Oromia State University

School Of Leadership and Governance

Department Governance and Development Management (DM)

The Role of Micro and Small Enterprises for local economic development:
In The Case of Sululta Town, Oromia, Ethiopia

A thesis Submitted to Oromia State University Department of Governance and

Development Management, in Partial Fulfillment of the Requirements for the
Degree of MA in Development Management

By: Belay Daba

Advisor: Daniel Ebba (Ph.D.)

May, 2022
Oromia, Ethiopia
 Oromia State University
School Of Leadership and Governance
Department Governance and Development Management (DM)

The Role of Micro and Small Enterprises for local economic

development: In The Case of Sululta Town, Oromia, Ethiopia

By: Belay Daba

A thesis Submitted to Oromia State University Department of Governance and

Development Management, in Partial Fulfillment of the Requirements for the
Degree of MA in Development Management

Approved by Board of Examiners

_______________________________ ________________

Chairperson, School of Graduate Committee Signature

_______________________________ ________________

Advisor Signature

_______________________________ ________________

External Examiner Signature

_______________________________ ________________

Internal Examiner Signature

DECLARATION
I, the undersigned, declare that this thesis hereby submitted to Oromia State University for the
degree of Masters of Arts in Development Management is my original work, which has not been
presented for a degree in this or any other university; and all sources of materials used in the thesis
have been duly acknowledged.
Name: Belay Daba Boke
Signature: _____________________________
Date of submission: _____________________
ENDORSEMENT
This is to certify that this thesis entitled “The Role of Micro and Small Enterprises on Local
Economic Development: The Case of Sululta Town Administration” Submitted in partial fulfillment
of the requirement for the award of the degree of MA, in Development Management of the Institute
of Leadership and management Studies, Oromia State University, through the Department of
Development management Studies, done by Mr. Belay Daba, ID. No: GPG/M/W/12/0902 is carried
out by him under my guidance.
Advisor: Daniel Ebba (Ph.D.)
Signature: __________________
Date: _______________________
ACKNOWLEDG8MENTS
Firstly, I would like to give special thanks to God the Almighty for giving me a dream,
strength, health and other resources to successfully complete this thesis. I would like to
acknowledge the academic support and invaluable guidance that I received from my advisor,
Dr. Daniel Ebba throughout this thesis preparation stages. I would also like to express my
gratitude to my mother, brothers and sisters for their valuable advice and encouragement. I
am very grateful to all people who supported me in providing useful data and materials
required for the research. Also my gratitude goes to my friends for their moral support. A
special thanks to Edessa Baye for his motivation, support and encouragement. Last but not
least, I would also like to thank staff from MSE offices of Sululta Micro and Small
Enterprise Development Agency, Sululta town Administration. Also to MSEs
owners/managers in the four kebele’s who took their time out of their busy schedule to
respond to the research questionnaire developed and conducted for this study. Without their
input, this research would not have been possible.

i
ABSTRACT
Local economies often get developed with the participation of government, non-government
organizations, and the community at large. Among the community, micro and small enterprises
managers have the capability to strengthen the local economy through mobilizing local resources.
This research explores the role of Micro and Small Enterprises (MSEs) in enhancing local economic
development in Sululta Town Administration. The analysis was based on primary and secondary data
collected through administrative type of questionnaires, Focus group Discussion and key informant
interviews from selected managers, government officials and enterprise representatives. The paper
used descriptive analysis. The explorative analysis tried to investigate the contribution of MSEs in
terms of the enterprises’ performance using their capital, profit, and employment creation as an
indicators. To see their impact, the study also reviewed contribution of MSEs in light of economic
improvement of the managers through household income and saving habit, household’s expenditure
on food, education, health, durable and non-durable assets. The descriptive analysis used Heckiman
selection model. The result from the Heckman selection model shows that, lack of sufficient capital,
high price of raw materials, lack of access to market, high tax rate and lack of technical skills were
found to be the major challenges in the performance of MSEs.

The access to working place, access to bank loan, technical training to the operator, better access to
raw materials, appropriate customer and assistance with marketing were found to be the major
components which contributed for the improvement of MSEs performance. The study revealed that,
MSEs represent a vital component of the local economic development process in Sululta Town
Administration, and their contribution in terms of employment, income and poverty reduction is well
acknowledged. Construction, manufacturing, Agriculture, Service, Trade, and Minerals need high
initial capital, they are labor intensive and have higher profit margin than the service. Hence, this
shows their contribution to local economic development is encouraging. Most of the managers were
performing with at least one type of training which is insufficient. Nonetheless, the operator’s living
standard, income, food consumption, education, health, durable, and non-durable household assets
are increasing. Most of the managers have a plan to expand the business either in the same line or to
have a branch and diversify the business which has a greater impact to the local economic
development. Major constraining factors for realizing such potential include lack of sufficient capital,
limited access to market and high price of raw materials. Hence the government, non-government
organizations and other concerned bodies should give support in making MSEs successful attaining
their goal in particular and to contribute to national economic development in general.

ii
LIST OF ABBREVIATIONS AND ACRONYMS
BDS Business Development Service
CSA Central Statistical Agency
EEA Ethiopian Economic Association
ETB Ethiopian Birr
FeMSEDA Federal Micro and Small Enterprise Development Agency
GTP Growth Transformation Plan
ICT Information Communication and Technology
ILO International Labor Organization
LED Local Economic Development
MoTI Ministry of Trade and Industry
MoUDC Ministry of Urban Development and Construction
MSEs Micro and Small Enterprises
SMMEs Small, Medium and Micro Enterprises

iii
Contents Pages
ACKNOWLEDG8MENTS ..................................................................................................................... i

ABSTRACT ........................................................................................................................................... ii

LIST OF ABBREVIATIONS AND ACRONYMS .............................................................................. iii

Contents Pages ..................................................................................................................................... iv

CHAPTER ONE..................................................................................................................................... 1

INTRODUCTION .................................................................................................................................. 1

1.1. Background of the Study ................................................................................................................. 1

1.1. Statement of the Problem .................................................................................................. 3

1.2.1. Research Question ................................................................................................................ 4

1.3. Objective of the Study ........................................................................................................ 4

1.3.1. General Objective ................................................................................................................. 4

1.3.2. The specific objectives .......................................................................................................... 5

1.4. Significance of the Study ................................................................................................... 5

1.5. Scope of the study .............................................................................................................. 5

1.6. Limitation of the study ....................................................................................................... 6

1.7. Operational definitions of the key terms ............................................................................ 6

1.8. Organization of the study ................................................................................................... 7

CHAPTERTWO..................................................................................................................................... 8

REVIEW LITERATURE ....................................................................................................................... 8

Introduction ............................................................................................................................................ 8

2.1. Theoretical framework ....................................................................................................... 8

2.1.1. Definition and Classification of MSEs ................................................................................. 9

2.1.2. Micro and Small Enterprises (MSEs) in Ethiopia .............................................................. 10

2.4.2 The output-demand theory .................................................................................................. 20

2.4.3 The firm growth theory ....................................................................................................... 21

iv
 3.1.3 Socio-Economic Activities ................................................................................................... 29

3.2. Study Design .................................................................................................................... 30

3.3. Types, sources, and methods of data collection ............................................................... 30

3.4. Sampling Techniques ....................................................................................................... 30

3.4.1 Sampling Frame................................................................................................................... 31

3.4.2 Sample size .......................................................................................................................... 31

3.5 Data Collection Instrument..................................................................................................... 32

3.6 Method of Data Analysis .................................................................................................. 33

3.7 Ethical considerations ....................................................................................................... 33

Chapter Four ......................................................................................................................................... 34

Result and Discussion .......................................................................................................................... 34

4.1. Socio- economics of respondents..................................................................................... 34

4.2. Performance of the MSEs ................................................................................................ 36

4.2.1. Ownership of Enterprise ..................................................................................................... 37

4.2.2. Regarding Technical Training ............................................................................................ 37

4.2.3. Knowledge Improvement after Training ............................................................................ 38

4.3. Job Creation ..................................................................................................................... 38

4.4. Role of MSEs in enhancing the well-being of households .............................................. 40

4.5. The contribution of MSEs to local economic development............................................. 42

4.5.1. Initial and Current capital of the Enterprises ...................................................................... 43

4.5.2. The assets of households .................................................................................................... 45

4.6. The major challenges and opportunities MSEs are facing in promoting local economic
development. ........................................................................................................................... 46

4.6.1. Challenges Faced by MSEs in the Study Area ................................................................... 46

4.6.2. Lack of Working Spaces .................................................................................................... 47

4.6.3. Lack of Sufficient Capital .................................................................................................. 47

v
 4.6.4. Limited Access to Market .................................................................................................. 48

4.6.5. Limited Access to Credit Facilities .................................................................................... 48

4.6.6. High price of raw material .................................................................................................. 49

4.6.7. Lack of raw materials ......................................................................................................... 50

4.6.8. Heavy government tax ........................................................................................................ 50

4.6.9. Pressure from Government Rules and Regulations ............................................................ 51

4.6.10 Lack of Technical Skill ..................................................................................................... 51

4.6.11. Lack of Information .......................................................................................................... 52

4.6.12 Unfair Competition from Other Enterprises ...................................................................... 53

Chapter Five ......................................................................................................................................... 54

CONCLUSIONS AND RECOMMENDATIONS ............................................................................... 54

5.1 Conclusions ....................................................................................................................... 54

5.2. Recommendation ............................................................................................................. 56

References ............................................................................................................................................ 58

Appendices ........................................................................................................................................... 62

Appendix A: ............................................................................................................................ 62

Appendix – B .......................................................................................................................... 67

Appendix-C .......................................................................................................................................... 70

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Lists of Table
Table 3.2: Sample Size……. ...... ……………………………………………………………31
Table 4.1. The demographic background of the respondents ................................................. 35
Table 4.2:-Ownerships of the enterprise ................................................................................. 37
Table 4.3:-technical training/Skill .......................................................................................... 38
Table 4.4:- improving knowledge ........................................................................................... 38
Table 4.5: Before you engage in the current job ..................................................................... 39
Table 4.6:- Employees of enterprise ....................................................................................... 39
Table 4.7: Income expense ..................................................................................................... 40
Table 4.8:- income condition after start the business ............................................................. 40
Table 4.9- saving from earn per day/week/month .................................................................. 41
Table 4.10:- saving conditions ................................................................................................ 41
Table 4.11:- household saving ................................................................................................ 42
Table 4.12:- source of income ................................................................................................ 43
Table 4.13:- The initial capital ................................................................................................ 43
Table 4.14:- Current Capital ................................................................................................... 44
Table 4.15:-The faced challenges ........................................................................................... 46
Table 4.16:- Lack of working spaces ...................................................................................... 47
Table 4.17:- Lack of sufficient capital .................................................................................... 48
Table 4.18:- Limited access to market .................................................................................... 48
Table 4.19:- Limited access to credit facilities ....................................................................... 49
Table 4.20:- High price of raw material.................................................................................. 49
Table 4.21:- Lack of raw materials ......................................................................................... 50
Table 4.22:-Heavy government tax......................................................................................... 50
Table 4.23:-Pressure from government rules and regulations ................................................ 51
Table 4.24:- Lack of technical skill ........................................................................................ 52
Table 4.25:- Lack of information ............................................................................................ 52
Table 4.26:- Unfair competition from other enterprises ......................................................... 53
4. 27. Table of Coefficients..................................................................................................... 70
4.28. Table of Correlations ..................................................................................................... 70
Table 4.29. Correlation of the challenges of MSEs ................................................................ 72

vii
Lists of Figure
Figure 2.1 Conceptualizing the Role of MSEs for Local Economic Development ................................. 27
Figure 3.1 Map of Sululta Town administration ................................................................................... 29
Figure: 4.1 Impacts on asset holding of the household ....................................................................... 45

viii
 CHAPTER ONE
INTRODUCTION
1.1. Background of the Study

Local economies development often get developed with the participation of government,
non-government organizations, and the community at large. Among the community, Micro
and Small Enterprises managers can strengthen the local economy by mobilizing local
resources.
Poverty and unemployment are viewed as the most alarming issues affecting development in
the majority of the developing countries in the world (Ndabeni, 2006; Mensah and Benedict,
2010; Okpara, 2011). In line with this Micro and Small Enterprises (MSEs) are inextricably
linked to economic growth, job creation, and income generation within poor and
disadvantaged communities in developing countries (Netswera, 2001; Egan, 2009). MSEs
have become a focal point of considerable attention to many international and government
institutions in emerging economies. The small business sub-sector is considered an important
force to generate employment and more equitable income distribution, activate competition,
exploit niche markets, enhance productivity, and bring technical change through the
combination of all of these measures, to stimulate local economic development.
Academicians, Politicians, and development economists have supported the promotion of
micro and small business enterprise towards job creation, poverty reduction, and innovation.
Under the prevalence of extreme poverty where unemployment coupled with the growing
urban population, the modern and formal sub-sector of the economy alone could not absorb
the multitudes of unemployed people who are more unskilled (Workneh, 2007). In
communities where unemployment and poverty are expanding like the study area, MSEs
always come to the front in employment creation and income generation. As a result, the
MSEs sub-sector is believed to be able to fill the gap that exists between the poor and the rich
in developing countries regarding income generation and, the unemployment rate. And
successful small businesses are the primary engines for economic development.
Among many, one of the contributions of MSEs is the development of the local economy by
providing jobs and entrepreneurship for the local people. To reduce the existing level of
urban unemployment and urban poverty through development, the present regime has

1
designed the MSEs development program under its urban-industrial development package in
2005. In 2009 the program had a target to reduce 80% of urban unemployment by creating
permanent employment opportunities and to reduce 20% of urban unemployment by creating
temporary employment opportunities, thereby reducing urban poverty (Munira, 2012).
Despite MSEs has been existing for longer periods in Ethiopia, they have only gotten the
attention of policymakers, academicians, and researchers very recently. The work of
Andualem (2004) repeated that MSEs in Ethiopia have been neglected for a long period until
a shift was made to a market-led economic system. However, since 1991 the Ethiopian
government has given due attention to the sector. Indeed there is no doubt about the
contributions of MSEs development interventions to national development in general and
local economic development in particular, but what matters is to what extent urban citizens
are becoming a beneficiary in such program intervention.
This research describes the role of Micro and Small Enterprises on local economic
development in enhancing local economic development in Sululta town. The analysis was
based on primary and secondary data collected through an administrative type of
questionnaires and key informant interviews from selected managers, government officials,
and enterprise representatives. The paper used both descriptive and econometrics analysis.
The explorative analysis tried to investigate the contribution of MSEs in terms of the
enterprises’ performance using their capital, profit, and employment creation as an indicator.
To see their impact, the study also reviewed the contribution of MSEs in light of economic
improvement of the managers through household income and saving habits, household’s
expenditure on food, education, health, durable and non-durable assets.
The econometrics analysis used the logit model and Heckman selection model. The result
from the Heckman selection model shows that lack of sufficient capital, the high price of raw
materials, lack of access to the market, high tax rate, and lack of technical skills were found
to be the major challenges in the performance of MSEs. The study revealed that MSEs
represent a vital component of the local economic development process in Sululta town, and
their contribution in terms of employment, income, and poverty reduction is well
acknowledged

2
1.1. Statement of the Problem
In the current situation many developing countries, like Ethiopia, are highly attached to
different problems like poverty, unemployment, traditional culture, famine, illiteracy, and
high population growth rate. According to FeMSEDA (2016), the key objectives of micro
and small enterprise development program are to create a broad-based springboard for the
development of competitive domestic industries and private sub-sector, create employment
opportunities and thereby reduce poverty. Existing literature on LED (Blakely 2010;
Helmesing 2003; Rodriguez-Pose and Tijmstra 2007; Tegegne and Richard 2011) remark
that there are three major actors of local economic development as government, the private,
and the community sub- sectors.
Issues like extensive unemployment, deficiency of the formal sub-sector to absorb a fairly
sufficient level of labor, increasingly heavy capital shortages, the need for local resource
mobilization and stimulation of the local economy, and other points of concern made MSEs
quite peculiar and relevant entities that deserve sufficient attention as well as policy focus in
the local economic development initiatives of urban localities. The relative importance of
MSEs is growing as a result of the urban population dynamics and the daunting urban
poverty level. In Ethiopia, the urban population increases roughly by 8 % per annum
(Zegeye, in Hibret 2009) consequently the poverty level is about 60%, which means that
more than 1.7 million people in the city are living below the poverty line (Asmamaw, in
Hibert 2009).
In Sululta town the available MSE are playing their role. But no study is conducted on this
area in a consolidated form to identify the role of MSE and their contribution for local
economic development. This study is the first to be conducted in this area..
Research Gap
Previous study have conducted various issues on MSE. By this study issues which are not
covered by them is filled. Among those issues cost reviewed empirical studies focus on
factors that hinder the growth of MSEs and the outcome of the program in aggregate forms.
Regarding the role of Micro and Small Enterprises in local economic development, the
studies give no or little focus on the issue of the role of MSEs for local economic
development. For instance, the study conducted by Admasu (2012) analyzes the major
problems of the sub-sector but the researcher did not see how MSEs contribute to local

3
economic development. Moreover, Brhane's (2014) study focused more on access to finance
for MSEs and found that to attain the desired goal of MSEs, access to finance is very
important. However, the researcher overlooked the role of MSEs in community
development.
Apart from these, the research conducted by Zemenu and Mohammed (2014) also tried to
analyze growth determinants of MSEs and found that intensive competition, inadequate
credit facility, starting a business without conducting the survey, inappropriate tax
imposition, and inappropriate tenure were the top five challenges that MSEs faced. However,
the study failed to investigate how MSEs can contribute to local economic development in
terms of employment creation, income generation, improving livelihood, and poverty
reduction. From the above-mentioned studies, it is possible to learn that the role of MSEs in
local economic development is not studied very well. Thus, this study tries to examine the
role of MSEs on a community’s economic development.
1.2.1. Research Question
The research was guided by the following questions;
1. What are the contributions of MSEs in generating employment opportunities for the
local people in Sululta town?
2. Are MSEs actors contributing to local economic development?
3. What changes are scored by MSE managers in terms of income, saving, and asset
holding after they engage in the activities?
4. What are the education, health, and living status of MSEs managers?
5. What are the challenges and opportunities for MSEs in enhancing local economic
development in the study area?
1.3. Objective of the Study
1.3.1. General Objective
The main objective of this research is to investigate the role of Micro and Small Enterprises
in local economic development in Sululta town

4
1.3.2. The specific objectives
 To analyze the performance of the MSEs (in terms of capital, employment, and profit)
operating in Sululta town.
 To examine the role of MSEs in enhancing the well-being of households.
 To identify the major challenges and opportunities MSEs are facing in promoting local
economic development.
 To examine the contribution of MSEs to local economic development.
 To identify job creation for unemployed duelers.
1.4. Significance of the Study
This study can have value to the development efforts in poverty reduction, employment
creation, local economic development, and generally in LED, in general, and in particular in
Sululta. The Information which was gathered and analyzed in this study provides empirical
findings on the role of Micro and Small Enterprises for LED. The findings of this study is
believed to show the contribution that MSEs have model LED.
It may also serve as reference other researchers who might be interested to conduct further
studies on similar subjects. Moreover, the outcomes of the study may serve as a source of
information for a person who needs to know about MSEs. Last but not least, the results
obtained from this study may serve government institutions at all stages, including small and
micro-enterprise development agencies, and non-governmental development organizations
formulate reasonably sound policies and decisions in matters related to MSE development.
1.5. Scope of the study
The study has spatial and conceptual delimitation. Spatially it is limited to Sululta town
administration.
Thematically the research covered the main products such as:-Manufacturing industry, Service,
Construction, Agriculture, Trade, and Minerals sub-sectors of MSEs in Sululta Town that registered
capital of less than ETB 500,000.
The other sub-sectors other than the three sub-sectors mentioned above were not considered in the
study because of time and financial constraints. Also, the study was carried out on selected
individuals operating in MSEs activities or establishments in one administration town.

5
1.6. Limitation of the study
There are some limitations to this study. Conducting quality research needs adequate
resources and time. However, during the study, shortage of time, budget constraints, and
resistance to respond to research questions from employees, other officials, and lack of
sufficient documents existed in some sectors to be successful accomplish the study were the
major limitation of the study.
1.7. Operational definitions of the key terms
 Micro enterprises are those businesses 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 tech establishments.
 Micro Enterprises are those enterprises having 5 workers including family members and
total assets not exceeding Birr 100,000 for manufacturing enterprises and Birr 50,000 for
service providing enterprises.
 Small enterprises are those enterprises having 6-30 workers and their total capital not
exceeding Birr 1.5 million for manufacturing enterprises and Birr 500,000 for service
providing enterprises.
 Local Economic Development is a conscious process in which communities are assisted
by well-advanced organizations to work in the direction of improving the standards of
social and economic well-being
 Local Economic development describes an increase in the quantity and quality of the
economic goods and services that a society produces.

6
1.8. Organization of the study
The research paper is organized into five chapters. Chapter one deals with the background of
the study, statement of the problem, research questions, the objective of the study,
significance of the study, and limitation of the study. The second chapter is a review of
literature on theoretic concept, the empirical and conceptual framework of MSEs and LED.
The third chapter deals with the research design and methodology. In the methodology types
and approach of study, Sample design, Types, Source and methods of data collection,
Methods of Data Analysis, Ethical consideration, and time and Budget schedules are
included. Chapter four is about the result and discussion of the data. The last chapter
summarizes the main finding of the study and draws conclusions and recommendations.

7
 CHAPTERTWO
REVIEW LITERATURE
Introduction
This chapter of the study deals with different theoretical concepts, theories, and empirical
evidence related to economic development. Therefore, the chapter is classified into two parts.
The first part is about theoretical literature relating to local economic development and
performance. The second is about empirical evidence obtained about economic growth
practice on the performance of the government on economic growth.
2.1. Theoretical framework
A review of existing literature shows that the promotion of MSEs is one of the policy
strategies for achieving national development goals such as poverty alleviation, economic
growth increasing people’s participation in economic activities, employment creation, and
income generation (Raymond, 2009). According to Rudjito (2003), the importance of MSEs,
including medium enterprises that they are contributing to job creation and output growth,
and sustainable development is now widely recognized among developing and developed
countries in the post-1970s.
MSEs also help to achieve a more equitable distribution of the benefits of the economy and
thereby help to give solutions for some of the problems associated with uneven income
distribution. With this advantage, MSEs therefore can alleviate poverty and helps as a
seedbed for the development of medium and large-scale enterprises in urban settings. The
governments of developing countries have also been supporting MSEs through various
programs, like credit schemes and the provision of training (Tambunan, 2006).
From any angle, there is no doubt that MSEs have already become major features of the
economic landscapes in most developing countries. As a result, researchers, practitioners,
and policymakers are increasingly interested in MSEs as incubators of labor-intensive
technologies and as sources of jobs and incomes for the urban poor (Thorbeche, 2000;
Ronge et al. 2002). The importance of the Micro and Small Enterprises sub-sector in
Ethiopia, particularly for the low-income, poor, and women groups, is evident from their
relatively large presence, share in employment and small capital requirement. These are

8
sufficient reasons for governments and other stakeholders in development to be interested in
Micro and Small Enterprises (Tekle Hiluf, 2014).
2.1.1. Definition and Classification of MSEs
Micro and Small Enterprises are defined in several countries within their different purposes
and intention. What is stated or identified as Micro and Small Enterprises in many
industrialized countries may differ in other developing countries. Micro enterprises in
developed countries can be labeled as small or medium in developing countries. This is
because the amount of capital invested and the number of people employed in operating and
implementing MSEs and the level of technology varies from one country to another.
In some countries, MSEs are labeled based on the number of employees and in others on
capital invested. Most definitions of MSEs depend on the policymakers (financiers, labor
officers, traders, and Service personnel). The common criteria that are used by different
countries are; Number of employees, Assets employed, Sales turnover, and/or Combination
of the above three factors.
According to the Ethiopian Micro and Small Enterprises development strategy, which is cited
in different packages of MSEs, the working definition of MSEs in Ethiopia is based on
capital and the number of employees. Hence a micro-enterprise in the industrial sub-sector
(Manufacturing, Construction, and mining) operates with up to five people including the
owner, and/or has total assets not exceeding ETB 100,000. Similarly, for activities in the
Service sub-sector (retailer, transport, hotel, tourism, ICT, and maintenance), a
microenterprise operates with up to five people including the owner, and/or has total assets
not exceeding ETB 50,000 (FeMSEDA, 2015). A small enterprise in the industrial sub-sector
operates with between 6 to 30 persons and/or has paid-up capital or total assets not exceeding
ETB 1.5 million. Similarly, a small Service sub-sector enterprise has between 6 and 30
persons and/or has total assets or paid-up capital of ETB 500,000 (FeMSEDA, 2015).
Though traditionally when referring to a small business financed by micro-credit the term
micro-enterprise is used, the terms microenterprise and micro-business have the same
meaning. Similarly, when referring to a small, usually legal business that is not financed by
microcredit, the term micro-business is used (FeMSEDA, 2012).

9
2.1.2. Micro and Small Enterprises (MSEs) in Ethiopia
The MSE sub-sector everywhere is characterized by highly diversified activities which can
create livelihood opportunities for a substantial segment of the population. This implies that
the sub-sector is a quick remedy for the unemployment and poverty problems. The
realization of a modest standard of living through curbing unemployment and facilitating the
environment for new job seekers and self-employment requires direct intervention and
support from the government and other concerned stakeholders. Hence, to channel all
necessary support and facilities to this diversified sub-sector, a definition is needed to
categorize the sub-sector accordingly.
However, coming up with a universally applicable definition of MSEs is found to be
difficult. This is so because the criteria and ways of categorizing enterprises as small, micro,
and medium vary from country to country and from organization to organization. The
absence of such a uniform definition of MSEs has created difficulty. In line with this, for
instance, 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 for functional and promotional purposes to
achieve the desired levels of development of the sub-sector, the High-Level Commission on
Legal Empowerment of the Poor argued.
After indicating that volume of capital, size of employment, market share, growth
performance, and annual and monthly turnover are some of the common criteria used widely.
Tegegne and Meheret (2010), report that, in addition to these criteria, enterprises can be
categorized based on past growth performance as new starts, no growth firms, small growth
firms, and graduates. The other categorization distinguishes enterprises as livelihood survival
and growth-oriented enterprise. In the case of Ethiopia, there is a lack of uniform definition
at the national level to have a common understanding of the MSE sub-sector. Ministry of
Trade and Industry (MoTI) uses capital investment, while Central Statistical Agency (CSA)
uses employment and favors capital-intensive technologies as a yardstick. The definition
used by MoTI, which uses capital investment as a yardstick, has been developed for
formulating micro and small enterprise development strategies in 1997. According to the
MoTI, Micro-enterprises are those business enterprises, in the formal and informal sub-

10
sector, with a paid-up capital not exceeding ETB 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 ETB 20,000 and not exceeding ETB 500,000 and excluding
high tech consultancy firms and other high tech establishments.
Similarly, CSA categorizes enterprises into different scales of operation on the size of
employment and the nature of the equipment. As to CSA, establishments employing less than
ten persons and using motor-operated equipment are considered small-scale Manufacturing
enterprises. Enterprises in the micro-enterprise category are subdivided into informal sub-
sector operations and cottage industries: Cottage and handicraft industries are those
establishments performing their activities by hand and using non-power-driven machines
whereas the informal sub-sector is defined as household type establishments or activities,
which are non-registered companies and cooperatives operating with less than 10 persons.
All enterprises employing ten or more workers are grossly considered medium and large
enterprises (CSA: 1999b and 2000 cited in Tegegne and Meheret: 2010; MoTI: 1997).
Currently, in Ethiopia, the country-wide used definition of MSEs is based on level of paid-up
capital/fixed asset, size of employment, using high tech establishment and consultancy
Services. This categorization is important for functional and promotional purposes to achieve
the desired levels of development. As a result, the revised MSEs strategy divides and defines
MSEs in terms of product and Service. Accordingly, Micro Enterprises are those enterprises
having 5 workers including family members, and their total assets not exceeding ETB
100,000 for Manufacturing enterprises and ETB 50,000 for Service providing enterprises.
Small enterprises are those enterprises having 6-30 workers and their total capital not
exceeding ETB 1.5 million for Manufacturing enterprises and ETB 500,000 for Service
providing enterprises.

The Micro & Small Enterprise Development Program in Ethiopia meaningfully has been
given due attention by the government since 2004. Until 2004, the national strategy was
implemented by Federal MSEs Development Agency organized only at a national level.
Because of this, it was very difficult to make the strategy practical, especially in delivering
business development Services for MSE managers. Thus, by considering the critical role of

11
the sub-sector and the constrained faced by MSE managers since 2004 the government of
Ethiopia decide to establish an MSEs coordinating body at a regional level.
Accordingly, MSEs development Agencies are set up in all regions, even sub-branch offices
at the zone/district level. The system helps to support a lot of MSEs and thereby to create job
opportunities for unemployed youth and women. Currently, the government amends the
MSEs strategy with the objective of that in addition that the sub-sector play alleviating
poverty & reducing unemployment, to help out the sub-sector play its pivotal role as a base
for medium and large scale industry.
2.1.3. Socio-economic Importance of MSEs
2.1.3.1. Employment Creation
The major problems that the current world faces are unemployment, inequality, and poverty.
Developing countries in general and African countries, in particular, have been experiencing
high unemployment rates paralleled by increasing urban poverty. To reduce unemployment
Micro and Small Enterprises make undoubtedly a huge contribution, especially in the
developing world. Most studies conclude that small enterprises are more labor-intensive than
larger ones, and some even find that the smaller firms also produce more output (or value-
added) per unit of capital and thus generate more output as well as employment for a given
investment than do larger firms (Haggblade et al 1990).

When we look at the share of employment in MSEs and large industries for lower and
higher-income countries, 62%, and 38% of employment opportunities in lower-income
countries are created by small-scale and large-scale enterprises respectively. However, the
share of employment in MSEs in higher-income countries is still considerable and it accounts
for 41% of the total employment, Workneh (2007).
Nevertheless, some evidence suggests that enterprise-scale is an unreliable guide to labor
intensity because many small firms are more capital intensive than large firms in the same
industry. According to the study made by Sondgrass & Biggs (1998) depicted that „The fact
that small firms employ a large share of the labor force in developing countries may be a
more reflection of the product composition of production in those countries than inherent
labor intensity of small firms’.

12
While there are many exceptions to the basic pattern, some evidence suggests that larger
employers offer better jobs in terms of wages, fringe benefits, working conditions, and
opportunities for skills enhancements as well as job security. In low-income countries, small
enterprises have much lower productivity levels than larger firms which leads to lower wages
and non-wage benefits. There is some evidence that this divergence in labor productivity and
wage rates between small and large firm’s narrows as countries become more developed in
terms of industrialization (Snodgrass and Biggs 1998).
In the case of Ethiopia, of the arguments in favor of the promotion of MSEs, the creation of
employment for urban youth is the major one. According to FMSEDA, jobs created by MSEs
have been growing since 2010/11. The total number of jobs in 2010/11, 2011/12, 2012/13,
and the first 9 months of 2013/14 were 289 thousand, 806.3 thousand, 1223.7 thousand, and
963.8 thousand, respectively. According to the study by Ethiopian Economic Association,
disaggregation of MSEs by sub-sectors enables us to see the relative importance of each
subsector.
It also enables us to judge whether the performance is going as planned in meeting the other
objectives, other than job creation, such as facilitating technology transfer, creating and
strengthening linkages with medium and large scale industries, etc.
Furthermore, the study revealed that the biggest employment has been generated by the
Construction sub-sector accounting on average for about 36.2 percent over the four GTP
implementation years, followed by Services with 20.8 percent, trade with 15.2 percent,

Manufacturing with 14.7 percent and urban agriculture taking 13.1 percent over the four GTP
implementation years (EEA, 2015)
Ligthelm (2003), states that small businesses in the formal economy are created due to the
lack of employment and option of income possibilities. The establishment of the SMMEs is
therefore the consequence of an effort to escape the difficulties of unemployment and
poverty rather than the exploitation of prosperous business opportunities (Caswell, 2013).

13
2.1.3.2. Poverty Reduction
An appropriate dual and general definition of Poverty is a condition in which people lack
satisfactory material resources (food, shelter, clothing, housing), are unable to access basic
services (health, education, water, sanitation), and are constrained in their ability to exercise
rights, share power and lend their voices to the institutions and processes which affect the
social, economic and political environments in which they live and work (Caswell, 2013).
Governments in many developing countries are unable to provide adequate basic Services.
On this point, poverty reduction can be correlated with job creation. Here poverty refers to
the poverty of the MSE managers/owners of the MSEs. As most managers are very poor and
are found at the floor of the economic status, the chance to operate their own business at a
very low startup capital, and expand from that point will help them support the MSEs and
their families. This intern will operate to reduce nationwide poverty (Benyam Aragaw,
2008).

Munira (2012), stated that according to the 2003 International Labor Conference on Working
out of Poverty the ILO Director-General’s report outlined eight ILO activities that contribute
to poverty reduction concerning MSEs. These are vocational training, entrepreneurship
development, and microfinance, cooperatives, reducing discrimination, working to end child
labor, ensuring income and basic social security, and work safety. Small enterprise
development was given attention by the Director General’s report.
The report noted that poor people need to be entrepreneurial to raise the income needed to
survive. The ILO’s approach to poverty reduction through small enterprise development
focuses on the needs of poor people who are part of the micro and small enterprise economy,
as owner/managers and workers, as their dependents, as the unemployed who may benefit
from job creation, and as customers.

14
2.1.4. Challenges faced by Micro and Small Enterprises
Even though MSEs ‟s have important roles in economic development, poverty alleviation,
and employment opportunity, they are critically challenged by certain impeding factors to
sustain within the sub-sector. According to the Ethiopian Economic Association (2015), the
major challenges facing MSEs include problems related to finance, access to market and low
competitiveness, business information, working premises, poor acquisition of technical skills
and managerial expertise, appropriate technology, and access to quality infrastructure.
In Ethiopia, although its economic policy has attached due emphasis to entrepreneurship
values and appreciation of the sub- sector's contribution to the economy, there are still
constraints related to infrastructure, credit, working premises, extension Services,
consultancy, information provision, prototype development, imbalance preferential
treatment, and many others, which therefore need proper attention and improvement. It is in
this context that the Ethiopian Micro and Small Enterprises Development Strategy was
conceived and developed (MoTI, 1997). Lack of better technology, managerial, and other
technical skills results in the development of small businesses producing the same things and
competing with each other to sell into the same small local market. (Endanchyelem, 2000)

The inexistence of institutional regulation in the economy of small businesses may influence
various settings of the work process. For example, labor may be tacit, lack social benefits,
and be paid under the minimum wage. Workers tend thus to be downgraded, taking fewer
benefits, fewer wages, and working under inferior working circumstances than those
universally accepted in the formal economy (Tsegereda, 2002) An additional challenge
related to MSEs is the difficulty of obtaining reliable statistics and thus lacking a proper
insight to address the problems in this sub-sector. Competition in most small enterprises
markets is fierce due in part to ease of entry and a large number of participants and in part to
the small size of many markets served by small sub-sector enterprises.
2.1.5. The Theory of Local Economic Development
The concept of LED has been promoted as a critical solution for poverty alleviation,
unemployment, and economic development in developing countries (Rogerson, 2005).
Economic development has advanced from being merely considered in economic terms such

15
as Gross Domestic Product, which did not essentially quantify the distribution of income and
wellbeing (Blakely and Leigh, 2010).
Development concepts have become premises with a human feature in which development is
not viewed simply as economics, but as aspects such as the level of education, gender-based
development, quality of water, health, employment, and poverty levels are included (Blakely
and Leigh, 2010). Therefore, LED links not only the economic measures and human aspects
of development, but goes on further to focus on development at the micro-level.

LED is a conscious process in which communities are assisted by well-advanced

organizations to work in the direction of improving the standards of social and economic
well-being (Cunningham and Meyer-Stamer, 2005). Thus, in essence, LED promotes joint
development between the local government, community, private sub-sector, NGOs, and any
other stakeholders.
LED is about building partnerships between different stakeholders to control local resources
and stimulate employment and the economy of a locality (Kanyane, 2008). It is regarded as a
participatory development process that stimulates partnership between the private and public
stakeholders of the locality (Rodriguez-Pose and Tijimstra, 2007; World Bank, 2003). LED
is often referred to as a „territorial development strategy‟ which is based on endogenous
factors such as the local economic structure, human resources, and institutional setting in the
local sphere of government (Rodriguez-Pose and Tijimstra, 2007).

Local resources are frequently underused in communities in developing countries and this is
where local capacity is significant. There are different types of local resources that the local
community possesses. The greater the ability of the local community to translate these
resources into development opportunities, the greater the benefits of development outcomes
(Meyer-Stamer, 2003). For instance, a community requires an economic development
institution such as a business society or economic development corporation, or government
institution to effectively resolve the issues and problems of underdevelopment and improve
the available resources.
Additionally, there is no single action or strategy which embraces LED; however, it is a
concept that describes local initiatives that respond to the needs of communities in the local

16
sphere of government. Alternatively, the focus is on using local people with local approaches
for local outcomes. Therefore, LED is about seeking to manage and structure economic
transformation in the local sphere. Ultimately, the primary aim of LED is to improve the
quality of life of the people, alleviate poverty, create job opportunities, improve skills and
build capacity within the communities (Nel and Rogerson, 2005; Kanayne, 2008).

Some advantages are associated with LED. These incorporate social and economic issues
such as empowerment of local communities, creation of dialogue, and enhancing
transparency and accountability among local institutions. In economic aspects, LED helps to
create sustainable employment in business, given the promotion of economic activities that
are at the center of specific economic circumstances and comparative advantages of a locality
(Rodriguez-Pose and Tijmstra, 2007). Generally, LED contributes to the renewal of the local
economy and the improvement of the monetary capacity of the local government. LED can
assist in the formulation of balanced development strategies as a result of the dynamic
participation of crucial stakeholders in the planning and implementation processes.

2.2 Local economic development approaches

Concerning local economic development approaches, there are two broad strategic
orientations as mentioned in Tegegne (2011). These strategies are discussed by Tegegne
(2011) and summarized as follows.
2.2.1 The market-driven approach
The market-driven approach focuses on the pursuit of economic growth, investment
attraction, and courting high-profile businesses. This approach has some benefits; it
addresses the goals of individual self-reliance, entrepreneurship, expansion of the market,
competitiveness, reduction of unemployment, and sustainable growth (Rogerson, 2000 in
tegegn, 2011). The various interventions in the market-driven approach include:
1. Location (general tax incentive, enterprise zones, industrial parks),
2. Pro-globalization (sister cities program, export promotion, foreign trade zones, attraction
of international direct investment),
3. General entrepreneurial (venture capital provision, targeted tax incentive),

17
4. Entrepreneurial mercantile (business incubators, equity participation, local development
corporations, and
5. Human capital (employment training, human capital initiatives) (Rogerson, 2000 in
Tegnene).
2.2.2 Pro-poor LED approach
There are different dimensions in pro-poor LED. The first relates to the role and functions of
a municipality or the meso-level intervention in poverty reduction. It is understood that
municipalities are well placed to undertake local planning in the area of poverty alleviation in
association with the private sector, NGOs, and CBOs (Pieterse cited in Tegegne, 2011). The
poverty reduction roles of municipalities involve facilitation, coordination, planning and
programming, implementation, and monitoring of different infrastructures.
On the other hand, pro-poor LED can be measured based on community-based economic
development. Helmsing (2003) cited in Tegegne (2011) has noted that community economic
development has five broad aims:
 To stimulate a sense of community;
 To promote self-help and empowerment;
 To contribute to the generation of (self-employment);
 To improve living and working conditions in settlements; and
 To create public and community services.
Helmsing (2005) notes that most CED activities in Africa have related to the following
components as mentioned in Tegegne (2011) these are creating local safety nets, housing
improvement, and settlement upgrading, basic service delivery; micro-enterprise programs.
CED enterprises are based on a consideration of the relationship between economic factors
and other community elements such as housing, education, the natural environment, health,
and the arts.
2.3. Micro and Small Enterprises for Local Economic Developments
Due to its benefits in socio-economic development MSEs get the attention of the government
for enhancing the local economy. And local resources are crucial ingredients in the course of
local economic development. Amongst different performers in the course of action of local
economic development, MSEs can play a pivotal role in the advancement of LED. In

18
Developing countries like Ethiopia, the involvement of MSEs in the enlargement of the local
economy is momentous.
The present government has been giving an immense concentration on the escalation and
development of MSEs for enhancing the local and national economy in its five-year plans
called the Growth and transformation plan (GTP one and GTP two). In the industrial sub-
sector, GTP has laid down two strategic directions: the expansion and development of micro
and small industries and the development of medium and large industries. The MSE
component of the GTP and that of LED are very identical and similar. As mentioned in
Tegegne (2011) GTP targets for micro and small scale enterprises are the following:
Provide comprehensive support to micro and small scale enterprises so that they create
employment opportunities for about 3 million people.
Achievement of this target will enhance citizens’ income, contribute to a rise in domestic
savings, and enhance the benefits of women and youth from the sector to reduce
unemployment and poverty.

Provide Training of Trainers for 10,000 professionals in the sector; provide capacity building
and basic skills training for about 3 million managers in the areas of entrepreneurship,
technical and vocational skills;
Prepare and develop 15,000 ha of land for working premises and construct shades and
buildings for MSEs.
Provide micro-credit and marketing information and work with producers to identify
bottlenecks and provide support where solutions are identified.
2.4 Theories on micro and small enterprises
Different views have been developed and discussed in the area of micro and small
enterprise’s role and their function. Among them, labor surplus theory, output demand
theory, and firm growth theories are the major theories discussed below.
2.4.1 The labor surplus theory
Among different theories developed for MSEs, labor surplus theory focuses on labor-related
issues. The labor surplus theory, called the main theory, which goes back to the seminal work
by Lewis (1955), argues that the driving force behind MSE development is excess labor
supply, which cannot be absorbed in the public sector or large private enterprises and is

19
forced into MSEs despite poor pay and low productivity. Arguably, the MSE sector develops
in response to the growth in unemployment, working as the last option for people who are
unable to find employment in the formal sectors. According to this theory, MSEs are
expected to grow in periods of economic crisis, when the formal sector contracts or grows
too slowly to absorb the labor force. However, when formal employment grows, the MSE
sector is assumed to contract again and thus develops an anti-cyclical relationship with the
formal economy. However, there are some empirical problems with the unemployment
theory of the growth and development of SMEs. First, there is a lack of reliable and adequate
data for researchers to test the hypothesis that MSEs absorb surplus labor from the public
sector or large private enterprises and the hypothesis that increases in labor demand by MSEs
has taken place before or after structural adjustment. Second, for the MSE sector to function
as a place of last resort, it must be easily accessible. However, many studies have shown that
this is only the case for a handful of MSE activities ( Murinde, and et al, 2006).

It is also sometimes argued that MSEs concentrate on trade because this requires less capital
and knowledge than production. While it may be true that production requires more
investment capital than trade, small scale trade is likely to require more working capital than
small-scale production to secure a certain income. This is partly because the value-added is
lower for the trader than for the producer, and partly because, in small-scale production, the
customer will often be required to pay for the 14 materials in advance, while the small-scale
trader will have to give credit (ibid). Therefore, there are several limitations to the extent to
which the MSE sector can function as a place of last resort during crises.
2.4.2 The output-demand theory
This theory assumes that a precondition for the development of MSEs is that there is a
market for their products and services. Therefore, the MSE sector will tend to develop a
cyclical relationship with the economy as a whole. However, MSEs will also develop in
competition with large enterprises in the formal sector, and their development will be
constrained by formal sector monopolies. Structural adjustment and other policies that limit
such monopolies, and attempt to create more competition, will therefore be advantageous to
the MSEs, because this may allow them to capture market shares from the large enterprises.

20
Proponents of structural adjustment and stabilization policies tend to base their arguments on
this theory.
Empirical studies based on the output-demand theory tend to focus on the upper end of the
MSE sector, particularly the manufacturing enterprises and the larger, more resourceful, and
successful MSEs, which have the potential to grow into the formal economy. These studies
propose a strengthening of the MSEs through networks or via the creation of forwarding
linkages with the formal economy, for example, franchising and sub-contracting (Murinde et
al, 2006). This approach has not had much success in Africa due to problems of poor
infrastructure and a lack of trust between both parties. This creates an unstable environment
and reduces the efficiency of the formal sector and access to factor markets for MSEs (ibid).
2.4.3 The firm growth theory
The firm growth theory known asserts that MSEs are more likely to disappear and be
replaced by modern large-scale industries. This theory has, however, been shown to be
inaccurate in the sense that MSEs do not normally compete directly with large enterprises;
rather, they often tend to remain micro and small, co-existing with large multi-national
companies, which phenomenon the World Bank (1989) has identified as the ‘missing middle’
(Ryan, 2005). The most obvious activity where these niches exist is in distribution to areas or
income groups where their costs would be prohibitively high for large enterprises. However,
in a literature survey on macro analyses of micro-enterprises in developing countries,
Liedholm 15 and Mead (1993) concluded that macro-level empirical evidence indicates that,
as aggregate per capita income increases, there is a systematic pattern of evolution of MSEs
towards larger firms based in larger localities, producing more modern products.
Nevertheless, critics of this view argue that analyses on MSE development must take account
of differences in their efficiency, the type of influence MSEs exercise in society, linkages
between small and large enterprises, the changing roles of women entrepreneurs, differences
in the level of education in the labor force, and other socio-economic differences(Murinde et
al, 2006). In general, each of the three theories has been modified into some variants;
however, one of the important elements common to all the theories and variants is the
proposition that the growth of MSEs can contribute to poverty reduction or in other words
enhance the local economy.

21
2.5. Empirical Literature Review on LED and MSEs (Previous Study)
2.5.1. International Experience
The contribution of SMMEs to economic growth and economic development is widely
acknowledged (Katwalo and Mwiti, 2009; Kongolo, 2010). Their ability to create jobs,
income, economic wealth, innovation, poverty reduction, and the general improvement of the
living conditions within the local communities is undoubted (Naidoo and Urban, 2012).
Therefore, the majority of economic activities in many countries, whether developed or
developing, are constituted by SMMEs (Zevallos, 2003; Chalera, 2007).
These enterprises are considered by various policymakers and researchers as crucial for
economic development including poverty reduction in many countries, particularly in
developing countries (Fumo and Jabbour, 2011). The recognition of MSEs as a means of
employment generation and poverty reduction has led to the establishment of various
interventions by government and private sub-sector organizations in an attempt to achieve
greater socio-economic objectives in their respective countries. Studies show that Micro and
Small Enterprises have massive contributions to reducing poverty, especially in urban areas.
Scholars have been conducting scientific research and getting ample results in the area of
MSEs.
According to Kongolo (2010), a successful and growing economy is usually characterized by
a vibrant and prosperous MSEs‟ sub-sector. However, SMMEs contribute largely to well-
developed countries, where a high level of education, low inflation rate, and a high level of
financial support are evident (Booyens, 2011). Although the economic performance of
SMMEs might not be significant in other economies, their important contribution to
innovation, facilitating change, and competition is essential.
In recognition of the crucial role of SMMEs in economic growth and development in
developed countries such as in the European Union, SMMEs account for about 98 and 99%
of the majority of enterprises in these countries and provide jobs for over 100 million people,
which are over 2/3 of total private employment (Kongolo, 2010; Fumo and Jabbour, 2011).
Looking at countries such as Australia, 95% of businesses are regarded as SMMEs, whilst
Germany’s economic growth was also led by SMMEs. Job creation studies indicate that the

22
employment dynamics associated with business formation and closure is critical to the
overall contribution of small business (Chalera, 2007).

Additionally, Small businesses are considered the creators of jobs and are what constitute the
US economy (Chowdhury, 2007; Kongolo, 2010). Throughout the period 2001 to 2003,
small businesses with less than 20 employees improved employment by 853, 074. These
enterprises account for 99.7% of the firms, generating more than half of the private sub-
sectors' gross domestic product, including 60% to 80% of the employment in the economy.
In 2004 there were about 5 million SMMEs in the US that employed more than 6 million
people. Therefore, it is evident that the contribution made by small businesses to the global
economy is substantial, given the availability of support programmers.
According to Kongolo (2010), SMMEs are the engine of economic growth and development
in any economy. This stems from the fact that the majority of the countries that have focused
on the SMMEs sub-sector and have ensured its vibrancy have succeeded significantly in
reducing unemployment and promoting the standard of living. Their effect on income
distribution, tax revenue, efficient use of resources, and stability of income in the global
economy is evident.
In Africa, according to Katwalo and Mwiti (2009), small businesses contribute to
employment creation and economic development. In Nigeria for example, the SMMEs sub-
sector provides income-earning for some people (Okpara, 2011). It is estimated that this sub-
sector accounts for about 50% of the economic activities In the Nigerian economy. In terms
of employment creation opportunities, the sub-sector consists of different types of activities
including small to medium scale manufacturing and service businesses.
2.5.2. Ethiopian Experience
Micro and Small Enterprises (MSEs) are a special focus of the government, given that they
comprise the largest share of total enterprises and employment in the non-agricultural sub-
sector s. In recognition of the important role, MSEs have to play in creating income and
For employment opportunities and reducing poverty, the government drafted its first micro
and small enterprise development strategy in 1997. The overall objective of the 1997 MSE
strategy was to create an enabling environment for MSEs, with specific objectives to
facilitate economic growth; bring equitable development; create long-term jobs; strengthen

23
cooperation between MSEs; provide the basis for medium and large-scale enterprises;
promote export; balance preferential treatment between MSEs & bigger enterprises (MoTI,
1997).

In March 2011, a task force headed by the Ministry of Urban Development and Construction
(MoUDC) and the Federal Micro and Small Enterprises Development Agency (FeMSEDA)
published a new strategy for the development of SMEs. The strategy identified and analyzed
key MSE development constraints namely, financial, training/consultancy, market,
infrastructure, technology transfer, institutional and cross-cutting issues. According to the
new strategy (2011), the overall vision of the strategy is to create a “competitive” MSE sub-
sector that lays the groundwork for industrial development. To realize this vision, three
objectives have been identified, which are: To increase the employment and wealth creation
capability of MSEs, To enable the MSE sub-sector to become more competitive and link
with agricultural development, and To ensure MSE development by creating a large
entrepreneurial base in towns and cities throughout the country.
According to the Central Statistical Authority (CSA) survey, there are almost 570,000 MSEs
in Ethiopia, 99.4 percent of which are micro-enterprises with fewer than ten employees,
accounting for 88.2 percent of private sub-sector employment. The microenterprises are very
small. On average, they employ one and a half workers (this includes the owner and perhaps
one occasional helper) and earn an annual operating surplus of 1,300 ETB. Sole proprietors
operated 82 percent of urban enterprises. Of the total employment in these urban micro-
enterprises, family members accounted for 60 percent. Beyond family members, apprentices
constituted a large proportion of the remaining MSE workforce (CSA, 2003).

A recent study on MSEs indicated that MSEs in Ethiopia are confronted with many
problems. The constraints facing MSEs in most developing economies are similar:
unfavorable legal and regulatory environment and, in some cases, discriminatory regulatory
practices; lack of access to markets, finance, business information; lack of business premises
at affordable rent; low ability to acquire skills and managerial expertise; low access to
appropriate technology; and poor access to quality business infrastructure.

24
Ageze (2006) revealed that BDS (Business development Service) in Ethiopia is at an infant
stage. The Service is more of a donor side or supply-driven in nature that is not initiated by
the managers. The program didn't achieve a good level of performance in developing high
quality, diverse and competitive market. The researcher also tries to identify the challenge
faced by MSEs in the BDS program in Addis Ababa some of them are low level of MSE
managers awareness for the majority of BDS, unwillingness to pay for BDS, lack of diversity
of BDS providers, and Service and lastly limited knowledge of BDS intervention.

The researcher concludes that Addis Ababa has a weak supply and demand status. As a way
forward Philipose recommends that the intervention should be designed based on market
development principles to stimulate BDS demand and supply conditions. Workeneh (2007)
in his study entitled constraints of micro and small enterprise in addressing employment
opportunity found that MSEs managers in Addis Ababa face a lack of adequate training, an
unfavorable regulatory policy of the government institutions, the problem of a premise, and
inadequate training in the area of marketing and bookkeeping affect the performance and
contribution of the sub- sector.

Concerning local economic development in Ethiopia, the past governments followed a

centralized form of administration, and the development schemes are planned without the
involvement of the local people Munira (2012). The recent government embarked on federal
and decentralized forms of government since the 1990s. Ethiopia’s decentralization has
provided space and opportunities for local governments to determine their future and
spearhead their development (Tegegne and Richard, 2011).
In addition, the fact that cities have their budget empowers them to implement local
economic development from their sources. Tegegne and Clacey (2011) found out that local
participation especially in Micro and Small Enterprises has a potential strength in the local
economy. Their study identified that LED programs have created positive benefits and best
practices in different localities.

25
However, the study approach seems to have weaknesses in targeting, marginalizing
individual entrepreneurs, limited networking, and poor marketing linkage.
The above referred and some other researches try to find out the employment creation, local
economic growth, and factors that hinder the noble performance of MSEs for local economic
development. However, these researches are more specific for example Ageze's (2006)
finding raises one issue of the component of MSEs which is BDS. The finding of Worekneh
(2007) focuses on the challenge faced by the enterprise during their performance. Lastly, the
finding Solomon covers only product diversification and business expansion. However, these
researches are failed to investigate the performance of MSEs managers in terms of local
economic development (LED).

Therefore, this research tries to bridge this gap by studying different managers engaged in
diversified sub-sectors in the Construction, Manufacturing, and Service subsectors ss. It will
try to analyze which sub-sectors are performing at their full capacity and utilize the local
resource to generate employment opportunities for this specific area and which sub-sector is
more contributing to the local economic development and performing well. Moreover, this
research tries to see the life standard, health, and educational level at the household level in
addition to the performance of the enterprises participating in MSEs.
2.6. Conceptual Framework of the study
Local economic development emanates from the utilization of local resources by the local
people. For this purpose, diversified actors working in the community have duties and
responsibilities so that they participate in different economic activities to enhance the local
economy. MSEs have huge potential in contributing to national economic development in
general and local economic development in particular.
Hence, to achieve this MSEs should get the proper attention and support from concerned
parties. The local government or agencies should develop strategies to ease the enhancement
of MSEs managers either through providing institutional support or creating linkage with
stakeholders and other non-governmental support agencies in a different direction. For
example offering business development Services (BDS) improve the performance of the
enterprise, its access to markets, and its ability to compete. Working premises and financial

26
 problems are among the major problems that MSEs face during starting period hence
government and also stakeholders should address such problems to promote MSEs.

MSEs that acquire essential institutional support have the potential to develop efficiency in
their output so that they perform their tasks systematically and in well-organized ways. As
unemployment is one of the predicaments in society, this problem is addressed through the
creation of employment opportunities for the local people by potential MSEs. As a result, the
local people will generate their livelihood and have income in due course these people will
save as well as pay the necessary taxes for the government. Also by enhancing the income of
the managers, the living condition of the actors will be improved through time if the local
resources are used efficiently.
The income generated from the local people coming from the enterprises serves the
development of the locality meanwhile they pay taxes to the local government which is the
foremost source of local development. Taxes coming from such actors and institutes increase
the rate of development in the locality and it also increases the participation of the resident in
the process of local development.
Developing Appropriate Enhance Local Economic
MSEs Strategy Development
Better Food

Betterment of the Local People Better Education

Working Premises
Institutional Support

Access to Credit
Better Health

Business Development Reducing Poverty

Access to
The Growth of Service
MSEs
other facilities

Increasing MSEs
Employment Opportunity Income Growth
Performance

Figure 2.1 Conceptualizing the Role of MSEs for Local Economic Development
Source:-based on the concept of MSEs and LED

27
 CHAPTERTHREE
RESEARCHMETHODOLOGY
Introduction
This section deals with the study area, research design, data sources, population, sample and
sampling technique, method of data collection and method of data analysis, variables model
Selections and ethical concerns, and consent statements.
3.1. Description of Targeted Study Area
3.1.1 Location, Topography, and Climatic condition
Sululta town is among the towns found in the Oromia Special Zone Surrounding Finfinne
(Addis Ababa) of Oromia National Regional State. The town got official recognition as a
municipal town and urban reform in July 1999 E.C by urban proclamation no.65/2003 and its
growth to second A town category in 2002, it was established during 1929. Sululta has four
kebeles of Sululta 01, QasoWeserbi, Nonomana Abichu and WeleLube are urban
administrative. Sululta town is located 23km from the regional capital city, Addis Ababa in
line with the main asphalt road that connects the northern part of the country.
Astronomically, the town is located between 9005’ 01” N-9018’ 45” N latitude and 380 33’
15” E – 380 50' 45"E longitude, and in the relative location the town shares its boundaries
with the Sululta district in the south, west and east direction and from Addis Ababa to
northern direction. The elevation variation of the town ranges from 3230 to 2600 meters
above sea level. The annual rainfall of the town is an average of 1200mm and is located in
the ‘Dega’ climatic zone with its mean average temperature of 180c. It covers a total area of
about 4470.50 hectares.
3.1.2 Demographic Characteristics
Regarding the demographic data, the Ethiopian national statistical population census was
taken place in 1999 according to E.C. However, Sululta town was reformed as a level "A" at
the end of 1999 after the population census was completed. As a result, it was difficult to
know the population number of the town, since after the reform three rural kebeles are
merged into Sululta town administrative, which were under the Sululta district. Therefore,
the municipality has undertaken a population census internally for the sake of information.

28
According to the census, the population number of Sululta town was 31,091 males and
31,226 females and a total of 62,317 populations. The town has different Ethnic groups
among this Oromo 73 %, Amhara 20.3%, Gurage 2.5%, Tigre 0.9%, Site 0.2%, and 0.1% of
other Ethnic groups.
3.1.3 Socio-Economic Activities
The main economic activities of Sululta town according to their importance are agriculture
(48.3%), Trade (32.2%) industries, and other work, which account for about 19.5%. At
present Sululta town has a different investment in manufacturing, agro-industry, social
service, and commercial activities (Sululta town profile, 2013).

Figure 3.1 Map of Sululta Town administration

29
3.2. Study Design
In this study, a descriptive research design is used in which attempts were made to establish
the relationship between MSEs and LED, and describe the nature of MSEs and the
challenges they face in the area. Also, qualitative and quantitative research approaches were
used in this study. The qualitative approach is used to learn about the phenomena in question
by applying a “less structured” methodology to gain richer and deeper information on the
respondents. In quantitative research, on the other hand, information is collected and
recorded either numerically or in the form of recorded categories. The researcher used
sectional study methods in collecting primary data from the participants. To get a more
competitive understanding of the research problem, the study employed a mixed method of
data collection and analysis from primary and secondary data
3.3. Types, sources, and methods of data collection
Both primary and secondary data sources were used. To achieve the objectives of this study,
the primary (both factual and opinion) data were collected through questionnaires and
interviews. The questionnaire was prepared in the English language accompanied by the
Afaan Oromo translation and was disseminated to respondents in a face-to-face interview.
And an in-depth interview was held among purposively selected key informants. Secondary
sources of data basis on literature which attempted to provide theories and discussions about
the nature of MSEs and the challenges they face. Also in theories about MSEs that generate
employment and income and how they contribute to local economic development. Hence
data were gathered from a different body of literature, such as journal articles, working
papers, relevant works on the stipulated research problem, and other publications were
consulted primarily via internet sources.
3.4. Sampling Techniques
Purposive and random sampling techniques were used for primary data collection.
Respondents were randomly selected from construction, manufacturing, and service sub-
sectors. These sub-sectors were selected in consultation with the concerned authorities. And
to apply a modest analysis to broadly appreciate the role of Micro and Small Enterprises in
local economic development. Initially, all four kebeles were purposely selected from the
Sululta town administration considering some enterprises and the number of individuals who

30
were engaged in MSEs in the selected town administration. Therefore, the selected four
Kebeles were 01 kebele, Noonnoo mana Abbichu, Kaso Weserbi, and Wale Lube.
3.4.1 Sampling Frame
The target population for this study was MSEs managers operating in construction,
manufacturing, and services sub-sectors in the sub-city. MSEs Managers refer to the founder
or owner of the enterprises who usually operate the business and act as both the manager and
worker.
3.4.2 Sample size
The total population for the sample size was determined with consideration of
representativeness. In consideration of representativeness at first, the study applied a
simplified formula provided by Yamane (1967) to determine the required sample size at a
93% confidence level, a degree of variability of 0.7, and a level of precision of 9% as
𝑵 𝟖𝟏𝟖 𝟖𝟏𝟖 𝟖𝟏𝟖 𝟖𝟏𝟖
follows; n=𝟏+𝑵(𝒆)𝟐 =𝟏+𝟖𝟏𝟖(𝟎.𝟎𝟕)𝟐 =𝟏+𝟖𝟏𝟖(𝟎.𝟎𝟎𝟒𝟗)=𝟏+𝟒.𝟎𝟎𝟖𝟐= =163
𝟓

Where n is the desired sample size, N is the population size, and e’ is the level of precision.
According to the above formula, the samples size was determined approximately 163 as
shown in Table 3.2 below.
Table 3.2: Sample Size

S/No Sectors Target Percentage(%) from Sample Sample

population each sector size(3) Size(4=2*3
(1) 2=(1*100/3003) )
1 Manufacturing 130 15.9 163 26
2 Construction 112 13.7 163 22

3 Agriculture 72 8.8 163 14

4 Service 222 27.1 163 44
5 Trade 271 33.1 163 54
6 Minerals 11 1.4 163 3
Total 818 100 163

31
Following this from the total of 818 managers in the frame, samples of 108 managers were
randomly selected. Each enterprise was represented by its owner/manager. A sample of 108
enterprises was deemed sufficient to the research to represent the target population and draw
general conclusions.
3.5 Data Collection Instrument
The required data was collected from the sample population, key informant interviewees
(KII), observation and group discussion (FGD) participants through questionnaire and
interview.
3.5.1.. Questionnaire
A questionnaire has been developed and prepared taking in to account results of literature
review. The questionnaire was prepared in both an open-ended and closed end type in
English language. Before the actual data was collected, the language used in these data
collection instruments were translated to local language (Afan Oromo) so that the
respondents can understands the questions. The questionnaire that were distributed to
respondents enabled the researcher to generate both qualitative and quantitative data, which
generated inputs for analytical operations to arrive at certain results, so as to postulate on
problems and their probable but applicable solutions.
3.5.2. Key informant Interview (KII)
Interviews have involved a series of open ended questions related to problems researcher
wants to study. The open-ended natures of the questions defined the topics under
investigation and provided opportunities to both interviewer and interviewee to discuss some
topics in more detail. Interviews were conducted by the researcher with the help of structured
guideline to get relevant information.
3.5.3. Focus group Discussions (FGD)
Sometimes it is preferable to collect information from groups of people rather than from a
series of individuals. To obtain in-depth information on concepts, perceptions, and ideas of
the groups; the researcher organized group of 6-8 employers of various sector and
experience with careful supervision to keep them on track of what is needed to be studied. It
aimed to more than a question-answer interaction.

32
3.6 Method of Data Analysis
In this study, the secondary data are analyze and test by establishing two variables:
dependent and independent variables. The dependent variable is local economic
development; the independent variables are MSEs Manufacturing, Construction, agriculture,
service, trade and minerals based on the concept of MSEs and LED
The process of data analysis involves arranging and bringing logical order to the huge amount of
data collected. In this study qualitative and quantitative analysis methods were employed.
Qualitative analysis method focuses on the qualities of phenomena being studied rather than their
numeric measurement. On the other hand quantitative method focuses on data that are collected
and recorded numerically or in the form of recorded categories. Quantitative data were coded in
numerical representation using Statistical Package for Social Sciences (SPSS). SPSS software
was used to compute and analyze data through various functions such as calculating frequencies,
descriptive statistics, and making graphs, and tables. Qualitative data are analysed in narrative
context
3.7 Ethical considerations
The researcher ensures that the rights, privacy and confidentiality of the participants are protected
and respected. The participants were informed about the nature of the study. Participation was on
a voluntary basis. Thus the researcher; introduced the purpose of the study as a fulfillment of a
Masters‟ Degree program and not for any other hidden agenda and requested the respondents to
participate in the study on a voluntary basis and while refusal or abstaining from participating
was permitted. The researcher also assured the respondents of confidentiality of the information
given and protection from any possible harm that could arise from the study since the findings
would be used for the intended purposes only. The Sululta town administration MSE offices
would be provided with feed-back information about the findings of the respective study.

33
 Chapter Four
Result and Discussion
4.1. Socio- economics of respondents
Among the most important Socio- economic variables; sex, age, marital status, and education were
used to characterize MSEs Respondents.
Table 4.1.As far as sex of the respondents is concerned, the result clearly shows that there is
male dominance in MSEs operation in the Sululta town Administration. The proportion of
men in MSEs covers 127(65.8%) and women constitute only 36(18.7%), demonstrating that
there is a clearly observable gender gap. There are some constraints for this variation such as
cultural norms regarding “suitable” works of men and women.
In terms of age, most of 97 (59.5%) of the respondents belong to the age group between 16- 29 years
suggesting that they were in the productive age category. About 49(30.1% were found in the age
group of 30-39 years and the remaining 17 (10.4%) were found in the age group of 40-59 years. The
result also showed that MSEs in the study area are creating better opportunities mostly for the youth
and adults providing employment opportunities.

The marital status of the respondents (table 4.3) shows that 25(15.3 %) of the respondents were
single and 136 (83.4 %) and 2(1.2 %) of them were married and divorced, respectively. This
shows that married households were mostly engaged in the MSEs than others. And this could
be due to the fact that married people have pressure and responsibility to earn income than
unmarried ones. The proportion of divorced individuals is also not that large in the
demography of the Sululta Town Administration.
Among 163 populations 132(81.0%) respondents are a family leaders and 31(19.0%) of the
total percent is not a family leaders.
For enhancing the productivity of MSEs, education and skills are important. Respondents
were asked whether they have attended formal education or not. All of them responded that
they have attended formal education. About 20(12.3%) attended primary school (Grade 1-8).
And 47(28.8%) of the respondents attended secondary education while most of the
respondents 50(30.7%), attended degree and 46(28.2%) are diploma. Table 4.5 shows that
the level of education of the respondents.

34
 The number of individuals living with household and generate income from MSEs indicates
the living standard of the family. As indicated in table 4.6, 65(39.9%) of the respondents had
family size of less than two person. About 19.44% of respondents have a family size of one
person, 85 (52.1%) of the respondents had a family size of between 2 and 5, and the rest
13(8.0%) had family size above 5 persons. The number of family size featured as a
contributory factor to the need and utilization of the income from the MSE business. This is
because the bigger the family, the greater the demands for the basic necessities of life like
food, clothing, shelter and education. It is usually when there is more demand than the supply
of these services that the household head, searches for alternatives to enable him to provide
for the family. The fact that MSEs are able to support such large family size directly and
indirectly is a remarkable achievement in the Sululta Town Administration. As long as
family integrity is concerned, this result showed that MSE have a great role to play in the
Sululta town administration society in general and in four kebele in particular.
Table 4.1. The demographic background of the respondents
Types Types of demographic Frequency Percent
Male 127 77.9
Female 36 22.1
Sex

Total 163 100.0

16-29 97 59.5
30-39 49 30.1
Age

40-59 17 10.4
Total 163 100.0
Married 136 83.4
Marital status

Divorce 2 1.2
Single 25 15.3
Total 163 100.0
Yes 132 81.0
Leaders

No 31 19.0
Total 163 100.0
Primary 20 12.3
Educat
Level

ion

Secondary 47 28.8
of

35
 Diploma 46 28.2
Degree 50 30.7
Total 163 100.0
Less than 2 65 39.9
Families of size

From 2-5 85 52.1

greater than 5 13 8.0
Total 163 100.0

4.2. Performance of the MSEs

Employment creation is one of the target areas in which the government and policy makers focus for
the establishments of MSEs. Creating employment for those poor people can improve their living
conditions and enhance the local economy in different ways. Helmsing (2003) citedin Tegegne(2011)
has explained LED is the central aim of local development in creating or expanding job opportunities
available for local economic development. Amongst the objectives of the government of Ethiopia in
its MSEs development policy, creating sufficient job opportunities for those who are unemployed
work force in different parts of the country is one. Several studies also show that there are a number
of job creation opportunities in Sululta town through MSEs so that the operator’s life condition would
be improved through time, though different supporting mechanisms are needed. In this case, the role
of MSEs in creating employment opportunity to selected respondents' member of the enterprise and
additional workers are discussed.
Under this sub topic ownershipness, their technical training in relation to their business, their
job backgroundareincluded. Accordingly their detail explanation are shown below.

36
4.2.1. Ownership of Enterprise
Out of the total respondents 125(76.7%) of them are owned cooperatively. The second high
category of ownership is sole proprietorship. That is 29(17.8%). The rest 9(5.5%) of them are
partnership.
Table 4.2:-Ownerships of the enterprise

Owner Frequency Percent

Sole proprietorship 29 17.8
Partnership 9 5.5
Cooperatives 125 76.7
Total 163 100.0
Source: Own survey (2022)
4.2.2. Regarding Technical Training
Almost all of respondents had taken technical training on their profession. The highest
training taken was on electricity. In this field 64(39.3%) of respondents are trained. Food
processing, masonry, woodwork, marketing, metal work and auto mechanical are responded
by 24(14.7), 23(14.1%), 17(10.4%), 16(9.8%), 15(9.2%) and 3(1.8) respectively. The rest
1(0.6%) respondents has taken training on other field.

From Table 4.3It is possible to conclude that most MSEs respondents in the study area have received
training/s to enhance their skills. Selected respondents were asked during interview how trainings
have been provided for them from governmental and non-governmental institutes. They responded
that, the trainings given were not enough and they did not get much knowledge as what they expect
from the trainings. Moreover, the respondents indicated that some trainings designed by
governmental or non-governmental organizations were not related to the actual situation of
entrepreneurs.
The study result found out that most of MSEs Respondents 64(39.3%) perform their daily activities at
least one training, while 24 (14.7%) of the respondents did take training related to what they are
doing.

37
Table 4.3:-technical training/Skill

Training type Frequency Percent

Woodwork 17 10.4
Electricity 64 39.3
Metal work 15 9.2
Auto mechanical work 3 1.8
Food processing 24 14.7
Masonry 23 14.1
Marketing 16 9.8
If other specify 1 .6
Total 163 100.0
Source: Own survey (2022)
4.2.3. Knowledge Improvement after Training
Table 4.4 shows as below table 101(62.0%) of respondents were no further knowledge
regarding of their training, while, 62(38.0%) respondents has improved their training
accordingly.
Table 4.4:- improving knowledge
Owners Frequency Percent
Yes 62 38.0
No 101 62.0
Total 163 100.0
Source: Own survey (2022)
4.3. Job Creation
Job creation refers to the process of providing new jobs, especially for people who were previously
unemployed or inactive. When an individual is employed, they are paid by their employer. This results
in them having money to spend on food, clothing, entertainment, and in a variety of other areas. It
refers to government policies intended to reduce unemployment. Job creation programs may take a
variety of forms. For example, a government may lower taxes and reduce regulation to make hiring
less expensive.

38
As the table 4.5 below shows 36(22.1%), from the respondents expressed as unemployed 90(55.2%),
36(22.1%) and 1(0.6%)
Table 4.5: Before you engage in the current job
Types of jobs Frequency Percent
Unemployed 36 22.1
Student 90 55.2
Private employee 36 22.1
Government employee 1 .6
Total 163 100.0
Source: Own survey (2022)
A permanent employee has a long-term job without a predetermined ending date. In this role,
He/shecan work for the same organization for months, years or your entire career. As a
permanent employee, can work on either a full- or part-time basis. Like temporary workers,
permanent employees have many reasons for pursuing this type of role.
As table 4.6 below shows among of 163 respondents 131(80.4%) of the respondents
permanently employed, 24(14.7%) of the respondents temporarily and 8(4.9%) of
respondents are family member.
Table 4.6:- Employees of enterprise
Owner Frequency Percent
Permanent Male 80 49.1
Female 51 31.3
Total 131 80.4
Temporary Male 18 11.04
Female 6 3.68
Total 24 14.7
Family member Male 5 3.06
Female 3 1.84
Total 8 4.9
Total 163 100.0
Source: Own survey (2022)

39
4.4. Role of MSEs in enhancing the well-being of households
Micro and small enterprises fulfill a critical function from an economic and social perspective in that
they create income earning opportunities for a large number of low income individuals. It has
provided jobs to many people who would have been unemployed 55 otherwise. It also improves their
capabilities and incomes for the operators and enhances the local economy. However, the process of
generating jobs and income in this sector remains inefficient and majority of the operators are to be
found in MSEs.

Attempts were made to investigate the level of importance of the use of the income from MSEs
activities or establishments. Accordingly, the survey result reveals that most MSEs respondents use
their income from the business for household consumption 38(23.3%). About 96(58.9%) respondents
use their income for business expansion. And 28(17.2%) of the total respondents use their income for
Health and education and (0.6) respondents use their income for ceremonies (table 4.7).
Table 4.7: Income expense

Frequency Percent
Household consumption 38 23.3
Health and education 28 17.2
Ceremonies 1 .6
Business expansion 96 58.9
Total 163 100.0
Source: Own survey (2022)

The survey result reveals that the income condition of MSEs respondents shows an increment
compared to their previous income. Thus, about 114(69.9%) responded that their income condition has
increased compared to the same time one year ago (table 4.8). While only 3(1.8%) responded that
their income has decreased, the remaining 46(28.2%) said that there is no change in income of the
household in comparison to last year.
Table 4.8:- income condition after start the business
Frequency Percent
Increased 114 69.9
Decreased 3 1.8

40
No change 46 28.2
Total 163 100.0
Source: Own survey (2022)
From the Earned Income. Otherwise known as their salary or typical monthly income his/her primary
job they saving income.

As table 4.9 below shows 126(77.3%) of respondents saving and 37(22.7%) of respondents are not
use saving.
Table 4.9- saving from earn per day/week/month

Frequency Percent
Yes 126 77.3
No 37 22.7
Total 163 100.0
Source: Own survey (2022)

Analysis of table 4.10 above, shows that the majority 116 (71.2%) of the MSE respondents in
construction, manufacturing, service agriculture, trade and Minerals respectively respond that their
saving amount had increased. While 47(28.8%) respondents in construction, manufacturing,
agriculture, service trade, and minerals respectively disagree to the increase in saving amount. Hence,
results indicate working in MSEs helps the respondents to save more and saving condition of the
respondents also improved through time.
Table 4.10:- saving conditions

Frequency Percent
Yes 116 71.2
No 47 28.8
Total 163 100.0
Source: Own survey (2022)

41
4.5. The contribution of MSEs to local economic development
Poverty can be said to exist in a given society when one or more persons do not attain a level
of material wellbeing deemed to constitute a reasonable minimum by the standard of that
poverty (Getachew, 2009). Micro and small enterprises help low income or marginalized
people in the economy to improve their and their household’s income, improve enterprise
management and increase their productivity for local economic development. These effects
were evident from a number of impact studies of the activities of the enterprises. Similarly,
this study identified the impact of micro and small enterprises activities on income,
employment creation, asset creation, food consumption, education expenditure, health
expenditure and saving as discussed below.

Besides, analysis of Table 4.11 below showed that out of the households of 163 respondent, 16(9.8%
) save only in the microfinance institutions; 68(41.7%) uses only Iqub (a traditional rotational group
based saving system) to save, 61(37.4%) saves in formal banks only and 18(11.0) saves in MFI and
formal bank. Most respondents use Iqub and other traditional saving system so that it is used as a
revolving fund to other people in the locality and it helps to contribute to local economic development
in the study area.
Table 4.11:- household saving

Frequency Percent
MFI only 16 9.8
Iqub only 68 41.7
Formal bank only 61 37.4
MFI and formal bank 18 11.0
Total 163 100.0
Source: Own survey (2022)

42
As a table 4.12 shown the most respondents 124(76.1%) of haveno additional sources of
income. While 39(23.9%) of respondents had some source of incomes.
Table 4.12:- source of income

Frequency Percent
Yes 39 23.9
No 124 76.1
Total 163 100.0
Source: Own survey (2022)

4.5.1. Initial and Current capital of the Enterprises

Defining the size of enterprises is very important to understand their underlying problem. Based on
the definition of the new strategy the results from the survey (Table 4.13) shows that, almost all of the
enterprises (98.16%) had initial capital below ETB 200,000. More importantly 81.48% of the
enterprises had an initial capital of less than 25,000 ETB.

As Table 4.13: below shows us the initial capital of manufacturing, construction, agriculture, service,
trade and minerals have initial capitals. For Example from 501-15000 respondents 74(45.4%) their
initial capital below of 1500 thousands, from 35001-100000 are 30(18.4%) their initial capital below
of 100,000 thousands, from 20001-35000 are 20(12.3%) their initial capital below of 35000, from
15,001-20,000 16(9.8%), greater than 200000 12(7.4%) are their initial capital above 200000
thousands and the rest initial capital between 100,001-200,000 thousands of initial capital compared
to each enterprises.
Table 4.13:- The initial capital
Owners Frequency Percent
501-15000 74 45.4
15001-20000 16 9.8
20001-35000 20 12.3
35001-100000 30 18.4
100001-200000 11 6.7
greater than 200000 12 7.4
Total 163 100.0

43
Source: Own survey (2022)
Table 4.14below shows the current capital status of the enterprises in a range. And the study result
revealed that there is a positive change in current capital from the initial one. Currently, from
300,001-100,000 56 ( 34.4%) their current of capital above 300,000 thousands , less than 5000,
10(6.1%) their current capital less than 5000 thousands from 5000-15000 20(12.3%) their current
capital above thousands, from 15001-30000 31(19.0%) their current capital above 15000 thousands ,
from 100001-300000 21(12.9%) their current capital were above 100000 thousands, from 300001-
2,0000,000 20(12.3%) and the rest greater than 2000001 of enterprises in the study area had capital
more than ETB 5, 000. In terms of enterprises, construction, manufacturing, agriculture, Service,
trade and minerals had made a substantial increment. Therefore, these enterprises showed
improvement in terms of their current capital.

Table 4.14:- Current Capital

Frequency Percent
Less than 5000 10 6.1
5000-15000 20 12.3
15001-30000 31 19.0
300001-100000 56 34.4
100001-300000 21 12.9
300001-2000000 20 12.3
greater than 2000001 5 3.1
Total 163 100.0
Source: Own survey (2022)

44
 160
134
140
112 117
120 102 103 108
99
Frequency

100 85 8479 90
78 73 7984 8083
80 61 64 60
51 55
60 46
40 29 After
20 Before
0

Assets of household

Figure: 4.1 Impacts on asset holding of the household

Source: Own survey (2022)

4.5.2. The assets of households

Therefore, as indicated in Figure 4.20, very few numbers of the operators have had basic
durable household assets prior to their engagement in the MSEs. About 17.8% and 39.3% of
the operators had modern chair and refrigerator respectively. In Addition, about 52.1%, and
51.5% of the operators had bed and sofa before joining MSEs. On the other hand 55.2%,
36.8%, and 49.1% of the respondents had tape recorder, television, and working tools.
Moreover, very few, 48.5% of the operators had their own house before starting a work in
MSEs. However, as shown in the survey result, after the establishment of MSEs, the
possession of both durable and non-durable household assets shows a significant change. For
example, the percentage of household having durable assets such as chair and refrigerator
increased from 17.8% to 64.90% and 39.3% to 85.12% respectively. The possession of
modern bed and sofa also increased from 55.2% to 67.07% and 51.5% to 112.57%
respectively. From the above result, it is shown that the assets of the household particularly
(in having durable assets like modern bed and sofa) showed an increase after the household
joined the MSEs. Similarly, 55.2% and 36.8% have tape recorder and television, respectively
before the business. Here again, the possession of the above assets increased after the

45
participation in the MSEs. Moreover about 48.5% and 49.1%, have their own house and
working tools respectively. Some household asset like refrigerator has a slight change even
after they join the MSEs. This is mainly because this household appliance is relatively
considered as comfortable and may not be a priority by the respondents. In contrast, not
having this appliances and assets show the living 0.00%, 20.00% ,40.00%, 60.00% ,80.00%,
100.00%, 120.00% and 140.00% Chair, Refrigerator, bed, Sofa ,Tape Television , Own
house ,Working tools standard of the MSEs operators. From the above result, it can be
possible to conclude that, micro and small enterprises enable the operators to make a
significant expenditure on both durable and non-durable household assets. Therefore, once
again from the above result, it is possible to conclude that, MSEs sectors in improving the
living condition and reducing poverty, is indispensable.

4.6. The major challenges and opportunities MSEs are facing in promoting
local economic development.

4.6.1. Challenges Faced by MSEs in the Study Area

Micro and small enterprises have a potential to support the development of the nation in general and
local economy in particular. Their contribution has to be known in different parts of the world so that
states develop different policies and strategies to strengthen and enhance the role of MSEs in the
process of nation buildings. A large number of people especially economically vulnerable actively
participate in MSEs and get necessary support. Though they have a lot of contribution for the
development of local economy, a lot of factors are challenging them.
Table 4.15 shown above the most respondents 104(63.8%) faced the challenges in their business
work, While 59(36.2%) no challenges in their business.
Table 4.15:-The faced challenges

Owner’s Frequency Percent

Yes 104 63.8
No 59 36.2
Total 163 100.0

46
4.6.2. Lack of Working Spaces
Working space is one of the essentials for MSEs growth and development and its lack therefore will
challenge the ability of MSEs to contribute effectively to local economic development. Table 416
above shows that among 163 respondents most 100(61.3%) respondents in the Manufacturing,
construction, Agriculture, service, trade and Minerals responded that the impact of lack of working
space to their enterprise is low. While, most 63 (38.7%) The Respondents in the impact of lack of
working space high. Hence from the result we can conclude that the impact of lack of working space
is low in the operation of the Sululta Town administration MSEs.
Table 4.16:- Lack of working spaces
Owner’s Frequency Percent
Low 100 61.3
High 63 38.7
Total 163 100.0

Source: Own Survey (2022)

4.6.3. Lack of Sufficient Capital

The lack of sufficient capital is among the major challenges to MSEs start-ups and expansion, which
has a negative consequence on the development of Manufacturing sub-sectors particularly and MSEs
in general, thus affecting negatively the local economy. The issue of sufficient capital is important,
specifically for enterprises that show a great potential to develop. Sufficient capital facilitates MSEs
owners to secure essential skills and raw materials to put entrepreneurial ideas into practice, to be
competitive, grow and survive. Therefore, lack of sufficient capital will impede MSEs to add more
employees and growth. This will, inevitably, have an unconstructive contribution to the local
economy

Table 4.17 above demonstrates the level of impact of the lack of sufficient capital on MSEs
development in Sululta Town administration. The table clearly illustrates that a greater number of the
respondents in manufacturing, construction, agriculture, service, trade and minerals rated the impact
of the lack of sufficient capital high. This group of the respondents constitutes 117(71.8%) of the total
sample followed by 46(28.2%) respondents who rated the impact as low in the same types of
enterprises. Therefore, it can be concluded that though the majority of the respondents in the town do
not have problems in obtaining sufficient capital, a great table of Enterprises are affected by this
problem and this impacts negatively on the growth of their businesses.

47
Table 4.17:- Lack of sufficient capital

Owner’s Frequency Percent

Low 46 28.2
High 117 71.8
Total 163 100.0
Source: - Own Survey of (2022)
4.6.4. Limited Access to Market
Access to market is essential for business growth and development and lack therefore will
compromise the ability of MSEs to contribute effectively to local economic development. The
problem of lack of access to market is usually caused by too many suppliers competing for too few
customers and the difficulty of MSEs to adequately innovate and market their products and Services.
As a result productive activities of MSEs will have little impact on the economy if their goods and
services do not find adequate markets.

Table 4.18 below demonstrates the level of impact of limited access to market on MSEs growth and
development in Sululta town administration. It is clear from the table provided above that the
majority of the respondents’ rated limited access to the market low. This group of respondents
accounts for 42(25.8%) of the total sample, followed by those who rated the impact high with
121(74.2%). Therefore, it can be inferred that the majority of MSEs respondents in the town do not
experience severe impact with regard to access to market. However, respondents indicated that
similar products and cheap import that satisfy the same market have a negative impact on their
business expansion.
Table 4.18:- Limited access to market

Owner’s Frequency Percent

Low 42 25.8
High 121 74.2
Total 163 100.0
Source: Own survey (2022)
4.6.5. Limited Access to Credit Facilities

48
Table 4.19 below demonstrates the level of impact of limited access to credit facilities on MSEs
growth and development in Sululta Town Administration. It is clear from the table provided above
that the majority of the respondent’s rated limited access to credit facilities high. This group of
respondents accounts for 118(72.4%) of the total sample, followed by those who rated the impact low
with 45(27.6%). Therefore, it can be assumed that the majority of MSEs respondents in the town do
not experience severe impact with regard to access to credit facilities.
Table 4.19:- Limited access to credit facilities

Owner’s Frequency Percent

Low 45 27.6
High 118 72.4
Total 163 100.0

Source: Own survey (2022)

4.6.6. High price of raw material

Table 4.20 below shows the level of impact of high price of raw materials on MSEs growth and
development in Sululta town administration. The table clearly reveals that a greater number of the
respondents in manufacturing, construction, agriculture, service, trade and Minerals rated the impact
of high price of raw materials high. This group of the respondents constitutes 111(68.1%) of the total
sample followed by 52(31.9%) respondents who rated the impact as low in the same enterprises.
Therefore, it can be deduced that the greater number of MSEs respondents in the town do not
experience severe impact with regard to access to credit facilities
Table 4.20:- High price of raw material

Owner’s Frequency Percent

Low 52 31.9
High 111 68.1
Total 163 100.0
Source: Own survey (2022)

49
4.6.7. Lack of raw materials
Table 4.21below displays the level of impact of lack of raw materials on MSEs local economic and
development in Sululta town administration. It is clear from the table provided above that the
majority of the respondents’ rated limited access to credit facilities high. This group of respondents
accounts for 100(61.3%) of the total sample, followed by those who rated the impact high with
63(38.7%). Therefore, it can be concluded that the majority of MSEs respondents in the town do not
experience severe impact with regard to lack of raw materials.
Table 4.21:- Lack of raw materials
Owner’s Frequency Percent
Low 63 38.7
High 100 61.3
Total 163 100.0
Source: Own survey (2022)

4.6.8. Heavy government tax

Taxes impact on small businesses development and growth in many ways. Small business owners
can take too much time and resources sorting out their issues associated with tax and this can impact
negatively on their businesses growth
Table 4.22 below illustrates the extent of impact of taxation on MSEs Sululta Town administration.
Most of the respondents rated the impact of taxation on their MSEs high 89(54.6%), while those who
rated the impact of taxation low are 74(45.4%) of the total sample. Therefore, it can be concluded that
most of the respondents who rated the impact of taxation low are particularly those enterprises which
have got government support related to taxation.
Table 4.22:-Heavy government tax

Owner’s Frequency Percent

Low 74 45.4
High 89 54.6
Total 163 100.0
Source: Own survey (2022)

50
4.6.9. Pressure from Government Rules and Regulations

The literature on MSEs indicates that government rules and regulations may also discourage and
negatively impact on entrepreneurship development. MSEs face problems with bureaucracy in the
processing of permits and licenses, a process which is not transparent. It is also expensive and
complicated, with levies that may hinder MSEs growth. The regulatory conditions in which the
enterprises operate have a huge impact on the country’s competitiveness and capacity to create jobs as
well as the wellbeing of MSEs

Table 4.23. below illustrates the level of impact of government rules and regulation on MSEs in
Sululta Town administration. It is apparent from the table provided that the majority of the
respondents have rated the impact of government regulation on their MSEs low 97 (59.5%) while
66(40.5%) of the respondents rated the impact high. Since the large proportion of MSEs in Sululta
Town is registered or licensed one can conclude that the impact will be low because they are
operating under conducive and favoring government legislative guidelines.
Table 4.23:-Pressure from government rules and regulations

Owner’s Frequency Percent

Low 97 59.5
High 66 40.5
Total 163 100.0

Source: Own survey (2022)

4.6.10 Lack of Technical Skill
Lack of technical skill is one of the frequently cited challenge facing MSEs in the country. If
respondents do not have requisite skills (productive human capacity) to operate their businesses, firms
would not function fruitfully. In addition, there are different factors that affect the inability of MSEs
to provide skilled workers. This includes the failure of MSEs to provide equivalent remuneration with
employee benefits parallel to larger businesses and labor laws.

Table 4.24below demonstrates the extent of the impact of this challenge to MSEs in Sululta town
administration. It is apparent from the table provided that the majority of the respondents have
esteemed the impact of government regulation on their MSEs high 113 (69.3%) while only

51
50(30.7%) of the respondents rated the impact low. Therefore, it can be indirect that a large
proportion of the sample experienced a least serious impact of this challenge with regard to
enterprise growth. However, only a small proportion of the respondents are faced with the challenge
of lack of technical skills and this impact negatively on their business progression.
Table 4.24:- Lack of technical skill

Owner’s Frequency Percent

Low 50 30.7
High 113 69.3
Total 163 100.0
Source: Own survey (2016)

4.6.11. Lack of Information

Table 4.25below demonstrates the extent of the impact of lack of information on MSEs in
Sululta Town administration. It is evident from the table provided that the majority of the
respondents have regarded the impact of lack of information on their MSEs low 44 (27.0%)
while only 119(73.0%) of the respondents evaluated the impact high. Therefore, it can be
indirect that a greater proportion of the sample experienced a least serious impact of this
challenge with regard to enterprise growth. However, only a small proportion of the
respondents are faced with the challenge of lack of information and this impact negatively on
their business progression.
Table 4.25:- Lack of information

Owner’s Frequency Percent

Low 44 27.0
High 119 73.0
Total 163 100.0

Source: Own survey (2016)

52
4.6.12 Unfair Competition from Other Enterprises
Table 4.26 below displays the level of impact of unfair competition from other enterprises on MSEs
growth and development in Sululta Town Administration. It is clear from the table provided above
that the majority of the respondents rated the impact of this challenge high. This group of respondents
accounts for 112(68.7%) of the total sample, followed by those who rated the impact low with
51(31.3%). Therefore, it can be concluded that the majority of MSEs respondents in the Sululta Town
do not experience simple impact with regard to unfair competition from enterprises.
Table 4.26:- Unfair competition from other enterprises

Frequency Percent
Low 51 31.3
High 112 68.7
Total 163 100.0
Source: Own survey (2016)

53
 CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS

5.1 Conclusions
Although the emergence of Micro and Small Enterprises (MSEs) is viewed differently, the
sub-sector has been playing a significant role in promoting local economic development
through creation of employment opportunities and utilization of local resources. Quite
recently, the economies of most industrialized countries have shown various signs of
stagnation and structural decline, MSEs are being recognized as generators of new growth,
primary sources of technological changes, job creation, and one of the major factors in
maintaining socioeconomic stability. In Ethiopia, too, considering the extent of poverty and
unemployment as well as realizing the potentials that micro and small enterprises have in
local economic development, the government and other policy implementers have given due
attention to the sub-sector very recently.

In line with this the present study revealed that access to working place, access to bank loan,
technical training to the operator, assistance with marketing, access to raw materials and
appropriate customer and were found to be the major components which contributed for the
improvement of MSEs performance. While the variable favorable rules and regulations found
to be not contributing for the increase in the income of MSEs. The study also disclosed that
MSEs form a vital element of the local economic development process, and their
contributions in terms of employment, income and poverty alleviation is commonly
acknowledged. Through these benefits, the local economy of the study area is highly likely to
develop as time goes. MSEs in Sululta Town Administration also witnessed potential
development for the local economy. A critical component to achieve these enterprises
mission, which is also a broader development objective of the society, is their ability to reach
the poorest and most disadvantaged section of society, so that the local economy is most
likely to happen through such enterprises. The proportion of respondents who were poor by
the time of program entry was substantial, but higher level of involvement of the poor and
poorest section of the society in the program makes their life encouraging. This is evident as

54
the proportion of respondent with income above poverty line, most of them even above
moderate poverty, is quite significant.
Micro and small enterprises have increased the income of households of the managers.
Increasing in income has a lot of implications for the household and the local economy.
Increasing income implies at least maintaining the welfare status of the managers. The
employment opportunities created following micro and small enterprise utilization of
managers is encouraging and it practiced through enterprise forms. Such practice enhances
the development of local economy through organized forms. But the enterprises face a
number of challenges in the process of local economic development though their impact is
low in the city. Limited productivity resulted from lack of technical and entrepreneurial
skills; lack of affordable access to raw materials and inputs; lack of sufficient capital; lack of
market and appropriate assistance for micro and small enterprise makes the enterprises not
performing in their full capacity. Micro and small enterprises have improved savings of the
respondents‟ through increasing the operator’s income. This improvement is not only in
terms of amount of saving but also in terms of bringing some managers who did not have
savings before MSEs.

Most of the respondents’ choice to save in formal banks and iqub than saving in the
microfinance institutions. It shows other saving forms and institutions have merit in some
respects than saving in microfinance institutions only. Because other forms of saving are
accessible and easy to entry than micro finances. Such saving habit have most likely to
contribute to the development of the local economy. If MSEs have to be self-sustainable,
they have to mobilize enough amount of capital through savings that can be borrowed by
other communities. After joining MSEs programs, expenditure of the respondents have
increased in food, health, education, and housing furniture. Such improvements show the
improvement of operator’s income and contribution for the development of local economy in
different aspects. The study shows that the enterprises sales capacity and expenditure is
somehow increasing, and also their profit earning is going up during the study period. When
we are looking the enterprises performance in terms of sectors, the construction and
manufacturing sub-sectors scores the highest profit, sales and expenditure compared to
Service. The other way of analyzing MSEs performance is, in terms employment opportunity

55
creation to the local community. In the study area 537 employment opportunities has been
created to founding members of the enterprise and all permanent and 419 temporary
employment opportunities are created to non-founding members. Conversely, the number of
female employees is still lagging behind. Therefore, government policy makers should give
due attention to women entrepreneurs and 73special support and emphasis for those
disadvantaged part of the community. Generally speaking the construction and
manufacturing sectors are performing well for various reasons and contributing to local
economic development compared to other subsector s. The other manifestation of local
economic development is through reducing the level of poverty and providing income
generating opportunities. In the study area, MSEs fulfill a critical function from an economic
and social perspective in that they create income earning opportunities for a large number of
low income individuals.
5.2. Recommendation

This study revealed that access to working place, access to bank loan, technical training to
the operator, assistance with marketing, access to raw materials and appropriate customer and
are the major components which contributed for the improvement of MSEs performance.
Hence the government and other concerned bodies should give strong support to MSEs in
these areas.
 In the process of local economic development, MSEs face a number of challenges though
their impact is low in the Sululta town Administration. Factors like, lack of technical and
entrepreneurial skills, lack of affordable access to raw materials and inputs, lack of
sufficient capital, lack of market and appropriate assistance are among the major
challenges. Therefore, big emphasis should be given to these problems by the
government offices to enhance the performance of MSEs thereby increasing their
contribution to LED.
 One way of assisting MSEs is in terms of providing training that helps them boost their
production, help increase the quality of the final product and boost their performance.
However, in the study area, selected managers responded that some trainings are not
related to their operating field. Also, even if some other trainings provided to the
managers are important, the trainings are not sufficient. Therefore, government or non-

56
 government and other concerned bodies should give the right training at the right time
and place as per the need of the enterprises for the development of the enterprise in
particular and local economic development in general.
 The development of MSEs in the study area needs various improvements in general and
the working areas of the managers in particular. The working areas are located far from
administration offices and market. Governmental and non- governmental organizations
should facilitate sustainable market linkage between the producer and potential
customers.
 The officers entitled to support the managers also fail to reach them due to lack of
transportation or necessary allowance or any motivational mechanism to provide them
with the necessary advices. Due to these factors, officers are not able to follow up how
the managers are doing their job in terms of the training provided to the entrepreneurs.
Responsible bodies should act to tackle such problems by providing transportation or
motivational mechanism for the officers who provide necessary advice and follow up.
 One of the findings in this research is a very limited participation of women in the MSEs
sector in the study area. Though different affirmative actions are applied to motivate
women to participate in MSEs, due consideration should be given to increase their
participation. Though enough is stated at the policy level to encourage women to
participate in the MSEs, aggressive awareness raising mechanism, provision of special
credit window and women focused special training is mandatory to increase their
number. This will create a better conducive environment for women to play a major role
in local economy development.

57
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Appendices
Appendix A:

Questionnaire used in the Research Questionnaire

Oromia State University
School of Graduate Studies
Dear respondent, my name is Belay Daba and I am doing a research as part of the MA
program in Oromia State University. The topic of my research is “The role of government
spending on Local Eonomic Development in Sululta town”. For the Partial Fulfillment

of the Requirements for the Degree of MA Degree Leadership and Good

Governance in Development Management the information you provide will be used
only for academic purpose and kept confidentially.
Therefore, your honest and genuine response to the items in this questionnaire helps to meet
the objective of this study. The information you provide will be used for academic purpose
only and it will be kept confidential. Hence, I would like to thank you in advance for giving
me your valuable time.
Thank you in advice for your cooperation
Name of the researcher ( Belay Daba)
To be filled by the MSEs Owners/Managers
General Instruction
Don’t write your name;
Put a tick ( ) mark against your choice for items with alternatives;
For multiple choice items, you can use more than one answer, if you believe two or more
alternatives are important;
Write your answer briefly for open ended questions.
Part One:- The profile or background of the respondent
1. Woreda: ___________________________
2. Organization name: _____________________________
3. Business/Enterprise type: _______________________

62
4. Working site: ________________________
Part 2. Demographic profile of the Operator

1. Gender: □ Male □ Female

2. Age category: □ 16 to 29 year’s □ 30 to 39 year’s □ 40 to 59 year’s □ above 59
3. Marital Status: □ Married □ Divorced □ Widowed □ Single

4. Are you a family leader? □ Yes □ No

5. What is your educational status? □Illiterate □Up to primary □primary

□ Secondary □ Tertiary Diploma Degree(/Bsc/ BA) MA/Msc and Ph.D
6. Family size: □ less than 2 □ 2-5 member’s □ More than 5
7. Ownerships of the enterprise
□ Sole proprietorship □ Partnership □ Cooperatives 80
8. Have you received any vocational/technical training in relation to your business?
□ Yes □ No
9. If your answer is “yes” for the above question, in what type of profession?
□ Woodwork □ Electricity □ Metal work □ Auto mechanical work
□ Food processing □ Masonry □ Marketing □ Tailoring
□ If other specify________________________
10. Does/Do the training/s you obtained above improved your knowledge?
□ yes □ no
Part 3: Information on employment, income and saving
1. What were you doing before you engage in the current job?
□ Unemployed □ Student □ Private employee □ Government employee
□ Other (specify) __________________________________
2. Were you permanently employed before you started to work in this enterprise?
______________
3. How many employees do the enterprise have?_________
A. Permanent: Male______ Female _______
B. Temporary: Male______ Female _______
C. Family member: Male______ Female _______
4. What is your most important income expense?

63
 □ Household consumption □ Health and education □ Ceremonies
□ Business expansion □ Debt payment □ other (specify) _________________
5. How is your income condition after you start the business?
□ Increased □ Decreased □ No change
6. Do you save from what you earn per day/week/month?
□ Yes □ No
7. Does your saving increased after your engagement in this business?
□ Agree □ Disagree
8. Where does your household save?
□ MFI only □ Iqub only □ Formal bank only □ MFI and formal bank
□ MFI and Iqub □ Iqub and formal bank □ MFI and other people
□ MFI, formal bank and Iqub □ MFI, formal bank and home □ MFI, Iqub and home
□ Home only □ others (specify) ___________________________
9. Do you have other source of income?
□ Yes □ No
Part 4. Information on improvement of livelihood standard and expenditure of HH
1. Do you have the Before the business After the business
following assets before or
after you own this
business?, Please, put (X)
mark on the proper
column you think is
correct Type of Assets
Bed
Sofa
Table
Chairs
Shelf
Refrigerator
Television
Tape Recorder

64
Radio
Jewelry
House
Working tools
Others/specify

Part 5. Information on Capital. For the Multiple Choice Items Below, please put a tick
( ) mark against your choice for items with alternatives in the correct box and specify
the correct answer in the space provided.
1. How much was the initial capital of your enterprise? _________ETB
2. How much is your current Capital? ______________________ETB
3. What was the major source of your initial capital?
□ Own saving □ Loan from MFI □ Loan from Bank
□ Loan from MFI & own saving □ Loan from friends
□ Others /specify___________________________________
Part 6. Challenges facing Micro and Small Enterprises
1. Do you face challenges?
□ Yes □ No
2. If you face challenges, what is the impact of the types of challenges indicated below?

Depending upon your relative answer in Impact

the table provided below. Types of
challenges Low High

Lack of working spaces

Lack of sufficient capital
Limited access to market
Limited access to credit facilities
High price of raw material
Lack of raw materials
Heavy government tax

65
Pressure from government rules and
regulations
Lack of technical skill
Lack of information
Unfair competition from other
enterprises
Other/specify……………..

THANK YOU FOR YOUR CO-OPERATION

66
Appendix – B
Key informant interview guide used for Government officials and Enterprise
representatives
Oromia State University School of Graduate Studies
Key informant interview guide used for Government officials
Thank you for your cooperation to the interview
Date of interview ____________________________
Name of the Organization _________________________________________
Name of interviewee _____________________________________________
Position in the institution _________________________________________
Time of interview: Started at __________________
Ended at __________________
1. What services and assistance do you provide for the MSEs sub- sector managers?
___________________________________________________________________________
_____________________________________________________________________
2. Do your office use selection criteria and screening mechanisms? Yes No If yes,
what kind? (Check against: Age, Sex, Type of Business, Business Location, Permanent
Residence, Character AssesMSEnt, and Letter of Recommendation by other Socio-Political
Institutions)
3. What measures do you take to serve the poorest of the poor?
___________________________________________________________________________
_____________________________________________________________________
4. How do you organize MSEs
associations?________________________________________________________________
_____________________________________________________________________
5. What major challenges did you faced in organizing these associations?
___________________________________________________________________________
__________________________________________________________________
6. From which government bodies do MSEs get support principally? _______________

67
7. How do you view MSEs activities in your
surrounding_________________________________________________________________
_____________________________________________________________________
8. How do you monitor the activities of MSEs in your areas?
___________________________________________________________________________
_____________________________________________________________________
9. What mechanisms does your office use to measure the performance of the enterprises
working in your area?
___________________________________________________________________________
_____________________________________________________________________
10. What are the roles of MSEs managers in reducing poverty in your town?
___________________________________________________________________________
____________________________________________________________________
11. In your own experience, what major problems did/are you face/facing in your office in
the operation of MSEs in the Sululta town administration?
___________________________________________________________________________
_____________________________________________________________________
12. Which of the problems are solved? Explain how?
___________________________________________________________________________
_____________________________________________________________________
13. Which of the problems are not solved? Why?
___________________________________________________________________________
_____________________________________________________________________
14. How do you view MSEs activities towards ensuring sustainability?
___________________________________________________________________________
_____________________________________________________________________
15. Would you explain how MSEs managers participate in local economic development?
___________________________________________________________________________
_____________________________________________________________________
16. How do you evaluate the participation of MSEs with regard to local economic
development?

68
___________________________________________________________________________
_____________________________________________________________________
Thank you again for your cooperation

69
 Appendix-C
The tables below shows the assets of coefficients and challenges of coefficients of
correlations
4. 27. Table of Coefficients

Model Unstandardized Standardized

Coefficients Coefficients

B Std. Error Beta T Sig.

(Constant) .820 .096 8.561 .000

Bed .035 .026 .113 1.351 .179

Sofa .015 .033 -.050 -.471 .638
Table .041 .033 -.123 -1.230 .221
Chairs .032 .035 .079 .910 .364
Shelf .011 .028 .033 .382 .703
Refrigerator .075 .030 .235 2.517 .013
Television .019 .025 .063 .764 .446

Tape Recorder .042 .018 -.207 -2.361 .020

Radio .064 .033 .194 1.926 .056
Jewelry .061 .031 -.178 -1.989 .049
House .039 .033 .126 1.169 .244
Working tools .024 .024 -.078 -.994 .322
Others/specify .052 .028 .157 1.845 .067
4.28. Table of Correlations

livelihood Pearson 1 .152 .074 -.064 .030 .123 .197* .115 -.110 .113 -.011 .164* -.076 .110
standards and Correlation
expenditure of Sig. (2-tailed) .053 .345 .417 .705 .117 .012 .144 .160 .150 .886 .037 .332 .162
HH
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
Bed Pearson .152 1 -.020 -.117 .060 .284** -.035 -.008 -.101 -.086 .000 .290* -.042 -
Correlation
*
.167*
Sig. (2-tailed) .053 .802 .138 .445 .000 .661 .920 .201 .274 .997 .000 .593 .033
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
Sofa Pearson .074 -.020 1 .113 .098 -.062 .302** .218** .090 .061 .063 .523* .044 .034
Correlation
*

70
 Sig. (2-tailed) .345 .802 .150 .213 .433 .000 .005 .255 .440 .427 .000 .581 .663
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
** **
Table Pearson -.064 -.117 .113 1 .141 .002 -.054 .244 .292 .414* .012 .072 .239* .351*
Correlation
* * *

Sig. (2-tailed) .417 .138 .150 .073 .976 .497 .002 .000 .000 .884 .361 .002 .000
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
*
Chairs Pearson .030 .060 .098 .141 1 -.128 -.013 .125 -.182 - .279* .062 .121 .083
Correlation
.177* *

Sig. (2-tailed) .705 .445 .213 .073 .104 .872 .112 .020 .024 .000 .429 .124 .291
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
** *
Shelf Pearson .123 .284 -.062 .002 -.128 1 .157 .119 .041 .042 -.091 .214* -.049 -
Correlation
*
.167*
Sig. (2-tailed) .117 .000 .433 .976 .104 .045 .130 .601 .591 .250 .006 .533 .033
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
Refrigerator Pearson .197* -.035 .302** -.054 -.013 .157* 1 .115 .250** .149 .138 -.051 -.010 .102
Correlation
Sig. (2-tailed) .012 .661 .000 .497 .872 .045 .145 .001 .058 .079 .520 .896 .194
Television Pearson .115 -.008 .218** .244** .125 .119 .115 1 -.084 .201* .174* .167* .086 .081
Correlation
*

Sig. (2-tailed) .144 .920 .005 .002 .112 .130 .145 .286 .010 .027 .033 .276 .303
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
Tape Recorder Pearson -.110 -.101 .090 .292** -.182* .041 .250** -.084 1 .271* - .007 .027 .177*
Correlation
*
.159*
Sig. (2-tailed) .160 .201 .255 .000 .020 .601 .001 .286 .000 .043 .927 .733 .023
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
Radio Pearson .113 -.086 .061 .414** -.177* .042 .149 .201** .271** 1 .303* .173* .052 .253*
Correlation
* *

Sig. (2-tailed) .150 .274 .440 .000 .024 .591 .058 .010 .000 .000 .027 .512 .001
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
Jewelry Pearson -.011 .000 .063 .012 .279** -.091 .138 .174* -.159* .303* 1 .047 .093 .115
Correlation
*

71
 Sig. (2-tailed) .886 .997 .427 .884 .000 .250 .079 .027 .043 .000 .555 .236 .143
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
* ** ** ** *
House Pearson .164 .290 .523 .072 .062 .214 -.051 .167 .007 .173* .047 1 .079 .070
Correlation
Sig. (2-tailed) .037 .000 .000 .361 .429 .006 .520 .033 .927 .027 .555 .315 .372
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
Working tools Pearson -.076 -.042 .044 .239** .121 -.049 -.010 .086 .027 .052 .093 .079 1 .184*
Correlation
Sig. (2-tailed) .332 .593 .581 .002 .124 .533 .896 .276 .733 .512 .236 .315 .019
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163
Others/ Pearson .110 -.167* .034 .351** .083 -.167* .102 .081 .177* .253* .115 .070 .184* 1
specify Correlation
*

Sig. (2-tailed) .162 .033 .663 .000 .291 .033 .194 .303 .023 .001 .143 .372 .019
N 163 163 163 163 163 163 163 163 163 163 163 163 163 163

Table 4.29. Correlation of the challenges of MSEs

Limited Limited High Lack of Heavy Pressure from Lack Unfair

Lack of Lack of access access to price of raw govern government Lack of of competition Other/
working sufficient to credit raw material ment rules and technic inform from other specif
spaces capital market facilities material s tax regulations al skill ation enterprises y
Lack of Pearson 1 .190* .093 .011 -.187* .035 .015 .013 .118 .142 .074 .121
working Correlatio
spaces n
Sig. (2- .015 .237 .889 .017 .658 .847 .873 .133 .070 .350 .125
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
Lack of Pearson .190* 1 .690** .558** .010 -.078 -.106 -.010 .026 -.013 -.012 .030
sufficient Correlatio
capital n
Sig. (2- .015 .000 .000 .904 .324 .177 .895 .739 .871 .884 .701
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
Limited Pearson .093 .690** 1 .734** .259** -.093 -.143 .086 .125 .084 .086 .070
access to Correlatio
market n

72
 Sig. (2- .237 .000 .000 .001 .237 .069 .276 .111 .286 .272 .373
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
Limited Pearson .011 .558** .734** 1 .343** .017 .071 .230** .214** .057 .027 .069
access to Correlatio
credit n
facilities Sig. (2- .889 .000 .000 .000 .828 .369 .003 .006 .468 .730 .379
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
High Pearson -.187* .010 .259** .343** 1 .592** .486** .162* .173* .147 .021 .171*
price of Correlatio
raw n
material Sig. (2- .017 .904 .001 .000 .000 .000 .038 .028 .061 .793 .029
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
Lack of Pearson .035 -.078 -.093 .017 .592** 1 .870** .039 .210** .255** .198* .175*
raw Correlatio
materials n
Sig. (2- .658 .324 .237 .828 .000 .000 .623 .007 .001 .011 .025
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
Heavy Pearson .015 -.106 -.143 .071 .486** .870** 1 .099 .168* .195* .209** .130
governm Correlatio
ent tax n
Sig. (2- .847 .177 .069 .369 .000 .000 .206 .032 .013 .008 .098
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
Pressure Pearson .013 -.010 .086 .230** .162* .039 .099 1 .223** .107 .098 -.121
from Correlatio
governm n
ent rules Sig. (2- .873 .895 .276 .003 .038 .623 .206 .004 .172 .211 .124
and tailed)
regulatio N 163 163 163 163 163 163 163 163 163 163 163 163
ns
Lack of Pearson .118 .026 .125 .214** .173* .210** .168* .223** 1 .644** .584** .135
technical Correlatio
skill n
Sig. (2- .133 .739 .111 .006 .028 .007 .032 .004 .000 .000 .087
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163

73
Lack of Pearson .142 -.013 .084 .057 .147 .255** .195* .107 .644** 1 .812** .463**
informati Correlatio
on n
Sig. (2- .070 .871 .286 .468 .061 .001 .013 .172 .000 .000 .000
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
Unfair Pearson .074 -.012 .086 .027 .021 .198* .209** .098 .584** .812** 1 .407**
competiti Correlatio
on from n
other Sig. (2- .350 .884 .272 .730 .793 .011 .008 .211 .000 .000 .000
enterpris tailed)
es N 163 163 163 163 163 163 163 163 163 163 163 163
Other/sp Pearson .121 .030 .070 .069 .171* .175* .130 -.121 .135 .463** .407** 1
ecify Correlatio
n
Sig. (2- .125 .701 .373 .379 .029 .025 .098 .124 .087 .000 .000
tailed)
N 163 163 163 163 163 163 163 163 163 163 163 163
*. Correlation is significant at the 0.05 level (2-tailed).
**. Correlation is significant at the 0.01 level (2-tailed).

74