FACTORS AFFECTING PERFORMANCE OF SMALL

AND MEDIUM SIZED ENTERPRISES: THE CASE OF

ADAMA CITY:

UNITY UNIVERSITY
ADAMA CAMPUS
DEPARTMENT OF BUSINESS ADMNISTRATION
MBA PROGRAM

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

DEGREE OF
MASTER OF BUSINESS ADMISTRATION

By: Baharu_________

MARCH, 20, 2021

ADAMA, ETHIOPIA
 FACTORS AFFECTING PERFORMANCE OF SMALL
AND MEDIUM SIZED ENTERPRISES: THE CASE OF
ADAMA CITY:

A Thesis Submitted to Department of Business Administration in Partial

Fulfillment of the Requirements for the Award of Master Degree in Business
Administration (MBA)

By
Baharu_______

Advisor: _______ (Ph.D)

UNITY UNIVERSITY

FACULTY OF BUSINESS AND SOCIAL SCIENCES

DEPARTMENT OF BUSINESS ADMINISTRATION

MBA PROGRAM

MARCH, 20, 2021

ADAMA, ETHIOPIA
 Declaration

I, the undersigned, declare that, this study “Factors Affecting Performance of SMEs: The Case of
Adama city” is my original work and has not been presented for a degree in any other university,
and that all sources of materials used for the study have been duly acknowledged.

Declared by:

Name: Baharu____________

Signature: ______________

Date: __________________

iii
 Confirmation
This is to certify that Baheru_____ has carried out this thesis on the topic entitled “Factors
Affecting Performance of SMEs: The Case of Adama city” Under my supervision. Accordingly,
I here assure that her work is appropriate and standard enough to be submitted for the partial
fulfillment of the requirements for the award of Masters Degree in Business Administration.

_____________ (Ph.D.)

Signature: ______________

Date: __________________

iv
 Letter of Approval

FACTORS AFFECTING PERFORMANCE OF SMALL

AND MEDIUM SIZED ENTERPRISES: THE CASE OF
ADAMA CITY:
Prepared by: Baheru_____

Approved By a Board of Examiners

___________________ _____________ __________

Chair Person Signature Date

___________________ _____________ _________

Internal Examiner Signature Date

___________________ _____________ _________

External Examiner Signature Date

v
 ACKNOWLEDGMENTS
I wish to extend my deepest gratitude to my advisor ___________ (Ph.D.) for his professional
guidance and advice throughout my study.

This paper would not have been possible without the support of the staffs of different
organizations especially Adama city MSE office workers for their cooperation in providing me
all the necessary data required for the study. In addition, my heartfelt appreciations to the staff of
Unity University Adama campus for their unreserved support during the research study.

Finally, my acknowledgement extends to all my family and friends for their unreserved
encouraging support to accomplish this study.

vi
 Table of Contents
Contents Page
Declaration.....................................................................................................................................iii
Confirmation...................................................................................................................................iv
ACKNOWLEDGMENTS..............................................................................................................vi
Acronyms........................................................................................................................................ix
List of Tables...................................................................................................................................x
List of Figures.................................................................................................................................xi
Abstract..........................................................................................................................................xii
CHAPTER ONE: INTRODUCTION..............................................................................................1
1.1. Background of the Study...................................................................................................1
1.2. Statement of the Problem..................................................................................................3
1.3. Research Questions:..........................................................................................................5
1.4. Objectives of the Study.....................................................................................................6
1.4.1. General objective.......................................................................................................6
1.4.2. Specific Objectives....................................................................................................6
1.5. Significance of the Study..................................................................................................6
1.6. Scope of the study.............................................................................................................6
1.7. Limitation of the study......................................................................................................7
1.8. Definition of terms............................................................................................................7
1.9. Organization of the Study.................................................................................................7
CHAPTER TWO: REVIEW OF RELATED LITERATURES.......................................................8
2.1. Theoretical review of related literature.................................................................................9
2.1.1. Concept and definitions of Micro and Small Enterprises..............................................9
2.1.2. The Role of Small Enterprises in Poverty Alleviation................................................12
2.1.3. Micro and small Enterprises Development strategy in Ethiopia.................................13
2.1.4. The Implementation Structure of the Strategy............................................................14
2.1.4.1. The Ministry of Trade and Industry.....................................................................15
2.1.4.2. The Federal Micro and Small Enterprises Development Agency........................15
2.1.5. Factors Affecting Performance of Micro and small Enterprises.................................16
2.1.5.1. Inadequate finance...............................................................................................16

vii
 2.1.5.2. Marketing challenges...........................................................................................17
2.1.5.3. Problem of skilled manpower (Management Experiences).................................17
2.1.5.4. In adequate infrastructure.....................................................................................18
2.1.5.5. Policy and regulatory challenges.........................................................................18
2.1.5.6. Working premise and Challenges........................................................................19
2.1.5.7. Access to Business Information Service..............................................................19
2.1.6. Performance Measurement Metrics.............................................................................20
2.2. Empirical Reviews..............................................................................................................22
2.2.1. Empirical Studies on Micro and Small Enterprises in Ethiopia..................................23
2.3. Conceptual Framework of the study...................................................................................26
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY.......................................27
3.1. Introduction.....................................................................................................................27
3.2. Research Design..............................................................................................................27
3.1. Types and Sources of Data..............................................................................................27
3.2. Target Population............................................................................................................27
3.3. Sample size determination..............................................................................................28
3.4. Sampling Techniques......................................................................................................28
3.5. Data Collection Instruments............................................................................................29
3.6. Data Collection Procedure..............................................................................................29
3.7. Method of data analysis..................................................................................................29
3.8. Ethical Consideration......................................................................................................30
3.9. Validity and Reliability...................................................................................................30
3.9.1. Test of Reliability........................................................................................................30
3.9.2. Test of Validity............................................................................................................31
CHAPTER FOUR: DATA PRESNTATION, ANALYSIS AND DISCUSION..........................32
4.1. Introduction.....................................................................................................................32
4.2. Response Rate.................................................................................................................32

viii
Acronyms

.
.
.

ix
List of Tables

x
List of Figures

xi
 Abstract
The purpose of the study was to examine the Factors Affecting Performance of SMEs in Adama
city.

Key word:

xii
 CHAPTER ONE
INTRODUCTION
This chapter consists of the background of the study, statement of the problem, research
questions, and objectives of the study, significance of the study, scope of the study, Limitation of
the study, definition of terms and organization of the paper.

1.1. Background of the Study

Small and Medium sized enterprises (SMEs) have usually been perceived as the dynamic force
for sustained economic growth and job creation in developing countries. They play multifaceted
role such as boosting competition, innovation, as well as development of human capital and
creation of a financial system. With increased urban population dynamics of Sub-Saharan Africa
(SSA), the importance of SMEs is also growing. In SSA, given the rapid rural-urban migration
and deficiency to absorb this migration, SMEs have become important urban economic activities
particularly in providing urban employment. In similar fashion, in cities and towns of Ethiopia,
SMEs are the predominant income generating activities and thus they have a significant
contribution to local economic development and used as the basic means of survival (Gebre-
egiziabher and Demeke, 2004).

The fundamental contribution of the small business sector to the overall performance of the
economy is indeed a crucial motive for researchers to investigate and examine the key success
factors behind this sector. Small businesses face many challenges that hinder their growth or
even further cause a permanent shutdown. Most micro and small businesses are control by their
owners because they could not have fund for to hire proficiency to run the businesses for them
(Raja ram, 2008). Small business success or failure directly depends on the sole ability of the
owner(s) without defend of limited liability; the owners of small business may be personally
liable for the business misfortunes such as debts (Carter and Jones-Evans, 2006).

According to Akande (2006), small businesses heavily rely on owner’s skills, ability, and
personal characteristics for the success of the business. However, small business, across the
industrial world, still account for a significant fraction of developed build up. They play some
defined roles in the economy that support and strengthen the growth of a nation (Mwobobia,
2012). According to Werotew (2010: 226-237) also that „environmental factors such as social,

1
economic, political, and legal along with, internal (personal) factors like individual attitudes,
training and technical know-how are all the constraints that are challenging the success of
Ethiopians small business enterprise.

In Ethiopia, despite the enormous importance of the SME sector to the national economy with
regards to job creation and the alleviation of abject poverty, many of the SMEs are unable to
realize their full potential due to the existence of different factors that inhibit their growth and
performance. One of the leading factors contributing to the unimpressive growth and
performance of the enterprises is limited access to finance (Wolday and Gebrehiwot, 2004). In a
similar way, comparing small and large firms the World Bank finds that small firms face more
challenges 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 (World Bank, 2015).

The financing gap to SMEs in Ethiopia can be attributed to both the demand side and supply
side. The demand side has to do more on the characteristics of enterprises that limit their ability
to fulfill the criteria for bank loans leading to financial limitations. The supply side could be
more related to the banking sector reform and the perceived risks by banks to finance SMEs. In
Ethiopia, despite the introduction of banking sector reform in 1994 that led to expansion of the
banking industry, SMEs’ problem of credit access has persisted implying that changes in the
banking sector structure per se are not sufficient to introduce competition in the banking industry
and an improvement in SME credit access (Ashenafi, 2012).

Beside the financial gap Small and medium enterprises in Ethiopia are confronted with several
factors that affect the performance of MSE. The major factors include including financial
problems, lack of qualified employees, lack of proper financial records, marketing problems and
lack of work premises, etc. Besides, environmental factor affects the business which includes
social, economic, cultural, political, legal and technological factors. In addition to these, there are
also personal attitudes or internal factors that affect the performance of MSE, which are related
to the person’s individual attitude, training and technical know-how (Werotew. 2010). Generally,
there are external and internal factors which are still affecting the very performance of MSEs.

Therefore, intention of this study was to make sure whether those constraints are really available
at Adama city or not. Beside these, the researcher identifies and analyzes the varied problems

2
that hamper the growth, development and sustainability of the micro and small enterprises at
Adama city taking five industry sectors.

1.2. Statement of the Problem

Now a day many countries uses SMEs in order to promote entrepreneurship, investment and
growth, facilitating access to venture capital, cutting administrative burdens and increasing legal
certainty. Likewise, Micro and Small Enterprises Sectors contribute to the economy of nations’
by creating employment opportunities, production of goods and services and other value added
activities. As per Berhanu (2014), Micro and small enterprises sector are major income
generating and basic means of survival for the poor.

The development of the sector in Ethiopia is believed to be the major source of employment and
income generation for a wider group of the society in general and urban youth in particular. The
five-year Growth and Transformation Plan (GTP) of Ethiopia envisages creating a total of three
million micro and small scale enterprises at the end of the plan period (NBE, 2011). Citing the
source from the Federal Micro and Small Enterprise Development Agency (FMESDA), the EEA
Research Brief noted that a total of seventy thousand five hundred (70500) new MSEs were
established in 2011/12 employing eight hundred six thousand three hundred (806300) people
across the country. The performance is below the target set in GTP (EEA, 2015).

There are a number of challenges SMEs face that prevent them from conducting their businesses
effectively and efficiently. As per Shonesy and Gulbro's (2004) report from review of literatures
on small business success studies, ‘there have been several studies, which seek to identify the
critical success factors for small businesses. However, there appears a problem to develop a
common list of the factors which contribute for success of small business performance operating
in various business environments and regions’. It is important to define these factors for any new
business, as the owner should be concerned about the chances for success.

According to Arinaitwe (2006), small business enterprises are countenance with the problems of
lack of expertise, lack of managerial skills, inadequate legislature to protect small business
enterprise against the competitions from multinational and imported goods and limited of
finance. The financial institution policies Credit in Nigeria have also a propensity to discriminate
against small-scale enterprises; as a result, most of these enterprises have been force to obtain
funds from family members and from micro credit markets, which interest rates are very high
3
and often injurious. Similarly, Carter & Jones-Evans (2006) also clearly put the followings as the
strategic problems of micro and small business enterprises- un availability financial resources,
marketing problems and customer concentration, poor management skills, lack controls, and
technology skills. They further explained that most small business are undercapitalized and are
improperly capitalize in terms of both a high debt-equity ratio. Small business managers fit into
place in little marketing activity and have no awareness of marketing, prefer to apply their time
to activities that products that are more familiar.

Conferring to Evans (1987) the most important external factors influencing growth of MSEs
include access to finance, competition, and limited production/market place, lack of market for
the product or service; and other barriers to trade. On the other hand, the internal (firm-specific)
factors that inhibit the growth of MSEs include management competency, ‘lack of skilled labor,
poor marketing strategies, innovation level and investments on technology, etc. 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).

In Ethiopia according to (Assefa, et.al., 2014) key constraints of Micro and Small Enterprises
includes access to finance, collateral challenges, marketing challenges, working and sales space
constraints, institutional coordination problem, attitudinal challenges, licensing and registration
challenges, capital goods and machinery challenges‖. While major challenges identified by
ministry of urban development and construction ( 2013) are access to finance, access to land or
work or work space, access to input, lack of managerial skill, lack of technical knowledge access
to market . Among these the major ones are lack of finance (42%), lack of working premise
(28.3%) and lack of access to market or absence of linkage to market (18.1%) among others like
access to input , lack of managerial skill and lack of technical knowledge.

Moreover, SMEs have a problem of finance when establishing the business most individual
sources of finance come from personal savings and loans acquired from relatives, friends and
moneylenders with high amount of interests (MoTI, 2005:13-14). After the business goes
operational, the probability of becoming profitable and paying back debts along with accrued
interest is less. Besides, MSEs do not conduct market research and develop/design a product or
service as per the need of customers (Zeleke Worku, 2009:2-9). For MSEs, lack of premises is

4
unquestionably a serious problem in the city. Most informal operators do not get access to
suitable locations where they can get easy access to markets (HLCLEP, 2006:17). Further, the
problem of technical procedures and appropriate technology used by the firm are another factor
associated with high technology of equipments and use of new technologies.

Factors affecting Performance of SMEs’ in Ethiopia has not received extensive research.
Brehanu Borji and Mesfin Gashu(2015) and Deresse Mersha and Zerihun Ayenew (2017) are
among those who have carried out studies touching on Factors affecting Performance of SMEs’
in dilla town and West Oromia Region respectively. Assefa et al., (2014) and Woldie, et al.,
(2008) are some of the researchers who have carried out studies touching on factors affecting in
SMEs growth and its Challenge. Although several have been undertaken that greatly focused on
accesses to fiancé and SMEs, they have not been conclusive and should be updated to show the
current situation. Therefore, this study investigated the Factors affecting Performance of SMEs
in Adama city in order to set some light on how the problem of SMEs should be addressed.

Therefore, the novel future of this study was first, investigate the problem focusing on the
general aspects which was not used privies researches (earlier studies focused on specific
functional areas, not on the general constraints of SMEs.). Investigating an issue focusing on a
general aspect would help to identify the general problem in broader. Second, this study tries to
identify factors affecting Performance of SMEs both from Internal and External side that earlier
studies mainly focused on the External side factors. In addition the novel future of this study was
the inclusion of additional variables or constraints with major constraints which was not used by
most of the researchers (i.e. Inadequate finance, Marketing challenges, Problem of skilled
manpower, in adequate infrastructure, Working premise and Challenges, Policy and regulatory
challenges and Availability of Business Information system). A lot of studies have not been done
collectively on those factors specifically in Ethiopia; therefore the study seeks to address this
knowledge gap by focusing on factors affecting performance of small and medium enterprises in
Adama city. And also based on the empirical evidences the researcher has set the following
major research questions to be answered on this study.

5
1.3. Research Questions:

The following research questions were answered in the study:

1) What is the effect of Internal Factors on Performance of SMEs in Adama city?

2) What is the effect of External Factors on performance of SMEs in Adama city?
3) How can supports for SMEs solve the challenges of MSEs operating in Adama city?
1.4. Objectives of the Study
1.4.1. General objective

The general objective of this research was to examine factors affecting performance of small and
medium enterprises (SMEs) in Adama city.

1.4.2. Specific Objectives

 To examine the effect of Internal Factors on Performance of SMEs.
 To ascertain the effect of External Factors on performance of SMEs.
 To analyze ways of correcting challenges of MSEs in Adama city.
1.5. Significance of the Study

The study is useful for different reasons. First, the study will contribute to the body of knowledge
on the factors affecting performance of small and medium enterprises taking into consideration
in the Adama city. Second, this study was intended to shed light on the relationship between
microfinance services and growth of small and medium enterprise particularly with the focus on
their livelihoods for both planners and policy makers in government, agencies and NGOs.
Currently, the Ethiopian government mainly focuses to micro, small, and medium enterprises
starting and progress. The establishing of these firms would ultimately guide to the transfer of
suitable knowledge and its adaption to suit the background.

These needs transferring the exact wants of the firms to the core of the strategy providing
procedure in Adama city, possibly the mainly imperative challenge facing strategy provider in
industrial improvement is the funding and technical improvement of the many of SMEs that
created the foundation of industry and make the mass of job and proceeds creation. Finally, it
may contribute to the academic literature supplementing to the understanding of the nature and
characteristics of small and medium enterprise in small cities.

6
1.6. Scope of the study

The scope of this study was to examine the factors that affect performance of small and medium
enterprise in Adama city taking seven constraints that was believed as they have positive and
significant effect on performance of SMEs, using descriptive and explanatory research design.
The population for the study majorly limited to Adama city this was mainly because of enormous
presence of SMEs in the city. MSEs Sector comprises manufacturing, construction, service, trade
and urban agriculture sectors in Adama city.

1.7. Limitation of the study

While these results are valuable, the limitation of this study must also be considered. Potential
limitations of this research were not considering the responses of the other stakeholders such as
NGOs whom provide funds for SMEs, only taking SMEs from Adama city, and not considering
the other contextual factors i.e. type of industry.

1.8. Definition of terms

Enterprise: can be defined as an undertaking engaged in production and/or distribution of goods

& services for commercial benefits, beyond subsistence (household) consumption at the
household level.

Factors: A factor is a contributory aspect such as government regulation, business information

service, and management experience, marketing and financial management influences that affect
performance of micro and small enterprises.

Micro Enterprise: when the numbers of its employees (including the owner or family) are not
greater than 5 & total asset is ≤ 100,000 ETB for industrial sector and ≤ 50,000 ETB for service
sector (MSEDS, 2011).

Small Enterprise: means a business engaged in commercial activities whose capital is not
exceeding birr 1.5million and 6-30 employees for industries and 500000 for service other than
high technology and consultancy service institutions.

1.9. Organization of the Study

7
The research report consisted five major chapters. The first chapter is an introductory chapter,
which consists of Background of the study, Statement of the problem, Objectives of the study,
Significance of the study, Scope of the study, Limitation of the study, and Organization of the
paper. The second chapter reviews literature that related to the study. The third chapter
incorporates the methodology of the study, which deals about what methods, and materials are
used. The analysis, presentation and summary of the data collected from respondents constitutes
the forth chapter. The last chapter incorporates conclusion and recommendation.

8
 CHAPTER TWO

REVIEW OF RELATED LITERATURES

This part of the study provides theoretical and empirical review collected from different sources
and specific to concepts or ideas of Micro and Small Enterprises, Performance of SMEs and
Barriers/ Factors Affecting Performance of SMEs. Based on the literature reviewed, the selected
conceptual framework is also presented

2.1. Theoretical review of related literature

2.1.1. Concept and definitions of Micro and Small Enterprises

It is hard to find universally acceptable definition of Micro and Small Enterprises (The World
Trade Report, 2016:16; Haile, Girmay and Hagos, 2014:135; Hawando: 2017). Some countries
even have multiple definitions across different government institutions. This is so because the
criteria and ways of categorizing enterprises as Micro, Small and Medium vary from country to
country and from organization to organization. The most commonly used criteria are
employment, turnover and productive assets (Reinecke, and J.White, 2004; World Bank, 2013).

United Nations Industrial Development Organizations (UNIDO) gives alternative definition for
developing countries. Accordingly, it defines micro enterprises as the business firms with less
than 5 employees and small enterprises as the business firms with 5-19 employees (UNIDO,
2002:53).

The United States of America, the Small Business Act issued in 1953 stated that, small business
is one which is independently owned and operated and not dominant in its field of operation. The
act also further stated that, number of employees and sales volume as guideline in defining small
business (Major L. C. & Radwan N. S., 2010:2-19). In the same country, a committee for
economic development (CED) has explained that small business is characterized by at least two
of the key features: management is independent (usually the managers are owners), capital is
supplied and an individual or small group holds ownership and the area of operation is mainly
local (workers and owners are in one home country).

9
According to Kayanula and Quartey (2000:16) in Malawi, the official definition of enterprise
sizes is based on three criteria namely the level of capital investment, number of employees and
turnover. An enterprise is defined as small scale if it satisfies any two of the three criteria, that is,
it has a capital investment of USD 2,000 - USD 55,000, employing 5-20 people and with a
turnover of up to USD 110,000 (using 1992 official exchange rate).

In Kenya, by referring the 1999 MSE National Baseline Survey, MSEs defined as those non-
primary enterprises (excluding agricultural production, animal husbandry, fishing, hunting,
gathering and forestry), whether in the formal or informal sector which employ 1-50 people
(Ronge et al., 2002 cited in Mulugeta, 2011:15). More specifically, according to them, micro
enterprises are those that employ 10 or fewer workers and small-scale enterprises are those that
employ 11-50 workers. The same study argued that the above definitions are based on one of the
three criteria mainly used in literature to define MSEs-number of employees. The second
criterion relies solely on the degree of legal formality and is mainly used to distinguish between
the formal and informal sectors. According to this criterion, MSEs are those enterprises that are
not registered and do not comply with the legal obligations concerning safety, taxes and labor
laws. The last criterion defines MSEs by their limited amounts of capital and skills per worker.
The above indicated writers emphasized highlighted that the degree of informality and size of
employment have perhaps been the two most readily accepted criteria on which classification of
MSEs is based; and lastly they claimed that the term MSE incorporates firms in both the formal
and informal sectors.
According to Bataa Ganbold (2008) in developing countries, number of employees and size of
asset or turnover for SME tend to be much smaller compared with their counterparts in
developed countries due to their relative size of business entities and economies. For example, in
Mongolia, SME are defined as legally registered business entities with employees of 199 or less
and with an annual turnover of 1.5 billion togrog (Mongolian currency Unit.) which is
approximately 1.3 million US dollar at the time or less respectively. In the US and Canada, SME
consists of firms with less than 500 employees. Comparatively, SME Department of the World
Bank defined SME as follows:

 Micro enterprise:- up to 10 employees, total assets of up to USD10, 000 and total

annual sales of up to USD100, 000.

10
  Small enterprise - up to 50 employees, total assets and total sales of up to USD 3million
 Medium enterprise: - up to 300 employees, total assets and total sales of up to USD15
million.

Definitions of small and medium-sized enterprises

Company category European Union United

Employee Turnover or Balance sheet States
Employee
Medium-sized s 250
< ≤ total
€ 50 <10 m ≤ € 43 < 10 m s1
< 500
Small 
< 5050 ≤ € 10 < 2 m ≤ € 10 < 2 m < 2020
Micro < 1010 ≤€2m ≤€2m …
Source: European Commission and Fort et al (2013)

In Ethiopia, there is no consistently placed definition for the Micro and Small Enterprise sector
by different organization. Federal Ministry of trade and industry has defined Micro Enterprises
as an enterprise with a total asset of less than 20,000 Birr ($1200) and Small Enterprises as
Enterprises with a total asset of Birr 500,000 ($30,000) or less. While Central Statistics Agency
used type of technology adopted and the size of man power to define the sub sector.
Accordingly, Handicraft and cottage industries in which a single person or family members
perform their activities mainly by hand and using non-power driven machineries; and Small
manufacturing enterprises engaging less than 10 persons and using motor driven machinery
(MoTI,1997).

However the country has revised the definitions of MSEs in 2011 to align with at least some
countries and an international organization(Abawa & Raghurama, 2017), toconsider the
limitations of previous definitions,to integrate the development of the sector with the country‘s
5year (2003-2007 E.C) Growth and Transformation Plan (GTP) andhoped to bring about rapid
economic growth and lift up the country to middle income level. In the new definition, some of
the attributes used by other countries and international organizations such as considering job
creation, size, asset base and differentiating Minimum asset requirement for services and
industry are addressed(MoUDH, 2016). Accordingly; Micro Enterprises are those enterprises
having 5 workers including family members and its total asset not exceeding Birr 100,000 for
Manufacturing enterprises and Birr 50,000 for service providing enterprises. Small Enterprises
are those enterprises having 6-30 workers and its total capital not exceeding Birr 1.5 million for
manufacturing enterprise and Birr 500,000 for service providing enterprises. When ambiguity is

11
encountered between manpower and total assets as explained above, total asset is taken as
primary yardstick (Federal Micro and Small Enterprise development agency, 2011). In this
research the revised definition MSEs by FeMSEDA is used.

According to MSE strategy regulation article (2011), micro enterprise entails the total capital
excluding building, not exceeding Birr 50,000 in the small enterprises as an enterprise having a
total capital, excluding building from Birr 50,000 to 500,000 in the case of service sector or Birr
100,000 to 1,500000 in the case of industrial sector and engaged 6 to 30 workers case including
the owner, his family members and other employees. The case of service sector or not exceeding
Birr 100000 in of industrial sector and engaged 5 workers including the owner, his family
members and other employees .The same article defines aforementioned classification
summarized with table 12 as:

2.1.2. The Role of Small Enterprises in Poverty Alleviation

By now, it is clear and agreeable that poverty, both in urban or rural areas, is all about lack of
basic needs, health care, clean water, sanitation, education and low or inadequate level of income
and consumption, and poor command over resources. Before reaching in to such multifaceted
understanding of the concept of poverty, poverty was viewed in terms of level of income in the
late 1950’s and 60’s. Then onwards, however, the trend of defining it begun to incorporate other
non economic aspects; Likewise, on the other hand, according to Green et al (2006), one
important innovation, since the late 1980’s and early 1990’s, in development research and policy
has been the refocusing of the goals of development strategy from an exclusive concern with
economic growth to growth with poverty reduction’ through MSE’s development. Again during
these decades, the roleplay by MSE‟s, through the various socio-economic benefits emanating
from the sector, was found to be eminent in the overall development effort and process of
nations. In other words, by generating larger volumes of employment as well as higher levels of
income, the SMEs will not only have contributed towards poverty reduction, but they will also
have enhanced the welfare and standard of living of the many in the society (Mukras, 2003 cited
in Mulugeta, 2011).

As shown above, central to the problem of poverty is the availability of work. Work, secured as
either owner or employee in MSE‟s, allows people to produce for themselves (i.e. food) and earn
the money needed to buy goods and services. In this point poverty, reduction can be correlate

12
with job creation. According to Vandenberg (2006), it is also from work that wealth created
which, through taxation, allows governments to fund pro-poor services such as health care, clean
water and education. Hussmans and Meharan (2005), indicated that small-scale enterprise can
spark of socio-economic revival as they need little capital to operate but can contribute much for
they work with minimum simple and inexpensive equipment’s and management skills. They can
be adapted quickly and create quick self-employment and jobs much needed by the enumerable
job seekers.

The health of micro and small business sectors enhance the overall economy of the country,
since they utilize local resources, satisfying vital needs of large segment of the population with
their products and services, serve as spheres of technological, marketing and management
capacity and skill acquisition, and enable technological progress via adoption technologies
(FeMSEDA, 2004).

The value of the small business sector is recognize in economies worldwide, irrespective of the
economy‟s developmental stage. The contribution towards growth, job creation and social
progress is valued highly and small business regarded as an essential element in a successful
formula for achieving economic growth.

Small-scale enterprises are one of the priority areas of action among the Programs addressing
African development (UN, 2008). It could see as a means of achieving smooth transition from
tradition to modern industrial sector; and has a huge contribution to the growth and development
of the country in terms of employment generation with a relative low capital cost (Stephen &
Wasiu, 2013).

2.1.3. Micro and small Enterprises Development strategy in Ethiopia

Nowadays, the significant contribution and potentials of the MSE sector in poverty reduction has
been recognized in Ethiopia (Adam, 2014). In line with, federal government of Ethiopia has
adapted MSE development strategy to promote the sector in 1997.The objective of the strategy is
to create enabling environment for the sector (MOTI, 1997). MSE Policy targets reducing
poverty in urban areas and laying the foundation for industrial development. The strategy was
revised in 2010/11 with renewed interests and targets but having similar objectives. According to
revised (MSEs) Development Strategy of Ethiopia, the main focus of the government is to create
Job opportunities through MSEs development, in order to reduce unemployment problem,
13
alleviate poverty and promote industrial development by considering the MSEs as a base (Joshi
and Mihreteab,2015).

The revised MSE strategy has two major dimensions of MSE development stages. The first is the
transition of an enterprise from Micro to Small and from Small to Medium Enterprise level. The
second is the process whereby MSEs maintain and strengthen their competitiveness within their
own category of MSE. MSE development, being one of the key focus areas of the country‘s
development strategy, receives massive support from the government in the form of access to
finance, market, technology, training and working space (MoUDH, 2016). As stated by Assefa,
et.al. (2014:9-10) and Seyoum, Aragie, and Tadesse(2016:584-585):

 Policy support for MSE development in Ethiopia depends on stages of development in

which MSEs are categorized into Start-ups, Growing-middle and Maturity. Start-up stage
Enterprises refers to those enterprises found at their establishment stage and comprises a
group or individual aspiring entrepreneurs that seek various supports to make their
enterprise operational. The basic challenges at this stage include lack of initial and
working capital, poor knowledge of business management and entrepreneurship and lack
of knowhow about the different government policies and directives related to the sector. In
order to mitigate these challenges, FEMSEDA has designed a strategy that focuses on
facilitating access to initial capital, supporting MSEs in formalization and legalization
process and provision of training on business management, entrepreneurship and
production technique.
 Growing stage Enterprises refers to those enterprises that are competent in the market in
terms of price and quality and successfully utilize the various government support
packages and are profitable in their business. However, Enterprises at this stage also
suffer from different challenges like financial constraint, lack of appropriate technology
and technical skill, absence of sufficient working and sales premises and rent seeking
behavior. To alleviate these specific challenges, FEMSEDA has formed a national strategy
that focuses on facilitation of financial support and skill and technological development
program. On the other hand, Enterprises are considered to have reached the maturity
stage when they are fully profitable and engaged in further expansion and investments in
the sector. At this stage FEMSEDA has a strategy that aims to strengthen Enterprises in

14
 terms of productivity and product quality. Moreover, at this stage, knowledge of
international standards and better production technology are disseminated to Enterprises.
2.1.4. The Implementation Structure of the Strategy

The two most important institutions that are directly involved in the promotion of MSEs are
MoTI and the newly established MSEDA. The latter is envisaged to operate the federal and
regional level of government (MoTI, 1997:8-27).

2.1.4.1. The Ministry of Trade and Industry

The ministry of trade and industry has responsibility, as the organ of the federal government for
the formulation of policies and strategies to promote the expansion of enterprises and to facilitate
the provision of assistance to MSEs. The other duties given to the ministry is to support and
create conducive environment for the development of private promotional institutions. Regional
bureaux of trade and industry were delegated to develop and promote the sector in their regions
by coordinating regional activities and creating networks with business associations to strengthen
the flow of information to MSEs (MoTI, 1997:8-27).

2.1.4.2. The Federal Micro and Small Enterprises Development

Agency

To further ensure the proper institutional coordination for MSE support functions, the
government created the new Federal Micro and Small Enterprises Development Agency
(FeMSEDA) in 1998. In addressing above objectives, FeMSEDA is expected to provide support
to the Regional Micro and Small Enterprises Development Agencies (ReMSEDA). The
FeMSEDA (2006:39-42) provide:

leadership by delivering ‘training the trainers’ programmes to equip regional agencies,

business associations, and other professionals to deliver entrepreneurship training and
facilitation services and BDS to MSEs; studying the problem of identifying viable markets
for MSEs and addressing product quality issues; disseminating information to MSEs; and
advising government on MSE policies and strategies. FeMSEDA also operates skills and
technology training facilities, much like incubators, where training is offered in
woodworking, metalworking, garments making and handicrafts. It also provides a marketing

15
 outlet for MSE products in its sales and display centre and organizes MSE product
exhibitions at national and local trade fairs.

The FeMSEDA has been established as an autonomous government institution having its own
legal identity and run by a board of management which includes representatives of the private
sector. Private sector participation in the management of enterprise promotion agency is a new
approach in Ethiopia. The FeMSEDA is directly accountable to the MoTI. In 2000, the regional
governments also provided for the establishment of ReMSEDAs to provide extension services to
MSEs at the regional, zonal and wereda level. The MoTI through FeMSEDA, provides
institutional support.

2.1.5. Factors Affecting Performance of Micro and small Enterprises

Sitharam and Hoque(2016) defined the business environment as factors both internal and
external to the organization, influencing the continued and successful existence of the
organization. Accordingly this part assesses the most serious challenges that constrain the
development of Micro and small Enterprises.

2.1.5.1. Inadequate finance

One of the major challenges pointed out as hindering the development and survival of start-up
MSEs is access to finance (MOTI, 1997, pp, 10;Engida,et al,2017,pp.11;Fadahunsi ,2012).
MoUDC (2013) and Tadesse(2014) also identified that financing has become a principal
challenge to Micro and Small Enterprises in Ethiopia; banks in Ethiopia do not provide finance
in the form of loan to MSE‘s due to collateral obligations and other requirement. More over the
study conducted by (Kefyalew, 2016)revealed that MSE lack adequate loan to start-up their
business, long process to secure the credit, high collateral requirement and high interest rate of
loan service by lending institutions. Several studies (Abera,2012; Wolde,2013;Mebrahtu,2014;
Alemu,2015;Admasu,2016;Gebreyohannes,2015) pinpointed that the loan MSEs is not sufficient
to start business, run and expand business because enterprises need finance to purchase
equipment and machinery, to expand their market and to cover working capital shortages. Since
there is high interest rate and collateral requirement, most MSEs have been forced to use the
informal institutions for credit. The research conducted by Bernard; Sare, and Musah,(2014) in

16
Ghana also confirms that high interest rate is the leading factor in constraining MSEs
development.

Financial constraints such as inadequate investment capital, insufficient loan, and inefficient
financial market are the major obstacles in doing business, and most MSE‟s are highly risky
ventures involving excessive administrative costs and lack of experience in dealing with
financial institutions (CLEP, 2006). According to Sacerdoti (2005) in Habtamu et al. (2013),
financial institutions such as microfinance and the banking systems in Africa are not in a position
in providing enough financial support to the expansion of micro and small businesses. MUDC
(2013) also identified that financing has become a principal challenge to small scale enterprises
in Ethiopia; except City administrations and regional microfinance institutions, their savings and
family supports, banks in Ethiopia do not provide finance in the form of loan to MSE‟s due to
collateral obligations and other requirement.

2.1.5.2. Marketing challenges

Marketing knowledge is important for the promotion, growth and development of small-Scale
enterprises. In this regard, the Ethiopian government has formulated MSE‟s strategies to ease
marketing challenges by creating inter-linkage mechanisms with other institutions, providing
training on marketing, developing export support programs and marketing information center
(MoTI, 1997). However, inability to sell the products and services; lack of adequate marketing
channels, and lack of marketing skills are the problems to the starting of business and further
growth of the sector (MUDC, 2013; MoFED, 2011).

Presence of market for the products and services is one the driving forces behind the success of
Micro and Small Enterprises and some efforts available by the governments; marketing is among
the major challenges for the development the sector. MSEs in Ethiopia are encounter access to
sufficient and sustainable market, lack of suitable working and selling premises and inadequate
market competition and knowledge. Several studies conducted in different regions such as:
Admasu (2016). Abera(2016); Bekele and Mezgebe (2016); Engida,etal,(2017,pp.11); Abera
(2012); Sherefa(2012)also identified that marketing is among the top most severe problems that
hinder the development of micro and small enterprises.

17
 2.1.5.3. Problem of skilled manpower (Management Experiences)

The problems of MSE’s management arises from the limited knowledge and ability of the owner
or shortage of competent staff to advice the owner on management policies (Stephen & Wasiu,
2013). Decision-making skills, sound management and accounting practices are very low for
SSE operators in developing countries (Aremu & Adeyemi, 2011). In addition, lack of
managerial skills leads to problems in production due to lack of coordination of production
process, and inability to troubleshoot failures on machinery and/or equipment’s and they cannot
afford to employ specialists in the fields of planning, finance and administration (CLEP, 2006).

The performance of MSEs is mainly associated with human capital, availability of managerial
skills and experience affect the performance of MSEs (Kamunge 2014).MSEs manager lack the
experience and managerial skills where they develop their own management skills through a
process of trial and error and they don’t get training on business management frequently.
According to Kamunge (2014) management skills is needed so as to enable a proper planning,
controlling, budgeting, directing and staffing with qualified and competent employees.

For Micro and Small Enterprises, Training is the main means to gain the relevant and business
specific know-how and abilities to start and grow their own businesses in low and middle income
countries (German Development Institute, 2013).However, studies by Abera (2012); Kebede
(2015) mentioned that Lack of entrepreneurship training is one the hindering factors for the
success of their business.

2.1.5.4. In adequate infrastructure

In most developing countries infrastructural facilities are grossly inadequate Olalekan (2014).
Inadequacy of the physical infrastructure is among the causes of low levels of investment and
unsatisfactory performance of Micro and Small Enterprises. Study conducted by Abdissa and
Fitwi (2016) in south west of Ethiopia, most MSE operators opined that lack of adequate
infrastructural facilities especially insufficient and interrupted electric power and water supply.
Abera(2012); Cherkos( 2017) ; Demeke (2016) also mentioned challenges like interruption of
electric power, interruption of water supply, lack of road facilities and interruption of
telecommunication service are constraining factors of MSEs development.

2.1.5.5. Policy and regulatory challenges

18
Having the right business policy, regulations and related institutions is vital for the health of an
economy (Doing Business, 2014; Belás and Sopková (2016). However, enabling policy
environment itself may not be sufficient to ensure optimal results because the response to the
enabling policy environment depend on, among other things, the degree to which MSE operators
can access resources such as skill, technologies, finance, infrastructure, markets, etc( Ageba and
Amha,2006). (Bekele and Mezgebe, 2016; Abera, 2012) study results reveals that most of the
Enterprises are not getting support from government. (Abera, 2012; Admasu, 2016) also states
that bureaucracy in company registration is the main factor that affects the performance of the
sector in addition to unreasonable tax and related issues.

Registration and licensing, and the extent of government official involvement and accessibility
of rules and regulations have impacts on MSE‟s. According to Dlitso, K., and Peter Q. (2000),
high startup costs for licensing and registration requirements, cost of settling legal claims and
excessive delays in court proceedings can impose excessive and unnecessary burdens on MSE‟s
operations. Even though registration and licensing helps SSE‟s to have legality rights, and to
reduce the prevalence of informality, more than 12% of MSE‟s in Addis Ababa didn‟t have
registration license (MUDC, 2013).

2.1.5.6. Working premise and Challenges

For successful and sustainable growth of Enterprises, working premise is one of the main
components (Haile et. al, 2014). However, the shortage of such infrastructure has also been one
of the main obstacles to the development of the sector in many urban areas of the country. For
instance, the findings of (Haile et. al, 2014) shows that MSEs that have own working premise
grow faster than those that operates at rented and at family working premise. In addition, the
studies conducted by Adego( 2014);Berhanu (2014); MoUDC( 2013) and Cherkos et.al (2017 )
states that among obstacles experienced by entrepreneurs operating MSEs sector is unavailability
of work premises.

2.1.5.7. Access to Business Information Service

Information is the ‘life blood’ for business enterprises. Organizations cannot survive without
information. They need information on market, raw materials, government directions and others.
Access to business information services has been identified as one area that needs attention from

19
governments and business services providers if the SMEs sector in developing countries is to
achieve sustainable levels of growth and development. Many firms in Africa Operate in an
information which is poor environment due to lack of adequate business support services and the
poor information technological infrastructures (Oshikoya&Hussain, 2007). Access to
information has however been not given the same attention as other constraints to growth of
SMEs like access to finance, markets, technology or training.

Accessing business information services has over the years been greatly enhanced with the
emergence of various information and communication technologies. In developed countries,
because of well-developed information and communication technologies (ICTs) infrastructure
and easy access to computer hardware and software, SMEs enjoy easy access to business
information services.

In developing economies there are many challenges regarding ICTs infrastructure and the cost of
IT hardware and software. This in itself has created many problems in the area of business
information services for the SMEs sector. As governments and business service providers try to
address the many challenges facing the SME sector, it is also important that the present use of
ICTs in accessing business information services be identified in order to provide more
development support in this area (Levy, 2000).

For the SMEs sector in developing countries, including Ethiopia to observe sustainable levels of
growth and development, availability of business information services has been identified as one
area that needs attention from governments and business services providers. Many SMEs in
Africa and Ethiopia specifically, operate in an information insufficient environment due to lack
of adequate business support services and the poor information technological infrastructures
(Oshikoya and Hussain, 2007). Access to information has however been not given the same
attention as other constraints to improve the performance of SMEs like access to finance,
markets, technology or training (Kauffmann, 2005).

Availability of business information services for SMEs over the years has been enhanced with
the emergence of various information and communication technologies. In developed countries,
SMEs enjoy easy access to business information services due to well-developed information and
communication technologies (ICT) infrastructure and easy access to computer hardware and
software while in developing economies there are many challenges regarding ICT infrastructure

20
and the cost of IT hardware and software. This has brought many challenges in the area of
business information services for the SMEs sector. Despite the effort of governments and
business service providers try to address the many challenges facing the SME sector, it is also
necessary to note that SMEs identify and adopt the present use of ICT in accessing business
information services in order to provide more development support in this area (Levy, 2000).

2.1.6. Performance Measurement Metrics

According to Martin (2010:67) performance is defined simply in terms of output terms such as
quantified objectives or profitability. Performance has been the subject of extensive and
increasing empirical and conceptual investigation in the small business literature (Bidzakin K.J.,
2009:31). The issues that remain unresolved are the goals against which performance should be
assessed and from whose perspective the goals should be established (Etzioni, n.d:128).

Therefore, Performance can be identified when the business is able to achieve its main objectives
and goals and from previous literature several factors influence the performance of MSEs
(Kamunge2014). Performance in MSEs can be identified in terms of output as quantified
objective or profitability (Martin 2010). Performance can also be measured referring to how
employees deliver their services and any success in a business will be termed as good
performance while the failure of a business will be termed as poor performance (Wanjiku 2015).
Financial measure may include increase in profit and increase in sale volume while nonfinancial
measure may include overall performance of the business, increase in number of employees,
customer satisfaction, customer loyalty and brand awareness. Atieno (2009) concluded that
financial measure is simple easy to understand as well as to compute while non financial
performance are so complicated and cannot be computed.

Rami Alasadi and Ahmed Abdelrahim (2007:6-13) on their study defined performance as
follows. [T]he most commonly adopted definition of success [good performance] is financial
growth with adequate profits. Other definitions of success [good performance] are equally
applicable. For example, some entrepreneurs regard success [good performance] as the job
satisfaction they derive from achieving desired goals. However, financial growth due to
increasing profits has been widely adopted by most researchers and practitioners in business
performance models.

21
Global Entrepreneurship Monitor (GEM) defined Performance as the act of performing; of doing
something successfully; using knowledge as distinguished from merely possessing it (GEM,
2004:10). However, performance seems to be conceptualized, operationalized and measured in
different ways thus, making crosscomparison is difficult (Srinivasan et al., 1994:22). Among the
most frequently used operationalisations are survival, growth in employees and profitability.

A business enterprise could measure its performance using the financial and nonfinancial
measures. The financial measures include profit before tax and turnover while the non-financial
measures focus on issues pertaining to customers’ satisfaction and customers’ referral rates,
delivery time, waiting time and employees’ turnover. Recognizing the limitations of relying
solely on either the financial or non-financial measures, owners-managers of the modern small
business has adopted a hybrid approach of using both the financial and non-financial measures
(H Gin Chong, 2008:13).

2.2. Empirical Reviews

According to Mead & Liedholm (1998:69) and Swierczek and Ha (2003:46-58), the main factors
that affect the performance of MSEs in developing countries is not their small size but their
isolation, which hinders access to markets, as well as to information, finance and institutional
support. The argument that small businesses in Africa are crucial in the role they play in
employment creation and general contribution to economic growth is not new. Although this
may be true, the vast majority of new enterprises tend to be one-person establishments (Mwega,
1991:33-36). This has tended to ensure that the journey of the MSE entrepreneur in many
instances is short-lived, with the statistic of MSE failure rate in Africa being put at 99 per cent
(Rogerson, 2000:41). Various reasons for these failures have been proposed by scholars
including lack of supportive policies for MSE development (McCormick 1998:26-27), intense
competition with replication of micro-businesses (Manning & Mashego, 1993:59-61); manager
characteristics including lack of skills and experience (Katwalo & Madichie, 2008:337-348 and
Verhees, F. M., & Meulenberg, M. G., 2004:134-154).

A study by Hall (1992:237-250) has identified two primary causes of small business failure
appear to be a lack of appropriate management skills and inadequate capital (both at start-up and
on a continuing basis). The research undertaken in Tanzania by surveying 160 micro enterprises
showed that high tax rates, corruption, and regulation in the form of licenses and permits, are

22
found to be the most important constraints to business operations of micro enterprises (Fjeldstad
et al, 2006 cited in Mulugeta, 2011: 22).

Roy and Wheeler (2006:452-464) identified that the level of training of micro entrepreneurs
(both formal and informal); experience and number of years in operation; knowledge of the
market; level of differentiation (in terms of price, quality or other) and diversification of
products; access to the necessary resources and/or technologies; level of planning; vision for the
future; and the entrepreneur’s level of poverty are among the factors contributing to success of
MSEs while lack of market knowledge and training, limited access to capital, and lack of co-
operation among possible business partners are some of the factors inhibiting the growth and
development of the micro enterprise sector.

2.2.1. Empirical Studies on Micro and Small Enterprises in Ethiopia

Tarfasa, et al. (2016) conducted a research to assess the Determinants of growth of Micro and
Small Enterprises by using a random sample of 300 MSEs selected from manufacturing,
construction, service, trade and urban agriculture in Addis Ababa. According to this research,
among manager‘s or owner‘s characteristics, age, marital status and education were important
factors affecting growth of both Micro and Small Enterprises. The finding of this study reveals
that weak business environment influences the growth of firms. In particular, frequent power
interruptions, lack of access to credit, and shortage of water is inversely correlated with growth
of Micro and Small Enterprises

In his research, Cherkos et.al (2017)studied significant factors in Micro and Small Enterprises
performance in Amhara region. In his study, working premises, access to finance, infrastructure,
entrepreneurship and business managerial problems are found to be the most critical factors and
took majority of the share for the causes of 50% drop-out. The study also shows that even though
working areas are built, they are not functional due to lack of facilities. Moreover, due to
infrastructure problem of daily power interruption, 25% of their work time is lost.

Leza , Rajan and Kuma (2016) conducted research with the intention of investigating the key
determinants of employment growth among MSEs, based on interview schedule consisting 352
randomly selected enterprises in three administrative towns in Wolaita Zone, finding that
Shortage of working premises, power supply, other infrastructures and inputs rising costs are
among the problems of challenging the proper functioning of the MSEs. Available working
23
premises and other infrastructure in most cases are inconvenient to accommodate business tasks
and related requirements.

Kefale and Chinnan (2012: 25) identified major problems that hindered employment growths are
market problems, lack of working capital among others such as Seasonality work; input supply
problem, power fluctuation, and lack of skilled manpower, high rent, high input price, unfair
competition and utilities expense are also encountered by Micro and Small Enterprises. This
indicated the fact that market problem, working capital problem and lack of working place
coupled with other factors stated above has negative impact on the employment growth in
smalland micro enterprises. Similarly, key informants and group focus discussion held to identify
major constraints that hindered employment growth in Micro and Small Enterprises.

Study by Kibret, et al. (2015: 19-20) identified major problems experienced by MSEs in Gedeo
Zone, where high tax, inefficient tax administration, prices of inputs, bureaucratic burden, lack of
raw materials, inadequate skills, and high interest rate . Furthermore, high collateral requirement
was another major hindering factor. This is due to the reason that commercial banks considered
Small businesses as high risk clients with little or no resources to provide collateral.

Kebede and Simesh(2015: 1627) conducted a study to examine the impact of environmental
factors affecting theMicro and Small Enterprises performance in East Gojjam Zone and
concluded that inadequate power supply, inadequate water supply, unavailability of dry waste
and sewerage system, unavailability of business development service, unavailability of suitable
market place collateral requirements to get loan, shortage of working capital and unavailability
of own working premise were identified as serious problems for low performance.

According to the study of Mulugeta (2011) ,the critical problems of SSEs has recognized and
classified in to market-related problems, which are caused by poor market linkage and poor
promotional efforts; institution-related problems including bureaucratic bottlenecks, weak
institutional capacity, lack of awareness, failure to abide policies, regulations, rules, directives,
absence of training to executives. Also poor monitoring and follow-up; operator-related
shortcomings like developing a dependency tradition, extravagant and wasting behavior, and
lack of vision and commitment from the side of the operators; MSE-related challenges including
lack of selling place, weak accounting. In addition to this record keeping, lack of experience

24
sharing, and lack of cooperation within and among the MSEs and finally society-related
problems such as its distorted attitude about the operators themselves and their products.

In his research, Dereje (2008:47) studied the nature, characteristics, economic performance,
opportunities and challenges of MSEs in the construction sector based on 125 sample enterprises.
The results of the study revealed that the main constraints of the MSEs were shortage of capital,
lack of raw materials, absence of government support, lack of market, lack of credit facilities and
high interest rate. Studies were also conducted specifically with a purpose of identifying the
problems that MSEs encounter. For instance, Workneh’s (2007:51) research undertaken in Kolfe
Keraneo sub-city of Addis Ababa indicated that lack of capital, lack of market, unfavorable
policy, and inadequate infrastructure, absence of adequate and relevant training, bureaucratic
structure and procedures are among constraints faced by MSEs. Similarly, Adil’s (2007:63)
research carried out in Addis Ababa shows that inappropriate government intervention, shortage
of capital, location disadvantage, lack of market and lack of display room are the major
challenges that obstruct MSEs.

25
2.3. Conceptual Framework of the study

The conceptual framework shown in Figure below is developed based on the literature review.
The conceptual framework will illustrate the linkage between Independent variables (Factors that
affect Performance of SMEs) and Dependent variable (Performance of SMEs).

Figure 2.1.shows the relationship between independent and dependant variables

Figure 2.1: Conceptual frame work the study

Independent Variables
Dependent Variables

Internal Factors
 Management Skill and
Experiences
 Marketing Strategy

External Factors Performance of SMEs

 Financial Control & Planning
 Infrastructures
 Policy and regulation
 Working Premises
 Access to Business Information

Source: Compiled by the researcher (2021)

26
 CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1. Introduction

This part of the study consists of research design, type and source of data, population, sampling
techniques, sample size determination, data collection instrument, data collection procedure,
methods of data analysis, ethical consideration, validity and reliability of the study.

3.2. Research Design

The study adopted empirical investigation with descriptive and explanatory research design since
the major focus of the research was to examine factors affecting performance of small and
medium enterprises, explanatory studies and descriptive survey designs were used to allow for
the gathering of information, summarize, present and interpret it for the purpose of clarification
(Creswell, (2003). Whereas, the Research approach is qualitative and quantitative research
approach, it is a means for testing objective theories by examining the relationship among
variables. These variables, in turn, were measured, typically on instruments, so that numbered
data were analyzed using statistical procedures. Therefore, in order to accurately describe the
effect & relationships between the independent variables and the dependent variable Descriptive
and explanatory research studies were employed which helps to use both qualitative and
quantitative data analysis.

27
 3.1. Types and Sources of Data

The study employed both primary and secondary data sources. Primary data was collected from
employees of five different industry sectors (i.e. employees of construction material producers,
Manufacturing which composes of (Metal work industry, wood work industry, molding, soap
and detergent, machineries and others), whole sale and retail (Merchandising), Agricultural
products, Textile (garment and leather product including bags and footwear), Real estate and
Hotels and tourism) and employees of financial institutions. As the secondary data; books,
articles, journals, was reviewed to develop conceptual framework.
3.2. Target Population

The target population of the study was _____________________________

3.3. Sample size determination

Malhortra and Peterson (2006) and Zikmund (2003) stated that, the larger the sampling size of a
research, the more accurate the data generated. However, due to time and the nature of the
population, sample determination method developed by (J Carvalho,1984), "Archival application
of mathematical sampling techniques",(1984). (Quoted by national Archive report Richmond,
2005) was preferred to be used by researcher as a method to determine a sample size.

Table 3.1: Sample Respondents by stratum

Population size Small Medium Large

51-90 5 13 20

91-150 8 20 32

151-280 13 32 50

281-500 20 50 80

28
 501-1200 32 80 125

1201-3200 50 125 200

3201-10,000 80 200 315

10001-35000 125 315 500

35,001-150,000 200 200 800

Source: (Carvalho ,1984) as quoted by (national Archive report Richmond, 2005)

Table: 3.2: summery of sample respondents from each stratum

Organizations\Sectors Total population Sample size
Trade (Whole Sale & Retail)
Manufacturing
Urban Agriculture
Construction
Textile
Total

3.4. Sampling Techniques

For the purpose of this study, the researcher used probability sampling particularly stratified
sampling technique since the total population of the study is large and heterogeneous in type
stratified sampling technique was preferred. The target population for the study was classified
into five strata based on the organization and Industry sectors……

3.5. Data Collection Instruments

The data was collected through structured questionnaires with closed Likert type statements
questions. The Likert type scale commonly used in business research, because it allows
participants to provide their perceptions and opinions both in terms of direction (positive or
negative) and intensity (degree of agreement or disagreement). The questionnaire would utilize a
five point likert scale namely Strongly disagree (SD), Disagree (D), Neutral (N), Agree (A) and

29
Strongly Agree (SA) which was assigned scores of between 1 and 5. This allowed the researcher
to draw conclusions based on comparisons made from the responses.

3.6. Data Collection Procedure

Before collecting the data, the instruments of the data was prepared carefully and permission of
the selected firms were taken. Then the objectives of the study were explained to subjects. Based
on their willingness to participate in filling questionnaire the questionnaires were distributed. To
enhance the response rate, the questionnaires were delivered by hand and collected by hand on a
scheduled pickup date.

3.7. Method of data analysis

Descriptive analytical technique was used with the aid of Statistical Package for Social Sciences
(SPSS) version 25. The reliability of the variables was measured by Cronbach alpha. To analyze
the data collected with the use of questionnaires. The questionnaires have a five –point Likert-
type response scale (1 = strongly disagree, 2 = disagree, 3 = neutral, 4 = agree, 5 = strongly
agree). The study also used tables, frequencies, and percentages to analyze and present the
collected data. In addition, the collected data were analyzed by Regression analysis and
correlation analysis because it helps to investigate the relationship between the Independent
variables (Factors affecting Performance of SMEs) and Dependent variable (Performance of
SMEs) and their effect on the dependent variable Performance of SMEs.

Base on the conceptual model of the study expressed by Figure 2.1, mathematically the
relationship between Factors affecting Performance of SMEs dimensions and Performance of
SMEs were expressed in the multiple regression equation as:

Y = X0 +X1(ATF) + X2(MRS) + X3(MSE) +X4(ADI) +X5(GPR) + X6(WP) + X7(BIS) + e

Where:
Y= Performance of SMEs.
ATF = Financial Control & Planning Factors.
MRS = Marketing Strategy Factors.
MSE = Management Skill & Experience Factors.
ADI= Adequate Infrastructure Factor
GPR= Policy and Regulation Factor

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 WP= Working Premises Factor
BIS= Access to Business Information Service Factor
e= Error (level of precision)
X0= the constant parameter.
X1= Coefficient of Financial Control & Planning Factors
X2= Coefficient of Marketing Strategy Factors.
X3= Coefficient of Management Skill & Experience Factors.

X4= Coefficient of Adequate Infrastructure Factor.

X5= Coefficient of Policy and Regulation Factor

X6= Coefficient of Working Premises Factor
X7= Coefficient of Access to Business Information Service Factor.
In accordance with the above mathematical model the constructed research questions were tested
by considering significance level of each constant parameter in multiple regression analysis.

3.8. Ethical Consideration

A formal letter was written from Unity University, Department of Business Management to
SMEs and Adama city Mayor Offices located in Adama city. The data collection was started
after getting consent from the parties mentioned above, and all information gathered were
confidentially treated.

3.9. Validity and Reliability

3.9.1. Test of Reliability

Reliability has to do with the accuracy and precision of a measurement procedure (A measuring
instrument) is reliable if it provides consistent results. As multiple items in all constructs were
used, the internal consistency/reliabilities of Independent variable (Factors affecting Performance
of SMEs) and Dependent variable (Performance of SMEs) were assessed with Cronbachs Alpha
and the reliability values for all constructs are confirmed as greater than 0.7, which are

31
considered ideal (Pallant 2005). The following table shows the summary of reliabilities of all
constructs.

Table 3.3: Reliability of constructs

Construct Variables Cronbach’s Alpha Number of
Result items
Financial Control & Planning Factors

Marketing Strategy Factor.

Management Skills & Experiences

Factors
affecting Availability of Adequate Infrastructures
Performanc
e of SMEs Policy and Regulation Factors

Working Premises Factor

Access to Business Information Service

Performance of SMEs

Total

3.9.2. Test of Validity

Validity is the most critical criterion and indicates the degree to which an instrument measures
what it is supposed to measure. Malhotra (2010) mentioned about three types of validity in his
study: content validity, predictive validity, and construct validity. This study addressed content
validity through the review of literature and adapting instruments used in previous research

32
 CHAPTER FOUR
DATA PRESNTATION, ANALYSIS AND DISCUSION
4.1. Introduction
This chapter presents the data analysis and interpretation part of the research. The study
attempted to examine the Factors affecting Performance of SMEs in Adama city. The collected
data were presented and analyzed using SPSS version 25.0 statistical software. The study used
correlation analysis, specifically Pearson correlation to measure the degree of association
between different variables under consideration. Regression Analysis was used to test the effect
of independent variable on dependent variable.

4.2. Response Rate

From a total of

33
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