RIFT VALLEY UNIVERSITY

GULLALE CAMPUS, POST GRADUATE PROGRAM

DEPARTMENT OF BUSINESS ADMINISTRATION

ASSESSMENT OF MICRO AND SMALL ENTERPRISES IN ADDIS

ABABA: THE CASE OF KOLFE SUB CITY ADMINISTRATION

PREPARED BY:
ESAIAS LISANU

ADVISOR: DR.DINKIESA KENO

JULY, 2021G.C
ETHIOPIA, ADDISA ABABA
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 RIFT VALLEY UNIVERSITY
POST GRADUATE PROGRAM
DEPARTMENT: MBA

ASSESSMENT OF MICRO AND SMALL ENTERPRISES IN ADDIS

ABABA: THE CASE OF KOLFE SUB CITY ADMINISTRATION

A THESIS SUBMITTED TO RIFT VALLEY UNIVERSITY IN PARTIAL

FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF
MASTERS OF ARTS IN BUSINESS ADMINISTRATION

2021 G.C

ADDIS ABABA, ETHIOPIA

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 DECLARATION
I hereby declare that the academic study report on the title; “Assessment of Micro and Small Enterprises in

Addis Ababa: the Case of Kolfe sub city Administration” is my original work and has not been presented in

any other University or College for examination purpose. All sources that I have used or quoted in this

research report have been indicated and acknowledged by means of complete references.

Name: ______________________________

Signature: ____________________________

Date:________________________________

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 LETTER OF CERTIFICATION

This is to certify that EsaiasLisanuhas carried out the research work entitle: Assessment of Micro and Small

Enterprises in Addis Ababa: the Case of Kolfe sub city Administration. Accordingly, I assure that his work is

appropriate and standard enough for the submission in Final thesis.

Confirmed by: - Dr. Dinkisa Keno 06/07/2021

Research Advisor Signature Date

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 APPROVAL SHEET
This is to certify that the thesis prepared by EsaiasLisanuentitled; “Assessment of Micro and Small

Enterprises in Addis Ababa: the Case of Kolfe sub city Administration” submitted in partial fulfillment for the

Degree of Masters of Arts in Business Administration complies with the regulations of the university and

meets the accepted standards with respect to the originality and quality.

APPROVED BY:

Advisor ------------------------------------------------------------Sign----------Date-------------------

Chairperson ------------------------------------------------------Sign----------Date------------------

Internal Examiner ------------------------------------------------Sign----------Date------------

External Examiner -------------------------------------------------Sign---------Date-------

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 ACKNOWLEDGEMENTS
I would like express my special thanks to my advisor, Dr. Dinkiesafor his unreserved support and
constructive criticisms, and who gave me the golden opportunity to do this wonderful thesis.

I believe that this research would not have been completed without his valuable assistance. A
profound debt of gratitude is also owed to my beloved, kindest wife -------- my son-----, my
brothers-------, and my close friends and colleagues who helped me a lot and gave me moral
support to finalize in limited time frame. In addition, I would like to extend my appreciation to
SMEs employees and owners’ for their collaboration in any of their concerns. Had there not been
their support to pursue my studies, all my academic visions including this research work, could
not have been realized

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TABLE OF CONTENT

S
DECLARATION..............................................................................................................................i
APPROVAL SHEET.......................................................................................................................ii
ACKNOWLEDGEMENTS...........................................................................................................iii
ABSTRACT...................................................................................................................................iv
CHAPTER ONE
1. INTRODUCTION
1.1 Background of the Study...................................................................................................1
1.3 Objectives of the Study.....................................................................................................5
1.3.1 General Objective......................................................................................................5
1.3.2 Specific objectives of the study.................................................................................5
1.3.3 Specific research questions........................................................................................5
1.4 The Scope of the Study.........................................................................................................5
1.5 Significance of the Study..................................................................................................6
1.6 Operational Definition of Terms.......................................................................................6
1.7 Organization of the Study.................................................................................................7
CHAPTER TWO
2 RELATED LITERATURE REVIEW
2.1 Definition of Micro and Small Enterprises................................................................................8
2.2 Definition of Micro and Small Enterprises in Ethiopia....................................................9
2.3 The Improved Definition of MSEs in Ethiopia...............................................................11
2.4 The Role of Micro and Small Enterprise in Poverty Reduction.....................................12
2.5 Challenges for the Expansion of MSEs in Ethiopia and other Countries.......................13
2.6 Summary.........................................................................................................................21
CHAPTER THREE
3.RESEARCH DESIGN AND METHDOLOGY
3.1 .Introduction....................................................................................................................23
3.2 Research Design..............................................................................................................23
3.3 Data Sources...................................................................................................................23

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 3.4 Data Collection Instruments............................................................................................24
3.4.1 Questionnaires.........................................................................................................24
3.4.2 Interview..................................................................................................................24
3.5 Research Participants and Sampling Procedure..............................................................24
3.4.1 Sample Size Determination.....................................................................................25
3.5 Data Analysis..................................................................................................................27
3.6 Validity and Reliability...................................................................................................27
3.7 Ethical issues...................................................................................................................28
CHAPTER FOUR
4.DATA PRESENTATION, ANALYSIS AND INTERPRETATIONS
4.1 Introduction.....................................................................................................................29
4.2 Response Rate.................................................................................................................29
4.3 Demographic Characteristics of Respondents................................................................29
4.3.1 Sex and age of Respondents....................................................................................29
4.3.2 Educational level and Qualification of Respondents...............................................30
4.3.3 Work experience in years and its types (of Respondents).......................................31
4.4 Factors Affecting the Growth of Micro and Small Enterprises......................................32
CHAPTER FIVE
5.SUMMARY OF MAJOR FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of Major Findings and Discussions................................................................37
5.2 Conclusion......................................................................................................................39
5.3 Recommendations...........................................................................................................39
REFERENCES..............................................................................................................................41
LIST OF TABLES
Table 1:Target population..............................................................................................................25
Table 2: Sample size of the study.................................................................................................26

Table 2:- sex and age of Respondents

Table 3:- educational level and qualification of Respondents ..............................................

Table 4:- work experiences of Respondents (n=268)

Table 5: Current Practices of SMEs

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Table 6: The Challenges facing implementation of SMEs
Table 7: possible solution to the challenges facing SMEs.....................................................

ABSTRACT

The main purpose of this study was to assess factors affecting the Growth of Micro and Small
Enterprises in Addis Ababa in Case of Kolfe sub city administration. The descriptive survey
method was employed as a method of the study. Sample size of the study was 268. The data
obtained through the above instruments were analyzed quantitatively using frequency and
percentages, mean and standard deviation using SPSS. Lack of responsiveness from the side
of officers to the demands of the operators, low awareness creation program, about the
peculiar procedures, policies and proclamations that favor MSEs, low monitoring and
controlling system after training provision, lack financial analysis skills, absence of strong
capital management, lack enough competent employees, high bureaucracy from micro finance
institutions, The respondents suggested that government should not move only for report
purposes but needs give attention for financial and resources needed to produce products.
The government need to give due attention like large enterprises and should not undermine
the role SMEs in Ethiopia were major findings of the study.Providing affordable alternative
sources of finance for MSEs, organized training center within sub-city that provided a
continuous entrepreneurs and business skill training for MSE, increasing the capacity and
skill of operator through continues trainings experience sharing from successful enterprises,
and provision of advice and consultancy, be responsive officers to the demands of the
operators, arranging awareness creation program, Reducing bureaucracy from Woredas and
financial institutions, recommended as per findings of the study

Key Words: enterprises, small, micro, owners, governments

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 CHAPTER ONE

1. INTRODUCTION

1.1 Background of the Study

The micro and small business sector is recognized as an integral component of economic
development and a crucial element in the effort to lift countries out of poverty (Wolfenson,
2007). The dynamic role of micro and small enterprises (MSEs) in developing countries as
engines through which the growth objectives of developing countries can be achieved has long
been recognized. It is estimated that MSEs employ 22% of the adult population in developing
countries (Fisseha, 2006).

The health of small business sector is very important for the overall economic growth potential
and future strength of an economy 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). There has been more
written about MSEs business growth in recent years than any other aspect of management. One
of the main reasons is the contribution of expanding MSEs to economic development and
unemployment reduction, which, generally, has attracted the attention of researchers and policy
makers in many countries (Bernice and Meredith, 1997).

In most developing countries, MSEs by virtue of their size, location, capital investment and their
capacity to generate greater employment have proved their powerful propellant effect for rapid
economic growth. The sector is also known as an instrument in bringing about economic
transition by effectively using the skill and talent of the people without requesting high level
training, much capital and sophisticated technology. Moreover, they create job opportunities for
a substantial segment of the population (Commission on Legal Empowerment of the Poor, 2006).

Therefore, in developing countries, the MSEs sector is a large source of employment and
income, particularly for the urban population. The MSEs employment, outside of agriculture, is
defined as employment that comprises of both self-employment, in the MSEs, and wage

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employment, in the MSEs jobs, without secure contracts, worker benefits, or social protection
and represents nearly half or more of the total nonagricultural employment in all regions of the
developing world. It ranges from 48% in

North Africa to 51% in Latin America, 65% in Asia, and 72% in sub-Saharan Africa (ILO,
2002). In Ethiopia, about half of the urban workforce is engaged in the MSEs sector and Addis
Ababa nearly accounts for about 40% of the total operators in micro enterprise activities
(Gebrehiwot & Wolday, 2005).

Regarding employment generation of MSEs in Ethiopia, in the PASDEP period (2005/06-

2009/10), it was planned to create 1.5 million employment opportunity.

Accordingly, through 167,835 MSEs 1.46 million employment opportunities were created
(MoUDC, 2011). Hence, since the sector is a quick remedy for unemployment problem, direct
intervention and support of the government is crucial to facilitate the environment for new job
seekers and ease self-employment (Commission on Legal Empowerment of the Poor, 2006). As
a result, the Ethiopian Government recognized the contribution of MSEs and paid due attention
to their promotion and development. To this effect, it has formulated a National MSE
Development and Promotion Strategy in 1997 which enlightens a systematic approach to
alleviate the problems and promote the growth of MSEs. The overall objective of the strategy is
to create an enabling environment for MSEs, with specifi objectives to facilitate economic
growth, bring equitable development, create long-term jobs, strengthen cooperation between
MSEs, provide the basis for medium and large- scale enterprises, promote export, balance
preferential treatment between MSEs & biggerenterprises (CSA: 2004).

One feature of the Ethiopian private sector as a whole is that it is highly dominated by micro and
small enterprises, which are geared towards satisfying the needs of low income groups. MSE
sector, accounting for the bulk of nonagricultural economic activities, are highly concentrated in
the production and consumption of textiles, food and beverage processing (Commission on Legal
Empowerment of the Poor, 2006). Therefore the researcher has the belief that development and
sustenance of small business in Addis Ababa will go a long way in helping the economy of the
city.

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1.2. Statement of the Problem

In most developing countries, MSEs face constraints both at start up phases and after their
establishment. In Africa, for example, the failure rate of MSEs is 85% out of 100 enterprises due
to lack of skills and access to capital (Fedahunsi, 1997). It is typical of MSEs in Africa to be
lacking in business skills and collateral to meet the existing lending criteria of financial
institutions (World Bank, 2004). This, according to World Bank, has created finance gap in most
markets. The MSEs are able to source and obtain finance mostly from informal sectors like
friends and relatives while medium or large enterprises obtain funds from banks. This unequal
access to finance by MSEs and medium and large enterprises has undermined the role of MSEs
in the economic development in African countries (World Bank, 2004).

Okpara & Wynn (2007), research on small-business development has shown that the rate of
failure of MSEs in developing countries is higher than in the developed world.

Similarly, despite their contribution to economic development and job opportunity, micro and
small enterprises in Ethiopia in general and in Addis Ababa in particular are facing variety of
problems that hinder their growth and development. In 2009/2010 the number of establishments
and total employment created by MSEs in Ethiopia increased by 142.6 and 22.8 percent
respectively. However, their contribution to growth rate of GDP was limited to 5.1 percent
(NBE, 2010).

Some of the major constraints of micro and small enterprises in Ethiopia affecting the
performance of MSEs are: Cumbersome rules/regulations related problems such as high tax
level, uncertainty about tax policy, high collateral requirement, lack of/ inadequate business
premise, lack of business support service and inadequate access to credit, an inadequate access to
finance, lack of infrastructure, weak supporting institutional quality, access to land, access to raw
material, access to training, marketing and competition.

Bureaucratic requirements, penalties, weak legal enforcement, entry regulations and inability to
use the institutional enforcement mechanism were also among the major problems of MSEs
(Commission on Legal Empowerment of the Poor, 2006).

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The interruption of electric power, unavailability of adequate transport service and unavailability
and unreliability of water supply and other infrastructures are hindering the development of
MSEs (Gebrehiwot & Wolday, 2004). The absence of finance further restricts the development
of micro and small enterprises. Banks and micro finance institutions in Addis Ababa do not seem
willing to give proper loans and they are not actually meeting the financial needs of micro and
small enterprises (Gebrehiwot& Wolday, 2004).

The FeMSEDA international workshop on the role of MSEs in the economic development of
Ethiopia conducted in Addis Ababa in May 2017 also shows that MSEs in Ethiopia are facing
varieties of problems of which lack of access to start up and operating financial resources, lack
of working premises both for production and sales, shortage of skill and managerial expertise,
inadequate of supply of raw materials and marketing problems are the major constraints
(FeMSEDA, 2004).

According to survey of Ethiopian Development Research Institute (2004), conducted in six

major cities including Addis Ababa, only 7% of MSEs received short term training. The same
research reveals that 74% of MSEs indicated willingness to pay fully for the share in the cost of
training. This indicates that there is shortage of access to training to develop skill, knowledge
and attitude (Gebrehiwot&Wolday, 2004).

Marketing problems such as lack of product diversity, pricing problems, lack of awareness how
to compete in the market, limited business management and salesmanshipability, limited
capacity to promotional activities, and lack of market related knowledgeare also hindering the
development of MSEs (Assegedech, 2004).

The rationale of this study is that the Government established many institutions to promote the
smooth functioning of MSEs. NGOs are also promoting MSEs. However, this sector is not
performing up to the expectations of many stake holders as it has been suffering from several
problems. Therefore, conducting such a research seems essential in the light of the fact that
different problems centered in this sector. Hence, this study aimed at identifying the impact of
the varied problems on the performance of MSEs. This study has made an effort to analyze the
varied problems of MSEs in Kolfe Subcity and forwarded possible solutions to the policy makers
and business operators.

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 1.3 Objectives of the Study
1.3.1 General Objective

The general objective of the study was to assess Micro and Small enterprises in Addis Ababa in
case of Kolfe Sub-city Administration

1.3.2 SpecificObjectives
1. To assess the current practices of Micro and Small enterprises in Addis Ababa in case of
Kolfe Sub-city Administration
2. To examine the challenges facing implementation of Micro and Small enterprises in
Addis Ababa in case of Kolfe Sub-city Administration
3. To identify the solutions to overcome the problems facing micro and small enterprises
in Addis Ababa in case of Kolfe Sub-city Administration
1.3.3 SpecificQuestions
1. What were the current practices of Micro and Small enterprises in Addis Ababa in case of
Kolfe Sub-city Administration?
2. What were the challenges facing performances ofMicro and Small enterprises in Addis
Ababa in case of Kolfe Sub-city Administration
3. To identify the solutions to overcome the problems facing Micro and Small enterprises
in Addis Ababa in case of Kolfe Sub-city Administration

1.4 The Scope of the Study

Delimiting a research project using specific location, population, time frame, or issue to be
investigated helps the researcher to focus the center of attention and address the research
problem in a resource and time efficient manner (Creswell, 2009). Accordingly, the study
wasdelimited to manufacturing enterprises and because of time and budget constraints focusing
only on manufacturing enterprises. In additions the study focuses on current performance and
challenges facing Small and Micro enterprises.

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 1.5 Significance of the Study
This study is supposed to have the following significance:
 It may provide relevant information to decision makers about the strengths, and weakness of
SMEs in relation to the objectives set.

 The researcher hopes that the study will enrich the existing literature.

 The findings of the study may help the enterprises to become familiar with the kaizen
philosophy and then improve its implementation (improve it)

 Findings and suggested recommendation of the study may initiate further study

1.6 Operational Definition of Terms

o Enterprise: It refers to a unit of economic organization or activity whether public or
private engaged into the manufacturing of goods (Addis Ababa SMEs office manuals,
2019).
o Factors: A factor is a contributory aspect such as politico-legal, working premises,
technologies, infrastructures, marketing, financial, management and entrepreneurial
influences that affect performance of micro and small enterprises (Demisseww, 2017)
o Idir: A widely prevalent sort of funeral grouping in Ethiopia, where resources
aremobilized and pooled to get emotional and material support up on a death of the
member himself, his dependants or relatives.
o Informal sector: in this paper the concept of informal sector is used alternatively with
micro enterprises, because it is consistently and widely accepted, and comparative data are
available for Ethiopia (AAMSEs, 2016).
o Initial paid-up capital: is that part of the issued capital of an establishment that has been
paid by the owners to start the operation.
o Iqub: A voluntary, informal, and indigenous form of rotating saving and credit scheme,
where each member contributes a mutually agreed amount of money on weekly or monthly
basis. Manufacture of food products: includes manufacture of vegetable, preparing
‘baltina’ products and manufacture of bakery products.

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 o Micro enterprise: means commercial enterprise whose capital is not exceeding birr
20,000 other than high technology and consultancy services(AAMSEs, 2016).
o Performance: in this paper performance defined in terms of profitability of the MSEs
(AAMSEs, 2016).
o Effectiveness- Effectiveness means how efficiently an operation or activity is at achieving
its goal and the company’s overall objective. In a manufacturing setting, a process is
considered effective if the outcome achieved the desired specifications.
o Kaizen: -Kaizen is a combination of two words from one Japanese concept that its
definition refers to a change toward betters or continuous and gradual improvement.
Kaizen refers to the conducted partial expressions in the existing circumstance through
endless attempts and innovation refers to the general conducted expressions in the existing
circumstance through huge investment in technology with new equipment (EKI, 2018).

1.7 Organization of the Study

Chapter one provided a brief background to the study, statement of the problem, research
question, objectives, significance and scope of the study. The second chapter reviewedrelated
literatures in the study area. Chapter three explained the research design and methodology, target
population and sampling, data collection instruments and methods of data analysis. Chapter four
was presentation and analysis of collected as per research questions. Chapter five provided an
outline of conclusions and makes recommendations based on these findings. Finally, the
references materials and sample questions were attached at the end of this paper.

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 CHAPTER TWO
2 RELATED LITERATURE REVIEW

2.1 Definition of Micro and Small Enterprises

The MSE sector everywhere is characterized by highly diversified activities which can create
employment opportunities for a substantial segment of the population. This implies that the
sector is a quick remedy for unemployment and poverty problem. The realization of a modest
standard of living through curbing unemployment and facilitating the environment for new job
seekers and self-employment requires a direct intervention and support of the government and
other concerned stakeholders (Mulugeta, 2011). Hence, in order to channel all necessary support
and facilities to this diversified sector, a definition is needed to categorize the sector accordingly.

However, there is no single and universally acceptable definition of a small enterprise (Kayanula
and Quartey, 2000). This is so because the criteria and ways of categorizing enterprises as micro
and small from institution to institution and from country to country depending essentially on the
country’s level of development. Even within the same country, definitions also change overtime
due to changes in price levels, advances in technology or other considerations (Emma I. et al.,
2009). Firms differ in their levels of capitalization, sales and employment. Hence, definitions
that employ measures of size (number of employees, turnover, profitability, net worth, etc.) when
applied to one sector could lead to all firms being classified as small, while the same size
definition when applied to a different sector could lead to a different result. The absence of such
uniform definition of MSEs has created a difficulty. In line with this, Tegegne and Meheret
(2010) argued that the absence of a single or globally applicable definition has made the task of
counting the number of MSEs and assessing their impact extremely difficult across countries,
though the rationale for most governments to make such definition and categorization is mainly

8
for functional and promotional purposes to achieve the desired levels of development of the
sector.

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).

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). 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).

2.2 Definition of Micro and Small Enterprises in Ethiopia

Size of employment, capital investment or turnover is used as criteria to categorize enterprises
along scales of operations and define micro, small, medium and large enterprises. This
categorization is important for functional and promotional purposes to achieve the desired levels
of development (MSEDS, 2011).

In the case of Ethiopia, there is lack of uniform definition at the national level to have a common
understanding of MSEs sector. While the definition by ministry of trade and industry (MoTI) use
capital investment whereas the central statistics authority (CSA) uses employment and favored
capital intensive technologies as yardstick. According to the MoTI (2004) Micro enterprises are
those business enterprises in the formal and informal sector, with a paid up capital not exceeding
Birr 20,000 and excluding high tech consultancy firms and other high tech establishments.

Small enterprises are those business enterprises with a paid up capital of above Birr 20,000 and
not exceeding Birr 500,000 and excluding high tech consultancy firms and other high
technological establishments (MoTI, 2004). On the other hand, CSA (2004) categorizes

9
enterprises into different scales of operation on the size of employment and the nature of
equipment.

Enterprises in the micro enterprise category are subdivided into informal sector operations and
cottage industries. Cottage and handicraft industries are those establishments performing their
activities by hand and using non power driven machines.

The informal sector is defined as household type establishments or activities, which are non-
registered companies and cooperatives operating with less than 10 persons.

Establishments employing less than ten persons and using motor operated equipment are
considered as small scale manufacturing enterprises(CSA, 2004).

The above definitions given by CSA, however consisted of the following short comings.

o It focuses on manufacturing ignoring other sectors.

o Failure in using size of capital

Due to the absence of uniform definition of the sector, the agency failed in gathering data about
cottage and handicraft industries for the last 7 years. Hence, the data collected from the MSE and
the ongoing strategy and support frameworks become different to analyze and to interpret in
scientific ways.

When the MSE development strategy is formulated in 1998 the definition of MSEs was by
considering other countries experience especially the South African experience (MSEDS, 2011).
The definition given at that time was only based on paid capital or capital investment as most
businesses were confined to family man power basis and lack of availability of manpower
information of the sector. Hence, the following are identified as short comings/gaps of the 1998
definition (MSEDS, 2011).

Although the main objective of MSE is to create job opportunity, it was difficult to compare the
achievements in job creation with the definition. And it does not show enterprise capital
size/amount/ when it is compared with the experience of other counties.

10
The existing definition of the sector considered a paid up capital without considering the
experience in reality. It does not show the full pictures of MSEs as they are established based on
self-paid up capital and credit from banks (MSEDS, 2011).

As the existing definition lasts for more than 13 years, it did not reflect the current situation due
to inflation and currency fluctuation. For instance, the current paid up capital-ETB20, 000 or
3000 USD to micro enterprise is what was1200 USD or 900 Euro in the past. Similarly the paid
up capital allowed to small enterprise, i.e., ETB 500,000 or 76,000 USD what was 30,000. In
other words, the paid up capital existed before 13 years was better by 2.5 fold, due to currency
fluctuations.

Though the definition underlines a paid up capital, the transfer from micro to small and from
small to middle was on the basis of total asset.

Since the definition of small enterprise does not include high technology and consultancy/advise/
services, it should be revised from the angle of technology and construction services. Thus,
based on the above mentioned reasons the existing definitions of the sector were reviewed in
January 2011on international experience and current process of the sector basis (MSEDS, 2011).

2.3 The Improved Definition of MSEs in Ethiopia

Based on the gathered experience, by identifying the gaps of the existing definition of

MSE, ignoring the size of employee and by taking total asset as criteria and by dividing it in to
industry and service sector; and considering the coming 5 years inflation and
fluctuation/regularity of currency the definition of MSEs was improved in january2011 as
follows. Based on the revised sector both micro and small scale enterprises are categorized in to
industrial sector and service sector

Under industry sector (manufacturing, construction and mining) micro enterprises are defined as
an enterprise that operates with 5 people including the owner and/or their total asset is not
exceeding Birr 100,000.

Under service sector (retailer, transport, hotel and Tourism, ICT and maintenance service micro
enterprises are defined as an enterprise that operates with 5 persons including the owner of the
enterprise and/or the values of total asset is not exceeding Birr 50,000. Under the industry sector

11
(manufacturing, construction and mining) small enterprises are defined as operates with 6-30
persons and/or with a paid up capital of total asset Birr 100,000 and not exceeding Birr 1.5
million.

Under the Service sector (retailer, transport, hotel and Tourism, ICT and maintenance service)
Small enterprises are defined as operates with 6-30 persons or/and total asset, or a paid up capital
is with Birr 50,001 and not exceeding Birr 500,000. When ambiguity is encountered between
manpower and total assets as explained above, total asset is taken as primary yardstick (MSEDS
strategy, 2011).

2.4 The Role of Micro and Small Enterprise in Poverty Reduction

Poverty in Ethiopia is widespread and remains a major challenge of sustainable development and
stability (Lutheran World Federation of Ethiopia, 2006 cited in Eshetu & Mammo, 2009). By
now, it is clear and agreeable that poverty, both in urban and/ or rural areas, is all about lack of
basic needs, low or inadequate level of income and consumption, poor command over resources,
and high level of social exclusion, inequality and vulnerability. The role played by MSEs,
through the various socioeconomic 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 MSEs 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).

In conformity with the above view advanced by UNIDO and as an organization concerned to the
condition of labour, the ILO’s approach to poverty reduction is through small enterprise
development. This strategy focuses on the needs of poor people who are part of the MSE
economy, as owners/operators and workers, as their dependents, as the unemployed who may
benefit from job creation and as customers.

Drawing on a study conducted in the urban centers of four Western African countries namely
Benin, Burkina Faso, Niger and Togo to identify key factors shaping the micro enterprise sector,
explores the needs, characteristics, motivations, and success factors for micro entrepreneurship in
the region, together with some of the impediments to the growth and success of micro enterprise
ventures (Roy and Wheeler, 2006). Roy and Wheeler indicated that MSE provide a substantial

12
source of employment,thereby contributing to get rid of poverty to the urban poor. According to
them, the main reason for the urban poor to be absorbed in the MSE is due to the fact that the
formal sector does not have the capacity to absorb this growing demand for jobs, and for this
reason many have had to look for alternative means to generate a livelihood.

Hence, participation in the informal sector is often the only option available as a source of
income, and so the sector has absorbed many of the unemployed who have been neglected by the
formal sector in the region. They pointed that the income generated from being engaged in MSEs
primarily used to satisfy the poor’s own physiologicalneeds and those of their family, and then to
provide a home and security for thehousehold. They specifically claimed that MSEs help the
urban poor by making them financially secure which in turn limits or reduces the misery,
vulnerability and material and non-material hardships that come with poverty

2.5 Challenges for the Expansion of MSEs in Ethiopia and other Countries
According to Commission on Legal Empowerment of the Poor (2006), most MSEs inEthiopia
faces critical constraints both at the operation and start up level. Some of these constraints
include lack of access to finance, access to premise, infrastructure, training in entrepreneurial and
management skills, information on business opportunities, and social and cultural factors
particularly related to deficient entrepreneurial culture and excessive corruption.

Lack of access to finance and credit: lack of adequate capital, sufficient loan, and inefficient
financial market in terms of facilitating financial resources to entrepreneurs are the major
obstacles in doing business particularly in the informal sector. Most micro and small enterprises
are highly risky ventures involving excessive administrative costs and lack the experience in
dealing with financial institutions and do not have a track record of credit worthiness with banks.
Since most banking institutions are reluctant to provide small enterprises with loan and credits,
most MSEs are unable to secure collateral requirements. As a result of absence in financing, the
creation of new enterprises and the growth and survival of existing ones will be impeded
(Commission on Legal Empowerment of the Poor, 2006).

Access to finance is a major bottleneck for the rapid growth and development of MSEs mainly
due to targeted mechanism put in place to address the financial needs of small scale enterprises.
Most micro and small enterprises do not have access to micro finance institutions and most

13
banks are reluctant to avail credit facility to small enterprises unless they have acceptable
collateral. The standard of loan appraisal, the long delay the banks take to sanction loans,
unfavorable disposition towards small loans and the limited collateral requirement, which is over
100% of the loan amount, are the major obstacles that small scale enterprises are facing
(Commission on Legal Empowerment of the Poor, 2006).

Moreover, the interest rate by most micro finance institutes, which is higher than the lending rate
of formal banks, inhibits effectiveness in addressing the needs of micro enterprises (Commission
on Legal Empowerment of the Poor, 2006). According ToWolday and Gebrehiwot (2006), more
than 93% of MSEs replied that they did not apply for bank loans for the reasons they considered
themselves as discouraged potential borrowers, need credit but are discouraged from applying by
the perceived or real high collateral requirement, high cost of borrowing, difficulty of processes,
ineligibility, or concern about their repayment ability and uninformed (i.e. not aware of the
facility, or where and how to apply, etc.).

The findings of Mulu (2007) also indicate that banks and MFIs do not seem to support MSEs
expansion. Due to this 85% of the respondents have never received credit from these formal
sources. The availability of other informal sources of finance, however, affects growth positively
and significantly. This shows that in the absence of formal source of credit, informal networks
appear more appealing for MSEs. Hence, firms with better network to borrow from informal
sources such as, relatives, friends, and suppliers better loosen credit constraints, and grow faster.
Lack of finance has been considered in many studies as a key success factor for MSEs such as
Rolfe et al (2010), Mbonyane & Ladzani (2011), Olawale & Garwe (2010) Okpara(2011) and
Etumeahu, 2009)
Lack of clear and pragmatic national policy and institutional qualities: Despite the strategies and
other rules and regulations that are in vigor in theory, most interventionist policies regarding
MSEs are inappropriate and impractical. For instance, most government policies have a tendency
to over regulate and limit the growth of private sector enterprises and they are over
bureaucratized and unfriendly to support small businesses (Commission on Legal Empowerment
of the Poor, 2006). A study conducted by Economic Commission of Africa (ECA) (2001) in
countries such as Ethiopia,

14
Cameron, Gabon, Nigeria, Senegal and Uganda have shown that the regulatory and policy
environment in which MSEs operate proves to be major handicap for their expansion and
growth. The same study reveals that the complexity of customs system and many forms and
declarations required have had a negative impact on the general business environment diverting
entrepreneurs’ efforts from more productive tasks.

The findings of Eshetu and Mammo (2009) also indicate that legal and regulatory problems are
major obstacles to efficient operation of micro and small enterprises.

According to this study, bureaucratic registration requirements for licensing, high policy control,
overregulation, corruption, high tariffs and unfair tax were found as major policy-related
constraints that adversely affect the sector. Free market policy has also exposed them to
international competition, and this had a significant negative impact on their performance.

Mbonyane & Ladzani (2011) further found that the government is not actively providing support
mechanisms for business registration to ensure the success of micro-enterprises.

There is also poor communication between the government and small business owners.

Lack of proper regulation in terms of borrowing funds from the banks by small business owners;
lack of focus in formulation and implementation of policies, and tax laws affects the
performance of MSEs. For the proper promotion of the development of small business
enterprises, there is need for a well-articulated plans or programs by the government (Etumeahu,
2009).

Location and working space problems: For MSEs, lack of premise is unquestionably a serious
problem. Most informal operators do not get access to suitable locations where they can get easy
access to markets. The issue of acquisition and transaction cost has become very prohibitive to
the emergence of new enterprises and to the growth and survival of existing ones. The issue of
land provision and the land lease system has greatly constrained the chances of micro, small and
medium enterprises who aspire to startup businesses (Eshetu & Mammo, 2009).

According to Rolfe et al (2010) findings location is critical factor for sales and income of small
scale enterprises and hence entrepreneurs benefit from businesses in formal residential areas.
Logically, this finding stems from the higher per capita income and demand density in developed

15
urban areas. Demand density also makes taxi ranks and train stations more lucrative. These
spaces are limited and thus a source of competitive advantage that cannot be copied or re-
created. Mbonyane & Ladzani (2011) found that small businesses select a site without first
thoroughly analyzing the suitability of location.

The same researcher found that most of the micro-enterprises are failing owing to a lack of space
provided by the government and the various shortcomings of the small business owners
regarding their businesses. Olawale &Garwe (2010) also found that poor location has a negative
impact of the performance of micro and small enterprises.

Lack managerial and other skilled labor, and lack of training: There is lack of knowledge of
entrepreneurial and managerial capacity, and marketing experience. Lack of skill leads to
problems in production due to the unfamiliarity of workers with rapid changing technology, lack
of coordination of production process, and inability totroubleshoot failures on machinery and/or
equipment’s is a critical problem that MSEs are facing since they cannot afford to employ
specialists in the fields of planning, finance and administration, quality control, and those with
technical knowledge (Commission on Legal Empowerment of the Poor, 2006).

Moreover, MSEs lack resources required for research and development and there is inadequate
technical and entrepreneurial skills (Commission on Legal Empowerment of the Poor,
2006).There is lack of formal education and training in MSEs operators. The most common form
of acquiring skills in the MSEs sector is through apprenticeships.

Though the formal education system prepares students for paid employment, there are very few
vocational institutions that cater for developing skills. This inevitably leads to low level of
innovation in almost all sectors of the economy and severe shortage of training opportunities for
potential entrepreneurs (Gebrehiwot & Wolday, 2004).

Mbonyane & Ladzani (2011) found that more than 50 percent of micro-enterprises lack training
in proper business management. As a result, there is lack of technology available to micro and
small businesses enterprises. The results of this research show that the government does not have
enough support mechanisms available to ensure that small business owners and their employees
receive the training that would enable them to run the business successfully. Most owners do not

16
have management experience and adequate training and skills to operate a business (Okpara,
2011).

Olawale and Garwe(2010) also found lack of business skills and shortage of skill labor which
results from absence of proper training are affecting micro and small enterprises negatively.

Furthermore, there has been research that indicates that enterprises who had received training in
their areas of business reported that their businesses were doing well. But enterprises who did not
receive training in their areas of business perform less. This indicates that relevant training can
produce positive results in the running of businesses (Bowen et al 2009).

Management is one of the fundamental bases of business development. Most of the small
business owners do not acquire enough education before establishing business of their own and
they are still blind in seeing the wisdom of formal learning or acquiring managerial skills in
doing business though claim to be successful with their acquired experience. This has resulted to
the low level of attention to the welfares of their workers. It is therefore important for small
business owners to absorb the skills of proper management (Etumeahu, 2009).

Lack of sufficient marketing and high competition level: The marketing problem is the main
constraint for the growth of enterprises (Rahel & Paul, 2010). Micro and small enterprises in
Ethiopia faced various marketing problems. There is lack of product diversity and as a result
similar products are overcrowding the market. In addition to this certain micro and small
enterprises lack the skill to modify their products and they have lack of sufficient range of
product designs (Assegedech, 2004).

Ethiopian micro and small enterprises have different pricing problems such as lack of costing
knowledge, did not include overhead costs, salary or wage of family members involved in the
production process are not considered, and do not know the exact earning from sales
(Assegedech, 2004)

Many MSEs plan to promote their products, however, their budget is mostly limited. In addition
to this, such MSEs have lack of awareness haw to compete in the market. MSEs are less
advantageous to compete in the market than large companies since they have smaller economies
of scale (Assegedech, 2004).

17
In terms of problems related to product diversity, the findings of Assegedech (2004), Rahel and
Paul (2010) and Eshetu and Mammo (2009) are similar. According to Eshetu and Mammo
(2009), majority of MSEs produce or give services of similar products in a limited domestic
market. Most of them do not seek new possibilities and opportunities outside the local markets.
(Rahel and Paul 2010) also reported the presence of competition is the most significant factor.
This is because of the reason that enterprises in the same sector sell identical products without
any additional distinctiveness and innovative activities. This led them to compete for the same
demand.

Due to this, the local markets crowded with similar products or services and the level of
competition among local producers of goods and services is intense. As result, the returns are
fairly low.

In addition, presence of illegal traders around their market place leads to unbalanced competition
and low demand for merchants who are legal. This results in lack of demands which is another
problem for the enterprises.

The establishment of markets in residential areas also limits the demands. The change in demand
and being unable to modify their products with the demand is the other marketing problem.

Because of such collective factors (stiff competition from local and foreign products), most of
the MSEs are claimed that they are at a disadvantage. There are no sufficient institutional
facilities that nurture the promotion, growth and development of MSEs.

Marketing their products effectively as well as accessing and acquiring information on business
opportunities are the major bottlenecks that small and micro entrepreneurs face all over the
country. As a result, the design and quality of products of MSEs are below standard. In addition,
lack of marketing skills and weak infrastructural facilities renders small businesses to be
uncompetitive (Commission on Legal Empowerment of the Poor, 2006).

Mbonyane &Ladzani (2011) also found that lack of appropriate marketing practices are among
the major constraints that hinder the smooth function of MSEs.

Bowen et al (2009) found that there is fierce competition in the small business sector which leads
to price competition and small margin of profit. Olawale & Garwe (2010) also show that high

18
competition is among the major factors that hinder the growth of micro and small enterprises.
This is due to the reason that most of MSEs tend to congregate in dense markets and
overcrowded cities. Small business owners do no longer find it easy in competing with their
own goods which is mostly perceived by consumers as low quality ones when compared with
those of the multinational companies.

Due to the aggressive competition small business enterprises are facing from companies that
operate with greater capital outlay, companies with better and modern equipments for
production, companies with better manpower and companies with marketing capabilities have
resulted to low level of business and at times outright closure by small business owners
(Etumeahu, 2009).
Lack of formal or informal linkages / business cooperation amongst enterprises: according to
Gebrehiwot and Wolday, 2004 a good portion (about 50%) of MSEs do not consider them as
useful at all. The other factor that hinders growth and expansion of MSEs is the effectiveness
with which they interact with large or similar firms. In other words, formal and informal linkages
or business cooperation through networking are not common. Large public enterprises and the
few foreign affiliates do not outsource some of their operations to local MSEs. The legal and
institutional mechanisms to enforce contractual obligations and government policy to design
appropriate incentive mechanism to encourage the expansion of business linkages/sub
contracting managements is at its infant stage.

A study conducted by Eshetu & Mammo (2009) also indicates that there is poor linkage between
enterprises. Despite the existing market problems, only 14.26% of respondents considered
linkage as being important for development. According to that research finding one factor that
could explain this low level of partnership and other forms of business undertakings could be the
capacity of MSEs in Ethiopia. The limited number of medium and large size enterprises in the
country conical the mutually benefits that could be derived from undertakings of partnership and
linkages.

Lack of good infrastructure facilitates: Good infrastructure facilitates have a positive effect in
reducing the cost of operation. MSEs Owners in Ethiopia indicated that lack of efficient, reliable,
safe and affordable infrastructure is affecting the performance of their business. The physical

19
infrastructure facilities are not adequately developed and expanded in Ethiopia to meet the
growing demand of MSEs activities. As a result, most

MSEs have problems related to business premises such as an increase in house rent, lack of basic
services such as telephone lines, electricity supply, sewerage and water services (Eshetu &
Mammon, 2009). According to Commission on Legal Empowerment of the Poor (2006), though
not directly linked, inadequacy of infrastructure (road, banking service, electricity,
telecommunication and other services in facilitating smooth operation of private investment are
serious impediments.

Rahel & Paul (2010) also identify that even if access to infrastructure is not reported as a
significant problem, lack of access to water and lack of awareness about the advantages of
telephones and media leads to a negative or insignificant effect on the growth of enterprises.
According to the findings of the same research most MSEs have an easy access to transportation.
But, the number of enterprises that has access to the rest of the infrastructures such as telephone,
television, radio and water are limited.

Previous business experience and service year: Previous business experience of the owner affects
growth significantly and positively (Mulu, 2007). The researcher further found that Smaller and
younger firms grow faster than large firms. The previous ownership of business has a positive
and significant contribution, since they acquire the knowledge in running business and they
expand their social networks (Rahel & Paul, 2010).

Eshetu & Mammo (2009), Rolfe et al, (2010) and Olawale & Garwe (2010) also found that lack
of experience is among the factors that adversely affected the performance of MSEs. Bowen et al
(2009) further found that majority of businesses that had been in operation for a shorter period
reported that their business performances were on the decline. It also seems that most micro and
small businesses hit their peak at the fifth year. After the fifth year, most entrepreneurs seem to
suffer from what may be described as entrepreneurial burnout and the excitement declines.
License and record keeping: Micro enterprises with business license grow faster than those who
have not license. But, the results for small enterprises were not significant. .

20
This might be due to the fact that unlike the micro firms the variation of possession of business
license might not be important predicting growth differential among the small firms’ category
since most of them (above 90%) have business license (Mulu, 2007).

According Commission on Legal Empowerment of the Poor (2006), MSEs complain about the
bureaucratic system governing the business environment and it requires a lot of money to get the
business license. According to Mbonyane & Ladzani (2011) most micro and small-enterprises
acknowledged that their businesses had not been licensed, although owners were reluctant to
disclose this fact. The results also indicate that more than half of the micro-enterprises and about
4 per cent of the small businesses did not keep records.

Raw material problems: Raw material is a basic component for the existence of the

MSEs since they create a backward linkage and demand for other sector products. The high cost
is the key raw material problem for the growth of enterprises. Lack of standardization, raw
material storages, and poor quality of raw materials are also major problems (Rahel & Paul,
2010). Strong forward and backward linkages between sectors of the economy in supply of raw
materials facilitate market for the output goods and services (Eshetu & Mammo 2009).

The factors reviewed in this study are summarized in figure 4 below. From the factors analyzed
in the literature of this study, year of establishment, favorability of the business environment,
level of competition, access to raw material, access to tainting and management practice, quality
of supporting institutions, financial factors, infrastructural factors, marketing factors, and rules
and regulations related factors were tested to see their impact on the performance of MSEs.

2.6 Summary
The research addressed various types of business constraints such as conductive business
environment, service year, rules/regulations related problems, inadequate access to finance, lack
of infrastructure, institutional quality, access to productive resources, access to training,
competition, marketing and management related factors.

The theoretical consideration on the link between business constraints and the growth potential
or performance of MSEs can be viewed from different angles. Business constraints may, on the
one hand, limit physical capital accumulation. On the other hand, they may constrain a firm’s

21
ability to undertake its daily operations since they may reduce its internal financing and its
capacity to make proper business decisions.

Moreover, they may interrupt a firm’s business operations and therefore impede its performance.

The business constraints under examination are expected to limit investment upgrading and
therefore limit firms’ growth potential and performance in several ways as indicated in Figure 5
below.

Majority of MSEs have limited access to external financing. As a result, they dependmainly on
their internal resources to finance investment. High tax rates reduce firms’internal sources of
finance. In some developing countries, it also discourages MSEs fromexpanding their operations
and becoming visible to governmental officials, since being visible or operating formally is
likely to increase the cost of operating. When MSEs have limited access to relatively
differentiated markets, they are forced to operate in low-income market segments. This limits
their levels of sales and profits since most of them compete for the same customers. Access to
business services (marketing information, networking, short-term training, and counseling and
consultancy services) also hinder the growth potential of MSEs (Ishengoma & Kappel, 2008).

Besides the above stated obstacles, other factors which may cause MSEs to fail or to upgrade
their performance are lack of infrastructure and weak institutional quality.

Absence of infrastructure increases cost of production and results in lack of on time production
and delivery. Due to poor quality of institutions that are established to support

MSEs, rules and regulations will not be enforced and the enterprises will not get the intended
support.

22
 CHAPTER THREE

3 RESEARCH DESIGN AND METHDOLOGY

3.1 .Introduction
This chapter will presented the research design and methodology by which the study was
carried out. Following this the process of data collection, analysis of the gathered data and
issues of research ethics were discussed.
3.2 Research Design
In this study the explanatory research design was employed with mixed research approach (i.e.
quantitative and qualitative). In addition to address the study objectives mixed approaches was
used with questionnaires and interview methods.

Explanatory research employed investigates in a timely manner a phenomenon that had not been
studied before, or had not been well explained previously. Its intention is to provide details
where a small amount of information exists. The researcher gets a general idea and uses the
research as a tool to guide him to issues that might be addressed in the future. Its goal is to find
the why and what for an object of study. It allows for increased understanding about a specific
topic and helps the researcher to find the reasons why a phenomenon occurs.

Thus, it allows the researcher to have a broad understanding of the topic and can refine
subsequent research questions to augment the conclusions of the study. Researchers can
distinguish the causes why phenomena arise during the research process, and anticipate changes.
Moreover, explanatory research allows them to replicate studies to give them greater depth and
gain new insights into the phenomenon.

3.3 Data Sources

In order to attain the objective of the study, the researcher employed both primary data sources.
The primary data was collected from trainers, enterprise managers and industry extensions
coordinators, whereas the secondary sources were collected from reports, manuals, journals and
scholar books.

23
 3.4 Data Collection Instruments
Using multiple technique and data sources to support the strength of interpretations and
conclusion is important in the study. By considering this, the data collection methods employed
in the study is questionnaires and interviews.

3.4.1 Questionnaires
The questionnaire is one particular type of survey which asks for responses to a set of questions.
The questionnaire is employed as main data collection instrument, because factual information is
better secured through the questioner. Moreover, questionnaire enables to obtain variety of
opinions from a large size of population, relatively within a short period of time (Dawson, 2002).
Both closed and open ended sets of questionnaires will be first prepared in English and the
Amharic versions will be distributed to the respondents to make them more comprehensible.
Most of the closed-ended items are constructed in the form of multiple choices.

3.4.2 Interview

In this study, besides, questionnaires, to get qualitative data and to allow for follow up questions
face to face interview questions were employed. This enables the researcher to obtain
information about participants’ thoughts, beliefs, knowledge, reasoning, motivations, and
feelings about the issue under research (Johnson & Christensen, 2004). In addition, information
on regarding factors affecting SMEswas obtained through interviews with the owners.
3.5 Research Participants and Sampling Procedure
In this study, the unit of analysis is the firm, and the target population was all employees in
SMEs in Kolfe Sub- City. In determining the sample size for the current survey, the researcher
will strategically select samples that best serve the desired purpose. Considering the total 136
small, micro and medium manufacturing enterprises supported with kaizen and other industry
extension services packages which has direct or indirect relationship to the subject of study were
totally selected due to small in number.

Table 1: Target population of the study

S.No Sectors
Enterprises Sample Units

24
1 Furniture MSE Middle Employees Trainers Managers
2 Metal work 19 4 86 23 23
3 Textile and 29 6 73 35 35
garment
4 Leather 48 7 345 55 55
114 22 597 136 136
TOTAL
136 869
Source: - Field survey, 2021

3.4.1 Sample Size Determination

To get representative data the researcher used solving formula cited by Yemane (1967)
considering the level of acceptable margins of error 5%. Regarding this Kothari (2004) suggests
that an optimum sample is one which fulfills the requirements of representatives and reliability.
Hence, from the target population size of manufacturing enterprise managers, employees and
Trainers (N=869) a total number of samples are required drawn assuming 95% of confidence
level and 5% margin of error.

Based on this the researcher decided to take the upper population size limit to get more valid
sample size. Then the total sample size (n) can be calculated by using the following formula.

n = the sample size N= the size of the population

e = the margin of error or the maximum error and for this study is 5% with confidence level
(95%). By using this formula the sample of the study are.

n =N = 869 =268

1+N (e) 2 1+869(0.05)2

Whereas N= Total Population, n= sample size and e= level of confidence

Therefore, the sample size of this study is 268 considered fairly representative of the target
population in the study area, 5 participants will be selected purposely for interview. To compute
the sample proportion of each sector, the obtained sample divided by population as follows

25
 Table 2: Sample Size of the study
Sectors Participants Sample proportionate
1 Furniture 86 27 86*869
2 Metal work 73 22 73*869
3 Textile and garment 345 108 345*869
4 Leather 93 29 93*869
Employees 597 186
1 Furniture 23 7 23*869
2 Metal work 35 10 35*869
3 Textile and garment 55 17 55*869
4 Leather 23 7 23*869
Trainers 194 41
1 Furniture 23 7 23*869
2 Metal work 35 10 35*869
3 Textile and garment 55 17 55*869
4 Leather 23 7 23*869
Managers 194 41
Total Respondents = 268
Source: - Field survey, 2021

3.5 Data Analysis

The data collected from primary sources was documented, organized and analyzed as per
research questions. Then, the major findings were summarized and presented using descriptive
statistical tools like frequency distribution and percentage for collected quantitative data. The

26
qualitative data obtained from the study was organized, analyzed and interpreted and
supplemented to quantitative data. To avoid redundancy while narrating respondents’ answers,
common responses were summarized in tables, and then, taken as support to or against
quantitative data.

3.6 Validity and Reliability

Reliability refers to how consistently a method measures something. If the same result can be
consistently achieved by using the same methods under the same circumstances, the
measurement is considered reliable. Validity refers to how accurately a method measures what it
is intended to measure. If research has high validity that means it produces results that
correspond to real properties, characteristics, and variations in the physical or social world
(Eden, 2017).
Therefore, reliability was tested using Cronbach‘s alpha values for the items in each construct.
Accordingly, reliabilities less than 0.60 were considered to be poor, those in the 0.70 range,
acceptable, and those over 0.80 good.
Accordingly, the Cronbach's alpha for the study is 0.822 for RQ1, 0.754 for RQ2 and 0.734 for
RQ3. This shows that the Cronbach's alpha lies within the 0.6 ≤ α ≤ 0.9 category indicating that
the survey instrument was good in terms of internal consistency. Validity is concerned with
meaningfulness of research component. Therefore, the validity of the research was assured
through designing appropriate questions for the questionnaire.

S.No Research Questions Cronbach Alpha Average

1 RQ1 0.822 0.806
2 RQ2 0.754 0.768
3 RQ3 0.734 0.721

27
 3.7 Ethical issues

Research should be designed, reviewed and undertaken to ensure integrity and quality.Informed
consent is the major ethical issue in conducting research. According to Armiger (1997), it means
that a person knowingly, voluntarily and intelligently, and in a clear and manifest way, gives his
consent.
The issue of confidentiality and anonymity is closely connected with the rights of beneficence,
respect for the dignity and fidelity.
Hence, in this study, respondents were informed fully about the purpose, methods and intention
of the study, possible uses of the study, what their participation in the study entails and what
risks, if any, are involved.
In addition, the confidentiality of information supplied by research subjects and the anonymity
of respondents was respected. Research participants were participated in a voluntary way, free
from any coercion.

28
 CHAPTER FOUR

4. DATA PRESENTATION, ANALYSIS AND INTERPRETATIONS

4.1 Introduction
This section dealt about data presentation, analysis and discussion. The quantitative data were

summarize and organized using SPSS software. This chapter presented data from questionnaire;

structured interview and related journals regarding assessment of Micro and Small Enterprises in

Addis Ababa in Case of KolfeSub City Administration

4.2 Response Rate

In order to make the collected data suitable for the analysis, all questionnaires were screened to
be complete. Out of 268 distributed questionnaires, 268(100%) response rates have been
obtained. No unreturned and incomplete questionnaires which considered as errors and
removed from the survey data.
On the other hand, the researcher involved interview for the TVET leaders and other high
experts. Thus, from the sample of 12 participants, 12(100%) of them participated in the
interview.
Therefore, all presentations and analysis presented below were summarized data from employees

and interviewed from leaders and other experts. The first section was on demographic

characteristics of the respondents. Furthermore, the second section presents and describes about

the data on assessment of Micro and Small Enterprises in Addis Ababa in Case of KolfeSub City

Administration

29
 4.3 Demographic Characteristics of Respondents
The first analysis of data involves profiling the background characteristics of the respondents
drawn from the sampled SMEs. In this section, based on the response obtained from the
respondents, demographic characteristics of the study group were examined in terms of sex,
age, educational background and level and service years.

4.3.1 Sex and age of Respondents

Table 2:- Summarized Frequency and Percentage sex and age of Respondents (n=268)
Sex category Frequency Percent
Male 140 52.23
Female 128 47.76
Total 268 100
Age
20-25 76 28.35
26-30 124 46.26
31-35 30 11.19
36-45 34 12.68
Above 45 Years 4 1.49
TOTAL 268 100

Source: Field Survey, 2021

As far as sex of respondents was concerned, about 140(52.23%) were males whereas the rest
128(47.76%) were females. Regarding age of respondents 124(46.26%) was in between 26-30
years old. While the rest 76(28.35%) were in between 20-25 years old. About 34(12.68%) were
on between 36-45 years old. The remaining 30(11.19%) of the employees were in between 31-35
years old. The remaining 4(1.49%) were above 45 years old.

This indicated majority of respondents were male in gender. In terms of age majority of
employees were young, energetic and matured enough for proper filling of questionnaires
distributed. In addition, it is also easy to get important and enough opinions regarding their
perceptions and attitudes towards the issues under study.

29
 4.3.2 Educational level and Qualification of Respondents

Table 3:-Summarized Frequency and Percentage educational level and qualification of

Respondents (n=268)
Level Of Education Frequency Percent
Diploma 234 87.31
Degree 32 11.94
Masters 2 0.74
Total 268 100
Field of Studies
Mechanical engineering 47 17.53
Garment and textile 15 5.59
Management 45 16.79
Construction 67 25
Agro food processing 46 17.16
Hotel and hospitality 25 9.32
Information technology 23 8.58
Accounting 47 17.53
Total 268 100

Source: Field Survey, 2021

Regarding educational level of respondents, 234(83.58%) of them were diploma holders while
the rest 32(11.94%) and 2(4.47%) were degree and masters holders respectively. As far as the
educational qualifications of respondents were concerned, majority of them were graduates of
construction sectors 67(25%). The rest 47(17.53%) and 46(17.15%) were graduates of
mechanical engineering, accounting andagro food processing respectively. The remaining
45(16.79%), 25(9.32%), 23(8.58%), and 15(5.59%) have management, hotel and hospitality,
information technology, garment and textile educational backgrounds respectively.

30
 4.3.3 Work experience in years and its types (of Respondents)

Table 4:- Summarized Frequency and Percentage of work experiences of Respondents (n=268)

Experience in years Frequency Percent

1-5 years 20.52
55
6-10 years 46.64
125
11-15 years 24.25
65
16-20 years 4.85
13
21 years and above 3.73
10
Total 268 100

Source: Field Survey, 2021

Regarding service years of respondents, majority 125(46.64%) were employees of having service
in between 6-10 years, while the remaining 55(20.52%) of the have work experience in between
1-5 years. The rest 65(24.25%) were in between 11-.15 years of service, 13(4.85%) were in
above in between 16-20 years. the remaining 10(3.73%) of them have above 21 years work
experience. This depicted that majority of the respondents were matured and experienced enough
to fill the questionnaires in critical way. The respondents were asked their types of experienced
they have.

31
 4.4 Factors Affecting the Growth of Micro and Small Enterprises

Table 5: Current Practices of SMEs

s.no ITEMS M SDEV
1. The enterprise have skills to apply financial statements analysis regularly 1.19 0.96
2. There is strong management of working capital 2.20 1.40
3. Currently the tax levied on my business is reasonable 2.21 1.40
4. There is suitable collateral requirement from banks and other lending 3.22 1.98
institutions
5. Current working place is convenient 4.24 1.38
6. I get updated and real information on government regulations that are 4.26 1.45
relevant to my business
7. The employees have enough skills to handle new technology 4.30 1.05

Notices: - (1.00-1.49) = highly disagree; (1.50-2.49) = disagree; (2.50-3.49) = undecided; (3.50 - 4.49) = agree; (4.50-5.00) = highly agree

Source Field Survey, 2021

The respondents were asked variables related with current practices of SMEs. Accordingly, the mean values of
each indicators were calculated between 1.19 (SD=0.96) and 4.30 (SD=105). As it is indicated in the above
Table 5, the enterprise have skills to apply financial statements analysis regularly(M=1.19, SD=0.96) and
existence of strong management of working capital in SMEs was scored low mean values below cutoff
point(M=2.20, SD=1.40). In addition,the owners of SMEs did not believe that currently the tax levied on their
business is reasonableand it’s non-reasonably was justified by low scored mean values lied below cutoff point
(M=2.21, SD=1.40). However, they remain indifferent and have says regarding suitability of collateral
requirement from banks and other lending institutions(M=3.22, SD=1.98). But, the business owner managers
were neither ‘agreed’ nor ‘disagreed’ with this problem.

The respondents did not complain against the convenience of current working place (M=4.24, SD=1.38) and
getting updated and real information on government regulations that are relevant to their business(M=4.39,
SD=1.45) in order of ascending. The employees believed that they have enough skills to handle new
technology (M=4.30, SD=1.05).

They informant confirmed that;

32
 There are problems related to government bodies at the woreda levels. The interviewees
are pointed out the implementation problems widely observed in the side of the heads and
lower level experts and employees of government sector offices such as lack of
responsiveness to the demands of the operators. This arises either from the deliberate
tendency of the executives to be bureaucratic or their lack of awareness about the
peculiar procedures, policies and proclamations that favor MSEs. The other possible
explaining factor for this non-responsiveness to the operators can be the fact that the
concerned government offices are overburdened with other routine activities of their
respective offices, which resulted in abandoning or being irresponsive to the issues of the
MSE operators. They provide training twice or three times a year for SMEs. But they
there is no monitoring and controlling system and did not follow its implementation. They
need it for report purposes rather than real work.

Therefore, it may be concluded that bureaucracy in lack financial analysis skills, absence of strong capital
management, and no reasonable tax levied on the SMEs were the main factors affecting the performance of the
businesses in a negative manner.

Table 6:The Challenges facing implementation of SMEs

s.no ITEMS M SDEV

1 Bureaucracy in company registration and licensing 4.22 0.87

2 Lack of government support 4.21 1.65
3 Unplanned withdrawal of cash for personal use 4.17 1.43
4 Political intervention 3.28 1.37
5 Insufficient and interrupted water supply 1.79 1.37
6 Lack of sufficient and quick transportation service 1.34 1.98
Notices: - (1.00-1.49) = highly disagree; (1.50-2.49) = disagree; (2.50-3.49) = undecided; (3.50 - 4.49) = agree; (4.50-5.00) = highly agree

Source Field Survey, 2021

The respondents were asked variables related with factors affecting SMEs. Accordingly, the mean values of
each indicators were calculated between 4.22 (SD=0.87) and 1.34 (SD=1.98). As it is indicated in the above
table 6, bureaucracy in business registration and licensing(M=4.22, SD=0.87),followed by that failure to lack

33
of government support (M=4.21,SD=1.65), unplanned withdrawal of cash for personal use(M=4.17,SD=1.43),
Political intervention (M=3.28,SD=1.37), insufficient and interrupted water supply(m=1.79,sd=1.37), lack of
sufficient and quick transportation service (m=1.34.SD=1.98)

The key informants from weed confirmed that;

Opportunities have been created; MSEs have not been able to draw the full advantage due
to absence of appropriate policy support. There is still exists an overly bureaucratic
government system that often results in unnecessary delays in compliance and is
excessively costly. This includes a complex system, lengthy procedures and rules. For
example, registration of a business, getting working places, payment of stamp duty among
others. For enterprises found in Kolfe Keranio Subcity this poses a major challenge and
cost as the owners of the business would need to close for days in order to travel to
concerned governmental offices to access these services sometimes without success.
Operators believe that these requirements force enterprises to operate informally, which
greatly limits their opportunities for growth, or to go out of business.

One can infer from triangulated data, bureaucracy in business registration and licensing, lack of government
support, and unplanned withdrawal of cash for personal use were the main factors affecting the enterprises
performance in a negative manner

34
 Table 7: possible solution to the challenges facing SMEs
S.No ITEMS D SDEV

1 The government should improve the quality and accessibility of the service of the 4.76 1.49
supporting SMEs by assigning employees that have proper knowledge in the
specific business area
2 The government should develop comfortable source of finance for MSEs by 4.09 1.37
organizing and supporting the performance of MFIs and other source of finance
3 MSEs should enhance their marketing skills through proper tainting and experience 4.39 1.51
sharing with other MSEs, and medium and large scale enterprises
4 The stiff competition among MSEs and other medium and big enterprises must be 3.58 1.45
also minimized by diversifying the products of the enterprises
5 Government should offer favorable business environment in corporation with the 3.79 1.42
society and other potential organizations

Notices: - (1.00-1.49) = highly disagree; (1.50-2.49) = disagree; (2.50-3.49) = undecided; (3.50 - 4.49) = agree; (4.50-5.00) =
highly agree

Source Field Survey, 2021

The respondents were asked variables related with possible solutions to factors affecting SMEs.
Accordingly, the mean values of each 5 indicators were calculated between 1.14 (SD=0.35) and
3.79 (SD=1.42). As it is indicated in the above Table 7, the respondents support the idea that the
government should improve the quality and accessibility of the service of the supporting SMEs
by assigning employees that have proper knowledge in the specific business area(M=1.14,
SD=0.35),followed by that the government should develop comfortable source of finance for
MSEs by organizing and supporting the performance of MFIs and other source of
finance(M=1.28,SD=1.37),MSEs should enhance their marketing skills through proper tainting
and experience sharing with other MSEs, and medium and large scale
enterprises(M=3.39,SD=1.51), the stiff competition among MSEs and other medium and big
enterprises must be also minimized by diversifying the products of the
enterprises(M=3.58,SD=1.45), government should offer favorable business environment in
corporation with the society and other potential organizations(M=3.79,SD=1.42) in order

35
descending. All mean values for the above 5 items lied above cutoff point indicating level of
agreement.
In additions, one of the enterprises owners added that;

Government support needs to be improved. We are interested in SMEs. But

the problem is with materials and inputs, machines for producing and being
competent in the world of work. The government should not move only for
report purposes but needs give attention for financial and resources needed
to produce products. There should be credit service from saving and Credit
institutions. The government give due attention to large enterprises and
undermine the role SMEs in Ethiopia. This is the reason why there is
unequal treatment to get credit services.
This support the literature arguing unequal access to finance by MSEs and medium and large
enterprises has undermined the role of MSEs in the economic development in African countries
(World Bank, 2004). In line this Etumeahu (2009) argued that due to the aggressive competition
small business enterprises are facing from companies that operate with greater capital outlay,
companies with better and modern equipment’s for production, companies with better manpower
and companies with marketing capabilities have resulted to low level of business and at times
outright closure by small business owners.

36
 CHAPTER FIVE

5. Summary of Major Findings, Conclusions and Recommendations

The main purpose of this study was to assess factors affecting the Growth of Micro and Small
Enterprises in Addis Ababa in Case Of Kolfe sub city administration. The descriptive survey
method was employed as a method of the study. The sources of data were employees, experts
and TVET leaders. To seek answers to the research questions, the data were gathered through
questionnaires and interviews supporting with related documents. The questionnaires were
filled out and returned by 268 employees. Ordinary Interview session was conducted with,
totally 12 respondents through face to face.

The data obtained through the above instruments were analyzed quantitatively using
frequency and percentages, mean and standard deviation using SPSS. Finally, based on the
analysis of the data, the following major findings, conclusions and recommendations were
obtained from the study.

5.1 Summary of Major Findings and Discussions

Regarding the respondent’s demographics, there was approximately proportional gender
composition and majority of them were diploma holders. Even though their sector type was
mixes from different sectors, majority of them are from construction,and cloth industry.

Coming to the first concern of the study, the implementation problems widely observed in the
side of the heads and lower level experts and employees of government sector offices such as
lack of responsiveness to the demands of the operators. lack of awareness about the peculiar
procedures, policies and proclamations that favor MSEs. The other possible explaining factor for
this non-responsiveness to the operators can be the fact that the concerned government offices
are overburdened with other routine activities of their respective offices, which resulted in
abandoning or being irresponsive to the issues of the MSE operators. They provide training twice
or three times a year for SMEs. But they there is no monitoring and controlling system and did
not follow its implementation. They need it for report purposes rather than real work. The study
revealed that bureaucracy, lack financial analysis skills, absence of strong capital management,
and no reasonable tax levied on the SMEs were the main factors affecting the performance of the
businesses in a negative manner.

37
Large opportunities have been created for SMEs; however, MSEs have not been able to draw the
full advantage due to absence of appropriate policy support. There is still exists an overly
bureaucratic government system that often results in unnecessary delays in compliance and is
excessively costly. This includes a complex system, lengthy procedures and rules. Unfair
competitions from informal sectors, unreasonable tax rate and lack of accessible information on
government regulations are identified as political & legal factors that affect the growth of MSEs.
For enterprises found in KolfeKeranio sub-city this poses a major challenge and cost as the
owners of the business would need to close for days in order to travel to concerned governmental
offices to access these services sometimes without success. Lack enough competent employees,
high bureaucracy from micro finance institutions, exercise poor accounting & bookkeeping
practices are identified major financial factors that affecting the growth of MSEs. Bureaucracy in
business registration and licensing, lack of government support, and unplanned withdrawal of
cash for personal use were the other factors affecting the enterprises performance in a negative
manner.

Regarding possible solutions to factors affecting SMEs, government support needs to be

improved. The enterprises owners are interested in SMEs. But the problem is with materials and
inputs, machines for producing and being competent in the world of work. The government
should not move only for report purposes but needs give attention for financial and resources
needed to produce products. The government give due attention to large enterprises and
undermine the role SMEs in Ethiopia. This is the reason why there is unequal treatment to get
credit services.

38
5.2 Conclusion
The study revealed that, lack of responsiveness from the side of officers to the demands of the
operators. This is because of government offices are overburdened with other routine activities of
their respective offices, which resulted in abandoning or being irresponsive to the issues of the
MSE operators, lowawareness creation program, about the peculiar procedures, policies and
proclamations that favor MSEs. In addition, there is low monitoring and controlling system after
training provision focus on report purposes rather than real work. Bureaucracy from woredas and
financial institutions, lack financial analysis skills, absence of strong capital management, and no
reasonable tax levied on the SMEs were also negatively affecting SMEs. Moreover, lack enough
competent employees, high bureaucracy from micro finance institutions, exercise poor
accounting & bookkeeping practices are identified major financial factors that affecting the
growth of MSEs. Bureaucracy in business registration and licensing, and unplanned withdrawal
of cash for personal use were the other factors affecting the enterprises performance in a negative
manner. The respondents suggested that government should not move only for report purposes
but needs give attention for financial and resources needed to produce products. The government
need to give due attention like large enterprises and should not undermine the role SMEs in
Ethiopia.

5.3 Recommendations
Based on the finding and conclusion of the study the following recommendations are forwarded.

 The Addis Ababa city government bodies should provide affordable alternative sources
of finance for MSEs
 There should be systematic and well organized training center within sub-city that
provided a continuous entrepreneurs and business skill training for MSEs owner.
 To make MSEs competitive and profitable, increasing the capacity and skill of operator
through continues trainings experience sharing from successful enterprises, and provision
of advice and consultancy are crucial.
 The government officers should be responsive officers to the demands of the operators is
needed.
 Awareness creation program, about the peculiar procedures, policies and proclamations
that favor existed and newly emerge MSEs.
 Reducing bureaucracy from woredas and financial institutions,
39
 Providing training to increase financial analysis skills of enterprise owners, to have
strong capital management

40
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46
 APPENDIX A: QUESTIONAIRES FOR EMPLOYEES

RIFT VALLEY UNIVERSITY

GULLALE CAMPUS, POST GRADUATE PROGRAM

DEPARTMENT OF BUSINESS ADMINISTRATION

Dear respondents the main purpose of this questionnaire is to assess factors affecting the Growth
of Micro and Small Enterprises in Addis Ababa in Case Of Kolfe sub city administration. So you
are kindly requested to give genuine responses in order to make this study successful. And I
would like to appreciate your genuine response to the questionnaire in advance.

Thank you!

Directions: Please

o Don't write your name.

o Make a tick mark (√) in the boxes provided.
o Write your brief and short response in the blank spaces.

PART I: Personal background of respondents

1. Sex: Male Female

2. Age: 20 -25 26-30 31-35 36-45 46 and above

47
3. Level of Education: What is your educational level?

1. Does not read and write

2. Read and write
3. Elementary School
4. Secondary School
5. TVET graduate
6. College diploma
7. First degree and above
4 Fields of study major:
1. leadership
2. Construction
3. Manufacturing
4. Industry development
5. others

1.6. How many Work Experience you have------------------

1. 1-5 years
2. 6-10 years
3. 11-15 years
4. 16-20 years
5. Above 20 years

1.7 What is the main activity of the enterprise?

1. Textile and garment

2. Food processing
3. Wood work
4. metal work
5. others

48
 Part Two: Basic Business Information

PART II: Below are tables that consist of questions that show the Factors Affecting
SMEs in case Of Kolfe Keranio Sub city. Each table contains five responses. Please
indicate the extent to which each statement represents your TVET by putting tick
mark (√) in one of the boxes against each item. Where, 1- Strongly disagree 2-
=disagree 3- Undecided 4- agree and 5-Very agree

Factors Affecting the Growth of Micro and Small Enterprises

RQ1 :CURRENT PRACTICES OF SMES

s.no ITEMS 5 4 3 2 1

8. The enterprise have skills to apply financial statements

analysis regularly
9. There is strong management of working capital

10. Currently the tax levied on my business is reasonable

11. There is suitable collateral requirement from banks and

other lending institutions
12. Current working place is convenient

13. I get updated and real information on government

regulations that are relevant to my business
14. The employees have enough skills to handle new technology

RQ2: THE CHALLENGES FACING IMPLEMENTATION OF SMES

s.no ITEMS 5 4 3 2 1

1 Bureaucracy in company registration and licensing

2 Lack of government support

3 Unplanned withdrawal of cash for personal use

4 Political intervention

49
 5 Insufficient and interrupted water supply

6 Lack of sufficient and quick transportation service

RQ3: POSSIBLE SOLUTION TO THE CHALLENGES FACING SMES

S.No ITEMS 5 4 3 2 1

1 The government should improve the quality and accessibility

of the service of the supporting SMEs by assigning
employees that have proper knowledge in the specific
business area
2 The government should develop comfortable source of
finance for MSEs by organizing and supporting the
performance of MFIs and other source of finance
3 MSEs should enhance their marketing skills through proper
tainting and experience sharing with other MSEs, and
medium and large scale enterprises
4 The stiff competition among MSEs and other medium and
big enterprises must be also minimized by diversifying the
products of the enterprises
5 Government should offer favorable business environment in
corporation with the society and other potential organizations

THANK YOU FOR YOUR COOPERATION!!!

50
 APPENDIX B
Interview Questions
Interview questions with MSE operators

1. Do you think that you success in your business?

if your answer is yes do you know the reason behind please specify the reasons of your
success________________________________________________________________________
______________________________________________________________________________
___________________________________________________if your answer is not why?
______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________________
2. What problems did you face while running MSEs in relation to:
 Politico-legal factors [government policy, bureaucracies (in relation to company
registration and
licensing,taxation)_________________________________________________________
__________
 Technology factors
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
----------------------------------------------
 Infrastructure (power, transportation, water supply and like)
________________________________________________________________________
__________

51
  Marketing factors (relationship with suppliers, customers and others)
________________________________________________________________________
__________
 Financial factors (interest rates, collateral requirements, etc)
________________________________________________________________________
________________________________________________________________________
__________________________________

What are other problem(s) did you faced regarding the overall functioning of your activity?
______________________________________________________________________________
______________________________________________________________________________
__________________________________
3. What do you think the solutions to these problems? -----------------------------------------
-------------------------------------------------------------------------------------------------------

52