················34
2.1.4 External Trade·····················································39
2.1.5 Other Economic Issues···········································41
2.1.6 Summary of Economic Status···································42
2.2 Industrial Development Policy/strategy in Ethiopia··················43
2.2.1 Industrial Development Strategy of Ethiopia ·················44
2.2.2 Current Industrial Development Strategy
(EPRDF Regime)·················································46
2.3 Investment Status of Ethiopian Manufacturing Industries···········48
2.3.1 Comparison of Total Investments in agriculture, industry
and service·························································48
2.3.2 Role of Domestic Private Investors (DPI) in the
Manufacturing Industry··········································48
2.3.3 Role of FDI in Ethiopian Manufacturing Industry ···········50
2.3.4 Public Investment on Manufacturing Industry
Development ······················································52
2.4 Major Issues and Challenges ············································54
2.4.1 Major Issues and Challenges of Ethiopian Economic
Development ······················································54
2.4.2 Major issues and challenges of industrial development in
Ethiopia ····························································56
Chapter 3. Status of SME in Ethiopia·································· 58
3.1 Legal Institutions for SMEs ·············································61
3.1.1 The Key Institutions··············································62
3.1.2 Other Supporting Organizations and Collaborating
Institutions·························································67
3.2 SME Business Environment·············································68
3.2.1 Definition of SME in Ethiopia ··································68
3.2.2 SME-specific Policies - SME Policy Environment···········69
3.2.3 SME Development Support Framework·······················74
3.3. Status by Industrial Sector ··············································87
3.3.1 Size and Structure of the Sectors ·······························87
3.3.2 The Recent Performance of SMEs in Ethiopia················90
3.4 Major Issues and Challenges ············································95
3.4.1 Major Challenges for the Development of SMEs ············95
3.4.2 Major Issues in SME Development in Ethiopia ··············98
Chapter 4. Korea’s SME Policy Development and Issues ········100

4.1. Status of SMEs and Legal Foundation ······························ 101
4.1.1 Current Status of SMEs in Korea····························· 102
4.1.2. SME legislation and Company classification ·············· 107
4.1.3. SME Support Agencies ······································· 112
4.2. Historical Development of SME Policies ··························· 114
4.2.1 A Brief Overview of Korea’s Economic Development···· 115
4.2.2 Forming a basic policy framework for SME protection and
fostering ························································· 117
4.2.3 Export-oriented industrialization ····························· 122
4.2.4 Heavy & Chemicals industrialization ························ 124
4.2.5 Alliance and Mutual Growth ·································· 127
4.2.6 Link with regional development policy······················ 131
4.3 Recent Issues and Policy Responses·································· 133
Chapter 5. Industrial Cooperation between Korea and Ethiopia:

Current Status and Opportunities ······················138
5.1. Status of Korea-Ethiopia Industrial Cooperation··················· 138
5.1.1 Trade ····························································· 139
5.1.2 Investment Status ··············································· 143
5.1.3 Development Cooperation and Others ······················· 145
5.2. Analysis of Trade and Investment Trends ·························· 148
5.2.1. Bilateral trade relationship between Korea and Ethiopia · 148
5.2.2. Potential export opportunities ································ 150
5.2.3. Trends in FDI inflows in Ethiopia ··························· 155
5.3. Case Reviews of Korean SME Activities······························ 160
5.3.1 ShinTS Ethiopia Garment ····································· 161
5.3.2 Pungkook Ethiopia Bags Manufacturing Plc. ··············· 163
Chapter 6. Ethiopian Perspective on Bilateral Cooperation ·····166

6.1 Ethiopia and Korea Bilateral Cooperation ··························· 166
6.1.1 Engagement Areas of the Republic of Korea’s
Government with Ethiopia ···································· 167
6.1.2 Korean Engagement in Ethiopia by Program ··············· 168
6.2 Investment and Trade of Ethiopia-Korea ···························· 170
6.2.1 Republic of Korea investment in Ethiopia··················· 170
6.2.2 Ethiopia–Korea Trade relations······························· 171
6.3 Challenges and Major Issues for Bilateral Cooperation············ 174
6.4 Strengths and limitations of Ethiopia–Korea bilateral
cooperation ······························································ 175
6.4.1 Strengths ························································· 175
6.4.2 Limitations of bilateral cooperation ·························· 176
6.5 Major Issues on Bilateral Cooperation ······························· 177
6.5.1 SMEs Bilateral Cooperation··································· 177
6.5.2 SMEs Internationalization ····································· 178
6.6 Conclusions and Proposals for Better Cooperation················· 179
6.6.1 Conclusions······················································ 179
6.6.2 Proposals for bilateral cooperation from Ethiopian
perspective ······················································ 180
Chapter 7. How to Promote Bilateral SME Cooperation?·······185

7.1 General Direction ······················································· 185
7.2 Expansion of Trade and Investment ·································· 190
7.2.1 Textile and Garment Industry ································· 190
7.2.2 Leather and footwear industry ································ 195
7.2.3 Utilizing AGOA ················································ 198
7.3 Policy Cooperation and Other Areas ································· 200
7.3.1 Implementation of Bilateral Agreements and MOUs ······ 201
7.3.2 SME Policy Development and Capacity Building·········· 202
7.3.3 Textile Industry Complex for Korean Companies·········· 204
7.4. Concluding Remarks··················································· 206
References ···································································208
ANNEX-1. Korean SMEs Data ········································214
ANNEX-2. Ethiopian SMEs Data ······································219
List of Tables
Table 1.1 KIET-PSI exchanges ····················································15

Table 1.2 SWOT Analysis of Ethiopian Business Environment for Korean
SMEs······································································24
Table 3.1 Definition of MSMEs ···················································69

Table 3.2 The Number of SMEs having BDS service in 2009 E.C
(2017 G.C) ·······························································80
Table 3.3 Have there been any linkages created to supply your products to
foreign markets?·························································82
Table 3.4 Number of Small and Medium Manufacturing Industries in
Ethiopia···································································87
Table 3.5 The Regional Distribution of SMEs···································88
Table 4.1 Criteria for SME ······················································· 103

Table 4.2 Number of Companies and Employees ····························· 104
Table 4.3 Companies and Employees by Industry (2016)···················· 105
Table 4.4 Companies and Employees by Region (2016) ····················· 106
Table 4.5 Criteria for Small Enterprise ········································· 108
Table 4.6 Number of Enterprises by Group ···································· 109
Table 4.7 Classification of Enterprises and Relevant Laws ·················· 110
Table 4.8 The Performance of Korea’s Development Plans ················· 116
Table 4.9 Comprehensive Plan for Small and Medium Business
Development (1961. 3) ··············································· 119
Table 5.1 Korea’s Trade with Ethiopia ········································· 139

Table 5.2 Major Export and Import items of Korea (2018) ·················· 141
Table 5.3 Korean Investment in Ethiopia······································· 144
Table 5.4 Top and bottom 10 products by Prody score (2015 data)········· 152
Table 5.5 Top Export Products of Ethiopia in 2016··························· 154
Table 5.6 FDI Inflows and Stock in East African Countries ················ 157
Table 6.1 Sectoral Classification and Status of Investment Projects by

Republic of Korea ····················································· 171
Table 6.2 Major Export Goods to the Republic of Korea in 1,000 USD
value ···································································· 172
Table 6.3 Trade Balance between Ethiopia and the Republic of Korea
(2014-2018) ···························································· 173
Table 6.4 Bilateral Agreements and MOU between Ethiopia and Republic of
Korea···································································· 175
Table 6.5 SME-based Bilateral Cooperation··································· 178
Table 6.6 Cooperation needs in training and gaps by sector ················· 183
Table 7.1 FDI to Ethiopia in theTextile Industry by Year ···················· 192

Table 7.2 FDI to Ethiopia in the Textile Industry by Country ··············· 193
Table 7.3 Income Tax Exemption for Industrial Parks························ 195
List of Figures and Boxes
Box 1.1 Tariff Privileges for Africa: AGOA, EBA, ACP······················· 19
Figure 2.1 Real GDP growth rate (percent) (1999/00 – 2017/18)············· 28

Figure 2.2 Three Sectors Share of GDP (percent) (2008/09 – 2017/18)······ 30
Figure 2.3 Inflation (CPI growth rate in %) (2003/04 – 2017/18) ············ 33
Figure 2.4 Population Increase Rate, Real GDP Growth and Unemployment
Rate ······································································ 35
Figure 2.5 Trends in Unemployment Rate by Sex at National Level ········· 38
Figure 2.6 Trends in Unemployment Rate in Urban and Rural Areas ········ 39
Figure 2.7 Trends in Exports, Imports and Trade Deficit ······················ 40
Figure 2.8 Total Private Domestic Projects and Operational Domestic
Projects (1992-2016)··················································· 50
Figure 2.9 Total FDI Projects and Operational FDI projects (1992-2016)··· 52
Figure 2.10 Total Public Projects and Operational Public Projects
(1992-2016) ····························································· 53
Figure 3.1 Distribution of Enterprises by Subsector ···························· 89

Figure 3.2 Production as Percentage of Yearly Capacity······················· 92
Figure 3.3 Source of Investment ·················································· 93
Figure 3.4 Revenue from Export Sales ··········································· 94
Figure 5.1 Trends in Korea - Ethiopia Bilateral Trade (million USD)·······140

Figure 5.2 Ethiopia: Major Export Destinations (2017)·······················142
Figure 5.3 Ethiopia: Major Import Origins (2017)·····························143
Figure 5.4 Trends in Korean Investment in Ethiopia ··························145
Figure 5.5 Trends in Korean ODA to Ethiopia (million USD) ···············146
Figure 5.6 Trade between Korea and Ethiopia (2000-2018) ··················149
Figure 5.7 Share of Ethiopian Imports and Exports in Korean Trade·······150
Figure 5.8 Relationship between EXPY and GDP per capita·················153
Figure 5.9 FDI Inflows in East African Countries ·····························156
Figure 6.1 Trade Balance between Ethiopia and the Republic of Korea
2014-2018 ······························································174
Figure 7.1 Export Trends in Ethiopian Leather Industry ······················197

Abstract 11
Abstract
This study explores how to promote bilateral industrial coopera-

tion between Korea and Ethiopia centered on bilateral trade and
investment. This research focuses particularly on industrial cooper-
ation between the Small & Medium Enterprises (SMEs) of the two
countries. This research was initiated as a joint study between Ko-
rea Institute for Industrial Economics and Trade (KIET) and the
Policy Study Institute (PSI) in Ethiopia.
Ethiopia has recently experienced rapid economic growth thanks
to active industrial development. The Ethiopian government is ac-
celerating its efforts to foster SMEs to sustain this growth and re-
duce widespread poverty by creating jobs and incomes for the peo-
ple. For this, Ethiopia has shown great interest in Korea’s rapid in-
dustrial development, and the PSI expressed a desire to partake in
Korea’s accumulated knowledge and experience through joint re-
search with KIET. Then, through the bilateral agreement, this co-
operative study began as a six-month KIET research project in
which a PSI team participated.
This study consists of seven chapters and appendixes of some
data on SMEs status in Korea and Ethiopia. The following is a
brief summary of the content of each chapter.
Chapter 1 introduces the purpose and background of the study.
Chapter 2 explains Ethiopia's overall economic situation.
Chapter 3 describes the status of SMEs in Ethiopia.
Chapter 4 describes Korea's SME policies development from a
12 Industrial Cooperation between Korea and Ethiopia
historical perspective.
Chapter 5 analyzes the status of industrial cooperation between
the two countries.
Chapter 6 provides an Ethiopian perspective on the bilateral co-
operation.
Chapter 7 proposes ideas for measures to promote SME coopera-
tion between the two countries.
Chapter 1. Introduction 13
Chapter 1. Introduction
1.1 Objective of the Study

This study explores how to promote bilateral industrial coopera-
tion between Korea and Ethiopia. The terminology “industrial co-
operation” used in this research refers to a wide scope of business
activities focusing on trade and investment between enterprises.
This research focuses in particular on industrial cooperation be-
tween the Small & Medium Enterprises (SMEs) of the two coun-
tries. At the same time, it also aims to share the knowledge and ex-
perience of SME development policies for both sides. In order to
explain the purpose of this study, a little explanation of the back-
ground against which the research was undertaken is necessary.
This research was initiated as a joint study between Korea Insti-
tute for Industrial Economics and Trade (KIET) in Sejong City,
Korea and Policy Study Institute (PSI) in Addis Ababa, the capital
of Ethiopia. The subject of the study was chosen to focus on coop-
eration between the SMEs of the two countries according to the
agreement between the two institutions.
Ethiopia has recently experienced rapid economic growth thanks
to active industrial development. The Ethiopian government is try-
ing to foster SMEs fast in order to sustain this growth and to reduce
widespread poverty by creating jobs and incomes for the people.
As part of this effort, the PSI under the Prime Minister’s Office of
Ethiopia visited KIET to hold discussion meetings on SME policies
and proposed joint research by both institutions.1

Ethiopia has shown great interest in Korea's rapid industrial de-
velopment, which enabled the country’s transformation from one of
the poorest countries in the world to a strong industrial state with
an advanced economy in a short term during the last half century.
The PSI expressed the hope to get implications from the knowledge
and experience of Korea through joint research with KIET, which
is a leading think tank in Korea on industrial policies with rich re-
search capabilities and experience in manufacturing and SME-
fostering policies.
In this process, the management and staff of the two research in-
stitutes visited each other several times to exchange opinions on
SME policies and concluded the agreements for joint research. The
first exchange took place in February 2017, when a delegation in-
cluding PSI management and the Ethiopian Ambassador to Korea
visited KIET in Sejong City, Republic of Korea, to discuss bilateral
cooperation on SME policy research.
Afterwards, the two sides concluded a comprehensive cooperation
agreement in May 2017, and through continuous exchanges as out-
lined in the <Table 1-1>, reached an agreement for this joint research
project in May 2019. As a result, the present task has begun in ear-
nest. This joint research project was conducted in the following
manner: KIET initiated a six-month research project and entrusted
PSI with the task of contributing to the parts explaining Ethiopia’s
economic situation and the environment of its SMEs. Thus, both in-
1 PSI was renamed to the current name in 2018 from its former name of PSRC (Policy
Research and Study Center)
stitutions have organized respective research teams and cooperated

together to progress on this project so far. At the end of June, this
year, they met in Sejong and Seoul, Korea, and held a three-day joint
workshop to discuss the contents and progress of the research.
Table 1.1 KIET-PSI exchanges

Date Place Activities
Introduction to Korea’s SME policies and
Feb. 2017 KIET
KIET activities
May, 2017 PSI KIET-PSI (then PSRC) MOU exchange
Nov. 2018 KIET Exchange of opinions on joint research
May 2019 PSI Joint Research Agreement
Jun. 2019 KIET Joint Research Workshop
Source: Compiled from internal documents
KIET initiated this project recognizing that Ethiopia, which is a

large country in East Africa with vast territory, rich resources and
an abundant labor force, is a promising cooperative partner for our
future market. Also, it agreed to share Korea’s experiences of in-
dustrial policies making focusing on SME development. Ethiopia
was particularly interested in SME policies during Korea’s “Devel-
opment era”, which usually refers to the period of 1960-80s, when
Korea achieved exceptionally high growth under the government
leadership. The PSI team expressed their hope to find implications
from this experience for SME policy formulation in Ethiopia. As
such, the outline of the contents of this research was determined
through discussions.
This study consists of seven chapters and appendixes of some
data for SMEs status in Korea and Ethiopia. The following is a

brief introduction of the contents and researchers.
Chapter 1 introduces the purpose and background of the study.
This section was written by Dr. Dong-joo Joo of KIET, who is the
project manager and chief editor of this study.
Chapter 2 explains Ethiopia's overall economic situation. This
part was written by Dr. Amare Matebu, who is the leader of PSI
team, and his colleague Mr. Sirack Kassahun of PSI.
Chapter 3 describes the status of SMEs in Ethiopia. This section
was written by Mr. Dereje Rahmet and Mr. Sisay Sintayehu of PSI.
Chapter 4 describes Korea's SME policies from a historical per-
spective. This part was written by Dr. Dong-joo Joo of KIET.
Chapter 5 analyzes the status of industrial cooperation between
the two countries. This part was co-authored by Dr. Dong-joo Joo
and Dr. Jooyoung Yang of KIET.
Chapter 6 provides an Ethiopian perspective on the bilateral co-
operation. This chapter was written by Dr. Netsanet Jote and Mr.
Sisay Sintayehu of PSI.
Chapter 7 proposes ideas on the measures to promote SME co-
operation between the two countries. This part was also written by
Dr. Dong-joo Joo.
1.2 Ethiopia as an Emerging African Market
This section will further explain why this study is paying atten-
tion to industrial cooperation with Ethiopia. First of all, as noted
previously, Ethiopia is emerging as a promising future market, hav-
ing realized rapid economic growth over the last decade. Ethiopia
is a huge country in Eastern Africa with enormous development
potential. It has a vast land area of 1.104 million km², which is
some five times larger than the entire Korean Peninsula, together
with a population of about 105 million (2018) and abundant re-
sources. As a country with a long history stretching back to antiqui-
ty, it maintained independence even during the colonial era, in
which all the other countries in the African continent suffered from
colonial rule.2 During the Korean War of 1950-53, it stood with Re-
public of Korea by joining the UN Peace Corps.
Despite this potential and great history, Ethiopia in modern times
has suffered severely as one of the Least Developed Countries
(LDCs) due to long-stagnant economic development and socio-
political confusion. This hardship has been mainly caused by the
ineptitude and corruption of the last monarchy, and the subsequent
dictatorship and socialist policies of Communist rule (1975-1991),
which eventually led to a civil war and separation of Eritrea in
1993.3
However, in the 2000s, the Ethiopian economy has been chang-
ing rapidly with one of the world's highest growth rates for more
than 10 years. During 2006/07~16/17, the Ethiopian economy grew
at an annual average rate of 10.3%, nearly double the average of
5.4% in East Africa (World Bank, 2019).4 In recent years, growth
2 In the year 1936, just before World War II, Italy under Mussolini invaded Ethiopia and
occupied the country for five years. Except this, it has never fallen into the colonial rule.
3 The rule of the last emperor Haile Selessie (1892-1975) collapsed in September 1974
with a military coup d’etat by the communist organization Derg.

4 https://www.worldbank.org/en/country/ethiopia/overview
has slowed down a bit due to social instability, but in 2017/18, the
growth rate was 7.7%, which is still very high on a global basis
(see <Table 2-3>).
Ethiopia's high growth rate is largely accounted for by the suc-
cessful implementation of the first and second "Growth and Trans-
formation Plan" (GTP) and subsequent performance of active in-
dustrialization policies. As a result, its manufacturing industry has
shown remarkable growth, with rapid increases of textiles exports.
Increased foreign investment targeting abundant low-wage labor
has aided this performance. The preferential tariffs from the US
and Europe to support the development of the LDCs in Africa also
helped the increase of exports. Some comment that Ethiopia will
grow as a manufacturing hub in Africa, and is showing a potential
to grow as a future global factory like China.5
This study pays attention to this dynamic change of the Ethiopi-
an economy, and intends to provide information on such trends to
promote bilateral industrial cooperation. For KIET, this study can
be said to be a follow-up study of previous research on “Strategy
for Industrial and Development Cooperation with East African
Countries”, carried out in 2017 by the same project manager of this
study(Joo, et al. 2017). At the time two years ago, the study target-
ed four countries in East Africa. In this current project, the study
narrowed down the subjects and target countries, then carried out
an in-depth study of Ethiopia.
Looking at the Korean situation, the ongoing trade conflicts be-
5 BBC News, August 24, 2017, “Can Ethiopia be Africa's leading manufacturing hub?”
tween USA and China, the World’s No.1 and No.2 economies and
also Korea’s second and first trade partners respectively, are lead-
ing to serious uncertainties in the external trade environment. In
addition, Korea is experiencing new trade conflicts with Japan, af-
ter Japan's sudden regulations on semiconductor exports in July of
this year. In this situation, the Korean government is struggling to
explore new markets through its New South and New North poli-
cies. The private sector is also struggling to keep the existing mar-
kets and to find new markets.
Box 1.1 Tariff Privileges for Africa: AGOA, EBA, ACP
The African Growth and Opportunity Act, or AGOA (Title I, Trade and De-
velopment Act of 2000; P.L. 106–200) is a piece of legislation that was approved
by the U.S. Congress in May 2000. The purpose of this legislation is to assist the
economies of sub-Saharan Africa and to improve economic relations between the
United States and the region. After completing its initial 15-year period of validi-
ty, the AGOA legislation was extended on 29 June 2015 by a further 10 years, to
2025.[ AGOA provides trade preferences for quota and duty-free entry into the
United States for certain goods, expanding the benefits under the Generalized Sys-
tem of Preferences (GSP) program. Notably, AGOA expanded market access for
textile and apparel goods into the United States for eligible countries, though
many other goods are also included.
Everything but Arms (EBA) is an initiative of the European Union under
which all imports to the EU from the Least Developed Countries are duty-free and
quota-free, with the exception of armaments. EBA entered into force on 5 March
2001. There were transitional arrangements for bananas, sugar and rice until Janu-
ary 2006, July 2009 and September 2009 respectively. The EBA is part of the EU
Generalized System of Preferences (GSP).
Apart from the GSP, the EU provides its separate customs benefits to the former
colonies of Africa, the Pacific, and the Caribbean (ACP). In 2000, EU signed a
new agreement with 78 ACP countries in Cotonou of Benin in Africa.
Source: Excerpted from Wikipedia

As such, KIET as a public institute for economic policies needs

to contribute to the efforts of the government and private sector to
explore new markets. In this regards, this research is timely as a
new study on a promising market in Africa. Africa is a vast conti-
nent, embracing more than 50 countries and some 15% of the
world's population. Even though all the countries on the continent
are as of yet underdeveloped, they still have the potential to grow
and serve as the world's future factories and markets when proper
opportunities are given. Among them, Ethiopia is rising fast with
dynamic growth.
In addition, Ethiopia is a strategic partner in the Korean govern-
ment’s development cooperation to contribute to the global poverty
reduction and sustainable development. While Korean government
has been increasing its Official Development Assistance (ODA) to
support the realization of the Sustainable Development Goals
(SDGs), Ethiopia has been an important partner in Africa. Ethiopia
has achieved significant poverty reduction with strong economic
growth recently, but it is still suffering from widespread poverty
with per capita GDP of less than $1,000. Ethiopia is endeavoring to
accelerate industrialization to fight poverty and as part of this ef-
fort, is actively working to study Korea's experience and
knowledge.
1.3 Why Focus on SME Cooperation?
While this study focuses on industrial cooperation between Ko-

rea and Ethiopia, the authors wish to provide some additional ex-
planation on why emphasis is put on SME cooperation. In fact, Ko-

rea’s trade and investment volume with Ethiopia is still meagre,
which reflects that there are not so many Korean companies getting
involved actively in the Ethiopian market. Korea’s trade with Ethi-
opia in 2018 amounted to $105 million in exports and $54 million
in imports, which combined together is equivalent to less than 1%
of total trade volumes. Considering the dominant role of Large En-
terprises in Korea, this implies that activities of Korean SMEs in
Ethiopia are still minor. Despite this fact, this research has paid
special attention to potential SME cooperation for several reasons
as follows:
First, the Ethiopian government's expectation of and efforts to-
ward SME development are very strong. The government is focus-
ing on fostering labor-intensive industries to reduce poverty and
unemployment as well as to expand exports and industrial basis for
sustainable growth. The strategic industries are textiles, clothing,
shoes and leather products, which are generally considered suitable
for SMEs. Ethiopia's poverty rate fell from 30% in 2011 to 24% in
2016, but one-fourth of the population is living under absolute
poverty. The Ethiopian government aims to transfer the nation from
an LDC to a Lower Middle Income country by 2025. To this end,
the Ethiopian government is actively working to foster SMEs,
which are the basis for employment and income generation. In re-
sponse to this effort, there is much room for SME cooperation and
policy cooperation.
Second, a lot of Korean companies engaging in labor-intensive
industries, such as apparel and footwear have moved their produc-

tion bases to China and South East Asia since the late 1980s, when
domestic wages increased rapidly. Their activities have certainly
contributed to the industrialization and job creation of the hosting
countries. However, many of them are currently considering relo-
cating their production bases due to the rising local wages. In par-
ticular, due to the ongoing US-China trade conflict and the increase
of American tariffs on Chinese export items, many global as well
as Korean companies are actually leaving from China. 6 There is
enough room for them to consider Ethiopia as an alternate destina-
tion as it is actively attracting foreign investment with low wages
and various incentives, while enjoying preferential tariffs on ex-
ports to USA and Europe.
Third, Ethiopia is a major development cooperation partner of
the Korean government, and a number of cooperative projects are
under way through the funding of KOICA and EDCF, the two arms
for grants and soft loans, respectively. A project for a special indus-
trial complex for Korean companies has been discussed in govern-
ment meetings. While these projects will contribute to the devel-
opment of Ethiopia, the participation of Korean SMEs is endorsed.
Also in policy areas, the Korean government has been running the
Knowledge Sharing Program (KSP) and many other consulting
projects, responding to the requests of developing countries to
share the experience of Korea’s economic growth. Industrial devel-
opment and SME promotion are the most frequently requested top-
6 http://biz.chosun.com/site/data/html_dir/2017/09/15/2017091502335.html
https://www.hankyung.com/economy/article/2019060471081
ics and KIET has contributed to these projects greatly through the
research and implementation of the consulting projects.7
Despite these opportunities for Korean SMEs, however, there
still exist lots of risks as well. First, Ethiopia is a landlocked coun-
try without harbors. To use the ports, they have to go to the Red
Sea through the bordering countries Djibouti and Eritrea. This
leads to an unstable logistics environment and high logistical costs,
especially in times of socio-political instability. In fact, Korean
companies operating in Ethiopia indicated this point as the most
serious impediment to their businesses.
Secondly, Ethiopia is a multi-ethnic country with over 80 tribes,
which in good times can be a source of blessed cultural diversity
but in bad times leads to complicated socio-political issues. Not
only by this, but the complex socio-political situation combined
with tribal conflicts occasionally leads to violent incidents. This
instability inevitably hampers economic development and negative-
ly affects the business environment.
Third, there is abundant low-cost labor, but it is not easy to ob-
tain skilled labor. On-the-job-training is not easy due to the lack of
relevant facilities and costs. Finally, infrastructure conditions such
as electricity and transportation are poor yet in general. <Table 1-
2> summarizes these factors as a whole, illustrating the opportunity
and threat factors of Ethiopian business environment that should be
taken into consideration for SME cooperation.
7 The project manager of this research has led many consulting projects on industrial poli-
cies of developing countries, including Algeria and Indonesia. He also led the research
for the Korean ODA Model in 2012 (Joo, et.al, 2012).
Table 1.2 SWOT Analysis of Ethiopian Business Environment for

Korean SMEs
Strengths Weakness
ㅇ World’s fastest growing economy

ㅇ Landlocked country without ports
ㅇ Abundant low-cost labor
causing unstable logistics
ㅇ Hub in the East African Market ㅇ Socio-political instability
ㅇ Preferential tariffs from USA and ㅇ Lack of skilled labor
Europe
ㅇ Insufficient infrastructure
ㅇ Strong government will to industrial-
(electricity, transportation, etc)
ize
Opportunity Threats
ㅇ New Market in the growing world

economic uncertainty ㅇ Protective trends of advanced
- New North, New South countries
ㅇ Escape from China and alternative ㅇ Increasing costs for logistics
production base destination
Source: Compiled by the Author
To conclude, this study was conducted as a joint research by

KIET and PSI at the request of Ethiopia to share the knowledge
and experience of Korea’s SME development. The authors in-
tended to share their ideas from both sides to promote SME coop-
eration between the two countries. In the meantime, many con-
sulting programs on economic policies of Ethiopia have been im-
plemented by international organizations and various donor agen-
cies. The difference of this research with those programs lies in
two points: in terms of content, this study discusses practical co-
operation issues of SMEs between Korea and Ethiopia, while ex-
amining the issues and policies of SMEs in both countries. In
terms of form, this study has been carried out through the joint
research and co-authorship by major research institutes in Korea
and Ethiopia.
Chapter 2. Recent Economic Status and

Challenges in Ethiopia
Ethiopia is one of the least developed countries (LDCs) in the

world, with a population of about 105 million people (2018 esti-
mate). After suffering economic stagnation for most of the 1970s
and 1980s, its economy began to grow in the mid-1990s (Admasu,
2017). In the last 16 years, the Ethiopian government designed and
implemented several strategies and development plans especially
with a strong desire of industrial development. As a result, Ethiopia
has become one of the fastest growing economies in the world with
an average gross domestic product (GDP) growth rate of about
10% per annum in the past decade. The government has designed
the ambitious five-year Growth and Transformation Plan (GTP)
starting from 2010. Ethiopian government has also plan to attain a
lower-middle-income status by 2025 through the structural trans-
formation from agrarian based economy to industry based economy.
In the first Growth and Transformation Plan (GTP I), the Ethio-
pian economy grew on average at 10.1% per year. Growth has been
accompanied by a substantial decline in poverty and improved ac-
cess to health and education facilities. In recent years, particularly
in the GTP II period, the Ethiopian economy has, however, faced
multifaceted challenges. Real GDP growth rates have decelerated
as the result of poor performance of the agricultural sector and in-
dustrial sector. The problem is not about kick-starting growth, but
rather about ensuring the sustainability of the current growth mo-
Chapter 2. Recent Economic Status and Challenges in Ethiopia 27
mentum. This is a real challenge given the current structure of the

Ethiopian economy where rain-fed agriculture continues to play a
dominant role, while manufacturing accounts for only 5% of GDP
(Admasu, 2017). Currently, the Ethiopian economy is subjected to
different problems and challenges including the widening trade
deficit, severe foreign exchange shortages, indebtedness, high un-
employment rate, lack of productivity in the agricultural sector and
the slow growth of the manufacturing sector.
This chapter will assess the recent economic growth status in
Ethiopia and identify the major issues and challenges relating to the
economic growth in the country. It also investigates the role and
contribution of the major sectors (Agriculture, Industry and ser-
vice) for GDP growth in the country in the last 15 years. More fo-
cus has been given to the contribution of the industrial sector espe-
cially the manufacturing industry.
2.1 Macro Economic Development and Performance

in Ethiopia
This sub-section deals with the Ethiopian Marco Economy in

terms of growth, inflation, employment, external trade and other
economic issues.
2.1.1 Economic Growth in Ethiopia

The Ethiopian government has designed and implemented dif-
ferent national and sectoral development policies, plans, strategies
and programs over the last 25 years including a Sustainable Devel-
opment Poverty Reduction Program (SDPRP), the Plan for Accel-

erated and Sustainable Development to End Poverty (PASDEP)
and the First Growth and Transformation Plan. Currently, the sec-
ond Growth and Transformation Plan (GTP II) which is in effect
from 2014 to 2020 of the Ethiopian fiscal year is under implemen-
tation. In this period, the government demonstrated unprecedented
commitment to public investment in economic infrastructure, edu-
cation and health services. The Ethiopian economy recovered from
1995-99 with 4.7% annual average growth and continued to grow
at 5.5% per annum from 2000-04 (Admasu, 2017).
Figure 2.1 Real GDP growth rate (percent)

(1999/00 – 2017/18)
Source: Compiled from the Annual Report of National Bank of Ethiopia (20162017)
<Figure 2.1> shows economic growth trends for the last nineteen
years (1999/00 to 2017/18) in terms of real GDP. During this peri-
od the highest growth (12.7%) was posted in fiscal year 2004/05
while the lowest growth (1.6%) was recorded in fiscal year
2001/02. Economic growth greatly intensified since 2003/04 at a
rate of slightly above 10% per annum, pushing average per capita
GDP growth to nearly 8% annually. Real GDP was growing on av-
erage by 10.9% per year. This strong economic record has been
mainly driven by investment, much of which undertaken by the
government and state-owned enterprises. Economic growth has
been relatively broad-based (across sectors), although the economy
remains dependent on agriculture (ECA, 2018).
In fiscal year 2014/15 which is the last fiscal year of the first
growth and transformation plan (GTP I), Ethiopia registered GDP
growth of 10.4%, somewhat lower than the targeted 11.2% for this
fiscal year. Growth has been extraordinary compared to the 4.4%
growth rate estimated for sub-Saharan Africa in 2015. Moreover,
growth was broad-based as industry recorded 21.6%, services
10.2% and agriculture 6.4% growth rates. Overall, in the five year
GTP I period (2010/11 to 2014/15), Ethiopia achieved a very high
growth rate of 10.1% per year, on average. Economic growth in
2015/16 due a recent drought. Real GDP grew by 8% in 2015/16
compared to 10.4% growth in 2014/15.
In GTP II, the government has planned for broad-based growth
of the economy by accelerated growth of the manufacturing indus-
try, realizing a desirable economic structural transformation. From
2013/14 - 2017/18 fiscal years the Ethiopian economy has shown
9.3% average annual growth, recording 7.7% growth in 2017/18
fiscal year, slower than the growth rate registered in the previous
year owing to growth deceleration in agriculture and industry sec-
tors. The growth in real GDP was mainly attributed to 8.8% growth
in services, 3.5% in agriculture and 12.2% in industrial sectors

(NBE Annual report 2017/18). This slow growth is partly attributed
to civil unrest, political uncertainty, and policy adjustments that
involved fiscal consolidation to stabilize the public debt. On the
supply side, GDP growth is facilitated by the development of ener-
gy, industrial parks, and transport infrastructure. On the demand
side, private consumption and investment continued to drive
growth, along with the government’s stable spending on public in-
frastructure and strong foreign direct investment inflows (African
Development Bank, 2019).
There is broad consensus that the rapid economic growth in
Ethiopia since 2000 is largely driven by public investment in infra-
structure (World Bank, 2009). This includes not only the expansion
of road networks but also the construction of hydroelectric power
plants and transmission lines, airports, telecommunication systems,
health and education facilities, and recently railways (Admasu, 2017)
Figure 2.2 Three Sectors Share of GDP (percent)

(2008/09 – 2017/18)
Source: Compiled from Annual Report of National Bank of Ethiopia (2009-2018)

Figure 2.2 shows the GDP shares of the Agriculture, Industry

and Services sectors for the last ten fiscal years. The share of Agri-
culture of GDP decreased from 47.3% in 2008/09 to 34.9% in
2017/18, as the Services sector from 42.6 % to 39.2% during the
same period of time. On the other hand the share of industry of
GDP rose from 10.1% in the 2008/09 fiscal year to 27.0% in the
2017/18 fiscal year.
In 2017/18, the share of agriculture of GDP fell to 34.9% as
compared to the previous period of 2016/17, where it stood at was
36.3%. This was marginally lower than the 35.4% GTP II target set
for the fiscal year. Likewise, its contribution to GDP growth de-
clined to 16.5% from 24.6%. Meanwhile the share of the industrial
sector showed 12.2% output growth in 2017/18 and registered a
27% share in GDP. The sector contributed 40.7% to overall eco-
nomic growth during this fiscal year. Its performance was lower
than the GTP II target of 20.6%. On the other hand, the Service
sector continued to dominate the economy as its share in GDP rose
to 39.2% in 2017/18 fiscal year while its contribution to the GDP
growth increased to 43.9%. The Service sector showed 8.8%
growth largely owing to the expansion of wholesale & retail trade
(12.3%), public administration & defense (8.9%), hotels & restau-
rants (6.5 %), transport & communication (6.4%) and real estate,
renting & business activities (6.2 %).
The government believes that this gradual but steady shift in the
structure of the economy reflects the government’s policy direction
of developing the manufacturing sector and promoting export-led
growth while continuing to give due attention to modernizing the

agriculture sector which has dominated the country’s economic
base for years. But, the achievement of industry and agricultural
sectors is not as expected or planned by the government. The gov-
ernment believes also that the robust and sustained economic
growth recorded over the last 15 years has led to improvements in
income inequality and poverty reduction. Accordingly, per capita
income has continuously increased, reaching USD 883 in 2017/18.
Poverty has declined to 22 % from 38.7 percent in 2004/05. The
investment to GDP ratio has increased to 34.1% while domestic
savings rose to 22.4% (NBE annual report, 2018).
2.1.2 Inflation
One of the major economic problems in the Ethiopian economy
is the rising general prices of both food and non-food items. Figure
2.3 shows inflation trends in Ethiopia for the past fifteen years. An
inflation rate of 36.4% was posted in the 2008/09 fiscal year, the
highest on record, but inflation dropped to 2.5% in the following
fiscal year — the lowest over the period in question. The govern-
ment has taken fiscal and monetary policy measures to quell the
highest inflation rate which is mostly driven by high prices of im-
ports.
The annual average headline inflation rose to 13.1% in 2017/18
from 7.2% a year earlier due to the rise in both food and non-food
inflation. Similarly, annual headline inflation went up to 14.7%
from 8.8%, owing to a 6.7 percentage point increase in food infla-
tion and a 4.9 percentage point increase in non-food inflation. In

April 2018, annual general price levels increased by 13.7%, food
prices by 16.1% and prices of non-food items by 10.8%. There is
an obvious upward pressure on inflation after the devaluation of the
birr by 15% in October 2017, but the magnitude was not very high
which could be attributed to monetary tightening that paralleled
devaluation (UNDP, 2018).
Figure 2.3 Inflation (CPI growth rate in %)

(2003/04 – 2017/18)
Source: Compiled from Annual Report of National Bank of Ethiopia (2009-2018)
There are many factors attributed to high inflation in 2008/09

and 2011/12, including accommodating monetary policy, agricul-
tural supply shocks and import inflation since the global economy
was in crisis during those times which resulted in high international
prices on imported items in Ethiopia.
2.1.3 Employment and Unemployment in Ethiopia

Ethiopia is a developing countries with relatively fast-growing
population coupled with an emerging economy. It is the second-
most populous nation in Africa after Nigeria and the population is
growing at 3.02% per year as it reached almost 105 million. It is
estimated that 45 percent of the population are under the age of 15
and 60 percent are under the age of 25. Almost 50% of Ethiopia's
population is the labor force (2017 estimate), and even though edu-
cation enrollment at the primary and tertiary level has increased
significantly, job creation has not caught up with the increased out-
put from educational institutes. About 5.308% of the population, or
5.6 million people, do not have jobs (2018 estimate). This indicates
that the country must create hundreds of thousands of jobs every
year just to keep up with population growth. Moreover, proper
management and efficient utilization of its work force is essential.
In this respect, the capacity of the economy in absorbing the labor
force needs to be monitored regularly and appropriate employment
policy should consequently be adopted. Thus, the levels of em-
ployment and unemployment of the country are widely used as
overall indicators in evaluating the current performance of the
economy.
On average, the rate of population increase over the last nineteen
years is 2.55% and the average unemployment rate in the past nine-
teen years is 5.68%, but the real GDP growth rate shows a decline
after 2017/18.
Figure 2.4 Population Increase Rate, Real GDP Growth and

Unemployment Rate
Source: Compiled from Annual Report of National Bank of Ethiopia (2017/2018)
The Central Statistics Agency of Ethiopia has conducted a na-

tional labor force survey at different periods (1999, 2005 and
2013). The national labor force survey results are differentiated at
the national, urban and rural levels. A brief description of employ-
ment and unemployment is based on these survey results.
The survey reveals that the total population of the country was
estimated to be 80,444,148, of which 55,629,497 persons (69.2%)
were aged ten years and above in June 2013. The economically ac-
tive population comprises employed and unemployed persons aged
ten years and above. The number of economically active persons in
2013 was 44,385,044 (79.8%) out of the total population aged ten
years and above. The economically inactive population, who were
neither engaged in productive activities nor available to furnish
their labor due to homemaking activities, attending school, old age,
illness, or youth numbered 11,235,786 persons (20.2%) (CSA,
2014)8
The highest proportion (73%) of the employed population work-
ing in the Agricultural sector at the national level. Agriculture plays
a predominant role in absorbing the rural labor force, while the ser-
vice sector performs that function in urban areas. The service sec-
tors, which include Public Administration, Defense, Compulsory
Social Security, Education, Health, other Social activities, Hotel
and Restaurant and Household activities account for 15% of em-
ployment, followed by Manufacturing, Mining, Quarrying and
Construction (6.9%) in the industry sector. Wholesale and Retail
Trades constituted 5.4% of employment as of June 2013 (CSA, 2014).
The definition of unemployment varies among developed and
developing countries. In the developed countries where the labour
market is largely organized and labour absorption is adequate, un-
employment is measured based on the standard definition of work-
seeking criteria that is having taken active steps to search for work
during a specified reference period. On the other hand, in develop-
ing countries like Ethiopia, where there is no strong labor market
information, labor absorption is inadequate and where the labor
force is predominantly self-employed, the standard definition, with
its emphasis on work-seeking, is somewhat restrictive and might
not fully capture the prevailing employment situation.
8 Employment-to-population ratio provides information on the extent to which the popula-

tion is engaged in productive activities. It is calculated as the percentage of total em-
ployed persons to the total population aged ten years and above. The value of the ratio
carries its own implication. A high employment-to-population ratio implies large propor-
tion of the population are employed, while a low employment-to-population ratio sug-
gests that a large share of the population is not involved in productive activities due to
unemployment or being out of the labour force.
Unemployment in Ethiopia is measured using the following

three criteria: i) not working ii) available for work and iii) seeking
work (ILO, 1990). This more relaxed definition of unemployment,
which best suits Ethiopian labor market situations, includes persons
who have no but are available for work. They may either be seek-
ing or not seeking work (discouraged job seekers). Discouraged job
seekers are those unemployed who want a job but are not taking
any active steps to search for work because they believe that no
jobs are available in the labor market (CSA, 2014).
The unemployment rate is computed as the proportion of unem-
ployed persons to the total economically active population. The
survey of June 2013 result reveals that unemployed population in
the country numbered 1,981,165, for an unemployment rate of
4.5%. This means nearly five persons are unemployed out of 100
economically active persons aged ten years and above. The differ-
entials of unemployment by sex show that the female unemploy-
ment rate (6.5%) is more than double compared to the male rate
(2.7%). As shown in figure 1.5, the total unemployment rate shows
a declining trend from 8.1% in March 1999 to 5.0% in March
2005, falling to 4.5% in June 2013. The comparison of this recent
unemployment rate exhibits a decline of 3.6 percentage points.
With regards to sex, females are more affected by the incidence of
unemployment than males. Patterns of unemployment indicate that
female unemployment decreased by half as much as their male
counterparts (CSA, 2014).
Figure 2.5 Trends in Unemployment Rate by Sex at

national Level
Source: Compiled from Central Statistics Agency (June, 2013)
ㅇ Urban-Rural Comparison of Unemployment

As shown in <Figure 2.6>, unemployment is a more predomi-
nant problem in urban areas than in rural areas. The national unem-
ployment in urban areas has declined from 25.7% in March 1999 to
20.6% in March 2005 and had since dropped to 16.5% by June
2013. In comparison, the unemployment observed in rural areas is
insignificant. Generally, the rate has shown a declining trend since
March 1999 to June 2013 in both urban and rural areas (CSA,
2014). But, since 2015/16, unemployment rate has shown a slight
increase as shown in <Figure 2.4> above.
Basically, high unemployment rate in Ethiopia is caused by pop-
ulation growth and poverty. It has a significant impact on growth
and development at large. It wastes economic resources such as
productive labor force and affects the long-run growth potential of
the economy.
Figure 2.6 Trends in Unemployment Rate in Urban and

Rural Areas
Source: Compiled from Central Statistics Agency (June, 2013)
2.1.4 External Trade

In Ethiopia, merchandise exports consist predominantly on pri-
mary products, such as coffee, oilseeds, gold, chat (an herbal
stimulant), pulse and flowers, which collectively account for 80%
of total merchandise exports, while air transport services provide
vital foreign exchange. Trade in intermediate goods remains lim-
ited, as exports are mostly comprised of raw materials and imports
favor capital and consumer goods. However, Ethiopia appears to be
gradually integrating into global value chains. A growing focus on
textile and garments as well as leather and leather product indus-
tries can potentially boost export earnings and generate knowledge
spillovers (IMF, 2018).
Figure 2.6 shows Ethiopia’s Exports, Imports and Trade Balance
from 1999/00 to 2016/17 in value of ETB as the trade deficit
reached 289 billion Birr since import values surpassed export val-
ues. However, there was an improvement in the trade deficit in
2016/17 of 1.2% compared to the previous. A reduced trade deficit
and strong growth in remittances helped to improve the current ac-
count deficit from 8.1% of GDP in 2016/17 to 6.0% in 2017/18.
Gross official reserves remained low, at 2.5 months of imports in
2016/17 and 2.1 months in 2017/18 (African Development Bank,
2019).
The merchandise trade deficit in 2017/18 amounted to USD 12.4
billion, depicting 3.7% improvement over the preceding fiscal year.
This was mainly attributed to reductions of import bills. As a result,
the merchandise trade deficit-to-GDP ratio declined by 2.4 percent-
age points and stood at 13.6%.
Figure 2.7 Trends in Exports, Imports and Trade Deficit
Source: Compiled from Annual Report of National Bank of Ethiopia (2016/17)

In 2017/18, total merchandise export earnings declined by 2.3%

over the last year which results in the decline of the ratio of mer-
chandise exports to GDP to 3.1% from 3.6% in 2016/17. Total
merchandise import bills amounted to USD 15.3 billion, exhibiting
a 3.5% annual decline. This was mainly on account of lower im-
ports of capital, consumer and semi-finished goods. As a result, the
total import-to-GDP ratio shrunk to 16.7% from 19.6% last year.
While export revenues and volumes in strengthened 2017/18,
declining commodity prices caused overall export performance to
fall below expectations, keeping the two indicators related to ex-
ports above their respective thresholds in the baseline. The main
vulnerabilities remain those that arise from Ethiopia’s narrow ex-
port base concentrated in primary commodities and air transporta-
tion and the volatility of export prices. While the export mix has
diversified in recent years and manufactured exports are growing at
double-digit rates, the levels of most new export lines remain still
low. Thus, while external debt is not comparatively high as a per-
centage of GDP (33%), it represents a high proportion of exports
(IMF, 2018).
2.1.5 Other Economic Issues

With a public debt–to-GDP ratio of 61.8% at the end of June
2018, Ethiopia remains at high risk of debt distress (2018 debt sus-
tainability analysis). A tax transformation program is under way to
strengthen tax policy and administrative efficiency (African Devel-
opment Bank, 2019).
External debt accounts for about 56% of total public and public-
ly guaranteed (PPG) debt. At the end of June 2018, total PPG debt
amounted to 61.8% of GDP, an increase of 4 percentage points
compared to June 2017, largely due to an increase in the domestic
currency value of external debt outstanding. This mainly reflected
the devaluation of the birr in October 2017. Domestic debt made up
44% of total debt, with domestic debt of the central government
accounting for 21.4% of this, and the remainder corresponding to
SOEs. The bulk of the domestic debt of the central government is
owed to banks, primarily the NBE, largely reflecting advances to
finance the budget. The remainder mainly comprises Treasury bills
held by commercial banks. Domestic borrowing by the SOEs,
whether through loans or bond issuance, was entirely from domes-
tic banks (IMF, 2019).
2.1.6 Summary of Economic Status

In summary, the real GDP of the country reached 70.3 billion
USD in 2017/18 from 32.9 billion USD in 2013/14, which in-
creased per capita Real GDP from 411 to 883 USD during the same
period of time. The trade balance has deteriorated from time to
time as the growth of imports surpassed exports, and the trade defi-
cit reached 12.4 billion USD even though there was an improve-
ment towards 2015/16. Foreign Direct Investment increased from
2013/14 to 2016/17. But it has since dropped to 3.7 billion USD
from 4.2 billion USD in the previous year. There was also growth
in remittances during the last five years, as it reached 5.1 billion
USD in 2017/18 from 3 billion USD in 2013/14. The inflation rate

fluctuated across the past five years and the latest figure showed
double digit inflation of 13.1% in 2017/18.
2.2 Industrial Development Policy/strategy in Ethiopia
An industrial policy of a country, sometimes called an industrial

strategy, is an official strategic effort to encourage the development
and growth of all or part of the economy, often focused on all or
part of the manufacturing sector. Any industrial policy has mainly
two parts. First, the ideology of the government which determines
the nature of industrialization, and second, the governing rules and
principles which provide a framework for implementing the ideol-
ogy. Industrialization is the first and foremost requirement of the
rapid economic development of country. Industrialization is not
only helpful in the development of industries, but it also promotes
agriculture, trade, transport, foreign trade, services and social sec-
tors of the economy. It increases employment opportunities, na-
tional income, per capita income and living standards of the people.
The Ethiopian government recognized the importance of indus-
trialization 16 years ago and designed an industrial development
strategy. It has also prepared Growth and Transformation Plans
(GTP I and GTP II) and tried to implement them over the past 10
years. In the first Growth and Transformation Plan (GTP I -
2010/11 to 2014/15), the Ethiopian economy grew by an average at
10.1% per year. In recent years, particularly in the GTP II period,
the Ethiopian economy has, however, faced multidimensional chal-
lenges. Real GDP growth rate has decelerated as the result of poor
performances in the agricultural, manufacturing and construction
sectors. In the second growth and transformation plan (2015/16 to
2019/20), the growth rate declined to 8.8% in 2016 and 7.5 % in
2018, which are far lower than the growth rates that the economy
experienced in the past 13 years.
2.2.1 Industrial Development Strategy of Ethiopia

Ethiopia has been striving to transform the structure of its econ-
omy since the end of the 19th century. Modern factories were built
in the country in the 1920s (as of 1927, about 25 factories were
built, mostly by foreigners) though a conscious effort to develop a
modern industrial sector was not made until the 1950s. Since then,
the successive governments of the country pursued their own re-
spective industrial policies. The three consecutive five-year devel-
opment plans of the Imperial regime (1930-1974) were formulated
in line with the development of industrial sector policies and strat-
egies. The Dergue Regime (1974-1991) and its claimed socialism
led to planned means of production, production targets and allocat-
ed resources based on the arbitrary decisions of the authorities.
Production of large scale goods was almost entirely state owned.
As a result, there was little room for private sector development.
The present regime, EPRDF (Ethiopian People’s Revolutionary
Democratic Front), adopted Agricultural Development Led-
industrialization (ADLI) as a guiding economic principle which
allows for and promotes the participation of the private sector in
most sectors of the economy (Kindeye, 2014).

Industrialization and achieving industrial development has been
a keen interest of all the successive regimes in the country. But
how to achieve it and where to locate i, is an contentious issue. In-
dustrial development policy in Ethiopia as a whole is dictated by
development paradigms such as market-oriented development (un-
der the Imperial era and EPRDF regime); public oriented (under
Dergue); foreign-dominated industrialization vs. domestic owner-
ship; and Import Substitution Vs Export promotion. It is important
to notice that policy formulation and execution in Ethiopia is not
static. Rather it is pragmatic and is not attached to a particular de-
velopment ideology. The shift in economic and industrial policy
from the centrally planned economy of the Dergue to the mixed
economy of the EPRDF does in some measure turn its back against
liberal thought. It takes the mindset of a developmental state and is
pursuing export-oriented industrialization.
The debate over the role of the state vis-a-vis the market, the ori-
entation of industrial policy, the ownership structure, incentives
and allocation are all open for debate in formulating the industrial
policy menu in Ethiopia. For the last 27 years, the major players in
the industrialization process of the country and especially in the
manufacturing industry have been the government, foreign inves-
tors (FDI) and local private investors. But, it seems that the role of
each player and their coordination is poor and unclear.
2.2.2 Current Industrial Development Strategy

(EPRDF Regime)
The industry sector in general and the manufacturing sector in
particular were given due national consideration following the for-
mulation of the national industry development strategy in 2002 by
the FDRE. The strategy was designed within the framework of the
global environment based on the principles of a free-market econo-
my. The seven industrial development strategies include: 1) Accept
that the private sector is the engine of the industrial development
strategy; 2) Following the direction of agricultural-development led
industrialization (ADLI); 3) Follow Export-led Industrialization; 4)
Focus on Labor Intensive Industries; 5) Use Coordinated Foreign
and Domestic Investment; 6) Employ strong government leader-
ship 7) Mobilize the whole society for industrial development. The
2002 industry policy has also identified five priority sectors (the
leather and leather products industry, the textile and garment indus-
try, the agro-processing industry, the chemical and pharmaceutical
industries as well as metal and engineering industries) that deserve
attention to a platform for the industry to take its key leading role
in the economy.
The agricultural-development led industrialization (ADLI) strat-
egy designates agriculture as a primary stimulus to generate in-
creased output, employment, and income for the people and as a
springboard for the development of the other sector of the econo-
my. The EPRDF had initially targeted agriculture as the key driver
of the post-war economic take-off (1995–2015) but increasingly
pursued the development of the manufacturing sector as the prime
driver of sustained economic growth and structural transformation

post-2010. Nonetheless by 2018, per capita income remained very
low and services had dominated the economy — not manufacturing
(Arkebe Oqubay, 2018).
Policy instruments such as the promotion of exports and produc-
tive investment, industrial financing, and the use of state-owned
enterprises (SOEs) have been designed to shape strategic sectors.
But, many policy instruments have not been effectively imple-
mented. First, most of the export-promotion schemes are not effec-
tive due to poor coordination, traditional customs systems, and
weak labor skills. Second, industrial organizations are neither ca-
pable nor equipped with professional skills, qualifications or expe-
rience. Third, the policy instruments were not empirically-based
with a full understanding of the specific industrial structure of each
sector. Fourth, industry associations have not been actively influ-
enced policies, nor have they communicated their needs to the gov-
ernment using existing channels for dialogue. Fifth, the lack of
effective vertical and horizontal coordination among and across
government agencies (federal, regional, and local) has been a major
constraint and has hampered the competitiveness of firms (Arkebe
Oqubay, 2018). Recently, the Ethiopian government has given
more emphasis to promote private investment in contrast to public
investment. Currently, the Ethiopian government is focusing on
FDI-led industrialization. The government has planned to privatize
publicly-owned enterprises such as the sugar and metal industries
among others partially or fully in the near future. Thus, the gov-
ernment has planned to build overall capacity by expanding indus-

trial parks and establishing clusters as well as creating linkages be-
tween domestic and foreign firms to facilitate transfer of technolo-
gy, skills and other externalities.
2.3 Investment Status of Ethiopian Manufacturing In-

dustries
2.3.1 Comparison of Total Investments in agriculture,

industry and service
When examining the general status of investors in manufacturing
sector over the last 25 years, 17,519 projects were licensed by DPI
in the manufacturing industry, but only 1,837 (10.4%) are at an op-
erational level. The remaining 89.6% of the domestic private in-
vestments have existed in a pre-operational stage for a number of
years. Even those 10.4% of domestic private investments are work-
ing under capacity (58% - 62%). The major reasons for under ca-
pacity include: input supply problems (quality, price, and quantity),
shortages of foreign currency, shortages of working capital, limited
market access, skilled labor shortages, shortages and interruptions
of electric power and an inability to adopt new technologies and
systems.
2.3.2 Role of Domestic Private Investors (DPI) in the

Manufacturing Industry
In Ethiopia’s industrial development strategy, there are three ac-
tors: Domestic Private Investors (DPI), Foreign Direct Investment
(FDI) and Public enterprises. All are expected to play a major role
in Ethiopian industrial development, especially in the manufactur-
ing industry. As stated earlier, the private sector is considered to be
the engine of the industrial development in Ethiopia, and domestic
private investors are expected to play a major role. But currently
the role and contribution of domestic private investors in manufac-
turing industries is very low. Most DPI prefer to engage in service
sector activities like trade or real estate than manufacturing sector
due to the following reasons. First, manufacturing requires high
initial investments and working capital. Second, it faces high levels
of global competition compared to services. Third, the import and
distribution of foreign manufactured goods offers fast returns and
high profits in Ethiopia compared to local production, for which
investment returns take more time. Fourth, entry and exit barriers
are much lower in the service sector than in the manufacturing sec-
tor. Fifth, service businesses are comparably easier to manage than
manufacturing businesses. Sixth, service businesses carry less risk
than manufacturing businesses. Seventh, getting a bank loan to be-
ing a manufacturing business is a lengthy and tedious procedure.
Finally, the government has failed to properly encourage develop-
ment of the sector.
Figure 2.8 Total Private Domestic Projects and

Operational Domestic Projects (1992-2016)
Source: Compiled from Ethiopian Investment Commission
2.3.3 Role of FDI in Ethiopian Manufacturing Industry

Ethiopia does not have any FDI legislation and FDI is instead
governed by investment proclamation. In 1992, the government
enacted investment proclamation to create favorable conditions for
private investment both domestic and foreign. The investment code
was amended several times (most recently in 2014). The revisions
tended to further liberalize the investment regime and introduce
generous incentives. The Ethiopian Investment Commission (EIC)
has also introduced some important changes in the direction of in-
vestment promotion that includes sector targeting, anchor investor
targeting and industrial parks as a key to boost Ethiopia’s attrac-
tiveness to FDI.
Ethiopia has given special attention to Foreign Direct Investment
(FDI). In the first Growth and Transformation Plan (GTP I) period,
USD 7.2 billion of net FDI inflows was registered. FDI stock in-
creased from about 487 million USD in 2000 to 5 billion USD in

2016. In this period, the number of operational investment projects
registered under FDI increased from 103 to 2,658. Of course, this is
not sufficient and the government has planned to attract more FDI
in the second GTP. So far Ethiopia does not sufficiently benefit
from FDI.
First, there are low domestic linkages and limited spillover ef-
fects. FDI in Ethiopia is not yet of high quality (that is, concentrat-
ed around low-value added production with weak linkages and
spillover effects with domestic firms). First, it was found that link-
ages between FDI and domestic firms are very limited. Only 7.5 %
of domestic firms are linked with FDI firms in supply relationships.
Ethiopia lacks a systemic mechanism to maximize the benefits of
technology and knowledge transfer and has no proactive policy or
programs encouraging linkages and formation of joint ventures.
Second, regarding capital inflows and outflows, there is yet an ab-
sence of clear data showing net capital inflows via FDI. Hence, it is
difficult to reach consensus on capital flows. Third, there is a low
level of exports. FDI’s export involvement is marginal as the pro-
portion of FDI manufacturing firms that export is only 16%, and
their export sales constitute only 7% of total sales. In other words,
93% of products produced through FDI investment are sold in the
domestic market (Mulu, Girum, Birhanu, 2017).
Figure 2.9 Total FDI Projects and Operational

FDI projects (1992-2016)
2.3.4 Public Investment on Manufacturing Industry

Development
As one of the dominant actors in the economy, the government
directly invests in industries in addition to regulating and monitor-
ing other economic actors and has tried to play a role in the Ethio-
pian industrial development. As mentioned in the earlier sections,
the government has focused on public investment in a few strategic
areas, for instance in large-scale manufacturing such as the chemi-
cal and cement industries, metal and industrial engineering busi-
nesses as well as the sugar industries. The government has invested
significant amounts in metal (Metals and Engineering Corporation)
and sugar industries.
But the number of public industrial establishments and their
gross value of production has actually decreased across time. After
1997, the total number of licensed, state-owned large scale manu-
facturing industries has increased, but only a few of those are oper-
ational (figure 2.10). Those state-owned enterprises in large scale

manufacturing industries are characterized by low efficiency, are
saddled with non-performing loans despite large capital invest-
ments from the government banks (Development Bank of Ethiopia
and Commercial Bank of Ethiopia). In general, the state-owned
large scale manufacturing businesses are not successful and have
not achieved their targets.
Figure 2.10 Total Public Projects and Operational Public

Projects (1992-2016)
On the other hand, some studies indicate that public investment

in Ethiopia has crowded out private investment, and that the rela-
tionship between public investment and private investment is not a
complementary but rather nonreciprocal, with a displacement effect
in competing for resources that could have been otherwise used by
domestic private investors.
2.4 Major Issues and Challenges
2.4.1 Major Issues and Challenges of Ethiopian

Economic Development
The Ethiopian economy has registered rapid economic growth
for the past fifteen years with 11% average real GDP growth annu-
ally and the main driver for this growth was investment taken by
the government and state owned enterprises. However, the econo-
my faces many obstacles, emanating from both external and inter-
nal factors. Some of those challenges and serious problems include
the low level of agricultural productivity, difficulties in achieving a
structural transformation, a shortage of foreign exchange, high debt
levels and inflation. The major problems and challenges of the
Ethiopian macro-economy can be summarized as follows:
Low levels of Agricultural Productivity: Ethiopian agriculture
remains dependent on rain-fed subsistence farming, rather than ir-
rigated mechanized farming, which considerably affects the
productivity of the sector. It is also prone to climate change and El
Nino shocks which reduce agricultural production during massive
draughts and resulting food insecurity crises. Transforming the Ag-
riculture sector is a daunting task for the government but there are a
number of initiatives in place backed by large investments to sup-
port the development of the sector by providing improved seeds,
fertilizers and pesticides and other supports to the farmers. The low
level of agricultural development has an impact on the industrial
development because of the low quantity and quality of raw mate-
rials.
Difficulty in achieving structural transformation: There are weak

backward and forward linkages between Agriculture and Industry
which are essential to achieve structural transformation. The coun-
try aims to become a manufacturing hub in Africa by 2025 through
developing the labor- intensive light manufacturing industry, but
there are various challenges such as a lack of infrastructure and
utilities, among others, which hinder efforts to bring about the de-
sired results.
High Debt: Even though the Ethiopian external debt-to-GDP ra-
tio was 30.1% in 2017/18; the country is classified as a high risk of
external debt distress. The total public and publicly guaranteed debt
stock has been gradually rising and now sits at above 50% of GDP,
half of which is external debt.
High Inflation: High Inflation is a persistent problem to the
economy despite a number of measures to curb its effects taken by
the government. Both food and non-food inflation contributes to
the general inflation but highly volatile food prices are the major
cause, they lead to shocks in agricultural production, illegal trade
practices and high import prices.
Weak export performance and shortage of foreign exchange:
Merchandise exports continue to rely on agricultural products,
mainly coffee, of low value added which are susceptible to stiffer
competition and price fluctuations in the world market. There are
a number of factors that contribute to the weak performance of
the export sector, including the undiversified export base and in-
accessibility of transport and logistics, among others. Despite
various economic measures including a 15% devaluation of the

Birr against the U.S. dollar in October 2017 to boost foreign ex-
change earnings, exports stagnated. Since the country imports
capital goods for investment and consumer goods for consump-
tion, the shortage of foreign exchange has become a chronic
problem to the economy as there is low level of export earnings,
remittances and other sources of foreign exchange.
2.4.2 Major issues and challenges of industrial

development in Ethiopia
The industrialization progress in Ethiopia has been facing signif-
icant challenges in recent years. The manufacturing sector's per-
formance has been in par with neither its potential nor the ambi-
tious targets set by the government. With the current performance,
the 2020 targets set for merchandise export and employment in the
industrial sectors in the GTP II will be missed by wide margins.
Major challenges in Ethiopian industry in general and the manufac-
turing sector in particular are as follows.
§ The manufacturing sector of Ethiopia has not yet matured past
infancy over the last five decades due to a myriad of constraints. It
is generally characterized by weak production and consumption,
and poor backward and forward linkages with the domestic econ-
omy. The sector is highly dependent on imported sources for its
raw material requirements. Weak inter-sectoral and intra-sectoral
linkages imply that sector has not been a source of dynamism for
economy at large.
§ Ethiopia’s manufacturing sector suffers from the serious bot-
tlenecks in capital accumulation, skilled labor, and weak infrastruc-

ture (weak logistics, high transport costs, power interruption).
§ Lack of clear vision or direction by the government’s top
leaders on industrial development.
§ Insignificant contribution to exports and foreign exchange
earnings: Ethiopia’s primary export products consist of agricultural
and mining products. Manufacturing exports are limited to a few
items such as apparel and leather products. Even these products are
disadvantaged quality-wise vis-à-vis Chinese and Vietnamese
products in the global market. Manufacturing exports account for
only 7.5% of total exports (2013).
§ Low productivity and competitiveness (Weak and narrow-
based manufacturing sector).
§ Transformation of agriculture is weak: (weak domestic value
chain to supply manufacturing).
Chapter 3. Status of SME in Ethiopia
Small and medium-sized enterprises (SMEs) play a very im-

portant role in the Ethiopian economy owing to the fact that they
constitute a large proportion of all enterprises and support an equal-
ly large percentage of total employment. The government authori-
ties have carried out a variety of programmes to support these en-
terprises. The design and implementation of such programmes have
received increasing attention over the last 10-15 years. The gov-
ernment formed in the wake of the 2005 (1997 E.C) elections has
committed itself to a significant array of programmes to improve
production processes, and quality parameters. The government rec-
ognises that a stronger SME sector is critical to achieving several
other important goals. In the future, SMEs are expected to produce
large numbers of far better-paying jobs and to create much more
value-added than current jobs in the sector. SMEs are also expected
to be significant contributors to government policy and programme
efforts to build a middle income economy by 2025.
Small businesses are strategically important because they curb
the monopolistic power of large enterprises and increase the com-
petitiveness of the market. They also act as the seed beds for entre-
preneurial skill development (UN-ECE, 1997). The significant con-
tribution of small businesses to employment growth is highlighted
in research from many parts of the world (Coy, 2003; Leppee,
2003; OECD, 2002; Pichler, 2004; UN-ECE, 1997; Valery, 1999).
Small businesses account for a disproportionate share of job crea-
Chapter 3. Status of SME in Ethiopia 59
tion in North America (Arend, Amit, Brander, & Hendricks, 1997;

OECD, 2002).
The small-scale business sector is recognized as an essential
component of economic development and a crucial element in the
effort to lift countries out of poverty (Wolfenson, 2007). According
to Ibrahim, Angelidis and Parsa (2008), “the dynamic role of mi-
cro, small and medium enterprises (MSMEs) in developing coun-
tries as engines through which the growth objectives of developing
countries can be achieved has long been recognized.” Small busi-
nesses play an important role in the development of a country and
serve as a means to sustain and grow economies. It is estimated
that MSEs employ 22% of the adult population in developing coun-
tries (Fisseha, 2006). MSMEs are known to make greater utiliza-
tion of local raw materials, generate employment, take part in rural
and urban development and the development of entrepreneurship,
mobilize local savings, form linkages with bigger industries, pro-
vide regional balance by spreading investments more evenly, pro-
vide an avenue for self-employment and opportunities for manag-
ers and semi-skilled workers (Taiwo et.al., 2012).
In OECD countries, small businesses provide the largest number
of jobs in the service sector and 60-70% of total jobs in the manu-
facturing sector (OECD, 2002). In the Asia Pacific region, these
account between 32 and 48% of employment (UN-ECE, 1997).
The contribution of these businesses to innovation, economic
growth, and job creation in most parts of the world is well docu-
mented. Thus, providing support to small businesses is a prudent
approach to create new employment opportunities.

SMEs play a key role also in transitional and developing coun-
tries. These firms typically account for more than 90% of all firms
outside the agricultural sector, constitute a major source of em-
ployment and generate significant domestic and export earnings.
As such, SME development emerges as a key instrument in poverty
reduction and industrial development efforts. Globalization and
trade liberalization have ushered in new opportunities as well as
challenges for SMEs. Presently, only a small part of the SME sec-
tor is able to identify and exploit these opportunities and deal with
the challenges. The majority of SMEs in developing and transition-
al countries, however, has been less able or unable to exploit the
benefits of globalization and, to add to the situation, are frequently
facing pressure in local or domestic markets from cheaper imports
and foreign competition.
The contribution of small and medium manufacturing industries
to facilitate the transition from an agricultural-led to an industrial-
led development process cannot be overemphasized. Small and
medium industries can create direct gainful employment to the
large majority of he non-agricultural population and indirect em-
ployment to the rural population through their ability to use local
resources. The expansion of SMEs would strengthen links within
the economy and hence facilitate synergies generated from strong
value chain integration among the various sectors of the national
economy. What is more, SMEs would foster regional development
and regional economic integration, which is a much needed phe-
nomena in a federal state such as Ethiopia.

Having this general overview in mind, this chapter discusses
some core issues concerning SMEs development and promotion in
Ethiopia.
3.1 Legal Institutions for SMEs

The government of Ethiopia provides direct policy support to
SME business operators through different agencies. This support
includes access to working space (facilities constructed by the gov-
ernment), access to markets (linkages), access to finance (guarantee
provision), access to industrial extension (various business devel-
opment services such as market linkages and technical support) and
access to training and advanced technology. To deliver these sup-
porting services the government of Ethiopia established different
institutions at each level (federal, regional and local level) of the
government. The MSEs Development Strategy established an insti-
tutional framework whereby SMEs could interact with other stake-
holders such as government agencies, MFIs and Technical Voca-
tional Education and Training (TVET) centers.
SME development in Ethiopia is therefore promoted through the
interaction of these various stakeholders. As the main actor in the
sector, the federal government formulates strategies and policies
through Ministry of Trade and Industry (MoTI). The main role of
the Ministry is to draft and enforce SME related policies and regu-
lations, but it is also mandated to provide services directly, includ-
ing advisory services, information provision and training to other
agencies at both the federal and regional level. In this section, insti-
tutions which are responsible for the implementation of the strategy
at the federal and regional levels are indicated by classifying into
two, key institutions and supporting institutions.
3.1.1 The Key Institutions

At the federal level the key institutions responsible for the im-
plementation of the strategy are the Ministry of Trade and Industry
(MoTI), the Federal Technical and Vocational Education and Train-
ing Agency (FTA) and the Federal Small and Medium Manufactur-
ing Industries Development Agency (FeSMMIDA). The main
mandates of these institutions are capacity building activities in-
cluding preparing guidelines and instruments for the implementa-
tion of the SME Development Policy and Strategy as well as moni-
toring their execution. The Federal TVET Agency (FTA) and the
newly established FeSMMIDA are the two most important gov-
ernment institutions that directly provide support services to meet
the developmental needs of SME manufacturers. Both agencies
have counterpart agencies at the regional level that are responsible
for the development of SMEs in each of the nine regions. The fact
that the two institutions are the direct actors in promoting SMEs
imply that there should be closer coordination between the two en-
tities to realize more cost effective policy implementation and gen-
erate synergies. This chapter will limit its focus to the roles and
responsibilities of each of the key institutions outlined below.
ㅇ Ministry of Trade and Industry (MoTI)

The major task of MoTI is to promote and expand the develop-
ment of industry by creating a conducive environment for the de-
velopment of investment and technological capacity of the indus-
trial sector by rendering efficient support and services to investors.
In the framework of SME development, the mandates of MoTI are:
· Formulate policies, strategies and action plans that assist in

the acceleration of industrial development in general, and SMEs
development in particular. Execute implementation upon approval
by the government.
· Conduct studies on laws that need improvement and new laws
to be developed to facilitate SME development.
· Support and build the capacity of FeSMMIDA.
· Ensure cities and ULGs support the SME development pro-
gram, take ownership of the program and assume responsibility for
its implementation, compile and disseminate best practices to be
obtained from the different regions as well as support implementa-
tion of corrective measures.
· Perform capacity building activities.
· Coordinate collaboration and cooperation among institutions
that have roles in the development of SMEs.
ㅇ The Federal Small and Medium Manufacturing Industry

Development Agency (FeSMMIDA)
To meet the objectives of promoting SMMIs, as an integral part
of industrial development, the government has established a spe-

cialized agency, the Small and Medium Manufacturing Industries
development Agency (FeSMMIDA) through the Establishment
Council of Ministers Regulation No. 373/2016 at the federal level,
which has been replicated by regional governments as well. During
the first implementation phase of MSE strategy, the support system
being provided to the MSE was biased towards micro and small
enterprises without a formally-adopted strategy targeting the Small
and Medium Manufacturing Industry (SMMI) in particular. Even in
cases where support was provided, it was supply-driven with little
or no relevance to individual establishments.
The support system failed to reach the right group of SMMIs
with potential for export marketing and import substitution. In
short, largely unattractive and generic supply of support packages
were neither relevant nor targeted to the needs of small and medi-
um industries. Cognizant of this fact the government established
FeSMMIDA. The establishment signalled the need to providing
targeted interventions are relevant to the needs of SMMIs. This or-
ganization is accountable to MoTI and is responsible for supporting
SMMIs, with 23 major power and duties (Regulation No. 373/
2016). Some of the major responsibilities of FeSMMIDA are:
§ Design enterprise support frameworks and make improvements,
depending on needs that may arise during the course of implementation.
§ Prepare long, medium and short term plans for SMEs and
monitor and evaluate their implementation.
§ Collect, compile and disseminate data and information on SME
development that can contribute to their accelerated development.

§ Facilitate SMEs' access to audit services.
§ Support and build the capacities of regional SME develop-
ment agencies.
§ Engage in both domestic and export market development
activities.
§ Prepare and execute supporting guidelines on SMEs support
frameworks.
§ Organize annual conferences on SMEs development.
§ Conduct research to identify and solve challenges faced by
SMEs. Compile, disseminate and monitor adaptations of interna-
tional best practices.
ㅇ The Federal Technical and Vocational Education and

Training Agency
It is believed that the development of necessary human resources
can be achieved through the provision of demand-driven technical
and vocational education and training. The technical and vocational
education and training strategy aims to build human resource ca-
pacity to achieve this. In addition it is found appropriate to enable
the technical and vocational education and training system to play a
role in developing the capacity of SMEs through industry extension
services to enhance MSME competitiveness. With this in mind, the
GoE established the Technical and Vocational Education and Train-
ing (TVET) Agency under Council of Ministers Regulation No.
199/2011. Some of the major duties and responsibilities are:
· Coordinate the overall technical and vocational education and

training system.
· Develop frameworks for training and technology development.
· Build the capacity of the teaching and research staff of TVETs.
· Build the capacity of TVETs in the regions and coordinate
their activities in order to achieve effective implementation of the
SME related Development Policy & Strategy.
ㅇ Regional Organizations
· In regional states, key institutions responsible for the imple-
mentation of the strategy are the Bureaus of Trade and Industry,
Technical and Vocational Education and Training Agencies, Small
and Medium Enterprise Development Agencies, TVET colleges,
MFIs and regional lease finance offices. These organizations per-
form duties designated by respective federal authorities. However,
their structure and responsibilities differ from region to region. In
addition to the above, there are One Stop Service (OSS) centers in
each city to deliver different front line services for entrepreneurs.
· Microfinance Institutions (MFIs) are responsible for develop-
ing appropriate financial products to SMEs based on their respec-
tive growth stages. They are also mandated to promote a savings
culture among SMEs and ensure that SMEs draw up financial re-
ports in order to facilitate access to credit.
· TVET colleges are responsible for the provision of SME
training in the areas of job creation, innovation, KAIZEN man-
agement methods, quality control, design and maintenance. Some
of the major mandates of TVET institutions are:

Creating, enhancing and strengthening outcome-based technical
and vocational education and training systems in the country;
Making training institutions incubators of SMEs and capacity
building centers for job creation;
Facilitating the identification, selection, prototyping, testing and
transferring of appropriate technologies;
Integrating enterprises with the technical and vocational educa-
tion and training system;
Action Oriented Research; the training institutions shall make
action-oriented research as an integral part of the technical and vo-
cational education and training system about identification, intro-
duction and the implementation of new working systems to resolve
the problems.
Provide industry extension service that can support SMEs.
3.1.2 Other Supporting Organizations and

Collaborating Institutions
§ Industry Sector Development Institutes (TIDI, LIDI, MIDI, etc…)

§ Ethiopian Kaizen Institute (EKI)
§ Industrial Park Development Corporation (IPDC)
§ Regional cluster development agency
§ Ministry of Innovation and Technology (MoIT)
§ The National Bank of Ethiopia (NBE)
§ Ministry of Urban Development and Housing
§ Research Centres, Higher Education and Training Institutions
§ Non-Governmental Organizations and Development Partners
3.2 SME Business Environment
3.2.1 Definition of SME in Ethiopia

Before we discuss the issues of SME business environment in
Ethiopia, it is better to highlight the definition of micro, small and
medium enterprises. There is some confusion among different gov-
ernmental organizations (e.g. Ministry of Trade and Industry, Cen-
tral Statistics Agency (CSA), & Federal Small and Medium Manu-
facturing Industries Development Agency (SMMIDA)) in defining
MSMEs in Ethiopia. For instance, the Central Statistics Agency
(CSA) of Ethiopia adopts its own definition which is not well
aligned with the MSE policy and the new definition. Hence, the
data it collects is less useful in terms of analyzing the MSE policy.
CSA’s definition is based on the size of employment and the extent
of automation. CSA had grouped both large and Medium Enter-
prises together when those enterprises have employed more than 10
employees and used automated machinery. The CSA's definition
ignores the scale of capital and non-manufacturing sectors.
In the 1997 national MSEs policy document Ethiopia has Micro
Enterprises as enterprises with total assets of less than 20,000 Birr
($1200) and Small Enterprises as Enterprises with total assets of
Birr 500,000 ($30,000) or less. In this definition, the base defini-
tion used is total assets, which differs from how international or-
ganizations define MSMEs. In addition, this definition segregates
sectors as service and manufacturing. However, in this paper we
adopted a revised definition, outlined in recent regulation9 issued

by Council of Ministers in 2016 (see Table 3.1 below). This new
definition considers human workforce and enterprise total assets as
the main measurement criteria. In case of ambiguities regarding the
use of total assets or employment, total assets shall serve as the
main criteria.
Table 3.1 Definition of MSMEs

Enterprise Number of
Sector Total asset11 /ETB/ Total asset /USD/
indicators employees10
Micro Industry ≤5 ≤100,000 ≤ 4,630
Service ≤5 ≤ 50,000 ≤ 2,310
Small Industry 6 - 30 101,000 - 1,5000,000 4,630 - 69,500
Service 6 - 30 50,0001-500,000 2,310 - 23,150
Medium12 Industry 31 - 100 1,500,001-20,000,000 n.a.
Service 31 - 100 500,001 – 7,500,000 n.a.
Source: Regulation No. 373/2016, TVET Proclamation No. 954/2016 and ADA asbl (2017).
3.2.2 SME-specific Policies - SME Policy Environment

Government can influence market mechanisms and make them
function efficiently by removing conditions that create market fail-
ures and administrative rigidities. They can also create an “enter-
prise culture” that enables firms to take reasonable risks and seek
profits. Entrepreneurs may be discouraged to start a business if
they have to follow many rules and procedural requirements, if
9 Federal Small and Medium Manufacturing Industry Development Agency Establishment

Council of Ministers Regulation No. 373/2016.
10 Including the owner, his family member and other employees.
11 Total capital excludes the value of buildings.
12 There is not yet a clear benchmark for an upper capital limit defining medium enterprises.
they have to report to many institutions, or if they have to spend

more time and money fulfilling the procedural requirements (Dana,
1987; Young & Welsch, 1993). Most of the time government influ-
ences the market through policy tools and instruments. The Gov-
ernment of Ethiopia has designed a number of policies for the eco-
nomic transformation. Among these, the Industrial Development
Policy and Strategy is one of the key strategy documents guiding
the country's industrial development path. The 2002 industrial de-
velopment strategy of the FDRE recognized the importance of mi-
cro, small and medium industries in employment creation, capital
accumulation and technological development as well as their con-
tribution to the country’s export drive. In addition to this, Ethiopia
has launched various bold initiatives and development policies with
plans to spur economic growth. Four major development plans
have been executed so far, the most recent being the second
Growth and Transformation Plan (GTP II) of 2016. The expansion
and development of MSMEs has systematically been a key strate-
gic priority within the framework of this government’s five year
economic development plans. The common and overarching objec-
tive of these development plans has been to ensure broad based
economic growth. This is so because broad based economic growth
is the main route to poverty reduction through employment genera-
tion.
Many important overall policy and institutional reforms have
been undertaken including: the introduction of a social safety net,
decentralization, market economy reforms, and agricultural Devel-
opment Led Industrialization (ADLI), among others. Moreover, a

number of sector-specific policy reforms and regulatory restructur-
ing may have contributed to the process of creation of micro and
small enterprises. One of the frameworks was related to issuance of
the National Micro and Small Enterprises Development Strategy in
1997 and the issuance of Proclamation No. 33/98, providing for the
establishment of the Federal Micro and Small Enterprises Devel-
opment Agency (Addis ReMSEDA, 2009).
The role of Micro and Small Enterprises (MSEs) is indispensa-
ble to poverty reduction through employment generation. Cogni-
zant of this, a national MSE Development Strategy was formulated
in 1997. Ethiopia’s MSE Policy envisions not only reducing pov-
erty in urban areas but also nurturing entrepreneurship and laying
the foundation for industrial development. The strategy was revised
in 2010/11 with renewed interest and more ambitious targets on
employment, the number of entrepreneurs and the transition to me-
dium-sized enterprises (Addis ReMSEDA 2009)
The MSE strategy stresses that “various policy, structural and in-
stitutional related problems and bottlenecks” have constrained the
role of the MSE sector in contributing to the national economy. It
thus primarily aims at creating enabling legal, institutional and oth-
er supportive environments for the development of MSEs. The spe-
cific objectives of the strategy include: facilitating economic
growth and bringing about equitable development; creating long-
term jobs; strengthening cooperation between MSEs; providing the
basis for medium and large scale enterprises; promoting exports;
and balancing preferential treatment between MSE/SMEs and big-

ger enterprises. The intended MSE/ SMEs supports include creat-
ing a legal framework; improving access to finance; introducing
different incentive schemes; encouraging partnerships; providing
training in entrepreneurship, skills, and management; improving
access to appropriate technology, information, advice and markets
and developing infrastructure. The strategy also states an intention
to strengthen private sector associations and chambers of com-
merce. A number of institutions are expected to be involved in
providing support to the SMEs. The government strongly believes
that SMEs are the best solution to urban unemployment and hence
reduce poverty. This ambition is reflected in the GTP I and II.
Therefore, SME promotion and support is a vital strategy to fulfill
this national plan of employment creation in the short-run and
achieve industrialization in the long-run.
The government of Ethiopia has supported the growth of Micro,
Small and Medium Enterprises (MSMEs), especially growth-
oriented businesses13, through various policy interventions. In order
to achieve the objectives of the Micro and Small Enterprise Devel-
opment Policy and Strategy in line with the Growth and Transfor-
mation Plans I and II, special support is given to those enterprises
13 The Government of Ethiopia identified growth-oriented MSMEs based on their potential

for job creation, poverty reduction, local raw material utilization and ease of transfor-
mation to medium and large scale businesses in a short period of time. Accordingly,
MSEs engaged in manufacturing (metal, leather, textile, wood work, agro processing),
construction (contractors and construction material producers), urban agriculture (dairy,
cattle fattening, poultry, beekeeping and animal food production), trade (wholesale and
retail) and services (hotel, tourism, solid waste collection, and so forth) are considered as
growth-oriented MSMEs.
that are engaged in the manufacturing sector and that produce items
for export or to substitute imports. Particular attention is given to
subsectors, activities and enterprises to be established in the manu-
facturing, construction, trade, services and agricultural sectors that
have potential to generate large scale employment.
According to the GTP II projection, the share of the manufactur-
ing sector of GDP is expected to show a fourfold increase from 4.8%
in 2014/15 to 18% by 2025. From this projection the share of Micro
and Small Enterprises of GDP under the baseline scenario is 1.1 per-
cent in 2014/15 to 1.8 percent by 2019/20 with an average contribu-
tion of 1.4 percent in 2015/16 to 2019/20. The projection for Medi-
um and Large scale enterprises as 3.7 percent from 2014/15 to 5.9
percent in 2019/20 with an average share of 4.9 percent from
2015/16 to 2019/20 (GTP II plan, 2016). Though the plan has tried
to project the contribution of Micro and Small enterprises and Medi-
um and Large enterprises to GDP, the entire projection is made only
for manufacturing, overlooking the service sector.
Small and medium manufacturing industries were recognized as
major contributors to the envisioned structural change of the econ-
omy. The second growth and transformation plan (GTP II) also ac-
corded due attention to the promotion of small and medium scale
industries. Accordingly GTP II stipulates that a wide range of SME
promotional measures and support services should be designed to
facilitate the growth and development of the sector. The plan’s stra-
tegic pillars are sustainable and rapid economic growth through
industrialization, social development, increased investment in agri-
culture and infrastructure, strengthened governance and an expand-

ed role for youth and women in the overall development endeavors
of the country.
3.2.3 SME Development Support Framework

The MSE development strategy is designed around a framework
that facilitates its implementation. These frameworks are designed
based on the nature of enterprises and their level of growth. The
frameworks aim at giving support on major areas that startup busi-
nesses need, including industry extension services, market access,
credit at fair interest rates, technology and R&D, production and
sales centers and also the development of a strong one-centre ser-
vice, or one-stop-shop centers. These supports are described in de-
tail in the following sections.
ㅇ One Stop Service (OSS)

The first element of the strategy for support of new start-ups is
the proposed development of one-stop centres to provide infor-
mation to both new and existing businesses. One-stop centres have
been developed in other countries at many levels of government.
They have been found to be very effective at disseminating infor-
mation about the bureaucratic processes that all businesses must
deal with. In addition to information, the centres can provide appli-
cation forms for various permits or licenses and can act as network-
ing agents, providing information about the availability of both
public and private support services. An important objective is to
simplify the creation of new enterprises and reduce bureaucratic

red tape. In order to ensure the development and long-term survival
of new technologically and economically competitive businesses,
entrepreneurs need access to information about many issues that
affect the business environment and their markets from the outset.
They need strategic development plans and access to market re-
search. It is important to give the smallest enterprises, which make
up the majority of Ethiopian SMEs, access to support that can
compensate for the operational resources they lack.
FeSMMIDA has several programmes to support entrepreneurs
with new start-ups. The general goals of these programmes include
informing entrepreneurs about the investment environment, provid-
ing sector-based plans and market research, and help with business
planning and the strategic approach to business growth and devel-
opment. Much of this information is provided through district or
Wereda or subcity level SMEs development centres. This Wereda-
level OSS centers are designed to provide the necessary business
support at a single point of service. Legal services delivered at OSS
include registration and provision of trade licenses, assignment of
taxpayer identification numbers (TIN), credit and saving services,
provision of work and commercial spaces and creation of market
linkages and facilitation of bookkeeping and auditing services. Alt-
hough there are some differences in the implementation of OSS
support across regions in Ethiopia, the three following actors are
frequently present in the OSS to provide MSMEs with support:
· MFI loan officers to deal with saving and credit issues;

· Industrial extension experts from TVETs to respond to train-
ing needs;
· Regional MSME development officers to facilitate and coor-
dinate support packages and to handle any problems that arise dur-
ing the day-to-day operations of OSS.
Officers from these institutions combine their expertise to address
MSME needs and are able to do so without any bureaucratic hurdles.
ㅇ Human Resource and Technology Development Support

The GoE also provides educational and skill development sup-
port to both new and existing firms. The general aim of the training
programs is to increase the competitiveness of the enterprises that
form the core of the economy. The training programs are also in-
tended to increase the supply of qualified personnel who are aware
of and able to use and apply modern technology to the production
process. An essential goal is to develop education at all levels to
encourage entrepreneurship and develop vocational education,
along with training and advisory services. In Ethiopia, the techno-
logical support given includes facilitating appropriate technologies
to be transferred to these enterprises and also providing different
manufacturing/production materials via purchase, rent or lease. The
third type of support included is the industry extension services
which are solely performed by TVET institutions.
A survey conducted by Tigist in 2016 shows that many of the
growth-oriented SMEs had not received enough training from their
respective training centers or TVET institutes. The survey data

suggests that compared to other types of support, training surpassed
the needs of the enterprises. Despite this the construction sector
and the metal and woodworks subsectors showed a huge gap be-
tween demand for supporting and training and supply. Out of all
surveyed enterprises only 17% acquired what they needed; only
21% of metal and woodworks businesses obtained the training they
needed (Tigist, 2016). Beyond the above figures, the research find-
ings indicated that training sessions are typically scheduled without
any consideration for trainees’ working hours. The surveyed enter-
prises also suggested that the quality of the training sessions was
poor, being too elementary for them and calling for more advanced
trainings. These enterprises also noted that the training sessions
seem to be conducted perfunctorily, without honest regard for
trainees’ skill development.
With regard to technological development support, a core aspect
of the SME development strategy in Ethiopia is the development of
technological capabilities and skills. Ethiopian SMEs need easier
and more frequent access to training, consultation and support in
product and process development in order to improve the quality of
their products and bring them into compliance with the country's
technical standards. TVET institutions are responsible in building the
technological capability of SMEs. Identification of in-demand tech-
nologies through value chain analysis is one of their duties. Similar-
ly, the industry development institutes are mandated to facilitate the
development of and transfer of industrial technologies, and to enable
the industries become competitive and beget rapid development.

However, the Industry Development Institutes pays little attention to
helping industrial SMEs increase their technological expertise.
The same study found that SME relations with government insti-
tutions are characterized by a focus on basic institutional linkages:
coordination with research and training institutions and market
linkages. The findings indicated that SMEs have linkages with
TVET institutions only in the training, which was rated poorly by
the enterprises (Tigist Derese Gebre, 2016). The study finds that
the training provided by the agency its representative Woreda MSE
bureaus mostly focus on technical skill development. There is also
training focused on developing business management skills. KAI-
ZEN, bookkeeping and business plan preparations are included un-
der this category. The training given by TVET institutions is basic,
and is unable to add value for SMEs. Some types of training are
even given once every three months.
These institutions should serve to be the centres of technological
transformation and change. The same study found that no enter-
prises have a relationship with a research centre. Again these cen-
tres can play a great role by designing projects that can bring better
products or production systems.
ㅇ Management Training and Business Development Services

(BDS)
Management training is a popular intervention in developing
countries to help firms grow. Numerous studies have shown that
the quality of management and business practices has a large effect

on sales, profits, productivity, and survival. It may also have an
effect on employment, although this dimension is often neglected
in impact evaluations. Programs offered for Ethiopian SMEs in-
cluded:
· Business skills training for potential or existing entrepreneurs
(with or intending to hire employees), covering topics such as
bookkeeping, business planning, pricing, and legal requirements.
· Comprehensive interventions to improve management, in-
cluding training but also mentorships or other specialized support
(BDS). Financing is sometimes added.
The combination of services called BDS (including specialized

services such as mentoring, support for supply chain development
and market access, support for auditing and accounting) and specif-
ic plant management support (as opposed to generic business train-
ing) has a good record. This result is interesting, given that numer-
ous studies argue that Africa suffers from a business management
deficit, which may be reducing wages and employment creation
(Filmer and Fox, 2014).
Industrial extension services for SMEs are delivered by TVETs.
TVETs integrate their activities with other SME support institu-
tions so that the quality and outreach of industry extension services
is enhanced to improve the managerial competencies of SME oper-
ators as well as advance the level of technology adopted by SMEs.
In some regions this service is delivered by SME's offices at the
Wereda level. However, the survey report from FeSMMIDA (2016)

indicates that most of the SME operators are not satisfied with the
BDS support service due to the low technical skills of the govern-
ment staff who provide support. If this factor is lumped with other
support measures such as implementation constraints, for example,
the frequency of support is just 23%, indicating that not only sup-
port factors but also the modus operandi of the support system may
need to be improved.
Table 3.2 The Number of SMEs having BDS service in

2009 E.C (2017 G.C)
Ethio Addis
R.N Sub-Sector Unit Tigray Amhara SNNPR Benshangul Total
Somali Ababa
Wood & Metal

1 Number 2246 171 1824 122 4363
Products
2 Textile & Garment >> 1599 114 1094 2807
Leather & Leather

3 >> 25 4 729 758
Products
4 Agro-processing >> 683 72 1520 708 25 39 3047
Construction input
manufacturing,
5 >> 1576 19 912 561 461 3529
chemical & mining
products
Grand Total >> 380 6079 1391 486 39 14504
Source: FeSMMIDA 2017 annual report (page 109)
ㅇ Market Linkages and Networks

One of the important issues with regard to Linkages and Net-
working is market linkages, both local and foreign. Facilitating ac-
cess to local markets is a critical condition for the success of an
enterprise. Enterprises cannot be successful without a market ac-
cess. Although searching for potential markets is the duty of the

SMEs themselves, there are different types of schemes that support
market access for enterprises. Strengthening the subcontracting
system, outsourcing and franchising among advanced and medium
and small enterprises is one scheme. Systems are arranged in Ethi-
opia for SMEs to provide raw materials to downstream companies
with incentives such as credit services provided to downstream en-
terprises, incentivizing them to work with SMEs. Market centers
are also constructed and organized by FeSMMIDA at which enter-
prises can display their products and services. The government also
supports a web-based information portal specifically to disseminate
information to small enterprises. The website consists of infor-
mation about current technologies, policies and strategies and the
best practices of other countries.
Government agencies facilitate access to local markets through
organizing bazaars and furnishing market space at lower rents. A
survey report by Tigist (2016) indicated that enterprises access lo-
cal customers in different ways. For enterprises in the construction
sector, a government entity (for example, the Housing Develop-
ment Agency) is their key customer which consumes their prod-
ucts. But for manufacturing subsectors the enterprises directly find
customers going door to door or sell their products to wholesalers
which in turn retail the products for profit. Access to local markets
is also possible through bazaars organized by different bodies. This
is achieved by organizing exhibitions and bazaars which are held
seasonally at national, regional and zonal levels.
Table 3.3 Have there been any linkages created to supply your prod-
ucts to foreign markets?
Textile & Metal & Leather Shoe Food
Response Construction
Garment Wood works products making processing
yes 7% 14%
no 100% 100% 93% 100% 100% 64%
missing 22%
total 100% 100% 100% 100% 100% 100%
Source: Tigist Derese Gebre, 2016
Foreign market linkages haven't been facilitated for most enter-

prises (Gebre 2016). Seven percent of metal and woodworking
SMEs reported access for foreign markets (see Table 2 above).
Most of enterprises identified inaccessibility of opportunity and a
lack of information about foreign market demand as the major jus-
tifications for not exporting to international markets. Critically a
number of SMEs in the textile and metal subsectors noted that they
have never thought of exporting their products. There is no direct
involvement of the SME development bureaus to supply their
products to foreign markets; rather, they give a technical advice or
disseminate information about export procedures. Most enterprises
in Ethiopia justify a lack of export activity by arguing that they
lack of access or opportunity.
ㅇ Finance and Credit Service Support System

Government financial support for SMEs is based on the pre-
sumption that capital markets cannot serve the needs of smaller
enterprises without government intervention. Generally, entrepre-
neurs require financial assistance for at least one of three purposes:

to diversify or spread start-up risk, to accumulate start-up capital,
and to finance growth and expansion. While the availability of fi-
nancial resources appears to be a major predictor of the frequency
of new business start-ups, many lenders seem to be unwilling to
invest in high-risk projects or tend to withhold support until the
firm has been established successfully. Research has shown that the
creation of investment companies, provision of low-interest loans,
and availability of credit guarantee schemes for small business fi-
nancing have all contributed to the establishment of new businesses
(Dana, 1987; Harrison & Mason, 1988; Hawkins, 1993).
Although the degree and means of generating it depends on the
creativeness of an entrepreneur, financial capacity is a basic re-
quirement to start and run a new venture. It is clearly indicated in
the strategy that the government of Ethiopia facilitates provisions
of loan services at preferential interest rates to SMEs during speci-
fied times. Though such instruments are very supportive for the
growth of SMEs, the availability and quality of this support in-
strument has its own impact on their growth. Assistance under this
category includes developing savings skills of entrepreneurs. Credit
is one of the major inputs for start-up and business expansion.
Credit and other financial services are provided by local micro fi-
nance institutions (MFIs) in Ethiopia. These MFIs focus on enter-
prises with good credit histories, enterprises that produce exporta-
ble items, and those engaged in the construction sector. The enter-
prises should first fulfill the criteria set by the agency before taking
any loan. MFIs and public officials are responsible for collecting
loan payments for ensuring the proper use of financing.
A study undertaken on 519 SMEs drawn from six major cities
and towns in Ethiopia in 2016 indicated that access to finance is
significantly influenced by the age of a firm, its previous engage-
ment with banks and the experience of its managers or other firms
managed by the owner. The same study also identified that finan-
cial institutions, especially banks, exhibit low levels of engagement
with SMEs is low. Both banks and MFIs emphasized that SME-
specific factors such as poor financial records, a lack of adequate
collateral, poor management of risks and largely informal nature
are major obstacles to their engagement with SMEs (HESPI, 2016).
In short, young firms without adequate managerial or operational
experience and those with inadequate collateral are face a tight
credit market in Ethiopia. Despite the importance of SMEs to the
national economy and increasing government support, many of
them remain unable to fulfill their full potential due to limited ac-
cess to finance. A similar report released by the World Bank in
2015 reached similar conclusions. Small firms face greater chal-
lenges in obtaining formal financing than large firms; they are
much more likely to be rejected for loans and are less likely to have
external financing due to a lack of collateral and credit history
(World Bank, 2015)14.
The NBE directive no. SBB/53/2012 restricts commercial banks
to 25% of their capital for single borrower and 15% of their total
14 World Bank (2015) SME Finance in Ethiopia: Addressing the Missing Middle Chal-
lenge. Washington, DC : World Bank Group.
capital for a related party. Similarly, the NBE directive no.

MFI/18/06 limits MFIs to 1% of their capital for individuals who
can provide collateral and not more than 4% of capital for groups
with collateral. These lending restrictions were imposed on private
banks and then replaced by an NBE directive (MFA/NBE Bills/
001/2011) which obliges commercial banks to allocate 27% of total
loans disbursed over the course of a month for the purchase of low-
interest NBE bills. The NBE bill purchase requirement continues to
severely constrain private commercial bank operations, which in
turn results in those backs favoring existing, established clients
when allocating loans as opposed to newer, riskier SMEs. (Fredu
Nega and Edris Hussein, 2016).
A study undertaken by the World Bank Group (2015), HESPI
(2016) and Gebre (2016) shows that the majority of the SMEs, es-
pecially small-scale enterprises, have not received any credit ser-
vice by MFIs or any other Banks. The picture is relatively better in
other sectors; only 29% of shoemakers, for instance, reported no
access to credit services. Enterprises engaged in metal and wood-
working and leather products also reported a better access to finan-
cial services when compared to the rest (Tigist Derese Gebre,
2016). This enough is reason to look into why MSEs failed to ac-
cess loan services or what was wrong with the system. There are
some enterprises who have criticized the existing system for insti-
tuting a number of different criteria on borrowers to be eligible for
the service, including forcing enterprises' to save almost 20% of
revenue to be eligible MFI loans.
With a view to improving access to finance for small and medium

sized enterprises, the government of Ethiopia introduced a lease fi-
nancing mechanism through the Development Bank of Ethiopia in
2016. DBE restructured its operations in such a way that 70% of its
resources are now allocated to providing lease financing to small and
medium enterprises (with total capital between ETB 550,000 and 7.5
million (EUR 21,000 to 281,000)) engaged in manufacturing, agro-
processing, tourism, construction and mining. The lease amount
ranges between ETB 1 million and 30 million (EUR 38,000 to 1.1
million). DBE covers 100% of the cost of machinery while small
and medium enterprises are required to cover the working capital
(estimated at 20% of the cost of machinery). Lease terms are more
favorable than loan terms for the following reasons: (1) no collateral
is required; and (2) the interest rate is relatively low, at 9%.
Though the lease financing mechanism is a good approach to
address the financial limitations of SMEs, the awkward criteria re-
quested by the bank makes it nigh-impossible for SMEs to access
this credit system. Examining data from FeSMMIDA there is a
clear gap between the lease finance disbursement plan and its actu-
al accomplishments. This clearly shows us that there are some bot-
tlenecks preventing enterprises from taking advantage of this re-
source. For example, in 2009 E.C (or 2017 G.C) 1,097 SMEs re-
quested 8,280,338,718.01 Birr for production machinery through
the lease financing scheme, but only 472 projects (47%) valued at
3,804,010,393.03 Birr won approval from the bank. Out of the ap-
proved recipients a very few number were SMEs (35), being fi-
nanced for 213,360,010.75 Birr (see Table 5 in the Appendix A).

This indicates that only a few percent (in this case 2.6%) of SMEs
use this opportunity after a long and tedious process.
3.3. Status by Industrial Sector
3.3.1 Size and Structure of the Sectors
ㅇ Number of SMEs
Knowing the actual number of SMEs is very challenging in
Ethiopia. Different organizations have different data with a large
variations. However, for this analysis the FeSMMIDA report is
taken as a reference. With this in mind, there are 9,823 (73%) small
manufacturing industries and 2,788 (21%) medium-sized business-
es, for a total of 12,611 small and medium manufacturing enter-
prises throughout the country (FeSMMIDA, 2018). In addition to
this, total capital assets were not listed for 878 firms. Including
those firms, the number of SMEs in Ethiopia comes to 13,489.
Table 3.4 Number of Small and Medium Manufacturing

Industries in Ethiopia
R.N Type of industry Quantity/number %
1 Small 9,823 73%
2 Medium 2,788 21%
12,611
3 Those who do not mention amount of capital 878 7%
Total 13,489 100%
Source: FeSMMIDA (2018)
Though FeSMEDA reported this number, the CSA and NBE15

data are completely different. The census in 2016/2017 indicated
that, without including medium scale enterprises, there are 142,968
small-scale manufacturing industries throughout the country. This
big variation might be due to their difference in defining MSMEs.
Despite this difference in the meaning of SMEs, the significant var-
iation raises a number of questions that should be answered by the
government organization responsible, and demands better coordi-
nation among SME-supporting institutions.
ㅇ Regional Distribution
With regard to SME distribution in the country, two regions, Tig-
ray 5111 (38%) and SNNPR 2902 (21.5%), dominate. The data is
shown in the table below.
Table 3.5 The Regional Distribution of SMEs

Type of industry SME with no
Number
R.N Region Capital Total %
Small Medium of SME
information
1 Harari 8 30 38 38 0.3%
2 Ethio Somali 43 21 64 4 68 0.5%
3 Benshangul 5 27 32 32 0.2%
4 Tigray 665 4,446 5111 5,111 37.9%
5 Amhara 150 1,543 1693 19 1,712 12.7%
6 Addis Ababa 816 801 1617 13 1630 12.1%
7 Afar 1 30 31 1 32 0.2%
8 Oromia 472 536 1008 800 1,808 13.4%
9 SNNPR 610 2,252 2862 40 2,902 21.5%
10 Diredawa 15 130 145 1 146 1.1%
11 Gambela 3 7 10 10 0.1%
Total 2,788 9,823 12,611 878 13,489 100%
15 During 2017/18 alone, a total of 144,107 new micro and small scale enterprises (MSEs) were
established which employed about 187.9 thousand people (NBE 2017/18 annual report)
ㅇ Sectoral Distribution and Variety

The SMEs in Ethiopia are established in different sectors. Disaggre-
gation of SMEs by sub-sector enables us to see the relative importance
of each sub-sector. It also enable us to judge whether the performance is
going as planned in meeting objectives other than job creation, such as
facilitating technology transfers and creating and strengthening linkages
with medium and large scale industries. SMEs engaged in manufactur-
ing (metals, leather, textiles, woodwork, agro processing), construction
(contractors and construction material producers), urban agriculture
(dairy, cattle fattening, poultry, beekeeping and animal food produc-
tion), trade (wholesale and retail) and services (hotels, tourism, solid
waste collection) are considered growth-oriented SMEs. Among a total
of 13,489 manufacturing industries, three sub-sectors — textiles and
garments (2,480), metals and engineering (2,163) and intermediate con-
struction goods (1,571) — take the greater share.
Figure 3.1 Distribution of Enterprises by Subsector
Source: FeSMMIDA, 2018 Annual Report

3.3.2 The Recent Performance of SMEs in Ethiopia
ㅇ Paid-up Capital
As depicted below in Table 3.1, the total paid-up capital by small
and medium enterprises came to 16,995,887,000 (7,456,294,000 by
small enterprises and 9,539,593,000 by medium enterprises). More
ever, the table shows that in terms of total paid up capital by indus-
trial group, food products and beverage ranked first (around 7 bil-
lion). Among the small and medium manufacturing industries, pri-
vate paid-up capital was 82% followed by public industries (9%)
and foreigners (9%) (see Table 8 in the Appendix A).
ㅇ Employment
As shown in table below, the total number of employees of small
and Medium Manufacturing industries came to 113,872, of which
Small industries employed 54,908 (48%) and Medium industries,
58,964 (52%). This indicates the medium manufacturing industry
contributed greatly to total employment created at manufacturing
SMEs. From a total of 115,286 persons engaged in manufacturing,
114,614 (99%) were Ethiopians and the remaining 672 (1%) were
foreign-born. This shows that the majority of employees were
Ethiopian. Of those employees, 72,964 (64%) were male and
41,650 (36%) were female. This shows females employees were
fewer in number than males. In other words, male employees are
employed more frequently in the small and medium manufacturing
firms than female employees.
Among the small and medium manufacturing industries the food

and beverage subsector employed 27,020 people, followed by the
non-metallic minerals products and textiles industries, with 23,528
and 11,737 employees, respectively (see Table 9 in Appendix A).
Creating employment for urban youth is a major argument for
promoting SMEs. According to FeSMMIDA, jobs created by
SMEs have been growing since 2010/11.
ㅇ Wages and Salaries Paid

Around a total of 17 billion Birr (1 billion Birr to from small en-
terprises and 16 billion Birr from medium-sized industries) in wag-
es and salaries were paid by small and medium manufacturing in-
dustries. Of this amount, 15,338,873,000 Birr (91%) was paid to
male Ethiopian employees, while 1,493,867,000 Birr (9%) was
paid to Ethiopian women and 112,444,000 Bird (1%) was paid to
foreigners (FeSMEDA, 2018). To address this gender disparity the
government should supports gender mainstreaming in all manufac-
turing industries as part of its development policy.
ㅇ Capacity Utilization
Capacity utilization plays an important role in evaluating current
economic activity and forecasting future activity. It has been used,
along with other factors, to explain investment, inflation, produc-
tivity, profit, and output behaviors. The figure below shows the ca-
pacity of small and medium manufacturing industries. SMEs only
utilize 60 percent of their production capacity (FeSMEDA, 2018).
In other words, 40 percent of total capacity remained unexploited.

By sector, on the high end of the spectrum the cork and furniture
industries utilized their 88 and 82 percent of their respective capac-
ities. On the low end, manufacturers of basic iron and steel prod-
ucts used only 37 percent of their capacity. In general, the capacity
utilization of small and medium manufacturing industries was 60
percent. To maximize capacity will require more government sup-
port. In addition to this, to enhance its productivity, the sector has
to address its critical obstacles.
Figure 3.2 Production as Percentage of Yearly Capacity
Source: FeSMEDA (2018)
ㅇ Investment
The total investment of fixed assets by small and medium indus-
tries was around 3.4 billion Birr. About 81% of manufactures indi-
cated that their source of investment was their own funds followed
by domestic banks (11%) while foreign sources played insignifi-
cant roles as shown in Figure 3.3 below.
Figure 3.3 Source of Investment
ㅇ Revenue from Sales

The survey result indicated that about 97% of their revenue from
sales was local, and only 3% came from exports (FeSMEDA,
2018). The result shows that the main market of manufacturing in-
dustries was the domestic market. The FeSMMIDA survey results
also show the tanning and dressing leather industries earned the
most foreign exchange, at 1.3 billion Birr (41%), despite most rev-
enues from sales being local (97%). This shows that small and me-
dium manufacturing industries utilizing local resources could con-
tribute to export growth in areas where the country has comparative
advantages in export trade. In this regards it is worth noting that
SMMIs have two interrelated advantages for developing the export

sector. They can either supply inputs to export-oriented companies,
(that is, indirect exports) or be direct exporters by selling their
products to export market. Also, small and medium industries
would foster the development of a productive and vibrant domestic
entrepreneurial class, which would in turn spearhead the develop-
ment of the manufacturing sector, and hence the national economy
as a whole.
Figure 3.4 Revenue from Export Sales
Results of the analysis show that about 41% of footwear, lug-

gage and handbag manufacturers, followed worn apparel (33%)
and textiles (8%) makers export their products (see Figure 3.4).
The low export performance of the small and medium manufactur-
ing sector reflects the apparent lack of encouraging industrial ex-
ports, which appears to be paradoxical for a country like Ethiopia.
The result indicates that the support system failed to reach the right
group of small and medium manufacturing industries with potential
for export marketing and import substitution.
3.4 Major Issues and Challenges
3.4.1 Major Challenges for the Development of SMEs

The main objective of this study, particularly this section, was to
determine the barriers to the growth of small and medium enter-
prises in Ethiopia. External and internal factors are known to affect
the growth of MSEs. The most important external factors influenc-
ing growth of MSEs include limited access to finance, excess com-
petition, insufficient markets access and other barriers to trade. On
the other hand, the internal (firm-specific) factors that inhibit the
growth of MSEs include management competency, a lack of skilled
labor, poor marketing strategies, innovation level and investments
on technology, and so forth. In this respect, Evans (1987) depicted
that firm growth decreases with firm size and age. Others contend
that the smallest firms were most vulnerable and that those that
grew were less likely to fail than those that did not (Stokes, 2000).
Given their role and the attention that they have received, the
performance of MSMEs in Ethiopia has not been satisfactory. The
level and quality of MSME employment is still a concern (Solo-
mon Tarfasa et al., 2016); large and older firms are still more im-
portant sources of net jobs than small and younger firms (World
Bank, 2015). Using 2011 Enterprise Survey data, the World Bank
(2015) identified that almost half of microenterprises, 40 percent of
small firms, and 18.5 percent of medium sized firms reported that
limited access to finance in Ethiopia was a major constraint to daily
operations. In Ethiopia, female-owned enterprises are challenged
by bad prices for their products and services, compared to other
similar enterprises. In addition a shortage of raw materials and a
lack of experience in owning a business were challenging factors
for women entrepreneurs” (Tadesse Demeke, 2016). In a study
conducted by Singh and Belwal (2008), Ethiopian women-owned
MSEs faced challenges a lack of capital, limited access to markets,
networks and facilities, a lack of training and cultural oppression.
Hagos Yared (2012) revealed that new MSEs face high levels com-
petition given low barriers to entry. In addition, the country’s de-
velopment strategy and policy focus on agriculture, which in turn
discourages MSEs from operating in other sectors.
Regionally, various studies describe a multitude of challenges.
According to Yonas Abera (2016), unfair practices, an unattractive
market a lack of marketing and limited market linkages were iden-
tified as challenges faced by MSEs in the Diredawa city admin-
istration. In a survey conducted by the FDRE Minstry of Urban
Development and Construction (2013) SMEs in Addis Ababa were
challenged by a lack access to finance, facilities and training. In
Hawassa city, the major challenges facing SMEs were a shortage of
electricity and unscheduled power cuts, a lack of market access,
limited access to facilities, insufficient credit and bureaucratic red
tape (Bereket Teklehimanot, 2017). According to Berhanu et. al
(2015) MSEs in the Gedeo Zone were challenged by high taxes,
high collateral requirements, bureaucratic red tape, lack of credit

access, inefficient tax administration, high interest rates and a lack
of business facilities.
Desalegn Berhane (2016) found that MSEs in Tigray suffered
from with weak infrastructure, a lack of technology and weak per-
formance. Similarly, Zemenu A. and Mohammed M. (2014) re-
vealed that MSEs in Mekelle City suffered from excessive compe-
tition, inadequate credit facilities, a lack of market knowledge, in-
appropriate tax imposition, inappropriate tenure, a lack of business
training, a shortage of working capital, an absence of appropriate
technology, uncollectible receivables and a lack of financial man-
agement skills. These challenges led enterprises to dissolve early
rather than grow. According to Belay et al (2015) a lack of finance,
young peoples’ adverse attitude towards working under the umbrel-
la of MSE agencies and the failure of the regional MSE agencies to
serve as brokers between MSEs and other supporting institutions
were the major challenges. Belay found that a lack of water supply,
reliable electricity, poor transport infrastructure, a high interest
rate, a lack of access to information on business opportunities, the
absence of state of-art machinery and equipment, business skill
gaps, young peoples’ reluctance to work for MSEs and consumer
perception of MSEs product as poor quality were factors that hin-
dered MSEs growth in Gore town.
SMEs, due to their size, are particularly constrained by limited
access to finance, cumbersome bureaucratic procedures in setting
up, operating and growing a business, a poor state of infrastructure
and a lack of effective institutional structures as well. Other chal-

lenges that undermine the growth of MSEs are access to technolo-
gy, skills, capital financing, strong competition in the markets, a
high level of interest on loans, poor infrastructure, lax debt repay-
ment by customers, the unavailability of suitable properties, the
state of the country’s economy, low market demand for products,
the pricing of competitor products, the unavailability of raw mate-
rials, the attitudes of banks and limited financing from lenders are
the major to small and medium business growth (FDRE MUDC,
2016). The removal of these constraints is a daunting task that calls
for holistic SME support, that is, an enabling environment for SME
development consisting of functioning macro, meso and micro lev-
el institutions. In this section we briefly discussed some of the ma-
jor challenges that hinder enterprise growth in Ethiopia.
3.4.2 Major Issues in SME Development in Ethiopia

· There is no inclusive definition and scope of micro, small and
medium sized industries in Ethiopia. Policies and strategies to pro-
vide result-oriented and sustainable support to micro, small and
medium enterprise development should be based on a uniform na-
tional definition of MSMEs. Data and information to be collated
and shared on SMEs needs to have common ground. Otherwise it is
very difficult to monitor and evaluate the various kinds of support
provided to MSMEs by using common criteria.
· Though the government has tried focus on Small and Medium
Enterprises development, no enterprises have graduated to next
higher level, since the focus of the government policy is on new

establishments. SMEs should not remain micro and small forever;
therefore, various growth constraining factors have to be addressed
and further incentives have to be identified and provided so as to
speed-up graduation to medium sized industries.
· SME linkages with medium and large scale manufacturing in-
dustries are critical; therefore, both forward and backward linkages
with the economy at large and the manufacturing industry in par-
ticular have to be strengthened.
Chapter 4. Korea’s SME Policy Development

and Issues
Korea has achieved remarkable economic growth over the past
70 years, transforming from one of the world’s poorest countries to
a strong industrial state. During the period from 1960 to 2018, an-
nual per capita income of Korea grew from a mere $87 to $31,000,
while annual exports grew from $123 million to $605.5 billion,
making Korea the world’s sixth-largest exporter. This process of
economic growth has been one of rapid export-led industrialization
aimed at the global market and the birth and growth of numerous
enterprises. Many new companies emerged each year as new mar-
ket opportunities were created, and the vast majority of them were
small and medium-sized enterprises who started with meagre capi-
tal and small workforces. Many of them continued to grow and
some successful companies eventually became globally powerful
conglomerates. However, many more companies closed their doors
after just a few years in business.
Since the Korean government adopted export-led industrializa-
tion as the main direction of economic policy in the early 1960s, it
has considered SME policy an important part of the industrial poli-
cy. As large companies have played a leading role in expanding
exports, SMEs have been designated as suppliers of parts and ma-
terials for large companies. Under this system, the “gyeyeolhwa
(계열화)” (quasi-integration or alliance) of large corporations with
SMEs was promoted, and cooperative projects were pursued to en-
Chapter 4. Korea’s SME Policy Development and Issues 101
hance the productivity of SMEs.16 Institutions to promote SME ex-

ports were also established.
However, the phase of high growth has ended from the 1990s,
creating a new environment and posing new challenges. In the
high-growth process based on the development of heavy & chemi-
cal industries, the gap between large corporations and SMEs as
well as inequality between industries and regions has widened. Al-
so, global competition has intensified along with the opening of the
economy and internationalization. On the one hand, rising wages
and labor disputes compelled large numbers of companies to move
abroad in search of lower labor costs. In response to these socio-
economic environmental changes, the Korean government has been
seeking to keep the growth momentum and find new sustainable
growth engines.
This chapter first examines the current status and legal founda-
tion of Korean SMEs, then historically examines the government's
policies that have supported the development of SMEs. In addition,
it tries to examine the new challenges and policy issues facing
SMEs in the recent economic situation.
4.1. Status of SMEs and Legal Foundation

The “SME” is a general term referring to small and medium-
16 “Gyeyeolhwa”(계열화) in Korean literally means “affiliation” or “incorporation into a
group”. Its connotation is somewhat similar to “vertical integration” described in economic
textbooks, but it does not exactly match with that terminology, since it does not indicate the
relationship governed by direct ownership or management. Rather, it means a special rela-
tionship based on subcontracting. As such, it can be regarded as “quasi-integration.” Kore-
an laws use “alliance” when translating “gyeyeolhwa” into English.
sized companies in every country's economic situation, but the ex-

act definition varies from country to country. It is relative because
every country sets its own standards that reflect income levels and
the size of the economy. In Korea, the law establishes the concept
of SMEs and the government setup a ministerial department to
manage SME policies. Although the Korean economy is often per-
ceived to be dominated by distinct conglomerates called “chaebol”,
SMEs make up a large portion of the economy and play very im-
portant roles in every sector.
4.1.1 Current Status of SMEs in Korea

In Korea, the scope of SMEs was determined by the Framework
Act on Small and Medium Enterprises (중소기업기본법), which was
enacted in 1966. Since 1995, detailed standards have been delegat-
ed to the Presidential Decree to enforce the Act.17 The Presidential
Decree sets the standard for SMEs flexibly to reflect the changing
economic situation. Since 2015, it has further subdivided the stand-
ards by industry and business sector, applying the three-year aver-
age sales of companies and excluding the number of employees.
However, it adds the principle that total assets should not exceed
500 billion Korean won regardless of industry and ownership, and
management should be independent from large companies.
The sales standards for SMEs, revised in February 2017 and cur-
17 The Framework Act on Small and Medium Enterprises (중소기업기본법) was enacted as
Law No. 1840 in 1966. The most recent revision was made in July 26, 2017 as Law No.
14839. The full text in English is available at the National Law Information Center web-
site; http://www.law.go.kr/LSW/eng/engMain.do
rently in effect, are shown in <Table 4.1>. According to these

standards, any company operating in the six manufacturing sectors
in the top group is defined as an SME when their three-year aver-
age sales are less than 150 billion won. The four service sectors,
which are the lowest group, have an upper limit of less than 40 bil-
lion won.
Table 4.1 Criteria for SME

Average 3 year Sales Business Sectors
less than 150 Billion Won 6 Manufacturing sectors
~ 100 Billion Won 18 business sectors
Source: compiled from Presidential Decree (중소기업기본법 시행령) No.29552, Feb.12. 2019
Note: The Decree was revised in Feb.12, 2019, but the criteria of SMEs annexed in the Decree
has not changed since October 17, 2017. The original table is attached as an Annex in
this research,
In 2017, SMEs accounted for an overwhelming 99.9% of firms

and 89.8% of employment. According to the statistics of the Minis-
try of SMEs and Startups (MSS), as of 2017, there are 3,737,465
enterprises in Korea, of which 3,732,997 are SMEs. There are
4,468 large enterprises, which is only 0.1% of the total. As of 2017,
out of 17,294,316 employees in 2017, 15,527,605 employees were
employed by SMEs, accounting for 89.8%. A simple breakdown of
employment figures shows that an SME in Korea employs an aver-
age of 4.1 people. On the other hand, when the number of employ-
ees employed by large companies is divided by the number of

companies, the average number is 395.1.
Table 4.2 Number of Companies and Employees

2014 2015 2016 2017
Number Weight Number Weight Number Weight Number Weight

All 3,545,473 100.0% 3,604,773 100.0% 3,676,499 100.0% 3,737,465 100.0%
Compa-
SME 3,542,350 99.9% 3,600,882 99.9% 3,672,327 99.9% 3,732,997 99.9%
nies
Large 3,123 0.1% 3,891 0.1% 4,172 0.1% 4,468 0.1%
All 15,962,745 100.0% 16,774,948 100.0% 17,051,453 100.0% 17,294,316 100.0%
Employee SME 14,027,636 87.9% 15,127,047 90.2% 15,392,246 90.3% 15,527,605 89.8%
Large 1,935,109 12.1% 1,647,901 9.8% 1,659,207 9.7% 1,766,711 10.2%

Source: Ministry of SMEs and Startups homepage
In other statistics, as of 2016, SMEs accounted for 49.0% of total

production, 50.8% of value added, and 37.5% of total exports of
Korea. By business sector, 26.9% of all SMEs are engaged in
wholesale and retail trade, followed by hotels and restaurants
20.0%, manufacturing 11.3%, transportation 10.6%, and repairs
and other service 8.6%. In employment, manufacturing accounted
for 21.7%, followed by wholesale and retail sales at 18.3%, and
hotels and restaurants at 13.7%.
By region, as of 2016, Seoul, the capital of Korea, alone among
the 17 macro regional divisions, is home to 20.8% of SMEs, and rep-
resents 23% of employment and 26.7% of exports. Gyeonggi-do,
which is adjacent to Seoul and considered to be the metropolitan
capital area, hosts the largest concentration of SMEs, with 22.1% of
SMEs, 24.2% of employment and 32.2% of exports. Next, <Table
4.3> shows that the Yeongnam area, which is a traditional name for
the regions in the southeast including Busan, Daegu, Ulsan,
Gyeongbuk and Gyeongnam, is a major center for SMEs.
Table 4.3 Companies and Employees by Industry (2016)

Companies Employees
Industry Code
ALL Weight SME Weight ALL Weight SME Weight
Total 3,550,529 100.0% 3,547,101 100.0% 17,468,405 100.0% 14,357,006 100.0%
Agriculture &
A 1,669 0.0% 1,666 0.0% 17,046 0.1% 15,847 0.1%
Fishery
Mining B 1,890 0.1% 1,887 0.1% 14,125 0.1% 12,945 0.1%
Manufacturing C 402,459 11.3% 401,004 11.3% 4,430,597 25.4% 3,110,230 21.7%
Electricity,
D 774 0.0% 722 0.0% 37,594 0.2% 5,273 0.0%
gas,water
Sewage &
E 6,693 0.2% 6,685 0.2% 70,290 0.4% 69,003 0.5%
waste
Construction F 132,718 3.7% 132,437 3.7% 1,386,611 7.9% 1,220,307 8.5%
Retail &
G 955,517 26.9% 954,821 26.9% 2,943,647 16.9% 2,620,525 18.3%
Wholesale
Transportaiton H 376,033 10.6% 375,883 10.6% 1,034,274 5.9% 930,173 6.5%
Hotel &
I 709,499 20.0% 709,433 20.0% 2,026,464 11.6% 1,964,729 13.7%
Restaurants
Publication &
J 36,467 1.0% 36,294 1.0% 530,335 3.0% 360,339 2.5%
Movies,
Finance &
K 10,157 0.3% 9,862 0.3% 574,202 3.3% 91,884 0.6%
Insurance
Real estate L 127,330 3.6% 127,038 3.6% 387,180 2.2% 345,208 2.4%
Science &
M 87,426 2.5% 87,229 2.5% 715,776 4.1% 523,379 3.6%
Technology
Facility
N 43,441 1.2% 43,350 1.2% 1,050,857 6.0% 878,693 6.1%
operation
Education
P 148,643 4.2% 148,617 4.2% 472,602 2.7% 452,732 3.2%
service
Health &
Q 103,280 2.9% 103,278 2.9% 804,469 4.6% 803,330 5.6%
welfare
Arts & sports R 101,683 2.9% 101,668 2.9% 290,560 1.7% 280,122 2.0%
Other repairs S 305,250 8.6% 305,227 8.6% 681,770 3.9% 672,287 4.7%
Source: K-BIZ, SME Statistics 2018
Table 4.4 Companies and Employees by Region (2016)

Companies Employees Exports
Regions
Number Number Amounts
Weight Weight Weight
(million) (million) ($billion)
All 3.733 100.0% 15.53 100.0% 108.7 100.0%
Seoul 0.775 20.8% 3.58 23.0% 29.0 26.7%
Busan 0.269 7.2% 1.08 7.0% 7.0 6.4%
Daegu 0.198 5.3% 0.72 4.6% 4.3 4.0%
Incheon 0.184 4.9% 0.77 5.0% 6.0 5.5%
Gwangju 0.109 2.9% 0.44 2.8% 1.0 0.9%
Daejeon 0.107 2.9% 0.42 2.7% 1.1 1.0%
Ulsan 0.079 2.1% 0.34 2.2% 1.2 1.1%
Sejong 0.012 0.3% 0.05 0.3% 0.2 0.2%
Gyeonggi 0.826 22.1% 3.76 24.2% 35.0 32.2%
Gangwon 0.126 3.4% 0.41 2.7% 0.7 0.6%
N.Chungcheong 0.115 3.1% 0.48 3.1% 2.9 2.7%
S.Chungcheong 0.151 4.0% 0.62 4.0% 5.3 4.9%
N.Jeolla 0.132 3.5% 0.46 2.9% 1.3 1.2%
S.Jeolla 0.135 3.6% 0.47 3.0% 1.2 1.1%
N.Gyeongsang 0.206 5.5% 0.75 4.8% 5.5 5.1%
S.Gyeongsang 0.253 6.8% 1.01 6.5% 6.8 6.3%
Jeju 0.055 1.5% 0.19 1.2% 0.2 0.2%
Source: Ministry of SMEs and Startups homepage

4.1.2. SME legislation and Company classification

It was in 1966 that the Framework Act on Small and Medium
Enterprises was enacted in Korea and stipulated the concept of
SMEs and the basic direction of government policies. However, in
the process of the rapid economic growth, the scope of companies
has greatly widened, as many new companies were created and ex-
isting companies grew fast. This has made the aspects of SMEs
more complex, as they differ in size, area of business, and activity,
and has brought the necessity of dividing SMEs into subgroups and
managing SME policy flexibly.
In 1982, the Framework Act was amended to divide SMEs con-
ceptually into Medium and Small enterprises. The main purpose of
this change was to classify Small enterprises, which were engaged
predominantly in subsistence activities rather than modern business
management, into a separate group and protect them. At this time,
the criteria of the number of employees was applied to identify the
subgroup of Small Enterprises, with an upper limit of 20 employ-
ees in manufacturing, mining, transportation and construction in-
dustries and five in commercial and other service industries (Kyu
Soon Choi, 1991, p.181).18 Since then, this standard has been con-
tinuously modified through revisions to the Presidential Decree.
Currently, the standard shown in <Table 4.5> is applied to each
industry, and is now based on a 3-year sales average instead of the
number of employees.
18 Kyu Soon Choi (1991), History of Korean Small and Medium Industry Policy, Global
Information Service Systems (in Korean)
Table 4.5 Criteria for Small Enterprise

Average 3 year Sales Business Sectors
less than 12 Billon Won 17 business sectors
Source: compiled from Presidential Decree No.29552, Feb.12. 2019
Even afterwards, owing to continuous economic growth, the size

of the SMEs has become more varied, and they have been further
subdivided into both upper and lower strata. In the upper stratum,
the Special Act on Promotion of Growth and Competitiveness of
Middle Market Enterprises (중견기업 성장촉진 및 경쟁력 강화에 관한
특별법) was enacted in 2014, targeting companies that had grown
beyond the category of SMEs. This law is a special law with a 10-
year time limit, aimed at correcting the problem of those compa-
nies delaying growth in order to continue receiving government
support given to SMEs. So, this law seeks to promote sustainable
growth of SMEs to MMEs. As of April 2015, the number of MMEs
that fell under the criteria of this Act made up just 0.184% of the
total number of companies but accounted for 9.7% of employment
and 15.7% of exports.19 For the lower stratum, deviations were ob-
served even within the category of Small Enterprises that were
originally considered to be subsistence companies. So a new sub-
group of firms called Micro Enterprises was devised to protect
19 Aju News, April 23, 2015, https://www.ajunews.com/view/201504231422532 09;

MMEs belong to the group of large firms in <Table 4. 1> applying the concept of
Framework Act on SME.
smaller companies. The Special Act on the Support of Small Enter-

prises and Micro Enterprises (소기업 및 소상공인지원을 위한 특별조치법),
which was enacted in 2000, defined companies with fewer than 10
employees as Micro Enterprises.20
Then, in 2015, the Act on the Protection and Support of Micro
Enterprises (소상공인 보호 및 지원에 관한 법률) was enacted in ac-
cordance with the merger and consolidation of relevant laws. Un-
der this Act, companies with less than 10 employees in mining,
manufacturing, construction and transportation industries as of
2017 and less than five employees in other industries are defined as
Micro Enterprises. As of 2016, within the scope of SMEs, Small
Enterprises accounted for 97.7% of all firms and Medium Enter-
prises just 2.3% of the total. Within the category of Small Enter-
prises, Micro Enterprises accounted for 88.6% of businesses.
Table 4.6 Number of Enterprises by Group

Micro Small Medium Large
Year Total SMEs
Enterprises Enterprises Enterprises Enterprises
2016 3,550,929 3,072,104 3,465,517 81,584 3,547,101 (99.9) 3,828
2015 3,484,713 3,021,819 3,402,315 77,962 3,480,277 (99.9) 4,436
2014 3,545,473 3,063,001 3,440,641 101,709 3,542,350 (99.9) 3,123
2013 3,418,993 2,962,367 3,317,303 98,560 3,415,863 (99.9) 3,130
2012 3,354,320 2,918,595 3,258,617 92,787 3,351,404 (99.9) 2,916
Source: K-BIZ, SME Statistics 2018
Note: The numbers in this table are slightly different from <table 4.1> due to unspecified
reasons.
20 In 1997, The Act on Special Measures for Small Enterprises (소기업지원을 위한 특별조치법)
was enacted, but this Act was replaced in December 2000 by The Special Act on the Support
of Small Enterprises and Micro Enterprises (소기업 및 소상공인지원을 위한 특별조치법) (Law
No. 6314).
For Large Enterprises that do not belong to the groups above, the
criteria set forth in the ‘Monopoly Regulation and Fair Trade Act’
(독점규제 및 공정거래에 관한 법률, 1990) is applied. According to this,
Large Enterprises are those companies with over 10 trillion won in
total assets as of 2018 and under the restriction of mutual capitali-
zation. The number of these companies was counted 1,332 under
32 conglomerate groups.21
Table 4.7 Classification of Enterprises and Relevant Laws

Enterprises Type Law Criteria
Large Enterprises (LEs) Total assets over 10 trillion
Monopoly Regulation and
won and under the restriction of
(대기업) Fair Trade Act (1990)
mutual capitalization
Middle Market Enterprises Special Act on Promotion
(MMEs) of Growth and Competi- Total assets of 500 billion ~ 5
tiveness of Middle Market trillion won
(중견기업)
Enterprises (2014)
Small & Medium Enter- Total assets less than 500 bil-
prise (SMEs) lion won and 3 year average
sales as well as independence
(중소기업)
from large enterprises
Framework Act on SME
- Medium Enterprises (1966)
(중기업)
- Small Enterprises
(소기업)
Fewer than 10 employees for
Micro Enterprises Act on the Protection and firms in mining, manufacturing
Support for Micro Enter- and construction industries.
(소상공인)
prises (2015) Fewer than 5 employees in
other industries
Source: Compiled from each law
21 The Act divides Large Enterprises into two subgroups. The companies with the total
asset over 5 trillion won as “disclosure companies group” and the companies with more
than 10 trillion won as “restricted mutual capitalization group”. As of May 1, 2018, 60
company groups (2,083 companies) were designated as the disclosure group.
https://www.kefplaza.com/labor/manage/econo_view.jsp?nodeid=289&idx=14825
https://www.mk.co.kr/news/economy/view/2018/12/762542/
In addition, various related laws have been enacted in Korea to

promote the sustainable growth of SMEs. In the 1990s, with the
implementation of the New Economic Five-Year Plan (1993-1997),
the eight existing laws concerning SMEs were merged and consol-
idated as five laws in January 1995. The purpose of this change
was to respond to the changing environment of the Korean econo-
my following internationalization and liberalization (Lee Kyung-Ie,
2015, p.405). However, more laws have been enacted since then in
response to continued economic development and social changes.
Among these laws, there are laws aimed at protecting and foster-
ing specific groups of companies by focusing on the characteristics
of management and the specialty of the business rather than the
size of the company. The ‘Act on Special Measures for the Promo-
tion of Venture Businesses’ (벤처기업 육성에 관한 특별조치법) was
enacted in 1997 to support startups engaging in R&D-oriented in-
novative businesses rather than conventional business areas. The
laws on the Promotion of SMEs owned by Women, Disabled Per-
sons, Urban Small Craftsmen, and on Traditional Markets and
Shopping Streets are such kinds of specific laws. As of October
2016, the number of venture companies in Korea was 32,440.22 In
2017, the number of female-owned SMEs was 1,139,862, or 38.7%
of total SMEs, among which 83,467 were in the manufacturing
sector.23
22 Venture Business Association, Venture Companies Status, October 2, 2016

23 Ministry of SMEs & Startups, 2017 Female-o wned Companies Statistics
4.1.3. SME Support Agencies

In Korea, the highest governing authority of SME policies is the
Ministry of SMEs and Startups (MSS, 중소벤처기업부). The Minis-
try was established by the government of Moon Jae-in, who took
office in 2017. It was expanded from the former Agency for SMEs
(중소기업청) under the Ministry of Trade, Industry, and Energy
(MOTIE). The evolution of the governmental organizations in
charge of SMEs in Korea shows that awareness of the importance
of SME policies has grown along with economic development. The
Small and Medium Business Department in the Industrial Bureau
of the Ministry of Commerce and Industry, established in July
1960, was eventually expanded to the Small and Medium Business
Bureau in 1968.24 Afterwards, it became the Agency for SMEs, a
vice minister-level organization in February 1996, before becoming
a cabinet-level ministry in February 2017.
According to the ‘Framework Act on Small and Medium Enter-
prises’, the Minister of MSS shall oversee and coordinate tasks of
protecting and fostering SMEs by the central government and local
governments (Article 4, 2). The government should establish and
implement a Comprehensive Plan on SME development every
three years (Article 19, 2), and prepare a policy guideline to im-
plement the Plan, evaluate its performance, and submit a report to
the National Assembly every year (Article 20). The MSS shall have
a SME Policy Council, consisting of the Minister as chairman and
of up to 30 members. This Council shall evaluate and coordinate
24 http://theme.archives.go.kr/next/organ/organBasicInfo.do?code=OG0018055
the Comprehensive Plan and its implementation process.

Public institutions established to support the government's SME
promotion policy in the field include Korea SMEs and Startups
Agency (KOSME, 중소벤처기업진흥공단).25 This organization was es-
tablished under the Act on the Promotion of SMEs in January 1979,
and has 31 domestic branches as of 2019, and a presence in four
overseas countries including the United States, Japan, Germany,
and China. Its main tasks are corporate diagnosis, consulting, ex-
port marketing, joint projects, and human resource support for
SMEs. Since the 1990s, some policy fund loans are provided by the
organization to help SMEs’ structural adjustments. 26
In the private sector, K-BIZ (중소기업중앙회) is the central organ-
ization representing SMEs. The organization was established in
May 1962 as a coalition of SME organizations under the ‘Small
and Medium Enterprise Cooperatives Act’ which was enacted in
December 1961.27 This organization is one of the five business so-
cieties in Korea. Its main duties are to represent and protect the in-
terests of SMEs vis a vis the government, while supporting SMEs
in various areas such as information and technology development,
market development, and cooperative projects and co-sales.
In the financial sector, a special bank and credit guarantee fund
25 Its name was the Small & Medium Business Corporation (SBC) at the time of estab-
lishment, but was renamed as of April 2019 in line with the name of the government
new Ministry.
26 Agency for SMEs (2013), 2012 Modularization of Korea's Development Experience:
SME Development Policy, p.36

27 When it was founded in 1962, it was named Korea Federation of Small and Medium
Business, but in August 2006 it was renamed as Korea Federation of SMEs (K-biz).
https://www.kbiz.or.kr/user/nd46557.do
were established to help SMEs solve their financial difficulties.

The Industrial Bank of Korea (IBK) was established as a financial
institution dedicated to SMEs under the Act on the Industrial Bank
of Korea in July 1961. In the Article 1 of the Enforcement Decree
of the Act, the first legal definition of SMEs was made in Korea
(Kyu Soon Choi, 1991, p.53). The bank provides loans to SMEs
based on government funding and public deposits. Currently, it also
operates as a commercial bank.
The Korea Credit Guarantee Fund (KODIT) was established as a
special corporation in 1976 under the Credit Guarantee Fund Act of
1974. The agency provides the SMEs with poor credit or little col-
lateral with guarantees for loans from financial institutions to fa-
cilitate financing, and manages credit information to support SMEs'
financial transactions.
4.2. Historical Development of SME Policies

Korea's SME policy is an important axis of economic policy and
has been managed for the purpose of achieving core tasks of indus-
trial policies in each period. Here, a concise overview of the histor-
ical changes in SME policies is given, focusing especially on the
characteristic policies of the ‘development era’, which refers to the
high growth period of the 1960s-80s in the Korean economy.28
28 Many parts of the old policies until the early 1970s described here depend on the sources
compiled by Kyu-Soon Choi, 1991.
4.2.1 A Brief Overview of Korea’s Economic

Development
Korea restored the sovereignty in 1945 after the 36-years of Jap-
anese occupation and colonial rule. But in the wake of the global
East-West Cold War, the Korean Peninsula was divided into North
and South Korea. In August 1948, South Korea was newly born as
the Republic of Korea through the general election carried out only
in the South of the Peninsula, while North Korea became a com-
munist republic. South Korea's economy suffered severely because
most of the heavy industries and power facilities were concentrated
in North Korea at the time of liberation. To make the situation even
worse afterwards, most of the industrial facilities and infrastructure
were destroyed during the 1950-53 Korean War. As such, postwar
Korea had to survive with the help of international community,
while the vast majority of people live hungry in absolute poverty.
In this situation, South Korea prepared for a new start as a mar-
ket economy by selling the “enemy assets” to private sector and
executing the land reform. The “enemy asset” meant the conscript-
ed companies and assets previously owned by Japanese ruling au-
thorities and individuals before liberation. After experiencing the
consecutive regime changes by the civil revolution in 1960 and by
military coup in 1961, Korea embarked on its First Five-year Eco-
nomic Development Plan (1962-66) in 1962. Since then, Korea has
promoted rapid industrialization with a policy of fostering export
industries targeting the global market. Initially, light industry,
which could utilize abundant low wage labor, was the center of ex-
port, but from the mid-1970s, the center moved to the more high
value-added heavy and chemical industry.

The success of this industrialization strategy changed Korea
from an agricultural state to an industrial state and rapidly in-
creased the national income, but it brought new challenges. Since
the mid-1980s, in the process of heavy and chemical industrializa-
tion, the government's preferential support was concentrated in a
few strategic industries, resulting in over-investment and over-
competition in some industries. In addition, the rise in labor costs
along with the increased national income necessitated a restructur-
ing of low-income industries, while labor disputes soared. People's
demand for social democratization also exploded.
Table 4.8 The Performance of Korea’s Development Plans

Unit: %
GNP Growth Export Growth

Perida
Annual Annual
1st 1962~1966 7.8 38.6
nd
2 1967~1971 9.6 33.8
3rd 1972~1976 9.7 32.7
th
4 1977~1981 7.5 11.1
th
5 1982~1986 8.7 12.6
6th 1987~1991 9.1 7.7
th
7 1992~1996 7.4 16.1
Source: Compiled from the World Bank, IMF and various sources
In the 1990s, the continued growth of the economy raised the in-
ternational status of Korea but brought widened and deepened
global competition along with the liberalization. In 1996, Korea
joined the Organization for Economic Cooperation and Develop-
ment (OECD), a cooperative organization of developed countries,

but in late 1997, Korea faced a serious foreign exchange crisis,
which caused severe economic and social confusion across the na-
tion. By the 2000s, the foreign exchange crisis was resolved and
stable growth began. However, while the growth slowed down, Ko-
rean companies are facing the endless competition in the globaliza-
tion era. The challenge now is to maintain growth engines through
continuous technology development and innovation.
4.2.2 Forming a basic policy framework for SME

protection and fostering
The Korean government recognized the necessity of systematic
policies for the protection and upbringing of SMEs in order to en-
sure social stability in the postwar period. In order to support SMEs
suffering from financial difficulties, during the war in 1952, the
government set special loan limits of commercial banks for SMEs,
and applied them to targeted companies in six industries, including
textiles, paper, agricultural equipment, ceramics, printing, and
crafts. This was the first policy that applied the concept of SMEs in
Korea (Kyu-Soon Choi, 1991, p.24). In 1954, loans were made to
SMEs with United Nations Korean Reconstruction Agency (UN-
KRA) funding. 29 Since 1957, SME loans were also made using
government funds.30 Thus, until the end of the 1950s, financial pol-
29 UNKRA was established as a result of the 5th UN General Assembly in December 1950.
Its mission was to provide emergency relief for the Korean people suffering from the war
and to help the reconstruction of Korean economy. The aid amounted to $ 122 million, and
its mission was completed by the end of June 1958 (Kyu-Soon Choi, 1991, p.27).
30 Low-cost loans were provided to SMEs by using the funds, which consist of Special
icies focused on loans for emergency relief were implemented.

As fiscal resources went to SMEs, the government began to rec-
ognize the need for more systematic SME promotion policies. In
October 1956, after deliberation by the Rehabilitation Committee,
the Outline of SME Promotion Plan was drafted, which was the
first comprehensive SME promotion policy. The measures included
the legislation of cooperative law for the organizational reinforce-
ment of SMEs, the expansion of fiscal and commercial funding
support, the provision of tax exemptions, and the expansion of
SMEs’ sales through military purchases and the establishment of
cooperative markets, etc.
In March 1961, the Comprehensive Plan for Small and Medium
Business Development was established to further systemize the
above policies. Detailed measures were devised, based on 1)
strengthening SME organizations, 2) improving management, 3)
expanding financial support, 4) expanding sales channels, and 5)
reducing taxes. Among these, important measures are summarized
as shown in <Table 4.9>. Two months after this measure, the gov-
ernment was overthrown in a military coup, but most of the poli-
cies were implemented by the military government.
Accounts reserves of Enemy Asset sales and Aid material sales (Kyu-Soon Choi, 1991,
p.38).
Table 4.9 Comprehensive Plan for Small and Medium Business

Development (1961. 3)
Point Measures
Reinforcing ㅇ Rearrange existing SME cooperatives and establish a new
Organization federated organization of SME cooperatives
ㅇ Enact a law on the promotion of SME management rational-
ization and establish the system on diagnose and guidance of
Improve man- SMEs
agement ㅇ Provide subsidies and loans to facilitate the modernization
of facilities, technology development, and technical training/
introduce special deceleration for facilities
ㅇ Establish a SME dedicated bank and focalize the window
Financial sup- for SME loans
port ㅇ Enact a law on credit insurance for SMEs
ㅇ Focus loans on weighted sectors
ㅇ Expansion of cooperative sales, purchase from the Army,
Sales channel
expansion overseas market exploration, quality improvement, standardi-
zation of goods
ㅇ Reduction of income tax, corporate tax, products tax, intro-
Tax reduction
duction of special deceleration
Source: Rearranged by the author based on Choi (1991), pp.44-46
Looking back at history, most of the major measures stated

above were implemented soon despite the change in government.
In July 1961, the Industrial Bank of Korea Act was enacted, and in
August, the Bank was established to function as a financial institu-
tion dedicated to SMEs. Through Article 15 of the Enforcement
Decree of the Act, a system of credit insurance was also intro-
duced; the Bank maintain a certain portion of loans for SMEs
through discount as reserves for credit guarantees. However, credit
insurance at this time was not aimed at mitigating the risk of loans
from SME perspective, but to prevent bank losses (Choi, Kyu-
Soon, 1991, p. 52).

In December 1961, the ‘SME Cooperative Act’ and the ‘SME
Business Adjustment Act’ were enacted. Under the former, cooper-
atives at all levels began to be established in February 1962, start-
ing with the Korean Automotive Industry Cooperative. In May, the
Small & Medium Business Corporation (SBC) was established as
the national federation of cooperatives. By the end of 1962, 75 re-
gional associations, nine sectoral associations, and 33 national fed-
erations were established (Kyu-Soon Choi, 1991, p.54).
Then, the SME Business Adjustment Act led to the establishment
of the SME Business Coordination Council, which was given the
authority to coordinate business adjustment. Under the system,
when there was excessive competition in certain projects, the con-
cerned companies were allowed to join the relevant co-operatives
and the Minister of Commerce and Industry should co-ordinate the
companies in accordance with the decisions of the Council.31 As the
law was revised in 1979, 23 industries were designated as SME-
fitting industries, and in 1982, SME-fitting industries were re-
named as SME-proper industries. By 1989, 237 types of businesses
were designated as SME-proper industries, which restricted large
companies’ participation in those business areas.
However, in light of ensuing criticism that the Act restricted free
market competition and hindered the development of SMEs, it was
replaced in 1995 by the Act on the Protection of SMEs' Business
Areas and the Enhancement of Cooperation between Companies.
31 http://www.law.go.kr/Statutes/Small Business Business Adjustment Act/(00885, 19611227)

Afterwards, the application of SME-proper industries was phased

out by the decision of the Regulatory Reform Committee in July
2000 (Lee, Byung-ki, 2015).32 The law was replaced again in March
2006 by the Act on the Promotion of Win-Win Cooperation be-
tween Small and Medium Enterprises.
Regarding the improvement of SMEs’ management, measures
were taken to break the situation in which most SMEs lacked fa-
cilities and technology as well as modern management concepts.
First of all, a pilot factory system was introduced. In 1961, the
Ministry of Commerce and Industry selected 10 factories in the
Gyeongin area and performed management and technology con-
sulting through the Korea Productivity Center. Then from the next
year, 50 plants were selected from all over the country to be given
consulting and guidance.
In 1966, the Framework Act on SME was enacted. The Act’s
manifest objective was to “promote the development and growth of
SMEs and contribute to the balanced development of the national
economy through contributing to the improvement of structure and
international competitiveness,” and stipulated the basic direction of
the policy that the government should implement for this purpose.
Under this Act, the SME Policy Council was established under the
President in 1967. The committee was chaired by the Prime Minis-
ter and the vice-chairman was the Minister of the Economic Plan-
ning Board. It consisted of 20 members.
32 Byung-ki Lee (2015), Economic Effects and Implications of SME-proper Indus-

try System, Korea Economic Research Institute (in Korean)
4.2.3 Export-oriented industrialization

In January 1962, Korea announced the First Five-Year Economic
Development Plan (1962-66). In the previous year, the government
established the Economic Planning Board (EPB) as the agency in
charge of the preparation for the plan and its implementation. The
position of the head of the agency was originally a Minister, but
was upgraded to Deputy Prime Minister in 1963. The first plan out-
lined the basic goal as modernizing the industrial structure to es-
cape the aid-dependent economy and to realize an independent
economy. To this end, the plan aimed to expand energy sources
such as electricity and coal, and infrastructure including railroads,
roads and ports, and to invest in more than 40 key industries, in-
cluding oil refining, fertilizers, chemical fibers, cement, integrated
steel mills, railway vehicles, shipbuilding, automobiles, and ma-
chinery manufacturing. Through this investment in key industries,
it aimed to substitute imports. Increasing agricultural production
was also an important goal.
However, it was recognized soon that the original plan to substi-
tute imports through the development of heavy and chemical indus-
tries, which required significant investments, could not expect re-
sults in the face of financing difficulties.33 In response, the govern-
ment began to revise the plan and in February 1964 announced a
Supplement to the first five-year economic development plan. The
supplement plan lowered the target growth rate from 7.1% to 5%
33 As the UNKRA's mission ended in 1958, the grant aid to Korea began to decline signifi-
cantly. US aid to Korea continued to decline since its peak at $383 million in 1957, stay-
ing at $113 million in 1965.
and drastically reduced investment in each sector. In addition, in

response to decreasing aid and increasing trade balance deficits, the
direction of development was changed to promote the development
of export industries.
Then, export-oriented industrialization policies were actively
applied to SMEs also. In 1964, the government announced the
SME export industrialization policy, which intended to support the
producers of designated export items with operation and facility
loans, convenience of raw material imports, and technology and
management guidance. As a result, 543 companies were selected
and supported during 1964-66; By industry, 203 textile companies
(37.4%), 59 chemicals companies (10.9%), 47 metals (8.7%), 36
machines (6.6%), 36 crafts (6.6%), 27 electric appliances (5.0%),
and 135 others (24.9%) (Kyu Soon Choi, 1991, p.60).
In September 1964, the Export Industry Complex Development
Act was enacted, and in December, the construction of the
140,000-pyeong Guro-dong Export Industrial Complex was started
and completed in February 1966.34 Originally, it was planned that
30 companies would move into the complex, but by 1967, 22 com-
panies owned by Korean residents in Japan and 18 domestic firms
moved in. The government additionally designated a second com-
plex of 120,000 pyeong and the third complex of 360,000 pyeong,
and then established fourth, fifth and sixth complexes in Bupyeong
and Jooan, Incheon.35 36
34 A pyeong (abbreviation py) is a traditional Korean unit of area and floor space, equal to
3.3058 m2 .
35 National Archives of Korea, Korea’s Export Industry Complexes in the 1960s
During this period, the Korea Trade Promotion Agency (KO-

TRA) was established in June 1962 under the Ministry of Com-
merce and Industry as a dedicated organization to support the ex-
port of SMEs. KOTRA helped SMEs exports by providing infor-
mation on overseas markets, holding product exhibitions, and ar-
ranging buyer meetings. In 1995, the organization was renamed as
the Korea Trade-Investment Promotion Agency (KOTRA), adding
investment attraction to its mission. In 2003, Invest Korea was es-
tablished as a one-stop investment window within the organization.
With the launch of the Second Five-Year Plan (1967-71), export
industrialization policies became more full-fledged. The govern-
ment pursued an aggressive export drive with the goal of upgrading
the industrial structure by fostering chemicals, steel, and machinery
industries, also improving the balance of payments through ex-
ports. Target exports were set to increase from $175 million in
1965 to $550 million in 1971, the last year, with an average annual
growth rate of 21%. The real record was a phenomenal increase in
exports with an average annual rate of 34%, reaching $1,688 mil-
lion in 1971, nearly twice the original target. However, the weight
of heavy and chemical products was still low, and most of the ex-
ports of industrial products came from light industry products.37
4.2.4 Heavy & Chemicals industrialization

The Third Five-Year Plan (1972-76) started with the goal of
36 http://theme.archives.go.kr/next/industry/delegate1960B.do
37 http://theme.archives.go.kr/next/economicDevelopment/increaseInExport.do
heavy & chemical industrialization. In January 1973, President

Chung-hee Park declared that the government would launch a full-
scale heavy and chemical industrialization, then huge investments
followed in major projects. This policy continued in the Fourth
Five-Year Plan (1977-1981). The government invested a total
budget of 2.8 trillion won ($8.9 billion) in six strategic industries,
including steel, shipbuilding, petrochemicals, automobiles and ma-
chinery, nonferrous metals, and electronics, to dramatically in-
crease production and exports. For steel, the target was to increase
production from 1 million tons in 1971 to 10 million tons in 1981,
and 0.25 million tons of shipbuilding capacity to 5 million tons. To
this end, massive investment was made in the strategic industries
with loans from international financial institutions and domestic
capital. According to a source, in the 1970s, 60% of credit by offi-
cial financial institutions in Korea and 75% of manufacturing in-
vestment were concentrated in the strategic industries (recited from
Backwicz, 2008, p. 52).
With the successful performance of this drive for heavy and
chemical industrialization, Korea's industrial structure changed
dramatically and exports increased rapidly. In 1977, exports
amounted to $10.47 billion, a tenfold increase from 1971. That
record meant that the Korean exports, which exceeded US $100
million for the first time in 1964, increased 100 times over 13
years. This was found to be the fastest increase of exports in the
world during that period.38 At the same time, thanks to this success
38 http://news.khan.co.kr/kh_news/khan_art_view.html?art_id=201312192058505
of industrialization, exports of industrial products, which were just

half of all exports in 1963, accounted for 81% in 1970 and 90% in
1979. Among industrial products, exports of heavy industry prod-
ucts came to 51% in 1979, surpassing light industrial products for
the first time (Korea National Archive Homepage, Export Promo-
tion).39
During this period, in April 1975, a new system of General Trad-
ing Companies was introduced as part of the export promotion de-
vice, which benchmarked Japan's system of a similar name. As ex-
port volumes grew drastically and the main exports items came
from heavy and chemical industries, it seemed that a new system
was necessary which could supplement the role of KOTRA. The
new system was designed so that the general trading companies
with sufficient capacity would support the exports of private com-
panies. To this end, strict standards to designate the general trading
companies were applied, which included export volumes of more
than US $1 million a year and at least 10 overseas branches in
more than 10 countries. In 1975, five companies including Sam-
sung C&T were designated as general trading companies, and a
total of 13 companies were designated by 1978. They were given
preferential measures such as tax reduction and were asked to con-
centrate on export promotion. But the system was abolished in
2009 (Korea National Archive Homepage, General Trading Com-
panies).40
Since the mid-1980s, the government's economic policy goal has
39 http://theme.archives.go.kr/next/economicDevelopment/increaseInExport.do?page=2
40 http://www.archives.go.kr/next/search/listSubjectDescription.do?id=006706&pageFlag=
changed from 'growth' to 'stability'. In the midst of the high growth,

the imbalance between industries, regions, and classes emerged as
a new problem, and so has the demand for democratization in soci-
ety. In response to the problems of strategic industries revealed
during the heavy and chemical industrialization, the government
restructured each industry in turn, including the fertilizer industry
in 1981, shipping in 1982, overseas construction in 1984, and au-
tomotive in 1986. In the shipping industry, 66 shipping companies
were merged into 17. The Industrial Development Act of 1986 at-
tempted to induce industrial rationalization by autonomous restruc-
turing of concerned companies through tax and financial support.
The policy of fostering heavy and chemical industry as the lead-
ing player in exports promotion favored the growth of large corpo-
rations, which were greatly supported by the government, and em-
phasized the role of SMEs in supplying materials and parts to large
enterprises. In 1972, a policy was devised to categorize SME busi-
nesses into SME suitable industries, complementary sectors of
large corporations, growth sectors potentially to be large corpora-
tions, but this policy was not actively pursued due to practical dif-
ficulties in its application. However, the policies of SME speciali-
zation and alliance were actively promoted to reflect this stream of
policy thought.
4.2.5 Alliance and Mutual Growth

As export-driven growth based on heavy and chemical industri-
alization was pursued, the alliance between large companies and
SMEs was actively promoted to fulfill the export targets. The

Framework Act on Small and Medium Enterprises in 1966 stipulat-
ed in Article 18 that “The government should take the measures
necessary for the formation of alliances between large enterprises
and SMEs in order to effectively complement each other and spe-
cialize in production and division of labor.” In 1970, the ‘Guideline
for SME Specialization and Alliance’ was drafted, and in 1975, the
‘Act on the Promotion of Small and Medium Enterprises Alliance’
(중소기업계열화촉진법) was enacted. The government set up a com-
mittee to select target companies for alliance and supervised its im-
plementation, providing funding and technology assistance to the
companies that achieved the goals of the alliance.
The alliance, or “gyeyeolhwa”, that has been pursued in Korea is
different from the vertical integration by which a company absorbs
production facilities in-house to procure necessary raw materials
and components, and is also different from standard market pro-
curement. It is a kind of quasi-vertical integration that subcontracts
the production of necessary goods through long-term, entrusted
relationships between large firms and SMEs (Lee, Kyung-Ei, 2015,
p.332). The advantage of such system was that it guaranteed SMEs
a secure customer base while maintaining ownership and inde-
pendence and allowed large companies to reduce the cost and man-
agement burden of having many parts production facilities in-
house. SMEs also could accumulate technology through specializ-
ing in the production of specific components. In the growing econ-
omy, this alliance was considered as a way for large corporations
and SMEs to grow together through the division of labor.

Under the alliance promotion act, its implementation had steadi-
ly expanded. The proportion of subcontractors among SME manu-
facturers increased from 19.7% in 1971 to 25.7% in 1979, and the
dependence on orders from large firms increased from 14.0% to
18.8% (Kyu Soon Choi, 1991, p.116). As large corporations grew
into giant chaebols, subcontractors increased from 14 per group in
1978 to 53 in 1983 (Bakiewicz, 2008, p. 54).
However, the high-growth process also led to a widening gap be-
tween large companies and SMEs, as well as growing imbalances
between industries and regions. Thanks to the government's prefer-
ential support, some large corporations with successful performance
in exporting had grown into global conglomerates, or chaebols. Be-
tween 1972 and 1982, the top 20 conglomerates accounted for 29
percent of the manufacturing output, and in 1980 the top ten con-
glomerates accounted for 48 percent of GNP. There are some indica-
tions that this process did not mitigate the difficulties experienced by
SMEs much despite the system of alliances. Large corporations
forced subcontractors to meet delivery, quality and costs demands,
instances of which were frequent despite government guidelines and
in-house regulations (Bakiewicz, 2008, pp. 52-53). According to a
survey of 4,146 SMEs in 1970, 60.7% of subcontractors reported
delays of payments, 55.1% price cuts, 48.6% an excess of competi-
tors (Kyu-Soon Choi, 1991, p.81). The government introduced
measures to enforce large companies to settle bills within 60 days
and banks to discount the bill notes received by SMEs for delivery.
Later, the alliance system became the target of much criticism

despite its achievements. The ‘unfair trade’ arising from the power
relationship between large corporations and SMEs was noticeable.
Especially during the recession period, large corporations passed
cost burdens on to subcontractors to reduce costs (Kim Ju-hoon,
2014). For the SMEs that belonged to alliances, a tendency, or iner-
tia, had grown that caused them to respond passively to the de-
mands of large corporations rather than moving on their own driv-
ers, which eventually hindered the development of technology and
management techniques. It also worked as a strong barrier to mar-
ket competition for SMEs of the same business who did not belong
to alliance.
After all, these criticisms have virtually ended the alliance policy
since the 1990s, and fair trade and mutual growth have emerged as
new issues. In 1994, the seven SMEs laws were merged into four,
and the alliance promotion act was replaced by the ‘Act on the Pro-
tection of SMEs' Business Areas and the Enhancement of Coopera-
tion between Companies’ (중소기업의 사업영역보호 및 기업간 협력증
진에 관한 법률). In March 2006, the ‘Act on the Promotion of Win-
Win Cooperation between Large Enterprises and Small and Medium
Enterprises’ (대·중소기업 상생협력 촉진에 관한 법률) was newly enact-
ed.41 The Framework Act on SMEs, amended in July 2011, stipu-
lated in Article 10 that promoting fair competition and mutual
growth was the main task of the government.42
41 http://www.archives.go.kr/next/search/listSubjectDescription.do?id=007255
42 Article 10 (Encouragement of Fair Competition and Mutual Growth). The Government
4.2.6 Link with regional development policy

Korea's economic development strategy was based on unbal-
anced growth that focused on investing limited resources in specif-
ic industries to foster strategic industries first and to lead the devel-
opment of other industries through forward and backward linkage
effects.43 To this end, large-scale industrial complexes were estab-
lished and concentrated in the metropolitan capital area and in
some industrial cities in the Southeast part, like Ulsan and Chang-
won. This process inevitably led to the imbalances between indus-
tries and regions.
The declining weight of agriculture and the growing manufactur-
ing industry led to the outflow of population from rural to urban
areas, raising the issue of rural evacuation. In 1953, agriculture and
fishing accounted for 47% of Korea's GDP but in 1972 had de-
clined to 25%. In the same period, the share of manufacturing in-
creased from 9% to 25%. As of 2018, agriculture accounts for less
than 3%. Development gaps were also noticeable between the met-
ropolitan capital area plus the Yeongnam region, where the indus-
trial complexes were concentrated, and other regions centered on
agriculture.
The government recognized this problem early and used the
SME policy as a tool to maintain the vitality of the rural economy.
In 1965, a policy fostering locally specific industries was intro-
shall take measures necessary to ensure that small and medium enterprises can cooperate,
fairly compete with businesses other than the small and medium enterprises, and pursue
mutual growth. [This Article Wholly Amended by Act No. 10952, Jul. 25, 2011]
43 The unbalanced growth theory is the economic development theory on developing coun-
tries, presented by Albert Hirschman in 1958 in The Strategy of Economic Development.

duced for local SMEs to take advantage of the rural labor force and
to promote local industrialization. To this end, eight specialty prod-
ucts, such as sweaters, wigs, and artificial pearls were selected and
supported as joint projects through cooperatives in the relevant in-
dustries (Kyu-Soon Choi, 1991, p. 62).
In 1969, the Saemaul Undong (New Village Movement) was
promulgated with the modernization of rural areas as the slogan. In
the 1970s, the campaign was carried out nationwide based on the
government's extensive public relations and organizations. In con-
nection with this movement, the construction of Saemaul factories
began in 1973. This was to expand the local specialty industry de-
velopment strategy further. It attempted to establish small factories
in the cities and villages nationwide and generate income by pro-
ducing goods suitable for local characteristics. According to this
policy, 1,357 companies were designated as Saemaul factories by
the end of January 1984. However, the actual outcomes were dubi-
ous as the policy was excessively pushed to show off the govern-
ment's achievements, ignoring local market conditions. At the end
of 1987, the number of Saemaul factories decreased to 556, of
which only 452 companies were operating normally (Kyu Soon
Choi, 1991, pp.162-166).
At the end of 1983, the government enacted the ‘ Act on the
Promotion of Rural Income Source Development’(농어촌소득원
개발촉진법) and promoted the creation of new Rural Industrial De-
velopment Promotion District (agro-industrial complex). Under
this law, it was planned to build at least one agro-industrial com-
plex in 135 counties across the nation and to house 2,300 factories.
As of 1987, 77 agro-industrial complexes were established or un-
derway, and 1,158 companies applied to locate there (Kyu Soon
Choi, 1991, pp.162-166). In 2015, a media reported that 167 of the
460 agricultural complexes in operation at that time were built in
the 1980s, and most of them were losing competitiveness due to the
old and outdated infrastructure and neglect from government
policies.44
4.3 Recent Issues and Policy Responses
The Korean economy has grown rapidly over the past 70 years,
and the government has guided this process by setting appropriate
policy directions when called for. This process, however, could not
be accomplished by government policy alone, but by the efforts of
numerous companies and individuals. The growth process of the
Korean economy was the combined process of hard efforts of indi-
viduals who dreamed of breaking out of poverty, creating compa-
nies and working hard to grow them. In response to the govern-
ment's export-led industrialization policies, the companies that
have taken advantage of the given opportunities well have grown
into large global corporations.
The list of the world's 500 largest companies, published by For-
tune magazine in the US in 2019, included 17 companies in Korea.
The number of companies by country shows that Korea is the 7th
44 No Cut News, December 7, 2015, “Why treat them like extramarital children? 30 years
of agro-industrial complexes”
in the world ranking. Among those companies, except for a few

companies established by the government in key industries such as
steel and electric power, most of them started out as weak SMEs.45
For example, Samsung Electronics, the world's No.1 company in
the electronics industry and one of the world's top 15 largest com-
panies today, started when its founder Byung-chul Lee opened a
retail store selling agricultural and fishery goods in 1938. Hyundai
Group, which has a number of large corporations, including the
world's No.1 shipbuilding company and the world's No.5 automo-
bile company, also began when its founder, Joo-young Jung, ac-
quired a small rice shop. Yesterday's SMEs are the roots of today's
big companies. Today's SMEs can be the mothers of tomorrow's
big companies.
But not all companies have followed this successful history, and
countless companies have failed to grow and died. A 2010 study
found that 41.9% of Korean companies with five or more employ-
ees survived for more than five years after their establishment. In
the case of companies with fewer than five employees, only 15.5%
of new companies survived that long (Byung-Ho Kong, 2013, p.33
reciting the study of Chi-Seung Song).
As of 2019, when Korea's per capita national income reached
$31,000 annually and exports amounted to over $600 billion, Ko-
rea's economic policy has to find a new direction in an environment
that is completely different from the time when it was the world's
poorest country. SME policy is no exception. The growth and glob-
45 https://fortune.com/global500/2019/
alization of the economy has made it difficult for the government to

intervene directly in the market and to guide the private sector. In a
time when direct measures of industrial policy, such as tax breaks
and favorable financial terms and foreign exchange regulation be-
came of no avail, the government has to induce private companies
to the direction desired by the nation by creating a growth envi-
ronment indirectly.
To conclude this chapter, the following is the author’s review on
some significant policy issues for Korean SMEs in recent years.
First, the mutual growth of large companies and SMEs is an im-
perative. In the period of high growth, the government tried to
promote the specialization of SME and stable relationships with
customers through alliances with large companies. But now, as the
gaps between large companies and SMEs are seen to be widening
in all areas, including size, wages and productivity, the government
should find the ways to narrow these gaps through market mecha-
nisms. As mentioned earlier, the government enacted the ‘Act on
the Promotion of Win-Win Cooperation between Large Enterprises
and SMEs’ in 2006. Since 2008, the government has been formu-
lating the Basic Plan for Win-Win Cooperation every three years.
Its main contents are to create a mechanism for large companies
and SMEs to cooperate in various areas, such as technology and
human development, overseas market expansion, and to encourage
the sharing of results while preventing unfair trade practices such
as delays in subcontracting payments.
Second, SME policies should have positive linkage effect with
balanced regional development. As the industrial development has

been pursued through large-scale industrial complexes, unbalanced
development between regions was inevitable in the past. To cope
with this problem, the government in the meantime has implement-
ed various policies as described above. In the 1970s and 1980s,
Saemaul factories and agro-industrial complexes were established
to this end, but SMEs could not settle successfully in somewhat
isolated rural environments. In 1994, the ‘Act on Balanced Region-
al Development and Fostering of Local Small and Medium Enter-
prises’ (지역균형개발 및 지방중소기업 육성에 관한 법률) was enacted.
Numbers of SME support centers and 18 Techno-Parks in major
cities have been established so far. Recent policies are being ap-
proached through the “Cluster” concept, which attempts to induce
not only factories but research facilities and nearby universities to
collaborate together with the help of local municipalities.
Third, continued innovation in management and technologies
have become prerequisite conditions for the survival of SMEs even
more than before. With the advent of the Fourth Industrial Revolu-
tion, or Industry 4.0, the speed of technology development in all
areas is accelerating, which is leading to faster changes in business
environments. In order to protect SMEs and promote their contin-
ued growth amid these environmental changes, the government
tries to support SMEs’ modernization, rationalization of manage-
ment, and human resources development, also supporting the intro-
duction of smart factories and smart offices. Techno-parks in each
region assist this task. The government is also implementing poli-
cies to foster R&D-focused and knowledge-intensive venture busi-

nesses.
Fourth, support for micro enterprises is needed more than ever.
As of 2016, the number of micro enterprises was 3.07 million (see
Table 4.6). Considering that the total population of Korea was
51.25 million in the year, this means there was one micro enterprise
for every 16.7 people. Micro enterprise is a legal term referring to
smaller firms in small enterprises, which is similar to ‘self-
employed business’ in colloquial language. According to a OECD
data, as of 2006, the proportion of self-employed workers among
Korea's total economically active population was 32.8%, much
higher than that of major industrialized countries such as Japan,
13.8%, Germany, 12.2%, US 7.4%, and more than twice the OECD
average of 15.8% (Requoted from Byung-Ho Kong, 2013, p.33).
Since these small businesses are very important for stabilizing peo-
ple's lives, generating income and maintaining employment, vari-
ous support measures are being sought.
Chapter 5. Industrial Cooperation between

Korea and Ethiopia: Current
Status and Opportunities
This chapter examines the current status of industrial coopera-

tion between Korea and Ethiopia, focusing on trade and invest-
ment. At the same time, the current status of various cooperation at
the public and private level will be examined as well, including the
development cooperation based on ODA funds. The first section
presents an overview of the status of bilateral cooperation. In the
second section, a brief output of some quantitative analysis on
Ethiopian trade is presented, which was tried to explore meaningful
implications on the prospects of bilateral trade. Also, in this sec-
tion, an overview of the status of Foreign Direct Investment (FDI)
of Ethiopia follows. Then, in the third section, a brief introduction
to the cases of some Korean enterprises already operating in Ethio-
pian Industrial Parks is made. Throughout this chapter, the authors
intended to explore the opportunities and risk factors in enhancing
bilateral SMEs cooperation, while presenting the current status.
5.1. Status of Korea-Ethiopia Industrial Cooperation
This section examines the current status of bilateral trade and di-
rect investment, together with the status development cooperation.
Chapter 5. Industrial Cooperation between Korea and Ethiopia: Current Status and Opportunities 139
5.1.1 Trade
Korea and Ethiopia's bilateral trade amounted to $151 million as
of the end of 2018, which showed a 9.7% decrease compared to
2017. As shown in Figure 5.1, in the 2000s, the trend of bilateral
trade has shown relatively fast growth, quickly rebounding after
temporary declines. However, in the more recent years, perfor-
mance has been sluggish. This is interpreted as a general reflection
of the trends of the world economy and Ethiopia. In other words,
the sharp decline in 2010 reflected the impact of the global reces-
sion after the financial crisis that occurred in USA at the end of
2008. The recent years of sluggishness seem to reflect a situation in
which the high growth of Ethiopian economy began to slow down
mainly due to political instability.
Table 5.1 Korea’s Trade with Ethiopia

Unit: million USD
Exports Imports Volume
value Increase (%) value Increase (%) value Increase (%)
2018 105 -7.9 54 -12.1 159 -9.7
2017 114 17.6 62 15.8 176 17.3
2016 97 -14.5 53 -3.5 150 -10.7
2015 113 -26.7 55 0.4 168 -20.0
2014 155 65.0 55 122.6 210 76.5
2013 94 -13.1 25 0.6 119 -10.5
2012 108 0.9 25 25.0 133 4.7
2011 107 111.7 20 68.3 127 104.8
2010 50 -36.7 12 -20.8 62 -34.7
Source: http://stat.kita.net
Figure 5.1 Trends in Korea – Ethiopia Bilateral Trade

(million USD)
Dividing trade into exports and imports, Korea exported $150

million of goods to Ethiopia and imported $54 million from Ethio-
pia in 2018, which resulted in a trade surplus of $51 million for
Korea. As of 2018, Korea's major export commodities were: plas-
tics products, which amounted to $ 28 million, or 18.7% of the to-
tal, followed by machinery parts worth $25 million (16.7%), other
petrochemical products valued at $19 million (12.7%), construction
equipment (8.6%), cereals (5.7%), and automobiles (3.8%). Korea's
major import commodity was overwhelmingly coffee (88.9%), fol-
lowed by oil seeds (4.1%) and flowers (2.9%). While the rest are
insignificant overall, leather and garments are somewhat notable.
Table 5.2 Major Export and Import items of Korea (2018)

Unit: 1,000 USD
HS Descriptions Exports HS Descriptions Imports
Plastics and Articles

1 39 28,462 09 Coffee, Tea, Mate, Spices 48,496
Thereof
Boilers, Machinery and
Oil Seeds, Oleaginous
2 84 Mechanical Appliances 25,072 12 2,215
Fruit
Parts
Live Trees, Other Live
3 29 Organic Chemicals 19,519 06 Plants, Bulbs, Cut Flowers, 1,566
Ornamental Foliage
Other Products of Animal
4 10 Cereals 5,865 05 452
Origin
Vehicles Other than Rail-
Articles Of Apparel and
5 87 way Or Tramway Rolling- 5,791 62 357
Clothing Accessories
Stock, And Parts
Electrical Machinery and Electrical Machinery and

6 85 4,115 85 314
Equipment And Parts Equipment and Parts
Optical, Photographic,
Cinematographic, Medical
Articles Of Leather, Trav-
7 90 Instruments and Appa- 3,676 42 256
el Goods, Handbags
ratus, Parts And Accesso-
ries
Articles Of Apparel and
Rubber and Articles
8 40 2,816 61 Clothing Accessories, 238
thereof
Knitted Or Crocheted
Other Textile Articles,

9 30 Pharmaceutical Products 2,810 63 236
Sets, Worn Clothing, Rags
Miscellaneous Chemical Raw Hides and Skins),

10 38 1,463 41 195
Products Leather
Ethiopia's position as a Korean trade partner is weak, which re-

flects the fact that Ethiopia is still a Least Developed Country.
While Korea's total exports amounted to $604.86 billion in 2018,
Ethiopia ranked 107th in terms of export destinations. Globally,
total imports to Korea amounted to $534.20 billion; Ethiopia

ranked 106th by country of origin.
On the other hand, the weight of Korea as a trading partner of
Ethiopia is relatively large. As of 2017, Ethiopia's exports totaled
$2.2 billion. Among export destinations, China was the top with
16% of the total, followed by Switzerland 13%, United States 12%,
Netherlands 11%, Germany 8.4%, United Kingdom 5.0% and Ja-
pan 4.9%. Korea ranked 7th with 2.7%.
Figure 5.2 Ethiopia: Major Export Destinations (2017)
Source: https://oec.world/en/profile/country/eth/
Regarding Ethiopian imports, which totaled $8.0 billion in 2017,

China was also at the top with 33% of the total. Following China
were France 12%, India 8.6%, Germany 4.6%, Turkey 4.2%, Unit-
ed Kingdom 3.9%, and Korea ranked 12th with 1.4%. It is note-
worthy that some nearby developing countries such as India, Tur-
key, Egypt, and Sudan are in the upper group of the trading part-
ners.
Figure 5.3 Ethiopia: Major Import Origins (2017)
Source: https://oec.world/en/profile/country/eth/
5.1.2 Investment Status

Direct investment between the two countries is centered on Ko-
rea's investment in Ethiopia. As shown in <Table 5.3>, Korea's in-
vestment in Ethiopia recorded $36 million with 16 new companies
during 2011~2018. It is still very weak, but considering that the
cumulative investment during 1996-2013 was only $15 million
with six new companies, Korea's investment in recent years has
shown impressive growth. Especially during the three years of
2014-16, it increased significantly along with the rapid growth of
the Ethiopian economy. Since then, the investment environment
has deteriorated due to a state of emergency in Ethiopia, and no
new Korean company entered the Ethiopian market in 2018.
However, according to KOTRA, inquiries from Korean compa-
nies on new investment in Ethiopia are increasing, especially con-
cerning labor-intensive industries such as clothing, shoes, and
wigs. These increasing inquiries are related to such factors as rising

labor costs in Southeast Asia, the US's exit from Trans-Pacific Stra-
tegic Economic Partnership (TPP) in 2017, and the AGOA and
EBA tax-free benefits.
Looking at the investment by industrial sectors, the largest por-
tion was made in manufacturing 52%, followed by construction
29%, wholesale & retail 14%, and others 5% by cumulative
amount. By investment agent, 49% of the total was made by large
companies, while 42% was made by SMEs and 9% by individuals.
Major projects in manufacturing were in Apparel (ShinTS,
Youngone Trading, Seyang C & T), Bags (Pungkook Industry), and
Steel (EKOS). Investment in the construction sector is related to
the highway and electric transmission network projects funded by
the EDCF (External Development Cooperation Fund) of Korea
(KOTRA, 2019).46
Table 5.3 Korean Investment in Ethiopia

2011 2012 2013 2014 2015 2016 2017 2018 sum
Numbers 2 1 1 4 3 2 3 0 16
Amount
0 0 0 2 7 12 6 9 36
($million)
Source: EximBank of Korea
46 KOTRA homepage, May 2, 2019, “Ethiopia 2019 Economic Outlook and Business
Environment Analysis,” report by the Addis Ababa Office
Figure 5.4 Trends in Korean Investment in Ethiopia
Source: EximBank of Korea
5.1.3 Development Cooperation and Others

Development Cooperation refers to a wide scope of international
co-operation activities to support economic and social development
of underdeveloped countries, thereby contributing to global poverty
reduction. Conceptually, it differs from industrial cooperation dis-
cussed in this study in that it does not pursue commercial purposes.
However, the involvement of companies, public or private, is es-
sential to carry out various projects pursued in development coop-
eration. Development cooperation is mostly funded through Offi-
cial Development Assistance (ODA), which refers to the financial
assistance by advanced countries’ public resources to developing
countries. In 2017, Korea provided a total of $22.1 billion in ODA
around the world.
Ethiopia is one of the seven strategic partners in Africa for the
Korean government’s ODA. Korean ODA for Ethiopia in 2017
amounted to $46.95 million, including $35.27 million in grants and
$11.68 million in concessionary loans. This is close to the amounts

that offsets Ethiopia's trade deficit of $54 million with Korea in the
same year. ODA to Ethiopia from Korea was highest in the previ-
ous year, 2016, when it recorded $61.6 million, 31% higher than
the figure from 2017 (ODA Korea Homepage).47
Figure 5.5 Trends in Korean ODA to Ethiopia

(million USD)
Source: http://www.odakorea.go.kr
Korea's ODA for Ethiopia closely tracks bilateral trade and in-
vestment trends. It increased rapidly in the 2000s, peaking 2016 but
then decreasing. It also seems to be related to the political instabil-
ity after 2016. By sector, $22.57 million, or 48.5% of the total in
2017, was allocated to social infrastructure including education and
health, followed by $14.84 million (31.9%) for economic infra-
47 http://www.odakorea.go.kr/ODAPage_2018/cate02/nation_stats2_Ethiopia.jsp
structure and $5.37 million for the production sector (11.5%). The
remaining portions went to multi-sectors $2.69 million (5.8%) and
humanitarian assistance $1.05 million (2.3%).
Looking at Korea's major ODA projects as of 2019, KOICA,
which is in charge of grants, is carrying out nine projects. Major
projects include rural development projects in Dodota, Oromia, and
family planning support projects as part of the the Small Happy
and Prosperous family in Ethiopia (SHaPE) program. An integrated
water hygiene support project and the construction of a vocational
training center in Tigria are also under way. Projects funded by the
EDCF, the agency in charge of concessionary loans, include Mojo-
Hawasa Highway Project Phase 1, the Gore-Tepi Road Project and
the Suluta-Gebre Guracha Power Transmission project.
In addition, several ODA projects are also underway by public
agencies of Korea with sponsorships of each Ministry. Among
them, Ministry of Strategy and Finance is sponsoring a Knowledge
Sharing Program focusing on policy dialogues with officials and
experts for economic policies development. The Ministry of Trade,
Industry and Energy is sponsoring the construction of a Techno
Park, and Ministry of Agriculture, Food and Rural Affairs is spon-
soring an irrigation project in Harari Province.48
As for other major cooperation issues, there were 40 MOUs
signed during former Korean President Park Geun-hye's visit to
Ethiopia and summit meeting in May 2016, including the construc-
tion of an industrial park for Korean textile corporations. The two
48 ODA Korea, “Ethiopia Support Plan by Ministry of 2019”

sides signed an MOU to create a 300,000 pyeong (990,000km2)

textile industry complex for Korean companies near Addis Ababa,
the capital of Ethiopia. Since then, however, the project has been
not launched yet due to complex problems including the subse-
quent Emergency and instability of Ethiopia.49
5.2. Analysis of Trade and Investment Trends
5.2.1. Bilateral trade relationship between Korea and

Ethiopia
Trade between Korea and Ethiopia has increased overall during
the period of 2000-2018, although it also experienced sharp de-
clines from 2009 to 2010 and from 2015 to 2016. As of 2018, ex-
ports totaled 105 million dollars and imports totaled 54 million dol-
lars, therefore a trade surplus of 50 million dollars was recorded.
Exports to and imports from Korea to Ethiopia peaked in 2014.
Since then, they have declined to previous levels.
The share of exports to and imports from Ethiopia is not signifi-
cant in Korea’s total trade as they have not exceeded 1%. Exports
to Ethiopia from Korea accounted for 0.017% of all Korean ex-
ports; imports from Ethiopia made up just 0.010% of all imports in
2018. Total Korean exports to all African countries in 2018 was 6.4
billion dollars and the share of exports to Ethiopia was 1.64%.
49 http://english.hankyung.com/news/2016/05/27/0920411/korean-textile-firms-to-build-
industrial-zone-in-ethiopia?setct=print&popup=1
Figure 5.6 Trade between Korea and Ethiopia

(2000-2018)
Unit: 1,000 USD, %
Source: Author’s calculation using data from Kita.net
Top exports products to Ethiopia include plastics/rubbers, ma-

chinery, and chemical products, while the top imports are mainly
coffee, seeds, and textiles/raw hide products. Among imported
products, coffee and tea products are in the first place with 48 mil-
lion dollars of import value, showing a big difference of 2.2 million
dollars with second-place oil seeds and oleaginous fruits.
Figure 5.7 Share of Ethiopian Imports and Exports in

Korean Trade
Unit: %
Source: Author’s calculation using data from Kita.net
5.2.2. Potential export opportunities

Based on the current trade structure, potential exports opportuni-
ty of Ethiopia can be explored. According to Hausmann et al.
(2007b), the more sophisticated commodities a country produces,
the greater the economic growth that a country can achieve. For
achieving economic growth and upgrading its industrial structure,
Ethiopia needs to improve its current exports structure by diversi-
fying its export basket. Hidalgo et al. (2017) measures distance be-
tween products based on their similarities in terms of the inherent
capability such as institution, physical factors, technologies, and
natural resources. Proximities among products are defined as the
minimum of conditional probabilities that a country has compara-
tive advantage on a certain products given it has comparative ad-
vantage on another product50. The intuition is that if a country has
50 = >1 >1 , C >1 > 1)}

, ′ ′ ′
comparative advantage in both goods at the same time, the country

possesses ability to produce closer products from the existing ex-
port products. In addition, since producing and exporting more so-
phisticated products is critical for economic growth, the transition
of production into a product induces more opportunities for eco-
nomic growth. Hausmann et al. (2007a) constructed the Prody in-
dex, which measures the sophistication level of a product by link-
ing each product to GDP per capita.51 Products exported from coun-
tries with a higher GDP per capita with comparative advantage will
have a higher Prody index, whereas products exported from coun-
tries with a lower GDP per capita with comparative advantage have
a lower Prody value. Table 3.2 shows examples of top and bottom
10 products ranked by Prody score. Chemical products, steel, and
watches have higher Prody scores while mineral and leather/fur
products have a lower Prody score.
Summing up all Prody values of products by industry or country,
the EXPY index, which indicates the level of sophistication and
competitiveness of an industry or country, is constructed.52 If a coun-
try exports a product with a higher value, the EXPY of the country
will exhibit a higher figure as well. Hausmann et al. (2007) find a
positive relationship between EXPY and GDP per capita which indi-
cates that the greater the value of products a country exports, the
greater probability that a country achieves economic growth.
51 =∑ , where indicates exports of product p by country c,

∑
52 =∑
∑
Table 5.4 Top and bottom 10 products by Prody score

(2015 data)
<Top 10 products> <Bottom 10 products>
HS code Descriptions Prody HS code Descriptions Prody
Halogenated deriv-
Oil-cake & other
290369 atives of aromatic 122,469 230610 1,940
solid residues
hydrocarbons
Tire cord fabric of Plaits & similar

590290 high tenacity yarn 94,746 460199 manufactures of 1,816
of viscose rayon plaiting materials
Niobi-
Remelting ferrous um/tantalum/vana
720450 94,348 261590 1,770
scrap ingots dium ores &
concs.
Wrist-watches, Carbonates;
910111 electrically operat- 91,686 283699 peroxocarbonates 1,516
ed (percarbonates)
Angles, shapes &
Tanned/crust hides
sections of
721633 89,447 410622 & skins of 1,372
iron/non-alloy
goats/kids
steel, H sections
Nickel oxide
Flat-rolled produc- sinters & other
721069 tion of iron/non- 88,311 750120 intermediate man- 953
alloy steel ufactures of nickel
metallurgy
Iron & non-alloy Beryllium waste

720610 85,117 811213 952
steel in ingots & scrap
Brass-wind musi-
Sheet piling of cal instruments.
730110 83,856 920510 926
iron/steel (e.g., trumpets,
trombones)
1-(1,3-
Nickel oxides &
293292 Benzodioxol-5- 83,496 282540 371
hydroxides
yl)propan-2-one
Analogue wrist Cultured pearls,

910121 81,740 710121 25
watches unworked
Source: Authors’ calculation using UN Comtrade data; as Cited in Yang (2018)

Figure 5.8 Relationship between EXPY and

GDP per capita
Source: Authors’ calculation using UN Comtrade data; as cited in Yang (2018)
Utilizing Hausmann’s product space model, we examine feasible

and desirable products that can be added to the current export bas-
ket of Ethiopia. Table 3.2 shows Ethiopia’s current top exports as
of 2016. 53 It is easier for a country to produce and export new
products if it can utilize existing capabilities such as technologies,
knowledge, facilities, and infrastructures. Examining its current top
exports, we can investigate the current inherent capability of Ethio-
pia. As seen in the Table 3.3, the top exports of Ethiopia as of 2016
are mainly agricultural products including coffee, meats, beans and
fruit, and textile/leather goods. The Prody scores of the main export
products of Ethiopia are relatively low compared to products pre-
sented in Table 3.2. The Prody index of coffee, which is the top
53 Since international trade database (UN Comtrade) provides trade data for Ethiopia up to
2016, we use 2016 data.
export, is 4,046, and beans are in the range of 3,475-7,283. The

product with the highest Prody index within the top 20 exports of
Ethiopia is vehicles, which scored 39,905.
Table 5.5 Top Export Products of Ethiopia in 2016

Unit: 1,000 USD
Product Prody
Description Exports
code index
090111 Coffee, not roasted, not decaffeinated 714,837 4,046
Gold (incl. gold plated with platinum), non-
710813
monetary, in semi-manufactured forms
128,806 8,753
071333 Kidney beans, incl. white pea beans 107,578 5,395

020450 Meat of goats, fresh/chilled/frozen 93,474 4,400
Chickpeas (garbanzos), dried, shelled, whether or
071320
not skinned/split
67,238 13,862
071390 Dried leguminous vegetables 46,257 2,752
Leather further prepared after tanning/crusting, incl.
411200
parchment-dressed leather, of sheep/lamb
38,802 6,549
071331 Beans of the species Vigna mungo 15,018 7,283
Leather furth. prepd. after tanning/crusting, incl.
411310
parchment-dressed leather, of sheep/lamb
14,783 5,557
071290 Dried vegetables, n.e.s.; mixts. of dried vegetables 12,920 13,798
Natural gums (excl. gum Arabic), resins, gum-
130190
resins & oleoresins
10,268 8,463
090412 Pepper (genus Piper), crushed/ground 9,834 12,218
Precious stones (excl. diamonds) & semi-precious
710310
stones
9,527 6,406
090411 Pepper (genus Piper), neither crushed/ground 8,194 10,366
Bread, pastry, cakes, biscuits & oth. bakers' wares
190590
n.e.s. in Ch.19
7,620 23,939
261590 Niobium/tantalum/vanadium ores & concs 7,303 1,770
071350 Broad beans (Vicia faba var. major) & horse beans 6,647 9,226
Beans (Vigna spp., Phaseolus spp. (excl. of
071339 0713.31-0713.33)), dried, shelled, whether or not 5,978 3,475
skinned/split
Footwear with uppers of leather/composition leath-
640510
er, n.e.s.
5,324 14,488
Vehicles (excl. of 87.02 & 8703.10) princ. designed
870324 for the tpt. of persons, with spark-ignition int. comb. 5,203 39,905
recip. piston engine, of a cyl. cap. >3000cc
Source: Authors’ calculation using UN Comtrade data
It is important to find feasible and desirable products which are

close to current export items and have high value-added. Proximi-
ties between products is measured by similarities among products
in terms of knowledge, technology, and facilities. Therefore, we
begin from the top export products to find items which are closer to
current top export items with greater Prody values.
For instance, in terms of coffee (HS 090111), which recorded
714 million dollars of exports, cane sugar, raw, in solid form (HS
170111) is the most similar item, with 8,233 of Prody. However,
the level of sophistication of the item is relatively lower. Other
goods with closer proximity to coffee include kidney beans, white
pea beans (HS 071333), flat-rolled products of iron/non-alloy steel
(HS 721041), wood sawed or chopped lengthwise, sliced/peeled
fruits (HS 440729), bananas and plantains (HS 080300), plastic
furniture (HS 940370), and barbed wire of iron/steel (HS 731300).
Among these items, barbed wire of iron/steel (HS 731300) is the
most sophisticated products.
5.2.3. Trends in FDI inflows in Ethiopia

In Chapter 2, the authors briefly introduced Ethiopia's foreign
investment policy and status. Then, in the previous subsection 5.1
of this chapter, a brief presentation on the status of bilateral in-
vestment was made while overviewing the general status of bilat-
eral cooperation between Korea and Ethiopia. Now, in this subsec-
tion, this status will be examined in more detail based on recent
data.
Figure 5.9 FDI Inflows in East African Countries

Unit: Million USD
Source: UNCTAD (2019), World Investment Report 2019, p.213
According to the latest edition of the World Investment Report

2019, published by the United Nations Conference on Trade and
Development (UNCTAD), foreign direct investment inflows in
Ethiopia increased rapidly from year to year from 2013 to 2017,
then decreased by a large percentage of 17.6% from $4.02 billion
in 2017 to $3.31 billion in 2018. This is a similar trend with Ko-
rea's trade and investment toward Ethiopia as discussed in the pre-
vious section of this chapter, which is related to overall trends of
the Ethiopian economy. In other words, the rapid economic growth
in the 2000s and the downturn in the recent years due to socio-
political instability and the national emergency evidently affected
the overall inflows of foreign investment.
But in East Africa, the increase of foreign investment in Ethiopia
was surprising. As shown in <Table 5.1>, Ethiopia's foreign in-
vestment decreased significantly compared to the previous year in

2018, but the absolute amount of the year is still the highest in East
Africa and is equivalent to more than one-third of the combined
total of 11 countries in the region. The total foreign investment in
East Africa was $8.966 billion in 2018, with Ethiopia accounting
for 36.9% of the total. In the previous year 2017, the record shows
that the region’s total was $7.694 billion, while Ethiopia alone rec-
orded $4.017 billion, or 46.4% of the region’s total.
Table 5.6 FDI Inflows and Stock in East African

Countries
Unit: Million USD
FDI Inflows each year FDI Stock

Country
2013 2014 2015 2016 2017 2018 Sum 2000 2010 2018
East Africa 7,253 6,615 6,873 7,694 8,665 8,966 46,066 7,202 37,855 91,537
Ethiopia 1,344 1,855 2,627 3,989 4,017 3,310 17,142 941 4,206 22,253
Tanzania 2,087 1,416 1,561 864 938 1,105 7,971 2,781 9,712 20,712
Kenya 1,119 821 620 681 1,275 1,626 6,142 932 5,449 14,421
Uganda 1,096 1,059 738 626 803 1,337 5,659 807 5,575 13,333
Madagascar 551 314 436 451 389 349 2,490 141 4,383 6,360
Mauritius 293 456 216 379 443 372 2,159 683 4,658 5,313
Somalia 258 261 303 334 384 409 1,949 4 566 2,725
Djibouti 286 153 124 160 165 265 1,153 40 878 2,219
Seychelles 170 230 195 155 192 124 1,066 515 1,701 3,023
Eritrea 44 47 49 52 55 61 308 337 666 1,055

Comoros 4 5 5 4 4 8 30 21 60 122
Source: Compiled by the author from UNCTAD (2019), World Investment Report 2019
The six-year trend confirms that Ethiopia has been very active
and successful in attracting inflows of foreign investment. Looking
back, in 2013, inflows to Ethiopia came to just 64% of what neigh-
boring Tanzania had attracted, and did not show much difference
with Kenya or Uganda, but by 2017 it had increased rapidly every
year and was 3-4 times higher than that of Tanzania, Kenya and
Uganda. In terms of total FDI in East Africa from 2013-2018, Ethi-
opia ranked first with $17.142 billion accounting for 37.2% of the
region, followed by Tanzania, Kenya, and Uganda.
This growth has led Ethiopia to become the regional leader in
FDI stock as well in 2018, which refers to the balance of inflows
and outflows up to the time. Also looking at the <Table 5.1>, Ethi-
opia's FDI stock was $4.206 billion in 2010, less than half of Tan-
zania and only the sixth in the region, but in 2018 it reached
$22.253 billion and was in the first place, surpassing Tanzania.
This fact supports the motivation of this research which was ini-
tiated by the recognition that Ethiopia is emerging as a promising
market in Africa and is drawing attention as a production base in
East Africa, as foreign investment in the manufacturing sector is
rapidly increasing, especially in labor-intensive industries such as
textiles, clothing, and leather goods. It surely affirms that the Ethi-
opian government was very successful in attracting foreign invest-
ment in spite of unfavorable geography, being a landlocked country
without ports.
According to the Ethiopian Investment Commission (EIC), a to-
tal of 5,318 investment declarations were made during 1992 and
2018, of which 2,993 were reported to be in operation. Total capital

came to $4.51 billion and 610 thousand laborers were employed.
By sector, manufacturing accounted for 74.0% of total investment,
with construction 10.3%, agriculture 8.1%, real estate 4.2%, hotels
and restaurants 1.5%, health 0.4%, and the others 0.6%. The largest
investor was China, with 19.0% of the total investment in 700 cas-
es, followed by Saudi Arabia 12.2%, Ethiopia-China joint venture
9.9%, and Turkey 6.7% (Korean Ministry of Foreign Affairs, 2019,
p.66)
It is difficult to know any more details from the data currently
released. However, the data provided by PSI through the Ethiopian
government shows another list of Korean enterprises which invest-
ed in Ethiopia. This list is added to the Annex of this research. In
the previous section 5.1, the current status of Korean investment
was presented based on the statistics of the Korea Export-Import
Bank. However, the Ethiopian data lists 33 investments reported
from 2007 to 2017. This seems to be different from the K-
EXIMBank source, as the Ethiopian source includes cases of rein-
vestment by Korean companies operating in local fields. By indus-
try, investments were made in various industrial sectors such as
construction, engineering, and metals, while light industry invest-
ments in the textiles, clothing, and wigs industries accounted for
the majority of cases. Of these, 27 were solely Korean investments
and the remaining six were joint ventures with local companies.
According to the Ethiopian source, currently, there are five Ko-
rean companies operating in Industrial Parks in Ethiopia as follows.
This study is going to introduce two cases among these in the fol-
lowing subsection, whose situations were identified through the
local interviews and various press releases.
I. Bole Lemi I Industrial Parks - three Korean companies

- Evertop (Youngone) sportswear PLC
- ShinTS ETP Garments PLC
- KEI Industrial Engineering Consultancy PLC
II. Kombolcha Industrial Parks
- Pungkook Ethiopia PLC
- Seyang Kombolcha Garment PLC
5.3. Case Reviews of Korean SME Activities
A KOTRA report in July 2019 introduces a slightly different list

of Korean companies operating production facilities at local indus-
trial parks in Ethiopia. Among them, two apparel producers,
ShinTS and Yeongone, have entered the Bole-lemi 1 Industrial
Park, and leather bag producer Pungkook and a swimsuit maker
Seyang are located in the Kombolcha Industrial Park. In addition,
EKOS, which is the largest rebar production plant in Ethiopia, is
located at a site near the East Industry Zone in Dukem city, a Chi-
nese-owned free economic zone.54
Although the numbers are small yet, they can be rightly referred
to as starting points for Korean companies’ activities in Ethiopia,
54 http://news.kotra.or.kr/user/globalAllBbs/kotranews/album/2/globalBbsDataAll Vie
w.do?dataIdx=174594&searchNationCd=101124
considering the recent opening of the Ethiopian economy and the

relatively recent entrance of Korean companies there. In this re-
spect, they are expected to serve as a testbed for measuring the pro-
spective future entries and success of Korean companies in Ethiopia.
It should be noted that the companies that invested in the apparel
and leather industries in Ethiopia started out as SMEs in Korea and
grew into middle-power companies through their successful over-
seas investments, and that they are now aiming to grow further
through their investment in Ethiopia. So, their cases may serve as
benchmarks for decision makers at Korean SMEs hoping to follow
the way to enter Ethiopia. In this regard, this section introduces
some cases of the activities of Korean companies in Ethiopia.
5.3.1 ShinTS Ethiopia Garment

ShinTS Ethiopia Garment Plc is an apparel maker, which is pro-
ducing sports and outdoor garments on an OEM (Original Equip-
ment Manufacturer) basis for global brands such as Blackyak in
Korea, Jack Wolfskin in Germany, and Mammut in Spain. In Sep-
tember 2014, the company invested 49 million Birr in Ethiopia,
excluding the cost of rent for the five sheds it occupied at Bole-
Lemi Industrial Park on the outskirt of Addis Ababa, and built 20
production lines. In 2015, it employed 1,500 people and produced
20,000 pieces per month, exporting them to the United States,
Spain and Italy. Target export value in that year was 1.5 million
USD.55 And currently, as of September 2019, its website shows that
55 https://addisfortune.net/articles/korean-textile-company-starts-operation/
it has 4,414 employees with 55 production lines.56

When the editor of this study visited the local factory in May
2017, it was known that the company employed 3,000 people.
Among them, there were 70 personnel from Vietnam and 10 Kore-
ans working as skilled labors and middle managers. The products
were 100% exported on an OEM-basis, and the market was 70%
Europe, 10% USA, 15% Korea and 5% others.
Bole-Lemi Industrial Park is located 9.5km away from the Bole-
Lemi International Airport, the main gate of Addis Ababa, which is
about 30 minutes driving distance in normal traffic conditions. The
company started overseas production in Vietnam, and decided to
invest in Ethiopia after a field survey in 2013. Ethiopia's biggest
incentive was that labor costs were very low, just around one-sixth
of China and one-third of Vietnam, and the labor force was
abundant.
During the interview with this author in May 2017, the chairman
Mr. Shin indicated the low productivity of the workforce as one of
the key problems, saying that the absence of employees was fre-
quent largely due to poor housing and transportation conditions in
the metropolitan area. There were no labor disputes, he said, but
the government policies were inconsistent with regard to relevant
issues, and the bureaucracy had a lot of discretion. Also, the burden
of logistical costs due to exports through the port in Djibouti was a
main concern, but it was hoped that the situation would get better
with the opening of the railway. He also expressed a hope for more
56 http://www.shints.com/main-factory/
tax incentives, as did all the other investors.57 Finally, the chairman
expressed an optimistic opinion about business prospects and
commented that more Korean investment in the apparel industry
would be desirable. He expected that Ethiopia would rise as a main
destination of production bases in the industry in the near future
owing to the advantage of low cost labor and duty-free exports to
USA and Europe.
According to a local media report in October 2018, the company
was considered as a success story, operating the facility on a
51,350m2 plot and employing 3,690 staff. However, it was known
that the low productivity and logistics issues were persistent. The
promising sign was the opening of the 4 billion USD, 756km Ethi-
opia-Djibouti electrified passenger rail in line with a parallel cargo
rail. Also, the recent improvement of the relationship with Ethio-
pia’s bitter enemy, neighboring Eritrea, raised hopes for new busi-
ness opportunities, as it would enable the company to use the port
of Assab in Eritrea, which is in the same distance as the port in
Djibouti.58
5.3.2 Pungkook Ethiopia Bags Manufacturing Plc.

Pungkook Ethiopia Bags Manufacturing Plc. operates at Kom-
bolcha Industrial Park, which is located 367km east from Addis
Ababa and 400km west from the Djibouti port. The Kombolcha IP
57 Ethiopia's corporate income tax is 30%, while personal income tax is 35% and sales tax
is 15%. Foreign investment is given corporate tax exemption for the initial seven years
after the investment. https://tradingeconomics.com/ethiopia/personal-income-tax-rate
58 https://www.just-style.com/analysis/africa-continues-to-face-challenges-to-reach-ful l-
potential_id134720.aspx
opened in July 2017, and Pungkook started operation in April 2018

as the first foreign company to enter the IP. Its parent company in
Korea, Pungkook Industrial Co. was established in 1966 with a fac-
tory in Seongnam, and expanded production bases to Mexico in
1988, Vietnam in 1992, Indonesia in 2012, and Myanmar in 2017.
Its main products are leather bags, including outdoor and sports
bags, handbags, and travel bags, which are exported to global
brands such as Adidas and Reebok.59
The company invested $2.3 million to lease 4 sheds totaling
27,500m2 at the Kombolcha complex. According to a report in
Ethiopian media, 1,043 bags were first exported to Europe and
New Zealand in April 2018 at a unit price of 32 dollars, generating
33,344 dollars’ worth of exports. The company hired 302 employ-
ees and a plan to hire 150 more was underway at the time of the
report in July 2018. It planned to increase investment to $7.2 mil-
lion and produce 366,000 bags annually for export to the United
States, Japan and Europe. The motivation of their investment in
Ethiopia was the country's relative safety and security and the ad-
vantage of duty-free exports to the US under the AGOA.60
In addition, Seyang Corp., a swimsuit manufacturer, also invest-
ed in Kombolcha Industrial Complex in 2019. The details about
this investment case are unknown yet. As stated above, the motives
for investment of Korean companies in Ethiopia are mainly low
wages, abundant labor, and tariff-free export benefits to the US and
Europe, taking advantage of AGOA and EBA. According to the
59 http://www.pungkook.com/
60 https://addisfortune.net/articles/ethiopias-mk-bags-destine-for-europe/
local KOTRA office, inquiries from Korean SMEs on the invest-

ment environment of Ethiopia have been increasing in recent years.
This makes it feasible to assume that Korean investment will be
increasing soon, especially when the local socio-political situation
is stabilized, as the problem has been a major deterrent to the bilat-
eral industrial cooperation. However, it should be also assumed that
the rapidly growing economy of Ethiopia will accompny the rise of
labor costs as in other developing countries, and might lead to the
abolition of duty-free treatment when it leaves the group of LDCs.
Chapter 6. Ethiopian Perspective on Bilateral

Cooperation
Ethiopia-Korea relations could be traced back to the 1950s.
Ethiopian armed forces participated in the war on the Korean pen-
insula in support of the Republic of Korea as part of United Na-
tions forces. Afterwards, the two countries formally established
diplomatic relations on December 23, 1965. The relationship be-
tween the two countries experienced a setback during the Military
Regime (1974-1991) of Ethiopia. Now the two sisterly nations are
engaged in different economic and political cooperation and deter-
mined to foster bilateral cooperation in different sectors. They have
signed more than 100 bilateral agreements and MOUs in different
areas. But, the cooperation is not as advanced as it should be in
some sectors, including SMEs, due to different reasons. This study
has identified some strength and weakness of their bilateral coop-
eration and tries to propose some basic cooperation areas in the
SMEs sector.
6.1 Ethiopia and Korea Bilateral Cooperation

After the fall of the Military Regime in Ethiopia, a rapproche-
ment led to the opening of the Ethiopian Embassy in Seoul in June
1992. The agreement stipulated that the parties should make efforts
to develop economic and technical cooperation through provision
of materials and equipment, training opportunities and the dispatch
of Korea Overseas Volunteers and Experts. The total amount of
Chapter 6. Ethiopian Perspective on Bilateral Cooperation 167
ODA in terms of commitment to Ethiopia between 2005-2011

amounted to USD 113.9 million. Republic of Korea’s ODA to
Ethiopia is administered through Grant and Loan schemes. These
ODA Programs are implemented by KOICA, EDCF, and KRC. Al-
so, some Knowledge Sharing Programs (KSP) sponsored by the
Ministry of Strategy and Finance have been undertaken.
6.1.1 Engagement Areas of the Republic of Korea’s

Government with Ethiopia
Health
The goal of this program is for the improvement of the status of
maternal and child health in Ethiopia by supporting the health of
women and children through efforts to reduce both the fertility and
mortality rate of mothers and infants. Nowadays the program is
implemented both in urban and rural parts of Ethiopia.
Agriculture and Rural Development

This engagement aims role to increase rural household incomes
and improve food security in Ethiopia.
Technical and Vocational Education and Training (TVET)

This program supports the cultivation of skilled workers to drive
Ethiopia’s economic growth and thus eventually will contribute to
the eradication of poverty.
Economic Infrastructure
Building an economic infrastructure is a game-changing activity
from a developing country’s perspective, because development and
investment require a well-developed economic infrastructure. In
Ethiopia, building this infrastructure is a challenging task since it
requires significant investments. To tackle such problems, estab-
lishing bilateral cooperation with developed nations like the Re-
public of Korea is a sound strategy.
Ethiopia has received investments for the following economic

infrastructure through the two nations’ bilateral cooperation agree-
ments:
§ Energy infrastructure development
§ Technological assistance
§ Road infrastructure development and expansion
Technical Assistance
Training programs include: The dispatch of experts and volun-
teers, development research and policy advisory services and cross-
cutting issues (gender equality and the environment).
6.1.2 Korean Engagement in Ethiopia by Program
KOICA ODA Program

KOICA ODA to Ethiopia, in the form of grants, has increased in
volume 3.8 times from USD 2.29 million in 2005 to USD 8.08 mil-
lion in 2011. A total of USD 25.35 million was invested as of 2011.

Some projects that began in 2013 are ongoing and some of them
have been completed (see table 6.1). Accarding to the data, 70 mil-
lion USD was allocated to finish the projects. Most of the projects
performed by KOICA in Ethiopia are focused on social develop-
ment sectors.
Economic Development Cooperation Fund (EDCF)

A Memorandum of Understanding (MoU) was signed on 15,
September 2010 between the Ministry of Strategy and Finance of
the Republic of Korea and MOFED of the FDRE. The loan is from
the Economic Development Cooperation Fund for an amount
equivalent to USD 100 million to finance several projects for three
years. The EDCF first approved ODA Loan project in Ethiopia in
2010 and it was a bilateral long-term concessional loan. This pro-
gram is administered by the Ministry of Strategy and Finance of
Korea and implemented by the Korea Exim bank. The very broad
objectives of the EDCF program are to assist developing countries
in maintaining industrial growth and economic stability and
strengthening bilateral economic cooperation. It encourages sound
development of partner countries by sharing Korea’s development
experience and knowledge.
Korea Rural Community Cooperation (KRC) — ODA Program

KRC is contributing towards the economic and social develop-
ment of the rural community and the preservation of land thorough
the modernization of irrigation facilities and the refurbishment of

agriculture production infrastructure. KRC also strives to create a
sustainable future rural community and it is operating three envi-
ronmentally-friendly projects in rural Ethiopia.
Knowledge Sharing Program (KSP)

KSP is a development assistance program that shares Korea’s
development experience and it is successful in developing coun-
tries through policy consultation. The program was initiated in No-
vember 2010, when the Ministry of Finance and Economic Devel-
opment of the Federal Democratic Republic of Ethiopia submitted
a written demand survey. KSP has contributed much in Ethiopia
especially in the following sectors:
ü Promotion of the Micro and Small Scale Enterprise Sector and
ü Improvement of Addis Ababa City Transportation System
The lifespan of the above two projects was only one year, and
both have already been completed. The KSP has continued its con-
tributions, with a special focus on the agricultural and service sec-
tors.
6.2 Investment and Trade of Ethiopia-Korea
6.2.1 Republic of Korea investment in Ethiopia

Accarding to the data from Ethiopian Investment Commission
(EIC), there is no investment promotion and protection agreement
between Ethiopia and Republic of Korea, but negotiations are un-
derway. Between the years 2007-2017, there were 33 investments

projects in the following categories: agriculture, manufacturing,
education, health, machinery and equipment, rental and consultan-
cy services, and construction.
Table 6.1 Sectoral Classification and Status of Investment Projects by

Republic of Korea
Operation
Pre-
Imple- Perma-
No. imple- No. Tem-
Sector menta- ma-
projects menta- pro- Capital porary
tion nent
tion jects Job
Job
Agriculture 1 1
Manufacturing 21 4 4 13 549,748 1,585 6,632
Education 2 1 1 3,680 5
Health 3 1 3
Machinery
3 5,666 23 8
equipment
Construction
contracting 2 1 1 14,363 4 0
water well
Others 1 1 200 50 50
Grand total 33 6 8 19 573,657 1,667 6,690
Source: FDRE investment commission (EIC)
6.2.2 Ethiopia–Korea Trade relations
Exports
Ethiopia is the 129th largest export economy in the world and
the 116th most complex economy according to the Economic
Complexity Index (ECI). In 2017, Ethiopia exported $2.2 billion
and imported $8 billion worth of goods, resulting in a negative
trade balance of $5.8 billion. Ethiopia has general trade agreement

with twenty countries. One of them is the Republic of Korea, with
which a general trade agreement was signed on June 3, 2002.
Trade between Ethiopia and Korea for many years has been
characterized by a negative trade balance, in favor of the Republic
of Korea, as shown in the table below. Most goods exported from
Ethiopia since 2014 have been agricultural products including cof-
fee and oil seeds.
Table 6.2 Major Export Goods to the Republic of

Korea in 1,000 USD value
Value Value Value values
Product label
in 2014 in 2015 in 2016 in 2017
Coffee, tea, maté and spices 26,793 30,062 44,785 52,421
Oil seeds and oleaginous fruits; miscel-

laneous grains, seeds and fruit; indus- 10,707 12,376 5,169 998
trial or medicinal
Products of animal origin, not else-
285 498 355 332
where specified or included
Raw hides and skins (other than fur-

160 310 176 631
skins) and leather
Live trees and other plants; bulbs, roots
and the like; cut flowers and ornamen- 26 29 128 266
tal foliage
Source: FDRE Ministry of trade and industry
Import
As seen in <Table 6.3>, imports were highest in 2015 and lowest
in 2018. This may be due to the country’s foreign exchange short-
age. According to the data from Ministry of Trade and Industry,
most of imported items from the Republic of Korea are mainly cap-
ital goods such as machinery, vehicles and other industrial goods.
This shows that Ethiopia is in a low level of industrial development
and highly independent on foreign imported industrial products.
Trade balance
The trade balance between the two nations shows a negative trade
balance on the Ethiopian side and is in favor of the Republic of Korea.
As mentioned above, most of the export items from Ethiopia are agri-
cultural products or semi-processed items and their prices on the in-
ternational market are very low.
Table 6.3 Trade Balance between Ethiopia and

the Republic of Korea (2014-2018)
Year Exports Imports Trade Balance
2014 35,481,978 184,042,989 -148,561,011
2015 41,971,365 197,032,359 -155,060,994
2016 46,096,256 139,800,956 -93,704,700
2017 54,432,380 131,360,083 -76,927,702
2018 46,799,139 132,426,953 -85,627,814
TOTAL 224,781,119 784,663,342 -559,882,222
Source: Extracted from FDRE Ministry of Trade and Industry data
The Republic of Korea is exporting capital goods and industrial

products to Ethiopia which has a high price relative to Ethiopia’s
agricultural exports and because of this Korea has a positive trade
balance over Ethiopia.
Figure 6.1 Trade Balance between Ethiopia and

the Republic of Korea 2014-2018
250,000,000
200,000,000
150,000,000
100,000,000 Export In Usd
50,000,000 Import In Usd

0
2014 2015 2016 2017 2018 Trade Balance
-50,000,000 In Usd
-100,000,000
-150,000,000
-200,000,000
Source: Compiled based on data from the Ministry of Trade
Based on the above figure, one can understand that the negative
trade balance (or deficit) begins to decline after recording a high in
2015. This is due to falling imports from Korea and a slight uptick
in exports beginning from 2014.
6.3 Challenges and Major Issues for Bilateral Cooper-

ation
According to the FDRE Ministry of Foreign Affairs, Ethiopia
and Republic of Korea have a total of 109 bilateral agreements and
Memorandums of Understanding (MOUs). The following table
shows a brief overview of the bilateral agreements and MOUs.
Table 6.4 Bilateral Agreements and MOU between

Ethiopia and Republic of Korea
No Type Number Institutions Remarks
Ethiopian
1 Agreement 7 2 are in the draft stage
government
Different Ministries 8 MOU - the draft is

2 MOU 99 and Universities, sent to the concerned
Research centers body
3 Letter of Intent 3
Source: FDRE Ministry of Foreign Affairs.
Among the above bilateral agreements and MOUs, nine remain

pending due to several reasons, and some others are still being
drafted, but most of the agreements and MOUs are not functioning
at their full potentials. The concerned institutions have lack of ad-
dressing the critical and more advantageous area of cooperation in
the Ethiopian side. Some of the other agreements are business to
business relations. For instance, the Ethiopian Chamber of Com-
merce and sectoral associations, Ministry of Industry, Ethiopian
Investment Commission and the Textile Industry Development In-
stitute have signed MOU with the Korean counterparts.
6.4 Strengths and limitations of Ethiopia–Korea bilat-

eral cooperation
6.4.1 Strengths
The bilateral relationship between Ethiopia and Republic of Ko-
rea has been growing in economic, social, political and cultural ar-
eas. According to FDRE Ministry of Finance, the Republic of Ko-
rea contributes significantly in various ways, and performs an

enormous role in promoting Ethiopia's development.
· Ethiopia has attracted a large amount of FDI as a result of its
economic ties with Korea. Between 1992 and 2017, FDI inflows
from Korea to Ethiopia were growing and amounted to about
112,879,130 USD.
· Firms of Korean investors have created 8,357 permanent and
temporary jobs for Ethiopian citizens over the last 10 years.
· Moreover, the economic ties between the two countries are
strengthened with loan agreements. The recent loan agreement be-
tween the Ministry of Finance of Ethiopia and the Korea Export
Import Bank illustrates the strong relationship between the two
countries.
· In 2019, financial loan assistance amounting to 264 million
USD (equivalent to 7.6 billion Birr) enables Ethiopia to finalize
different projects in the country. The other loan agreement was a
300 million USD framework arrangement with a view to financing
high- priority projects for the years 2019-2020 through concession-
al loans.
6.4.2 Limitations of bilateral cooperation

As mentioned above, the two nations’ bilateral cooperation in
different sectors has grown through time. But there are some weak-
nesses in the relationship, which are described briefly as follows.
The weak implementation status of bilateral agreements and

MOU.
Bilateral agreements and MOU play an essential role in bilateral
cooperation activities between nations. According to the data from
the FDRE Ministry of Foreign Affairs, both countries have signed
109 bilateral agreements and Memorandums of Understanding.
Among them, nine remain pending due to different reasons and
some of the MOUs are still in the drafting stage. As such, most of
the MOU and bilateral agreements are not functional due to differ-
ent reasons.
Absence of SME-focused bilateral cooperation agreements

The Republic of Korea has many SME-based bilateral coopera-
tion agreements with different countries, but there is no such
agreement focusing on the development of SMEs with Ethiopia.
Absence of an investment protection agreement

Even though the investment protection agreement is not a pre-
condition for investment activity, there is no investment protection
agreement between the two nations. However, negotiations are un-
derway. The investment protection agreement is an important tool
to support investors.
6.5 Major Issues on Bilateral Cooperation
6.5.1 SMEs Bilateral Cooperation

SMEs bilateral cooperation is an important issue to the devel-
opment of the SME sectors. Many countries have shown great con-
cern for SME bilateral cooperation and have reaped many benefits.
According to the data from the Federal Small and Medium Manu-
facturing Industry Development Agency (FeSMMIDA), the follow-
ing institutions (Table 6.5) are engaged in different capacity building
activities.
Table 6.5 SME-based Bilateral Cooperation

N.O NAME OF ORGANIZATION TYPES OF SUPPORT
World BANK and EIB through Provide financial (lease finance ) and
1
SMEs finance project Non-financial (BDS) support to SMEs
Higher consultants to develop master

2 UNIDO plans of cluster centers ,development
of creative Hub on leather production
Provide BDS to SMEs and capacity

3 JICA building of staffs who are supporting
the SMEs
World Bank through women Financial and Non-financial support

4 Entrepreneurs development (provide business management train-
project ing through TVETs)
Source: FeSMMIDA
6.5.2 SMEs Internationalization

Stronger participation by SMEs in global markets creates oppor-
tunities to scale up and enhance productivity by accelerating inno-
vation, facilitating spillovers of technology and managerial know-
how, and by broadening and deepening skillsets (Wagner, 2012).
The Ethiopian manufacturing sector as a whole is basically inward-
looking, with the highest registered annual export earnings in
2014/15 accounting for no more than 13% of total national export

earnings. The leather, textiles and apparels and processed food sec-
tors accounted for the lion’s share of manufacturing exports with
about 63% of the total in 2014/15 (Solomon Wole, 2015).
According to a survey by FeSMMIDA, out of 175 small and
medium manufacturing firms only 19 (or 11%) have participated in
the export market. The remaining 156 (or 89%) have not entered
the export market. Among export firms small scale manufacturers
accounted for just 32%, while medium industries accounted for
68%. The survey also reveals that the main barriers to export ac-
tivities are capacity limitations, unavailability of market linkages,
financing shortages, low product quality, utilization of old machin-
ery and a lack of sufficient production premises (SMMI assessment
survey, FeSMMIDA).
6.6 Conclusions and Proposals for Better Cooperation
6.6.1 Conclusions
In the recent development agenda, international economic coop-
eration and assistance are very important enablers for a broad range
of development goals in the world. Investment and trade are inte-
gral parts of the international economic system and major compo-
nents of local development. International cooperation will also aid
the development of developing nations like Ethiopia (UNCTAD,
2014). The bilateral cooperation between Ethiopia and the Republic
of Korea is considered a fine example. The Ethiopian government
has tried to create a better investment environment for Korean in-
vestors, as they benefit Ethiopians in terms of job creation, entre-

preneurship, and technology/skill transfer. Based on both nations’
bilateral cooperation agreement, Ethiopia receives various support
in the form of loans, knowledge sharing and grants that can help
the country’s development process. But, the benefits gained
through bilateral cooperation are not sufficient and not expected to
increase through time.
6.6.2 Proposals for bilateral cooperation from

Ethiopian perspective
As the Republic of Korea has remarkable experience in the de-
velopment of SMEs, Ethiopia stands to benefit from Korean shar-
ing that experience. Based on the current status of the SME sectors
in Ethiopia, some of recommended cooperation areas are men-
tioned below.
Cooperation in Development of SMEs Promoting and Sup-

porting Institutions
To increase the economic performance of SMEs as part of the
country’s economic development, the coordination work of an
SME-concerned institution has great value. Without a strong and
well-organized institutional advocates for SMEs, the development
of SMEs may face a challenge. In Ethiopia, there is a coordination
problem and a lack of policy implementation capacity among the
institutions that promote and support SMEs. Here Korea has a bet-
ter and remarkable experience in institutional capacity-building in
the sector compared to Ethiopia. Therefore, Ethiopia needs support
for institutional capacity-building processes in the SME sectors.

The Korea federation of SMEs, KBIZ, was established in 1962
under Korea’s first small and medium enterprise promotion policy.
This organization advocates for the rights and interests of the 3.5
million SMEs in Korea. Ethiopian SMEs should look to such an
organization as a model. KBIZ seeks to expand the market for
SME products, promote initiatives to nurture human resources,
support overseas market penetration, and provide financial support
and guidance.
The EDCF (Economic Development Cooperation Fund) is a
public financial apparatus in Korea. Its primary objective is to
promote mutually beneficial relationships between Korea and de-
veloping countries in which Korea supports the economic devel-
opment of its partner countries (EDCF, 2017). Ethiopia has benefit-
ed from the EDCF loans in different sectors. Since SMEs have the
potential to transform the economy and can be source of employ-
ment in developing countries, SMEs-focused financial support has
great potential to grow the sector and promote economic growth in
the future. Bilateral cooperation on SMEs-focused EDCF finance
will play a dominant role in solving the intertwined problems of
SMEs in Ethiopia.
Regarding SME-promoting policies and strategies, Ethiopia can
learn many things from SME policies in Korea. In Ethiopia, one of
the problems in the field of SMEs is the general definition of SMEs
accepted by SME-focused institutions. The Korean experience of
defining the SMEs by classifying them based on their scope and type
of the business is a good alternative for the Ethiopian SMEs sector.

The other important experience is the different financial packag-
es which are aimed to facilitate the growth of SMEs. For example,
the credit guarantee fund, technology guarantee fund, new growth
base fund are financial packages which could serve as examples of
good practice for SMEs in Ethiopia to solve their financial prob-
lems. Korea also has SME-promoting policies specifically for
startups and technology development at SMEs. These policies in-
clude success packages for startups, support for private investment,
startup incubator center operations, and research and development
capacity enhancement at SMEs.
All the above SME-promoting policies in the area of finance and
technology and startup promotion are good lessons for developing
countries like Ethiopia, which has no SME-specific policies to plan
and design SME-specific promotion policies.
Capacity Building Training at Different Manufacturing

SMEs
Based on data from FeSMMIDA, there are many challenges that
enterprises face in their day-to-day business activities. Because of
those limitations, their performance in productivity, marketing and
internationalization and participation in the export market is at a
very low level. To solve and improve their business activities, the
following training and capacity building activities are needed by
the enterprises, which could be considered in the future bilateral
cooperation areas in building the capacity of SMEs.
Table 6.6 Cooperation needs in training and gaps by

sector
Sub sector Type of training needed Gap
Project management, quality man- Lack of project management
Metal wood and
agement system on metal and wood system and quality manage-
engineering
and bamboo works ment system.
Leather, garment and good designs,
Leather and leath-
chemical management, leather
er goods
manufacturing technology.
Chemical process, process optimi-
Chemical pro-
zation, plastic production technolo- Skill gap on designing
cessing
gy.
Jewellery and Knowledge & Skill gap on
mining, construc- Gemstones lapidary technology, Gem identification, project
tion input materi- Jewellery designing technology, planning gap. lack of practical
als, agro pro- Fruit and vegetables processing exposure on d/t types of food
cessing safety system.
Textile Textile and fabric technology Technical and practical skills
Production Management skills and a
Garment lack of understanding between
designers and manufacturers
Source: Compiled from FeSMMIDA data
Cooperation in Building the Capacity of SMEs Engaged in

the Export Market
In the Republic of Korea, public support programs for exporting
small and medium sized enterprises (SMEs) have played a signifi-
cant role in their internationalization process. Multiple non-
reimbursable and co-financing instruments that promote innovation
of SMEs’ exports have contributed to their export success. In Ethi-
opia, SMEs have lagged behind in the export market because of
intertwined problems. These problems are related to the absence of
strong export supporting institutions and well-designed supporting
instruments. To increase the contribution of SMEs in the export
market and enable them to play a bigger role on the export sector,
the support of Koreans in the area of assisting SMEs export policy

formulation and designing export promotion instrument is a great
advantage for the country.
Cooperation on supporting SMEs based research and devel-

opment programs
SME-based research and development programs are very limited
on the Ethiopian side. Without continuous research and problem-
solving, designing a scientific solution for SME problems is diffi-
cult. So to design SME-problem-oriented solutions, bilateral coop-
eration in SME-focused areas are necessary.
To sum up, as a developing nation struggling to achieve an over-
all goal of becoming a lower middle income country by 2025,
Ethiopia pays much attention to SMEs’ development. The industri-
al sector development in the GTP II focuses on positioning the
country as a light manufacturing industry hub in Africa. To realize
this plan, establishing bilateral cooperation with experienced and
developed nation like the Republic of Korea is an advantageous
alternative. Ethiopia expects more and more SME-specific coop-
eration to alleviate the intertwined problems of marketing, finance,
capacity building, institutional capacity, internationalization and
policy design.
Chapter 7. How to Promote Bilateral SME Cooperation? 185
Chapter 7. How to Promote Bilateral SME

Cooperation?
So far, this research has examined the overall economic situation
and industrial development policies of the two countries in relation
to industrial cooperation between Korea and Ethiopia, with special
attention paid to SME development. Now concluding the research,
this chapter is going to explore ways how both countries can pro-
mote bilateral industrial cooperation, also with special attention to
SME cooperation. In the previous chapter, the Ethiopian point of
view on bilateral relations and prospective cooperation has been
presented. In this chapter, the Korean authors’ view on how to
promote industrial cooperation between Korea and Ethiopia and in
particular how to promote SME cooperation is presented.
7.1 General Direction

This study discussed the issue of industrial cooperation between
Korea and Ethiopia, paying attention to the potential of Ethiopia’s
emerging market in Africa. It is certain that the Ethiopian economy
has been growing very fast over the past decade. However, it still
belongs to the group of the world's least developed countries, and it
is unrealistic to expect that it will emerge soon as a major export
market for Korea. Despite this limitation, it is clear that Ethiopia is
rising as an attractive investment destination for small and medi-
um-sized enterprises, especially taking advantage of the abundant
low-wage labor force. In Chapter 5, while explaining the status of
bilateral cooperation, it was shown that Korean SMEs are highly

interested in labor- intensive industrial sectors of Ethiopia such as
textiles, apparel, footwear and leather industries, and some compa-
nies have been operating with good performance. The fact that the
Korean Fashion Industry Association has published articles with
titles including "Ethiopia emerging as a new global production
base" reflects this phenomenon.61
On the other hand, Korea's experience of transforming from a
least developed country some half century ago to become an eco-
nomic powerhouse provides many implications for Ethiopia as
well. Korea’s experience in poverty eradication and SME-fostering
policies is more recent than any other developed country, and pro-
vides a strong precedent for developing countries. In this regard,
varieties of cooperation for SME policies can be promoted, and this
study itself is an example of such cooperation. At the same time,
from the Ethiopian perspective, Korea is a major trading partner
and a good market to expand exports of its promising products.
With the recent growth of the Korean coffee market, for instance, it
is becoming a more promising market for Ethiopia, a major coffee
exporter. There is also room for cooperation with Korean SMEs in
the field of increasing value added by processing coffee and other
agricultural products.
This chapter takes into consideration these factors comprehen-
sively and examines promising areas for promoting trade and in-
vestment between SMEs of Korea and Ethiopia. Following the first
61 Korea Fashion Industry Association, "Ethiopia is rising as a new global production ba-
sis", January 2, 2018,
section, which presents an overall view of bilateral cooperation,

Section 7.2 examines the recent local situation of Ethiopia’s major
industrial sectors such as textiles, garments, shoes and bags. This is
accompanied with a brief introduction to the foreign investment
incentives centered on industrial parks, which Ethiopia is actively
developing to attract foreign investors. These industrial sectors are
the strategic fields that Ethiopia is paying close attention to in order
to address unemployment and poverty issues and to drive sustaina-
ble growth. In addition, Korean SMEs are also showing active in-
terest in these fields, which leads to the expectation that they will
have a win-win effect.
In particular, Ethiopia is emerging as a promising alternative
destination for SMEs, which are under pressure by the rapid in-
crease of wages in China and Southeast Asia. As for the wages,
Ethiopia’s low cost is certainly a major incentive for investors. Ac-
cording to an article in the local media, workers in the Ethiopian
textile and clothing sector have monthly wages of $50~$60, lower
than in neighboring Kenya ($140~$160). Compared to Asian coun-
tries, they are slightly lower than Bangladesh ($70~$90), but much
lower than Vietnam ($170) and significantly lower than China
($400-500) (Akter, 2017).62 In addition, Ethiopia's strength in these
industrial areas is significant, given the low rents of industrial
parks provided by the Ethiopian government, income tax exemp-
tion and duty-free exports to the US and Europe.
Despite these favorable conditions, however, it seems that for
62 Akhi Akter (2017), “Why Ethiopia is Attractive for Textile and Garment Invest ment?”,
Textile Today, August 13, 2017
Korean SMEs, Africa is still far not only in the geographical dis-
tance but also in psychological and cultural distance as well, and
this distance seem to work as a barrier to their investment deci-
sions. In this regard, more active cooperation by the governments
of both countries are necessary to shorten such distance and pro-
mote investment and trade. A variety of cooperative activities can
be pursued to raise the mutual understanding of business environ-
ments as well as cultural inheritance. Also, as a means of overcom-
ing these obstacles, it is expected to bring a positive effect if an
industrial complex in Ethiopia specifically for Korean companies,
for which the MOU was signed by the two governments in 2016,
can be realized soon.
Increased local investment also brings the effect of significantly
increasing bilateral trade through the imports of raw materials and
exports of finished products by invested companies, as seen in
China and Southeast Asia. In the process of the growth of China
and Southeast Asian countries as major trading partners for Korea,
overtaking the previously dominant positions of the US and Japan,
the role of Korean companies that have invested heavily in the re-
gion has been very significant. It might be assumed that increased
investment in Ethiopia would certainly bring similar effects to bi-
lateral trade as well.
One thing to remember is that while global investors are looking
for low wages, low wages often lead to labor issues and social ten-
sions in many developing countries. A recent study by some US
scholars that viewed the low wages of the Ethiopian textile and
clothing industry as a human rights issue appeared in a recent CNN

report.63 In Ethiopia, the situation is somewhat similar to the expe-
rience of Korea during the “development era.” That is, while the
economy is growing fast, inequalities are raised as new issues.
Rapid industrialization is accompanied by an influx of rural mi-
grants to urban areas, and land acquisition for industrial zones de-
velopment frequently causes social conflicts as local residents are
resistant to the compensation. Korean companies should pay close
attention to these issues, and try to understand the local situation at
an early stage of industrialization. Good understanding of the mul-
ti-ethnic local cultures and reasonable wages together with good
labor management are essential for the success of the investors’
own businesses.
Subsequent section 7.3 examines the major issues that both gov-
ernments need to cooperatively support at the policy level in order
to facilitate the process of realizing prospective cooperation in
these promising areas. In the previous Chapter 6, Ethiopian authors
presented their hopes for expanded cooperation in the areas of
SME policy development and capacity building, and suggested an
expansion of Korean ODA focused on SME promotion. For policy
development and capacity building, joint research such as this
study or a knowledge sharing program is a good example. It is
hoped that such cooperation will be expanded in various ways by
both government agencies, researchers, and academia.
Korean ODA, which is implemented through two main arms,
63 Aisha Salaudeen (2019), “Ethiopia ’s garment workers make clothes for some of the
world ’s largest clothing brands but get paid the lowest”, CNN, May 13, 2019
grants by KOICA and soft loan by EDCF, could be utilized to ex-

plore SME-focused cooperation projects. As mentioned in Chapter
6, there are many specific SME-fostering policies and support or-
ganizations which the Korean government introduced especially
during the development era and that the Ethiopian side currently
wishes to benchmark. For example, the establishment of public in-
stitutions like Korea SMEs and Startups Agency (KOSME), the
establishment of SME Bank, the establishment of federations such
as K-BIZ in the private sector and co-sales networks for SMEs, are
projects that could be introduced in developing countries. In addi-
tion, establishing vocational training centers and development of
education programs focusing on SMEs is widely endorsed by in-
ternational aid agencies. These projects could be identified and ex-
panded in collaboration with relevant SME organizations from both
sides.
7.2 Expansion of Trade and Investment

In this section, we review the current status of some strategic in-
dustries in Ethiopia, focusing especially on the textile and garment
industry, together with leather and footwear industries. We also ex-
amine the foreign investment environment centering on industrial
parks, then introduce the US AGOA system more in detail, through
which SMEs can take advantage of duty-free exports to the USA.
7.2.1 Textile and Garment Industry

Ethiopia has a favorable natural condition for cotton production
with its vast land area and warm highland climate, but until now,
production has been sluggish: around 50,000 metric tons per year,
which is not enough to be self-sufficient. The textile industries are
also vulnerable in most subsectors such as spinning and weaving,
and considerable portions of local demand in the garment industry
are being met by imports. Even though foreign investment in vari-
ous sectors of the textiles industry is endorsed, Ethiopia is more
focused on the garments industry, which aims to export to the US
and Europe, taking advantage of duty-free benefits.
Indeed, in recent years, Ethiopia has made remarkable achieve-
ments in these areas with the surge in foreign investment and ex-
ports. According to an Ethiopian media report in April 2018, Ethio-
pia's textile and clothing industry has grown by 51% annually over
the last five to six years, with 61 foreign investment permis-
sions. 64 Data from the Ethiopian Investment Commission (EIC)
reveals that a total of 386 FDI projects in the textile and apparel
industry were implemented during 1992-2017 valued at $386 mil-
lion, creating 57,768 full-time and 7,133 contract jobs. In terms of
the origins of the investors, China accounted for more than one-
third with 56 cases, while Turkey had 14 cases, India 13 and China-
Ethiopia 12.
64 The Ethiopian Herald, “Ethiopia: Textile on the Rise – Ministry”, April 5, 2018.
Table 7.1 FDI to Ethiopia in theTextile Industry by Year

Investment
Contract-based
Year Projects Capital Full-time worker
Worker
(USD millions?)
1992 1 0.1 182 0
2001 3 2 991 20
2003 2 1 180 20
2004 5 0.5 285 110
2005 8 10 1,603 195
2006 14 9 3,713 1,975
2007 10 2 539 163
2008 11 10 2,278 427
2009 8 137 7,481 310
2010 8 50 1,440 1,660
2011 5 53 185 540
2012 9 12 724 81
2013 10 11 2,521 424
2014 18 27 15,989 273
2015 15 20 1,701 101
2016 22 36 8,267 464
2017 5 5 4,689 370
Total 154 386 57,768 7,133
Source: EIC (Ethiopian Investment Commission)
However, in terms of investment capital, Turkey ranked first, fol-

lowed by China, India, and a Hong Kong-UAE joint venture as
seen in <Table 7.2>. Korea ranked 9th with 4 cases valued at 9 mil-
lion dollars. If one case of joint venture is combined, Korea’s rank-
ing goes up to 6th or 7th.
Table 7.2 FDI to Ethiopia in the Textile Industry by Country

Investment Contract-
Full-time
Ranking Country Projects Capital Share based
worker
(USD millions?) workers
1 Turkey 14 156 40.4 10,453 1,730

2 Turkey-Ethiopia 8 84 21.8 1,176 203
3 China 56 28 7.3 8,063 814
4 China-Ethiopia 12 25 6.5 2,360 648
5 India 13 19 4.9 11,742 335
Hong Kong-
6 1 16 4.1 570 0
UAE
7 Saudi Arabia 3 11 2.8 1,961 0
India-
8 1 10 2.6 761 0
Netherland
9 Korea 4 9 2.3 5,247 146
Korea-US-
10 1 8 2.1 285 1,500
Ethiopia
11 Other 79 20 5.2 10,150 1,757
Total 154 386 100 57,768 7,133

Source: EIC (Ethiopian Investment Commission)
The Ethiopian government is pursuing an ambitious goal by es-

tablishing a 15-year long-term plan to foster the textile industry,
increasing exports from $145 million to $30 billion in 2030. Ethio-
pia created 12 Industrial Parks in the 2000s, 11 of which are Indus-
trial Parks aimed at attracting investment in the textile and clothing
industry, which indicates the high interest of the Ethiopian gov-
ernment in this sector. Among them, six industrial parks, including
the Bole-lemi Industrial Park in Addis Ababa, the 1st and 2nd Indus-
trial Parks in Hawassa, together with the Adama, Mekelle and
Kombolcha Industrial Parks, were completed and are operating.
The one remaining park outside of the textile and clothing industry
is the Kilinto Industrial Park, which is under construction in the
metropolitan area and aims to attract pharmaceutical companies.
The full list of Industrial Parks provided by the Ethiopian Invest-
ment Commission (EIC) is attached to the annex of this research.
The Ethiopian government provides separate tax exemptions for
developers and resident companies in order to continuously devel-
op industrial parks and attract foreign investors. In addition, the
EIC has established a One-Stop-Shop (OSS) for foreign invest-
ment, providing services to simplify the process of issuing investment
permissions, moving in and beginning operation. <Table 7.3> summa-
rizes the income tax exemption benefits. In addition, tariff exemp-
tions are provided for imports of parts and equipment, and more
information is available through the EIC.
So far, some Korean companies have entered the Bole-lemi 1 in-
dustrial park and the Kombolcha industrial park as introduced in
the previous chapter. These companies aimed at the low costs for
labor as well as land lease, and duty-free exports to the US and Eu-
rope utilizing the AGOA and EBA. The United States and Europe
provide no tariff exports benefits for the UN-selected Least Devel-
oped Countries (LDCs) to help developing countries to end pov-
erty. Germany, in particular, is actively pursuing the Africa Initia-
tive for that purpose and is the largest importer of Ethiopian appar-
el products.
Table 7.3 Income Tax Exemption for Industrial Parks

· Industrial park developer: 10-15 years income tax exemption depending on location of
industrial park (10 years if in Addis Ababa or Special Zones of Oromia surrounding Addis
Ababa, and 15 years in other areas)
· Industrial park enterprise: Up to 10 years income tax exemption

- Up to 6 years exemption depending on sector of engagement
- Additional 2-4 years exemption for industrial park enterprises with at least 80% export
· Expatriate employees of industrial park enterprises: Up to 5 years personal income tax

exemption after issuance of business license by the investment
Source: EIC (2017), Industrial Parks in Ethiopia: Incentives Package
7.2.2 Leather and footwear industry

Ethiopia has the largest number of livestock in Africa and great
potential for the leather industry. According to data, as of 2016/17
there are 59.5 million cows, 37.70 million sheep and 30.20 million
goats in Ethiopia, and the production of leather is about 4 million
cowhides and 20 million sheep and goat skins per year. According
to other statistics, Ethiopia's livestock holdings are the 10th largest
in the world, accounting for 2.5% of global holdings.65 Raw leather
from the sheep and goats in Ethiopia is recognized internationally
for its resilience and durability. However, due to the lack of modern
slaughterhouses and defects in the storage and transportation pro-
cess, raw materials used in the leather industry are often considered
to be of low quality. In addition, the equipment and chemicals in
the leather industry depend entirely on imports, resulting in high
costs (Joo,et.al, 2017, p.109).
Despite these troubles, the leather industry has been growing
65 https://allafrica.com/stories/201802140625.html
rapidly in recent years due to increased foreign investment and ex-

ports in various subsectors of the industry including tanning, shoes,
bags, gloves and clothing. As shown in <Figure 7.1>, exports in the
leather industry as a whole increased 2.3 times in five years from
56 million dollars in 2009/10 to 133 million dollars in 2014/15.66 The
brief status of each sector is as follows.
First, the tannery sector employs 6,000 people in 34 tanneries in
2017 and processes 20 million skins and 2 million hides annually,
supplying them to the domestic leather industry. Ethiopia has
banned the export of raw hides since 1989.
The footwear sector employs 10,000 people and produces 24
million pairs per year, 95% of which are leather shoes. Exports
have reached 3.35 million pairs, and 91% of the footwear industry
exports came from foreign-invested companies. The footwear in-
dustry in Ethiopia has a long history, but many small businesses
went bankrupt in the early 2000s due to imports of low-priced Chi-
nese shoes. However, as the quality problems of Chinese products
are highlighted, local companies are recovering their competitive-
ness, and a considerable amount of foreign investment continues to
inflow, contributing to exports. In 2012, Hua Jian, one of China's
largest footwear manufacturers, invested and began production
near Addis Ababa.
66UNIDO(2017), Ethiopian Leather Sector – Current Status and Future Prospects, Semi-
nar Presentation
Figure 7.1 Export Trends in Ethiopian Leather Industry
Source: UNIDO (2017), Ethiopian Leather Sector – Current Status and Future Prospects, Sem-
inar Presentation
In the gloves sector, three out of four companies are foreign-

invested companies and they employ about 2,000 people. In the
past, no exports have been made, but recently, exports exceeded 1
million dollars annually. The bags and leather apparel sector also
had no exports in the past, but have recently exported around 1 mil-
lion dollars annually by foreign-invested companies.
In view of the above, Ethiopia's leather industry, which spans
various fields such as tanning, shoes, bags, gloves, and clothing,
has strengths in securing raw materials and labor in spite of the dif-
ficulties in importing equipment and intermediary goods. Also,
they have great potential in market terms. In addition to the bene-
fits of tariff-free exports to the U.S. and Europe, there is also a sig-
nificant demand for sales to domestic and neighboring African
markets. Korean companies have accumulated good production and
export experience in these sectors, and there is enough room for

Ethiopia to attract them.
7.2.3 Utilizing AGOA

As briefly introduced in Chapter 1 Introduction, AGOA refers to
the Africa Growth and Opportunity Act adopted by the US Con-
gress in May 2000 and entered into force in May 2001. It is a pref-
erential trade system for the LDCs especially in Africa. With the
beginning of the Second Millennium and the end of the East-West
Cold War, poverty eradication of underdeveloped countries
emerged as a new topic in the global community, which led to the
adoption of the Millennium Development Goals (MDGs) by the
United Nations in September 2000. Grounded on this global at-
mosphere, the AGOA was enacted to provide the least-developed
countries with opportunities for economic growth and poverty alle-
viation through trade promotion. For the same purpose, the Euro-
pean Union enacted the EBA (Everything but Arms) Act at a simi-
lar time, which came into effect in March 2001.
The countries covered by AGOA are the least-developed coun-
tries in the continent of Africa, designated by the UN every three
years based on several indicators, such as per capita income. Ethio-
pia is pursuing its economic development goals to move away from
this group to a low-income country by 2025, but is currently one of
the least developed countries that benefits from the AGOA system.
AGOA had originally a 15-year time limit, but it was extended by
10 years in June 2015 and is effective until 2025. Thus, during this
period, Korean companies can also benefit from AGOA for locally
produced products in Ethiopia. Comprehensive and detailed infor-
mation on AGOA is available here: https://agoa.info/
The AGOA system is implemented in conjunction with the Gen-
eralized System of Preferences (GSP) provided by developed coun-
tries to developing countries under the 1971 GATT Agreement.
While limiting the targeted countries, the AGOA system expanded
the target items further from the GSP. The GSP is a benefit system
that all developed countries provide to all developing countries on
the same terms, whereas the AGOA differs in that the United States
only provides benefits for LDCs in Africa. In addition to the 4,600
items covered by the GSP, 1,800 items including textiles, clothing
and leather goods are added, providing duty-free or low-duty
benefits.
The effect of AGOA on the trade growth of African LDCs is
considered to be significant. Exports under the AGOA regime in-
creased by 6.6 times from $8.15 billion in 2001 to $53.8 billion in
2011. Ethiopia's exports under the AGOA also increased by more
than 80% annually from $215 thousand in 2001 to $18,294 thou-
sand in 2012 (Ethiopia Ministry of Trade, 2013). One of the im-
portant factors contributing to the high growth of the Ethiopian in
the 2000s was the significant increase in exports of the textile,
clothing and leather industries, using the AGOA and the European
Union's EBA.
However, compared to other countries in Sub-Saharan Africa
(SSA), Ethiopia is considered to have not fully utilized the AGOA
benefits. In 2012, Ethiopia accounted for only 3.55% of AGOA

exports from East Africa, and only 0.15% of SSA. This is partly
due to demand-side factors, such as tough US standards, but more
important reasons are on the supply side, including a lack of a re-
sponse strategy to the AGOA system. Recognizing this problem,
African countries adopted a recommendation to develop an AGOA
response strategy at the 10th AGOA Forum in Lusaka, Zambia, in
2011.67
In response, the Ethiopian Ministry of Trade drafted an AGOA
Response Strategy in 2013 with the help of the UN Africa Com-
mission (UNECA) and Africa Union. 68 In this strategy, Ethiopia
selected five strategic industries, including 1) garments and tex-
tiles, 2) hand-woven textile products, 3) leather and leather prod-
ucts 4) horticulture 5) agricultural processing.
As mentioned earlier, Korean companies are investing heavily in
the Chinese and Southeast Asian markets, and they are generally in
lack of understanding of the AGOA system. If they can access
more information on AGOA or EBA, it will help them decide their
entry into Ethiopia.
7.3 Policy Cooperation and Other Areas

Now, this research is going to conclude with a review of cooper-
ation on the issues of policies and institutions among both govern-
67https://www.one.org/africa/blog/the-10th-agoa-forum-in-lusaka-zambia/
68The full text of AGOA Response Strategy can be downloaded here: https://agoa.
info/downloads/national-strategies.html
ments and public sectors to promote SME trade and investment

activities.
7.3.1 Implementation of Bilateral Agreements and

MOUs
According to the information by the Ethiopian Ministry of For-
eign Affairs described in Chapter 6.4.2 of this research by the Ethi-
opian authors, there were 109 bilateral agreements and MOUs be-
tween the Korean and Ethiopian governments, but most of the
agreements and MOUs have been underperforming. According to
media reports in Korea, 40 MOUs were signed in May 2016, when
the former Korean President Park Geun-hye visited Ethiopia and
met with the former Prime Minister of Ethiopia Hailemariam De-
salegn.69 Among major issues of media attention, the double taxa-
tion prevention agreement was signed on May 26, 2016 and en-
tered into force on October 31, 2017.70 However, the construction
of a textile industrial complex for the use of Korean companies,
which received great attention at the time, has not progressed as of
2019.
As was discussed in Chapter 5, economic cooperation between
the two countries increased rapidly until mid-2016, then stagnated
or declined afterwards. This has been affected largely by the socio-
political instability in Ethiopia, which led to the state of emergency
in October 2016 and February 2018. This situation has greatly im-
proved recently, and the incumbent Prime Minister Abiy Ahmed,
69 http://www.seoul.co.kr/news/newsView.php?id=20160527001010
70 Korea Ministry of Foreign Affairs (2019), Ethiopia in 2019
who took office in April 2018 was awarded the Nobel Peace Prize
in October 2019 for his contribution to improving the hostile rela-
tions with neighboring Eritrea. As such, one important barrier to
bilateral cooperation is fading away, and another round of active
cooperation is expected. It would be desirable for the two govern-
ments to prepare specific implementation plans for the underper-
forming agreements and endeavor to implement them sincerely.
The agreements between the two governments are diplomatic is-
sues concerned with the states' prestige, so they should be carefully
reviewed and concluded. It is important to avoid such signing cer-
emonies that are made prematurely to show off their achievements
when high-level officials including the president or ministers visit
each country. Repeated events like these will reduce the trust in the
promises between nations and exhaust the practitioners in the
fields.
In addition, our Ethiopian authors pointed out that there are no
bilateral cooperation agreement focused on SMEs and that there is
no investment guarantee agreement. This seems to be owing to the
fact that the cooperation between companies in Ethiopia and Korea
has not reached full scale yet to take into the SME issues seriously.
It will be desirable to review such agreements in advance to pro-
mote full-scale cooperation in the future.
7.3.2 SME Policy Development and Capacity Building

One area of cooperation in which Ethiopia has a high interest is
to share the experience of Korea’s SME policies development so as
to refer to them in the process of establishing their own SME poli-

cies. Ethiopia is currently entering the early stage of industrializa-
tion and has rare experience in the relevant policy areas from the
introduction of SME concepts to various SME support organiza-
tions and legislation, As such, it tries to develop appropriate poli-
cies through the implications of the Korean experiences. This is
also a direct motive for undertaking this study as mentioned in the
introduction. In this study, Chapter 4 described the process of SME
policy development in Korea over the time.
The economies and circumstances of Korea and Ethiopia are dif-
ferent and the times have also changed, so it is difficult for Ethiopia
to apply the policies that Korea introduced decades ago to their sit-
uation. However, it is worth mentioning to refer to the experiences
of establishing public institutions such as KASME and the Indus-
trial Bank of Korea which have a special mission to serve SMEs
and to provide financial support as well as credit guarantees. It is
also worth mentioning to refer to the functions of KOTRA and the
general trading companies system introduced to support the exports
of SMEs. The roles of public think-tanks such as KDI and KIET in
the policy formulation process are also worthy of referencing. It is
appropriate as well to refer to the process of forming private asso-
ciations such as K-BIZ to represent the interests of SMEs and ar-
ranging joint sales and joint purchases.
In Korea, KDI plays a major role in pursuing this kind of policy
cooperation project through the Knowledge Sharing Program
(KSP) funded by the Korean government. KIET also took part in
the project. In developing countries, consultancy for policy devel-

opment is actually in high demand, and in recent years, the demand
is being focused on specific industrial sectors and SME policy de-
velopment. The Korean government should properly respond to
these demands in collaboration with research institutes, industry
and academia.
On the other hand, there is also a great demand not only in the
field of SME policy but also in the development of manpower and
technology of SMEs. In response to this demand, developed coun-
tries and international organizations are also paying much attention
to the establishment of vocational training centers and educational
support. As for the Korean projects, KOICA has established a
three-year vocational training college in Addis Ababa in coopera-
tion with Korean conglomerate LG. Founded in November 2014,
the college offers a range of technical training to help graduates
explore their career paths. The LG-Koica-Hope-TVET-College
publishes news updates on Facebook.
7.3.3 Textile Industry Complex for Korean Companies

According to Korean media reports in May 2016, both the Kore-
an and Ethiopian governments announced that Ethiopia would
build a 990,000km2 industrial complex near Addis Ababa and pro-
vide the land for free, and Korean companies would invest $100
million there. 71 For this, an MOU was signed during the summit
meeting and another MOU was signed by the Korean Association
71 https://www.hankyung.com/politics/article/2016052651211
of Textiles Industry and Ethiopian authority. Then, the Korean As-

sociation of Textiles Industry announced that it will operate two
industrial parks, one in the Bole-lemi industrial park near the capi-
tal and another in the Adama industrial park about 80km away
from the capital. However, according to a report by a Korean media
in March 2018, the site creation has not progressed at all.72 Since
the contents of this projects are not known in detail, this study will
touch this issue principally from the perspective of discussing a
promising project for SME cooperation between the two countries.
Specific industrial complexes for Korean companies first ap-
peared in China in the 1990s and have since expanded to Vietnam,
Myanmar and India. These designated industrial parks have per-
formed well as they helped the Korean companies to overcome the
difficulties of initial settlement in foreign countries with unfamiliar
languages, cultures and a lack of information. However, in the
2000s, a number of SMEs left such industrial complexes in Tianjin,
Shenyang, Dandong, and Weihai due to increased labor costs and
changes in the local market conditions arising from the competition
with domestic companies.73 In India, an industrial complex for Ko-
rean companies was established in Gillot, Rajasthan, but it did not
work properly due to several reasons including poor incentives.74
In Ethiopia, the Eastern Industry Zone, which was established in
2007 in Dukem City, near the capital, was the first free economic
zone in Ethiopia. It was developed and run by Chinese corpora-
72 https://www.asiae.co.kr/article/2018031909494913377
73 https://www.mk.co.kr/news/business/view/2008/11/683358/
74 https://www.yna.co.kr/view/AKR20170924001700077
tions. In the process of creating the complex, conflicts with local

residents surrounding the land purchase and relocation were report-
edly severe, and criticism has been raised that the tenant companies
operate in isolation from the local economy after the completion.75
In the zone, according to its website, 83 manufacturers across vari-
ous industrial sectors including textiles, leather, and metals have
moved in and created 10,000 local jobs so far.76
If Korean companies can move into a specifically designated in-
dustrial park in Ethiopia, it would be helpful for them to overcome
initial difficulties of settling down in an unfamiliar African market
on the condition that normal business environment factors hold. In
this respect, this author hopes that sincere discussion would be re-
newed by the stakeholders and produce good news.
7.4. Concluding Remarks
Now, in concluding the whole research, we would like to remind

readers that this research is a joint project conducted by the re-
searchers of KIET and PSI in a relatively short period of 6 months.
They exchanged mutual visits and held a three-day workshop in
Korea to discuss the contents and progress of the research. Alt-
hough there were great difficulties to pursue research into the topic
of SME cooperation where information was extremely vulnerable,
the researchers feel that they have successfully completed a diffi-
cult task with limited resources on a tight schedule. The project
75 https://www.sciencedirect.com/science/article/pii/S0016718517303056
76 http://www.e-eiz.com/about.php?lg=en
manager and main editor wishes to deliver thanks to colleagues,

and wishes that this study could be utilized to help understand the
situation of SMEs in both Korea and Ethiopia and to promote prac-
tical cooperation.
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UN Comtrade, https://comtrade.un.org/
Korea International Trade Association, http://kita.org/

ANNEX-1. Korean SMEs Data

<Table A.1.1> Criteria for Classification of SMEs
Enforcement Decree of the Framework Act on SMEs (revised Oct.17, 2017)
Type of Business Code Criteria

Average
1. Clothing, accessories and fur product manufac- sales
C14
turing Below 150
billion Won
2. leather, bag and shoe manufacturing C15
3. Pulp, Paper and paper product manufacturing C17
4. Primary metal manufacturing C24
5. Electrical equipment manufacturing C28
6. Furniture manufacturing C32
7. Agriculture, Forestry, Fishery A
8. Mining B
9. Grocery manufacturing C10
10. Tobacco manufacturing C12
11. Textile products manufacturing(excluding
C13
clothing)
12. Lumber and wood product manufactur-
C16
ing(excluding furniture)
13. Coke, coal briquette, and refined oil product
C19
manufacturing
Average
14. Chemical and chemical product manufacturing C20 sales
15. Rubber product and plastic product manufactur- Below 100
C22 billion Won
ing
16. Metal processing product manufacturing (ex-
C25
cluding machinery and furniture)
17. Electronic component, computer, image, sound
C26
etc.
18. Other machinery and equipment manufacturing C29
19. Car and trailer manufacturing C30
20. Other transportation equipment manufacturing C31
21. Electricity, gas, steam and water supply D
22. Water service E36
ANNEX 215
Type of Business Code Criteria

23. Construction F
24. Wholesale and retail business G
25. Beverage manufacturing C11
26. Printing and recording medium duplication C18
27. Medical substance and medical supply manu-
C21
facturing
28. Nonmetallic mineral product manufacturing C23
29. Medical, precision, optical instrument and Average
C27
watch etc. sales
30. Other product manufacturing C33 Below 80
billion Won
E
31. Sewer & wastes processing, materials recycling
(excluding
etc. (excluding Waters)
E36)
32. Transportation H
33. Printing, imaging, broadcasting & communica-
J
tion
34. Maintenance in industrial machinery and facili-
C34
ties
35. Professional, science and technology service M
N Average
36. Professional, science and technology service sales
(excluding
(excluding rental service) Below 60
N76)
billion Won
37. Health care and social welfare service Q
38. Arts, sports and recreation related service R
39. Repair and other personal service S
Average
sales
40. Lodging and restaurant business I
Below 40
billion Won
41. Finance and Insurance K
42. Real estates and leasing business L
43. Rental Service N76
44. Education Service P
Notes:
1. Average sales in the table refers to “the three year average sales of a company”.
2. This English translation was made by the author of this research from the original Korean text
in the Decree.
<Figure A.1.1> Administrative divisions map of South Korea
Source : Wikipedia (https://en.wikipedia.org/wiki/Administrative_divisions_of_South_Korea

ANNEX 217
<Table A.1.2> Korean Investment Companies in Ethiopia

Date of Type of
No Name of Investor Investment Activity Region
Permit Investor
Wholly Consultancy in Business and
1 16-Oct-07 Tuwise Logistics PLC Addis Ababa
Foreign Management Service
Myungsung Interna-
Wholly Water Well Drilling (Grade one)
2 13-May-08 tional Development Addis Ababa
Foreign Expansion
PLC
Sang-Yeon Machinery Wholly
3 15-Jul-08 Construction Machinery Rental Addis Ababa
PLC Foreign
Pak Construction Joint with
4 29-Jul-08 Engineering Workshop Oromia
Machinery PLC Domestic
Korethi General Textile Wholly
5 01-Oct-08 Textile & Garment Factory Addis Ababa
PLC Foreign
Plus Engineering Ser- Wholly
6 30-Oct-08 General Engineering Work Shop Multiregional
vice PLC Foreign
Sang Woo Construction Wholly General Engineering Workshop
7 26-May-09 Addis Ababa
Equipment PLC Foreign Service
Wholly Grade 5 up to Grade Elementary
8 26-Oct-09 Soon Ja Joung Park SNNPR
Foreign School(Expansion)
Myungsung Interna-
Wholly general Hospital and Nursing
9 15-Dec-09 tional Development Addis Ababa
Foreign School(Expansion)
PLC
Sudako International Wholly
10 01-Oct-10 Textile Industry Addis Ababa
Textile PLC Foreign
BM Ethiopia Garment Joint with
11 25-Nov-10 Garment and Textile Factory Addis Ababa
and Textile S.C Domestic
Mimo Industry PLC Wholly Artifcial Hair Piece Manufactur-
12 26-May-11 Addis Ababa
/Mr.Sung IL Woo Gm/ Foreign ing
Standard Diagnos-
tics.INC /Ethiopian Wholly Medical Equipment Manufactur-
13 17-Jun-11 Oromia
Branch/ /Mr. Wan heo Foreign ing
gm/
Kim and Double orange
Joint with Manufacturing of PVC Window
14 18-Jul-11 Tree Global Business Addis Ababa
Domestic Frame, ABS Doors and Frame
PLC /Bying Soo-gm/
Kim and Double orange
Joint with
15 04-Jun-12 Tree Global Business Manufacturing of Metal Structure Addis Ababa
Domestic
plc
CGF-DY Roofing Tile Joint with Manufacturing Coated metal roof
16 01-Mar-13 Oromia
plc Domestic tiles
Myungsung Interna-
Wholly Higher General Hospital and
17 17-Jun-13 tional Development Addis Ababa
Foreign Nursing School /2nd Expansion/
PLC
Hiroki Addis Manufac- Wholly
18 13-Sep-13 Manufacturing of leather products Oromia
turing s.c Foreign
Kei Industrial Engineer- Wholly
19 23-Dec-13 Manufacturing Of Apparel Addis Ababa
ing Consultancy PLC Foreign
Shints ETP Garment Wholly
20 10-Jan-14 Manufacturing of Garments Addis Ababa
plc Foreign
Date of Type of
No Name of Investor Investment Activity Region
Permit Investor
Wholly Provision Of Hospital Service By
21 07-Apr-14 Jaeko Medical PLC Oromia
Foreign Constraction Own Building
Wholly Deformed Bar And Steel Angle
22 10-Jun-14 Ekos Steel Mill PLC Oromia
Foreign Manufacturing
Manufacturing Of Other Plastic
Joint with
23 01-Jul-14 M.S.Technology PLC Product Excluding Plastic Shop- Oromia
Domestic
ping Bag
Wooam corporation Wholly Consultancy in electrical engi-
24 07-Aug-14 Addis Ababa
Ethiopian branch Foreign neering service
Susan food and bever- Wholly Farming of bees/Production of
25 23-Apr-15 Oromia
age PLC Foreign honey
WB Manufacturing Wholly Manufacture of plastic water tank,
26 12-Jun-15 Oromia
PLC Foreign pipes and fittings
Hanure Manufacturing Wholly
27 16-Jul-15 Mnufacturing of Leather Prducts Oromia
PLC Foreign
Pax Industrial Machin- Wholly Manufacture of general purpose
28 16-Sep-15 Addis Ababa
ery PLC Foreign machinery(Expansion)
Evertop Sportswear Wholly Manufacturing of wearing apparel
29 05-Aug-16 Addis Ababa
PLC Foreign (Including sport wears)
Provision of Technical and Voca-
Joint with
30 10-Feb-17 S and E Service PLC tional (including Sports Training Oromia
Domestic
Service)
Shints ETP Garment Wholly
31 17-Jul-17 General contractor (GC-1) Addis Ababa
PLC Foreign
Shints ETP Garment Wholly Manufacture of made-up textile
32 06-Dec-17 Addis Ababa
PLC Foreign article, except apparel
Machinery (factory) and medical
Wholly
33 11-Dec-17 Kora Pharma Plc equipment maintenance and Addis Ababa
Foreign
servicing business
Source: EIC data provided through PSI
ANNEX 219
ANNEX-2. Ethiopian SMEs Data

<Table A.2.1> Distributed lease machines by DBE in
each region
Requested lease
Approved business plan Distributed
finance amount
Region/
r/n
City By the By the By the
By machinery By machinery By machinery
number of number of number of
price (birr) price (birr) price (birr)
Enterprises Enterprises Enterprises
Addis
1 211 2,151,800,613 90 974,618,623 12 110,339,217
Ababa
2 Tigray 77 626,134,613 32 261,275,381 198,909
3 Amhara 195 1,364,861,584 82 555,706,768 3 6,165,894
4 Oromia 149 1,323,415,770 58 567,905,240 9 53,705,220
5 SNNPR 377 2,343,547,909 187 1,256,975,125 10 41,654,821
6 Diredawa 69 462,343,326 23 187,529,253 1 1,295,948
7 Gambela 1 8,234,900 0 0 0 0.00
Total 1,079 8,280,338,718 472 3,804,010,393 35 213,360,010
Source: FeSMMIDA 2017 Annual Report

<Table A.2.2> Total Paid Up capital by Small and

Medium Manufacturing Industries
Total Paid Up Capital by Small and Medium
(in ‘000 Birr)
PRIVATE Small Medium

Industrial Group
(in ‘000 Birr) (in ‘000 Birr)
PUBLIC ETHIOPIAN NON- TOTAL
MALE FEMALE ETH.
Manufacturing of food
760,371 5,461,086 475,851 198,651 6,895,958 3,962,404 2,933,554
products and Beverages
Manufacturing of Textiles 592,073 549,319 68,331 36,848 1,246,572 595,663 650,909
Manufacturing of Wearing
- 101,168 65,809 135,358 302,335 108,803 193,532
Apparel, except fur Apparel
Manufacturing of footwear,
2,125 256,680 92,185 153,131 504,119 184,558 319,561
luggage and handbags
Manufacturing of Cork
23,855 8,401 504 - 32,761 13,340 19,421
except furniture
Manufacturing of paper ,
8,645 736,015 153,262 48,267 946,189 286,258 659,931
paper products and printing
Manufacturing of chemicals
- 483,604 132,126 34,081 649,811 269,807 380,004
chemicals products
Manufacturing of rubber and

- 1,224,257 195,485 10,432 1,430,175 483,379 946,796
plastic products
Manufacturing of ther non-

31,220 1,119,471 147,948 167,148 1,465,787 419,391 1,046,396
mettalic meniral products
Manufacturing of basic iron

- 509,846 231,312 702,600 1,443,758 503,364 940,394
and steel
Manufacturing of machinery
195,747 1,005,710 37,454 7,028 1,245,939 298,286 947,653
and equipment
Manufacturing of machinery
- 143,016 18,731 - 161,746 19,684 142,062
and equipment n.e.c.
Manufacturing of furinture ,
14,275 464,604 180,025 11,833 670,737 311,357 359,380
n.e.c.
TOTAL 1,628,311 12,063,177 1,799,023 1,505,377 16,995,887 7,456,294 9,539,593
Percentage 9% 71% 11% 9% 100% 44% 56%

ANNEX 221
<Table A.2.3> Number of Persons engaged by small and medium

manufacturing industries
Number of
NUMBER OF PERSONS ENGAGED
Employees
INDUSTRIAL
GROUP ETHIOPIANS FOREIG- Number of
TOTAL Small Medium
Male Female NERS Employees
Manufacturing of food
18,074 9,109 141 27,324 27,020 12,616 14,404
products and Beverages
Manufacturing of Textiles 5,213 6,615 36 11,864 11,737 3,760 7,977
Manufacturing of Wearing
1,819 7,564 93 9,476 9,451 3,278 6173
Apparel, except fur Apparel
Manufacturing of footwear,
2,959 1,859 50 4,868 4,833 1,737 3,096
luggage and handbages
Manufacturing of Cork
2,719 315 7 3,041 3,022 389 2,633
except furinture
Manufacturing of paper,
3,249 2,373 54 5,676 5,634 2,116 3,518
paper products and printing
Manufacturing of chemicals
2,423 1,119 8 3,550 3,522 1,848 1,674
chemicals products
Manufacturing of rubber
4,789 3,669 47 8,505 8,436 3,419 5,017
and plastic products
Manufacturing of other
non-mettalic meniral prod- 19,587 4,301 126 24,014 23,528 16,535 6,993
ucts
Manufacturing of basic iron

2,015 574 25 2,614 2,597 1,013 1,584
and steel
Manufacturing of machin-
4,665 1,235 13 5,913 5,786 3,694 2,092
ery and equipment
Manufacturing of machin-
652 459 5 1,116 1,103 807 296
ery and equipment n.e.c.
Manu.of Motor Vechiles,

4 2 6 12 6 6
trailers and Semitraliers
Manufacturing of furinture ,
4,796 2,456 61 7,313 7,197 3,696 3,501
n.e.c.
TOTAL 72,964 41,650 672 115,286 113,872 54,908 58,964

<Table A.2.4> Industrial Parks in Ethiopia

Type and Number Of
Adress Sheds
Name of Total
(Region, Eligible Status of
Industrial Number Remark
Woreda, Sector 11000 5500 3000 IP
Park of shades
Sub city) m2 m2 m2
Bole lemi Addis Apparel & Opera- Fully

20 10 10
-I Ababa textile tional occupied
- 107/ha
leasable
2 sheds Under Serviced
Bole lemi Addis Textile &
&Service 1 1 - con- land
-II Ababa garment
d land struction available
-Sheds
occupied
174/ha
Under leasable
Addis Pharmaceuti- Serviced
Kilinto - - - con- Serviced
Ababa cal Hub land
struction land
available
3
Hawassa special
Textile & opera- Fully
Phase- I, Hawassa 37 12 22 sheds
Garment tional occupied
Cycle -I (39,68
0 m2)
Hawassa
Textile & opera- Fully
Phase- I, Hawassa 15 5 10 -
Garment tional occupied
Cycle -II
Garment,
opera- Fully
Adama Adama Textile 19 6 9 4
tional occupied
&Machinery,
Ready
Garment,
Dire- Dire- for 13 sheds
Apparel and 15 5 6 4
Dawa Dawa inaugu- available
Textile
ration
Apparel opera- 3 sheds
Mekelle Mekelle 15 5 6 4
&Textile tional available
Kombol- Kombol- Apparel opera- Fully
9 2 7 -
cha cha &Textile tional occupied
Apparel Inaugu- Fully
Jimma Jimma 9 - 4 5
&Textile rated occupied
Under
Garment 8 Sheds
Bahir-Dar Bahir-Dar 8 - 8 - con-
&Apparel available
struction
Debre- Debre- Garment Inaugu- 4 Sheds
8 8
Birhan Berhan &Apparel rated available
Source: INDUSTRIAL PARKS DEVELOPMENT CORPORATION (IPDC)
http://www.ipdc.gov.et/index.php/en/industrial-parks
ANNEX 223
<Figure A.2.1> Location of Ongoing Industrial Parks in Ethiopia
Source: EIC data provided through PSI

BG109 Industrial+Cooperation+between+Korea+and+Ethiopia (Dong-Joo,+Joo)

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KIET Occasional Paper No.

Industrial Cooperation between

Edited by DONG-JOO JOO

Korea Institute for Industrial Economics and Trade (KIET)

KIET Occasional Paper No.109

Chapter 2. Recent Economic Status and Challenges in

Chapter 4. Korea’s SME Policy Development and Issues ········100

Chapter 5. Industrial Cooperation between Korea and Ethiopia:

Chapter 6. Ethiopian Perspective on Bilateral Cooperation ·····166

Chapter 7. How to Promote Bilateral SME Cooperation?·······185

Table 1.1 KIET-PSI exchanges ····················································15

Table 3.1 Definition of MSMEs ···················································69

Table 4.1 Criteria for SME ······················································· 103

Table 5.1 Korea’s Trade with Ethiopia ········································· 139

Table 6.1 Sectoral Classification and Status of Investment Projects by

Table 7.1 FDI to Ethiopia in theTextile Industry by Year ···················· 192

Box 1.1 Tariff Privileges for Africa: AGOA, EBA, ACP······················· 19

Figure 2.1 Real GDP growth rate (percent) (1999/00 – 2017/18)············· 28

Figure 3.1 Distribution of Enterprises by Subsector ···························· 89

Figure 5.1 Trends in Korea - Ethiopia Bilateral Trade (million USD)·······140

Figure 7.1 Export Trends in Ethiopian Leather Industry ······················197

This study explores how to promote bilateral industrial coopera-

1.1 Objective of the Study

and proposed joint research by both institutions.1

stitutions have organized respective research teams and cooperated

Table 1.1 KIET-PSI exchanges

KIET initiated this project recognizing that Ethiopia, which is a

data for SMEs status in Korea and Ethiopia. The following is a

1.2 Ethiopia as an Emerging African Market

with a military coup d’etat by the communist organization Derg.

Box 1.1 Tariff Privileges for Africa: AGOA, EBA, ACP

Source: Excerpted from Wikipedia

As such, KIET as a public institute for economic policies needs

1.3 Why Focus on SME Cooperation?

While this study focuses on industrial cooperation between Ko-

planation on why emphasis is put on SME cooperation. In fact, Ko-

industries, such as apparel and footwear have moved their produc-

Table 1.2 SWOT Analysis of Ethiopian Business Environment for

ㅇ World’s fastest growing economy

ㅇ New Market in the growing world

Source: Compiled by the Author

To conclude, this study was conducted as a joint research by

Chapter 2. Recent Economic Status and

Ethiopia is one of the least developed countries (LDCs) in the

mentum. This is a real challenge given the current structure of the

2.1 Macro Economic Development and Performance

This sub-section deals with the Ethiopian Marco Economy in

2.1.1 Economic Growth in Ethiopia

opment Poverty Reduction Program (SDPRP), the Plan for Accel-

Figure 2.1 Real GDP growth rate (percent)

in services, 3.5% in agriculture and 12.2% in industrial sectors

Figure 2.2 Three Sectors Share of GDP (percent)

Source: Compiled from Annual Report of National Bank of Ethiopia (2009-2018)

Figure 2.2 shows the GDP shares of the Agriculture, Industry

growth while continuing to give due attention to modernizing the

tion and a 4.9 percentage point increase in non-food inflation. In

Figure 2.3 Inflation (CPI growth rate in %)

Source: Compiled from Annual Report of National Bank of Ethiopia (2009-2018)

There are many factors attributed to high inflation in 2008/09

2.1.3 Employment and Unemployment in Ethiopia

Figure 2.4 Population Increase Rate, Real GDP Growth and

Source: Compiled from Annual Report of National Bank of Ethiopia (2017/2018)