Department of

Business Management &

Entrepreneurship

Entrepreneurship and Economic

Development (BME-352)

By Fekadu Tefera
fektefe@gmail.com
 ENTREPRENEURSHIP AND ECONOMIC DEVELOPMENT

Course description and objectives

The purpose of this course is to familiarize students
to an impression of the role of entrepreneurship
for economically, socially and politically
sustainable development, including poverty
alleviation.
The course provides an understanding of business
formation and management and the importance
of those organizations in poverty reduction,
economic growth and country’s development.
Thus, upon successful completion of this course, the student
will have reliably demonstrated ability to:

Comprehend the meaning and components of

entrepreneurship,

Compare personal characteristics and interests to that of

the successful entrepreneur,

Develop positive attitudes towards innovation, enterprise

and self-employment,
Create awareness of enterprise and self-
employment as a career option,     
Recognize the role of micro, small and medium
enterprises in reducing poverty,
Comprehend link of innovation with micro,
small and medium-sized enterprises,
Justify the significance of modern
entrepreneurship for economic sustainability
and reducing poverty in developing countries,
Explain the need for self-employment,
Manage significant issues faced when starting a
new firm.
 Contents

UNIT ONE: FUNDAMENTALS OF

ENTREPRENEURSHIP

1.1.Meaning, Feature, Types and Process of Entrepreneur

and Entrepreneurship

1.2.Characteristics, Functions, Roles and Importance of

Entrepreneurship

1.3.Entrepreneur Personality and Entrepreneurship

Concerns
 UNIT TWO: BASICS OF SMALL AND MICRO
ENTERPRISES

2.1.Definitions & Common Characteristics of Micro,

Small & Medium Enterprises

2.2.Innovation & Special Issues with regard to Micro,

Small & Medium Enterprises

2.3.Debates on and Major Problems of Micro and

Small Enterprises
UNIT THREE:

CONTRIBUTIONS OF ENTREPRENEURSHIP AND SMEs FOR

ECONOMIC DEV'T

3.1.Association of Economic Development with

Entrepreneurship and SMEs

3.2.The Contribution of Entrepreneurial Activity to Overall

Economic Growth

3.3.The Role of Micro and Small Enterprises (MSEs) for

Countries Development
UNIT FOUR:
INITIATING, SUPPORTING AND DEVELOPING
ENTREPRENEURSHIP TO UPKEEP COUNTRY'S
DEVELOPMENT

4.1.Innovating, Networking and Maintaining Right

Image

4.2.The Role of Government to Initiate, Support and

Develop Entrepreneurship

4.3.New Business Idea and Growing Entrepreneurship

 5. UNIT FIVE: MODERNIZING& DIVERSIFYING
ENTREPRENEURSHIP AND SMEs TO ENHANCE
COUNTRY’S DEVELOPMENT

5.1.Reforming and Diversifying Entrepreneurship

and Existing SMEs

5.2.Course of Actions to Foster Entrepreneurship

& SMEs Modernization
 Some inspirational Quotes
“To any entrepreneur: if you want to do it, do it now. If you
don’t, you’re going to regret it.” - Catherine Cook
 “Ideas are easy. Implementation is hard.” - Guy Kawasaki, 
"The best time to plant a tree was 20 years ago. The second
best time is now." - Chinese proverb.
“If you’re not a risk taker, you should get the hell out of
business.” - Ray Kroc, founder of McDonald’s.
 "A person who never made a mistake never tried anything
new." - Albert Einstein, physicist.
"It does not matter how slowly you go as long as you do not
stop." - Confucius.
• "Your most unhappy customers are your greatest
source of learning." – Bill Gates
•  "Entrepreneurship is neither a science nor an art.
It is a practice." – Peter Drucker 
• "Success is how high you bounce after you hit
bottom." – General George Patton.
• Whatever the mind can conceive and believe, the
mind can achieve. – Dr. Napoleon Hill
•  “I’m not afraid of dying, I’m afraid of not
trying.” – Jay Z, musician.
 UNIT ONE
Concept and General Overview of the Entrepreneurship
• Introduction
The coverage of this unit is the preliminary issues
of the subject matter.
• It examines the characteristics, types, forms,
functions, features, roles, importance, etc. of
entrepreneurship.
• The unit moreover provides detailed concepts to
the principles of entrepreneurship including self-
analysis of entrepreneurship readiness,
the role of entrepreneur in economic development
and hence, you will learn about yourselves, your
decisions, and your goals to determine how
entrepreneurship can play a role in your lives.
• Hence, you develop the skills, values, and
attitudes needed for success as an entrepreneur
whether starting a new venture from scratch,
joining or acquiring an existing business, or
creating a new venture inside a larger
organization.
 1.1. Meaning, Feature, Types and Process of Entrepreneur and
Entrepreneurship
• Overview
• There has been a great deal of attention paid to
the subject of entrepreneurship over the past few
years, stemming primarily from the discovery by
economic analysts that small firms contribute
considerably to economic growth and vitality.
• Moreover, many people have chosen
entrepreneurial careers because doing so seems
to offer greater economic and psychological
rewards than does the large company route.
Many definitions of entrepreneurship can be found in
the literature describing business processes.
• The earliest definition of entrepreneurship, dating
from the eighteenth century, used it as an economic
term describing the process of bearing the risk of
buying at certain prices and selling at uncertain
prices.
• Other, analysts broadened the definition to include
the concept of bringing together the factors of
production.
• Early this century, the concept of innovation was
added to the definition of entrepreneur-ship. This
innovation could be process innovation, market
innovation, product innovation, factor innovation, and
even organizational innovation.
• Later definitions described entrepreneurship as involving
the creation of new enterprises and that the
entrepreneur is the founder.
• Considerable effort has also gone into trying to
understand the psychological and sociological
wellsprings /source, origin, cause/ of entrepreneurship.
• Those efforts have noted some common characteristics
among entrepreneurs with respect to need for
achievement, perceived locus of control,
orientation toward intuitive rather than
sensate thinking, and risk-taking
propensity.
Meaning of Entrepreneur and Entrepreneurship
• The word “entrepreneur” originates from a
thirteenth-century French verb, entrepreneur,
meaning “to do something” or “to
undertake.”
• By the sixteenth century, the noun form,
entrepreneur, was being used to refer to
someone who undertakes a business
venture. It refers to those who “undertake”
the risk of new enterprises”.
•*An enterprise is created by an
entrepreneur. The process of creation is
called “entrepreneurship.
•An entrepreneur is someone who
organizes, manages, and assumes the risks
of a business or enterprise.
•Most people think being an entrepreneur is
all about coming up with an idea, but
that's just one part.
•An entrepreneur is an agent of change.
•An entrepreneur is someone who can take
any idea, whether it be a product and/or
service, and have the skill set, will and
courage to take extreme risk to do whatever
it takes to turn that concept into reality and
not only bring it to market, but make it a
viable product and/or service that people
want or need.
•Entrepreneurship is the development of a
business from the ground up coming up
with an idea and turning it into a profitable
business.
But while the definition of entrepreneurship may
be simple, its execution is much more difficult.
Entrepreneurship is the journey of opportunity
exploration and risk management to create value
for profit and/or social good.
• Entrepreneurship is the process of discovering
new ways of combining resources.
• When the market value generated by this new
combination of resources is greater than the
market value these resources can generate
elsewhere individually or in some other
combination, the entrepreneur makes a profit.
Shared Features of Entrepreneurship
Entrepreneurship is characterized by the following
features:
• Economic and dynamic activity:
Entrepreneurship is an economic activity because it
involves the creation and operation of an enterprise
with a view to creating value or wealth by ensuring
optimum utilization of scarce resources. Since this
value creation activity is performed continuously in
the midst of uncertain business environment,
therefore, entrepreneurship is regarded as a dynamic
force.
• Related to innovation
•Profit potential:
Profit potential is the likely level of return or
compensation to the entrepreneur for taking
on the risk of developing an idea into an
actual business venture.
•Risk bearing
The essence of entrepreneurship is the
‘willingness to assume risk’ arising out of the
creation and implementation of new ideas.
New ideas are always tentative and their
results may not be instantaneous and
positive.
Types of Entrepreneurs
Entrepreneurs can be classified on the basis of
their commitment to innovate something
new, their socio-cultural backgrounds, scale
or potential of operations, or in relation to
their professional lifespan. timing of venture
creation
Classification Based on the Level of
Commitment to Start Something New
Depending upon the level of willingness to
create innovative ideas, there can be the
following types of entrepreneurs:
A. Innovative Entrepreneurs:
These entrepreneurs have the ability to think
newer, better and more economical ideas of
business organization and management. They are
the business leaders and contributors to the
economic development of a country.
B. Imitating Entrepreneurs:
These entrepreneurs are people who follow the
path shown by innovative entrepreneurs. Such
entrepreneurs are found in countries and
situations marked with weak industrial and
institutional base which creates difficulties in
initiating innovative ideas.
C. Fabian Entrepreneurs:
• The dictionary meaning of the term ‘fabian’ is ‘a
person seeking victory by delay rather than by a
decisive battle’. Fabian entrepreneurs are those
individuals who do not show initiative in
visualizing and implementing new ideas and
innovations, rather they wait for some
development which would motivate them to
initiate unless there is an imminent threat to their
very existence.
D. Drone Entrepreneurs:
• The dictionary meaning of the term ‘drone’ is ‘a
person who lives on the labor of others’.
Drone entrepreneurs are those individuals who
are satisfied with the existing mode and speed of
business activity and show no inclination in
gaining market leadership.
E. Social Entrepreneur:
•Social entrepreneurs drive social innovation and
transformation in various fields including
education, health, human rights, workers’ rights,
environment and enterprise development.
•They undertake poverty alleviation objectives
with the zeal of an entrepreneur, business
practices and dare to overcome traditional
practices and to innovate.
Classification Based on the Timing of Venture
Creation
• Early Starters:
An early starter starts the venture with little or no
full-time work experience. Often, early starters
are from business families and have participated
in the family business.
• Experienced:
This type of entrepreneur has spent a few years
working in the family business or in some other
large company. The entrepreneur brings a lot of
experience, skills, and personal credibility into the
venture.
•Mature:
A lot of very senior professionals, some at
the level of CEO, are quitting their jobs to
start their own ventures. This is probably
because they have very high confidence in
their abilities and have a desire to do things
in a way that may not be totally acceptable
to their erstwhile employers.
Classification Based on Socio-cultural Variables:
• First-Generation Entrepreneurs: This category
consists
of those entrepreneurs whose parents or family
have not been in business and were into
salaried service.
Entrepreneurs from Business Families:
• Minority Entrepreneurs: There are many small
ethnic groups that have traditionally ventured
into business. They will serve as examples for
the rest of their community.
• Women Entrepreneurs: Women as
entrepreneurs
have been a recent phenomenon in our continent. The
social norms in Africa had made it difficult for women
to have a professional life. Now this has changed.
Classification Based on Entrepreneurial Activity:
•Novice:
A novice is someone who has started his/her first
entrepreneurial venture. Not to be confused with an
early starter, a novice can also be a 50 year old with
over 25 years of experience in the industry.
• Serial Entrepreneur:
A serial entrepreneur is someone who is devoted to
one venture at a time but ultimately starts many.
 Portfolio Entrepreneur:
A portfolio entrepreneur starts and runs a number of
businesses. It may be a strategy of spreading risk or it
may be that the entrepreneur is simultaneously
excited by a variety of opportunities. Also, the
entrepreneur may see some synergies between the
ventures.
Entrepreneurial Process
• Entrepreneurship is a process, a journey, not the
destination; a means, not an end. All the successful
entrepreneurs like Bill Gates(Microsoft), Warren Buffet
(Hathaway), Gordon Moore (Intel) Steve Jobs (Apple
Computers), and others all went through this process.
Activity [10%]
Assess the biography of these/others
entrepreneurs and identify their
distinguishing entrepreneurial personalities
and what we can learn from them.
• Family, Childhood and Education
• Career
• Contributions
• Achievements Awards
• Major Criticism and what we can learn from them.
To establish and run an enterprise it is divided
into three parts –
1. the entrepreneurial job,
2. the promotion, and
3. the operation.
•Entrepreneurial job is restricted to two steps,
i.e.,
1. generation of an idea and
2. preparation of feasibility report.
•For this particular course purpose, we shall
restrict ourselves to only these two aspects of
entrepreneurial process.
1) Idea Generation:
• To generate an idea, the entrepreneurial process
has to pass through three stages:
a. Germination:
• This is like seeding process, not like planting
seed. Most creative ideas can be linked to an
individual’s interest or curiosity about a specific
problem or area of study.
b. Preparation:
• Once the seed of interest curiosity has taken the
shape of a focused idea, creative people start a
search for answers to the problems.
Inventors will go on for setting up
laboratories; designers will think of
engineering new product ideas and
marketers will study consumer buying
habits.
c. Incubation:
•This is a stage where the entrepreneurial
process enters the sub­conscious
intellectualization.
•The sub-conscious mind joins the
unrelated ideas so as to find a resolution.
2) Feasibility study
•Feasibility study is done to see if the idea can be
commercially viable. It passes through two
steps:
a. Illumination: After the generation of idea, this
is the stage when the idea is thought of as a
realistic creation.
b. Verification: This is the last thing to verify the
idea as realistic and useful for application.
•Verification is concerned about practicality to
implement an idea and explore its usefulness
to the society and the entrepreneur.
 1.2. Characteristics, Functions, Roles and Importance of Entrepreneurship

1.2.1. Common Characteristics of Entrepreneur

Nobody is born a perfect entrepreneur, but some
have more of these traits than others. Knowing
the most common characteristics of successful
entrepreneurs is a good place to start in order to
better your own business chops.
 The good news is that, if you don't have these
traits, you can develop them over time.
Although there are no specific traits all entrepreneurs share,
there are certain characteristics that most successful
entrepreneurs possess. Here are some of the most common
characteristics shared among entrepreneurs who have
achieved great success. How many do you have--and how
many can you develop?
• Type-A-Personality
People with a “Type-A-Personality” are generally more
ambitious, more driven, and have more follow-throughs.
They're not dreamers; they're doers.
• Resilience /spirit, hardiness, toughness/
Entrepreneurship is going to dole out constant challenges,
some of which you've already considered but many of
which you'll never see coming.
You'll face complex financial problems, decision-
based dilemmas, long hours, sudden changes, and
predictions that egregiously fail.
• You must remember that all these challenges, while
difficult to face, are a natural part of being an
entrepreneur.
Success in business ownership is rarely a matter of
how many challenges you face so much as it is a
matter of how you face those challenges.
• Triumphant entrepreneurs have a level of
resilience, which allows them to face an almost
constant slew of challenges without ever weakening
their resolve.
• Morning People
Study after study has shown that morning people are more
successful in their careers (and in many other aspects of
their lives) than night owls. However, there are certainly
successful night owls, and if it's truly impossible for you
to get up at 5 a.m., then it's not required for your
success.
• The reason morning people get more done is that they're
not as prone to procrastination, which is something you
can work on no matter what your internal clock settings.
• Patience
• Too many entrepreneurs get started with a business
based on dreams of becoming an overnight
millionaire.
• The reality is success can only come after years
of hard, committed effort.
• Successful entrepreneurs realize that all great
things take time, and aren't impeded when their
great ideas don't take off immediately.
• Agility
Agile [Active] entrepreneurs are able to treat
every problem they encounter quickly and
adeptly, without taking too long to address them.
This agility allows entrepreneurs to remain
proactive and vigilant, preventing small problems
from becoming major ones.
• Just Likable Enough
Being super-outgoing and having everyone adore
you can be great for securing promotions and
climbing the corporate ladder. That's not,
however, the best personality to have when you're
an entrepreneur and in the executive's shoes.
• You need to be sociable enough to network and
build a solid reputation, but being too much of a
social
butterfly (or a complete hermit) is going to make
people not take you seriously.
• Trust
Mutual trust is a necessity when working in a
position of leadership, especially in the context of
a small team that typically defines startups.
• You can cultivate this trust by maintaining
constant, transparent lines of communication,
which will also facilitate greater productivity and
a tighter sense of collaboration within the team.
• Written Goals and Plans
You need to have a written business plan with
objectives that are regularly updated and pored
over. When you plan things, you need to put it all in
writing and (at times) have it signed by the correct
legal representatives.
• Passion
Finally, it's impossible to be a successful entrepreneur
if you aren't passionate about your work. Passion
can be defined subjectively, but what's important is
that you're excited to come to work every day.
After developing or acquiring and/or learning the
above common characteristics of the successful
entrepreneurs one should struggle to have the
following skills and abilities:
•Ability to plan
•Communication skills
•Marketing skills
•Interpersonal skills
•Basic management skills
•Leadership skills
Important Functions Performed by an Entrepreneur
1. To Prepare Plan
2. Selection of the Site:
• The entrepreneur makes the selection of the site
for the factory to be installed. The place should be
near the market, railway station or bus-stand. The
selection of the place may be near the source of
raw materials also. The selection of the place has
an important bearing on the cost of production.
3. Provision of Capital:
• Capital is required to install a factory or an
industry.
4. Provision of Land 12. Advertisement
5. Provision of Labour 13. Search for Markets
6.Purchase of 14. Supervision:
Machines and Tools 15. Contact with the
7. Provision of Raw Government
Materials 16. Payment to Factors
8. Co-ordination of the of Production
Factors of production 17. Quantity of
9. Division of Labor Production
10. Quality of Product 18. Risk-Taking
11. Sale of Goods 19. Innovation
1.2.3. Significance of Entrepreneurship
• Entrepreneurship offers the following benefits:
Development of managerial capabilities
Creation of organizations
 Improving standards of living
 Means of economic development
1.2.4. Mutual Roles of an Entrepreneur
The important functions performed by an
entrepreneur are listed below:
•Innovation
•Assumption of Risk
•Research
•Development of Management Skills
• Overcoming Resistance to Change
• Catalyst of Economic Development
1.3  Entrepreneur Personality and
Entrepreneurship Concerns
Overview
•We live in an intense and ever-changing era.
Markets have crashed. Jobs have disappeared.
Industries have been disrupted and are being
remade. But if you’re an entrepreneur, to a large
extent your destiny is in your own hands. And in
the new economy you can achieve financial
independence on your own terms. You have the
power to be as successful, perhaps even wealthy,
as you want to be. This is a key insight for any
entrepreneur, and a driving force in our own life.
 1.3.1. Likely Qualities of Entrepreneurs
•Entrepreneur is the person who perceives the
market opportunity and then has the
motivation, drive and ability to mobilize
resources to meet it.
1.3.1.1. Major Talents of Entrepreneurs
Self-confident and multi-skilled
Ethical
Self-Motivated An entrepreneur is intrinsically
motivated as there is typically no financial reward
in the beginning stages of starting a business.
Innovative skills
Results-orientated: drive that only comes
from setting goals and targets and getting
pleasure from achieving them.
A risk-taker
Leadership Skills An entrepreneur must have
the ability to motivate his employees to work
together toward their goals, which requires
earning their trust and respect. Entrepreneurs
must also have excellent communication skills
Total commitment
Visionaries and Managers
 1.3.1.2. Expert Quality of Entrepreneurs
• Expert is somebody with a great deal of
knowledge, or a high degree of skill, training or
experience in a particular field or a certain
subject and who performs skillfully.    
•Expert deals with:
• Solving Problems  
• Helping Others  
• Proficiency in Skills 
• Expert Advice 
• Specialized Knowledge 
• Starting a Business 
 •Knowing Mistakes 
•Depth Knowledge 
•Look a Professional 
•Tips on Expert: Successful entrepreneurs
do not search the market instead the
market searches them for their
expertise. Try to know everything about
something but not something about
everything. The bigger your expertise,
the more power you will have.
 Grave Quality of Entrepreneurs
Serious
 Carrying out activities or talking in earnest or
genuine and careful manner, instead of in a
joking or half-hearted fashion.
• Continuous Learning by Entrepreneurs
• Continuous learning is striving to get knowledge
and skills related to the business. This is done by
permanent learning process. There are various
different ways to get learned such as short term
training, on the job training, long term training,
reading, sharing ideas with experienced people.
 1.3.2 Collective Musts of Prosperous
Entrepreneurs
1) Do what you enjoy. 9. Get to know your
2) Take what you do customers.
seriously 10. Level the playing field
3) Plan everything with technology.
4) Manage money wisely 11. Build a top-notch
business team.
5) Ask for the sale
12. Become known as an
6) Remember it's all
expert.
about the customer
13. Create a competitive
7) Become a shameless
advantage.
self-promoter (without
becoming obnoxious). 14. Invest in yourself
8) Project a positive 15. Be accessible
business image.
1.3.3. Course of Actions for Being a Successful Social Entrepreneur

•While in several instances the social

enterprise is able to be self-sufficient, not
neces­sarily relying on funding, it is still
important for the government, the
community, etc., to be able to understand
the actual achievements of the company in
terms of social value.
•Measuring social value is a very challenging
task in comparison to a private value
measurement.
 How Social Entrepreneurs Attract Right Talents for
Their Organizations’?
• One of the biggest challenges social entrepreneurs face is
to attract the right talent to build their organization. Several
interesting strategies are followed by social entrepreneurs
to get the right people on board.
• First, one of the most effective ways that social
entrepreneurs can attract top talent for a specific
entrepreneurial endeavor is to train employees within the
company. In addition to finding the right people to be a part
of a social enterprise, it is also important to have the best
resources, which can also be considered top talent. Finally,
social enterprises can look to other businesses for the
proper technologies to make their business plan work.
 1.3.4. Some Myths about Entrepreneurship
Over the years, a few myths about entrepreneurship
have developed. These are as under:
• Entrepreneurs, like leaders, are born, not made
• Entrepreneurs are academic and socially misfits
• Education makes an entrepreneur a true entrepreneur.
• To be an entrepreneur, one needs money only
• But for a good idea whose time has come, money is not a
problem.
• To be an entrepreneur, a great idea is the only ingredient
•  One wants to be an entrepreneur as having no boss is
great fun
 1.3.5 Major Factors Affecting Entrepreneurship
1. Personality Factors:
Personal factors, becoming core competencies of
entrepreneurs, include:
• Initiative (does things before being asked for)
• Proactive (identification and utilization of
opportunities)
• Perseverance (working against all odds to
overcome obstacles and never complacent with
success)
• Problem-solver (conceives new ideas and
achieves innovative solutions)
•Persuasion (to customers and financiers
for patronization of his business and
develops & maintains relationships)
•Self-confidence (takes and sticks to his
decisions)
•Self-critical (learning from his mistakes
and experiences of others)
•A Planner (collects information, prepares
a plan, and monitors performance)
•Risk-taker (the basic quality).
2. Environmental factors:
These factors relate to the conditions in which an
entrepreneur has to work. Environmental factors such as
political climate, legal system, economic and social
conditions, market situations, etc. contribute significantly
towards the growth of entrepreneurship.
1.3.6. Key Tips for those Wanting to Enter the
World of Entrepreneurship
The only way to do great work is to love what you do. If
you haven’t found it yet, keep looking. Don’t settle.” In
general the following are the common activities to
be performed and/or knowledge to be acquired for
the new comers so as to be an effective
entrepreneur:
•Learn from others' failures
• Make sure, this is what you want
•Solve problems
•Be passionate
•Get advice from those who have done it

•Be open minded

•Try to possess a general management
and leadership knowledge
 UNIT TWO
 BASICS OF SMALL AND MICRO ENTERPRISES

Unit Introduction
This unit is designed to present the basics of
small and micro enterprise.
•We may have also a glance look in to the
medium size firms for comparison purpose.
•We will try to see as detail and manageable
as possible the definition and meanings of
micro, small and medium enterprises.
 2.1. Definitions and Common Characteristics of Micro, Small and Medium Enterprises

Overview
•A universal definition of micro and small
enterprise does not exist given the
multitude of different economic, social and
geographic differences with the
international context of micro and small
enterprise. In some countries, micro and
small enterprises are categorized based on
the capital that is invested and in some
other countries based on the employment
opportunity they provide.
In many countries, especially in developing
countries micro & small enterprises are minor
informally organized commercial operations
owned and operated mostly by the poor.
• However, they account for a substantial share of
the total employment and gross domestic
product (GDP) contribute significantly to the
alleviation of poverty and income creation.
2.1.1 Meanings of Micro, Small and Medium
Enterprises
MSE “Micro- and Small Enterprise,” SME (“Small
and Medium Enterprise”) and MSME (“Micro-,
Small and Medium Enterprise”) are all widely
used in the writings.
The statistical definition of enterprise size varies
by country, and is usually based on the number
of employees or the value of assets.
As per the multitude of the literature and the
related policies of many countries’ the lower limit
for small-scale enterprises is usually set at 5 to 10
workers and the upper limit at 50 to 100 workers.
• The upper limit for “medium-scale” enterprises is
usually set between 100 and 250 employees.
• For instance, some who define MSEs by employee
number—less than 10 for microenterprises and
10 to 100 for small enterprises.
•*More generally, USAID defines MSEs as
firms with up to fifty workers, which are
engaged in non-primary activities and sell at
least 50 percent of output. This category
includes both microenterprises, which have
up to 10 workers, as well as small
enterprises, which have between 11 and 50
workers. In the case of agriculture, a
microenterprise can be dairy, horticulture,
small livestock, or any crop or agribusiness
that is commercialized.
• The World Bank Enterprise Survey (WBES) classifies
enterprises with 5-19 employees as small and those with
20-99 as medium.
• The World Bank Group in-house definition considers
enterprises with 10-49 employees as small, 0-10 as
micro-enterprises and 50-299 as medium-sized.
• The concept of firm size varies significantly within the
different stages of economic development and structure,
as well as the various issues that we intend to address.
• For instance, with regards to small and medium
enterprises, countries with large economies like the U.S.
and member states of the EU use cut-off points of fewer
than 500 workers to describe SMEs.
Yet, in developing countries, where both market size and
average firm size are much smaller, SME cut-off points
are often fewer than 100 workers.
• The lack of consistency in employment-based MSEs
definitions based on the number of employees and
viewed in isolation from the size of markets or the
economy may be misleading.
More importantly, enterprise behavioral characteristics
do not correlate perfectly with employee-size.
• MSEs are a very heterogeneous group. Some scholars
distinguishes MSEs from SMEs and suggests that small-
and medium-scale enterprises (SMEs) usually include a
wide variety of firms – village handicraft makers, small
machine shops, restaurants, and computer software
firms.
R. Institutions criteria Remark
N
World Bank
Enterprise Survey
classifies enterprises with 5-19
(WBES) employees as small and those with
20-99 as medium.
• Microenterprises are normally considered to be
family businesses or self-employed persons
operating in the semi-formal and informal sectors;
most have little chance of growing into larger
scale firms, accessing bank finance, or becoming
internationally competitive.
Serving them often requires distinct institutions
and instruments, such as the group-based
lending methodologies used by some
microfinance institutions.
QDiscuss the impact of group-based lending in our
country? So what?
• In contrast, Small and Medium Enterprises
usually operate in the formal sector of the
economy, employ mainly wage-earning workers,
and participate more fully in organized markets.
• Small enterprises consider access to formal
finance a desirable possibility, and are more
likely than microenterprises to grow and become
competitive in domestic and international
markets.
• Various international donors have provided
targeted assistance to advance MSE
development in developing countries with the
same assumptions: that MSEs positively effect
economic growth and poverty reduction.
The support for MSE development on an
international scale is reflected in the desire to find
a middle ground between the structural
adjustment focus of the 1980s and a more holistic
approach that includes considerations for social
development.
• Support for MSE development generally revolves
around presumed comparative advantages of
small firms: relative to large firms, small firms are
believed to, among other things, create more jobs
at a faster rate; be more labor intensive and thus
create employment and training opportunities for
unskilled labor; be more efficient; serve as a
safety net against sudden economic
or household shocks; be a seedbed for
technological innovation and entrepreneurship;
and provide broader non-financial, non-wage
benefits to the working poor, such as greater
access to health care or education.
• Since 2000, USAID, the World Bank Group, the
Inter-American Development Bank and other
agencies have put forth great efforts to promote
private enterprise development. Searching for
further justification to promote smallness as an
instrument of poverty alleviation is not necessary:
it is enough to recognize that microenterprises
and SMEs are theemerging private sector in poor
countries, and thus form the base for private
sector-led growth.
• The rationale for small enterprise intervention
suggests that a small enterprise development
strategy is in reality just a “private sector
development strategy.”
2.1.2.Descriptive Overview of Informal and
Small Business Sectors
The dividing line between the informal sector
and the formal sector is not always a clear one.
Although there is no universally accepted
definition of what constitutes an informal
enterprise, there is consensus that
they are small scale, and operate outside
registration, tax and social security
frameworks, and health and safety rules
for workers, with informal economic activity
being defined by its ‘precarious’
/unstable/nature.
2.1.3. Common MSEs Characteristics
1. They employ few workers,
2. Do not generate high income nor
experience much growth,
3. Do not produce for markets outside
their local environment, etc.
The following demonstrates the common
characteristics and diversities of MSEs
Share of firms and employment;
• In many developing countries, microenterprises
and small-scale enterprises account for the
majority of firms and a large share of
employment, mainly consisting of small firms with
one person working alone or with unpaid family
members.
• Micro and small enterprises are a major source of
livelihood for a significant proportion of the
population in these areas.
common characteristics ………..
 Location;
•Location can play a central role in
determining MSE survival. MSEs located in
urban or commercial areas are more likely to
survive than their counterparts in rural
areas.
Gender;
•An increasing number of small firms in
developing countries are headed by women.
• These small firms tend to be concentrated in
relatively specific activities like local drink
brewing,
common characteristics ………..
knitting, dress-making, crocheting, cane-
work, and retail trading.
•MSEs headed by women are less likely to be
based out of their homes.
•Since home-based MSEs tend to be hidden
and overlooked, women owners of MSEs are
more likely to be ‘invisible entrepreneurs.’
Composition of Activities;
• A significant number of small firms are involved in
manufacturing activities. Among these, three
activities have been consistently identified as the
most important categories:
 common characteristics ………..
Textiles and apparel,
Food and beverages, and
Wood and forest products.
Sector Distribution;
• Small firm survival rates vary significantly by
sector – small retail trading firms face the highest
risk of closure. Real estate, wood processing,
wholesale traders, and non-metallic mineral
enterprises are the least likely to close, while
trading, transport and chemical MSEs are the
most likely to close /near/.
common characteristics ………..
Initial Enterprise Size;
• There is no direct relationship between an MSE’s
initial size and its survival chances; initial
enterprise size has no significant influence on
firm survival. So, smallness, by itself, is not an
impediment to firm survival. However, growing
enterprises are more likely to survive than those
that remained the same size.
Firm Creation/Contraction;
• MSEs are constantly changing; not only are new
firms being created (new starts or births) while
others are closing, but existing (surviving) firms
are expanding and contracting in size.
common characteristics ………..
These changes are usually summarized in two
concepts: Net firm creation (new starts minus
closure), and “mobility” or net firm expansion
(firm expansion minus firm contraction).
Labor Intensity;
• Small firm expansion boosts employment more
than large firm growth because small firms are
more labor intensive, coinciding with the factor
market structure of most developing countries.
• Many analysts argue that, within industries, for
a given scale of production, small firms are
more labor intensive than large firms.
Common characters..
Job Creation;
• Apart from labor intensity, it is often argued that
small firms are important for employment growth
(i.e. job creation). While small firms experience
both high job creation and destruction rates, it
appears that job destruction during recessions is
lower in small enterprises than in large
enterprises – perhaps due to greater wage
flexibility in small firms. In other words, small firm
owners may temporarily accept lower
compensation during recessions in order to hold
on to their business.
2.1.4 Correlation /Association of Entrepreneurship
and Small Business in the Economic System
• Entrepreneurship and small business are related
but certainly not synonymous concepts. On the
one hand, entrepreneurship is a type of behavior
which concentrates on opportunities rather than
resources. This type of behavior can happen in
both small and large businesses but also
elsewhere.
• Small businesses can be a vehicle for those
entrepreneurs introducing new products and
processes that change the industry and for people
who simply run and own a business for a living.
Many scholars emphasize the role of the
entrepreneur as prime cause of economic
development. They describe how the innovating
entrepreneur challenges incumbent firms by
introducing new inventions that make current
technologies and products obsolete.
In a time when large firms had not yet gained the
powerful position of the 1960s and 1970s, small
businesses were the main supplier of employment
and hence of social and political stability.
The world has changed
In today's world small businesses, and particularly new
ones, are seen more than ever as a vehicle for
entrepreneurship contributing not just to employment
and social and political stability, but also to innovative
and competitive power. In short, the focus has shifted
from small businesses as a social good that should be
maintained at an economic cost to small businesses as a
vehicle for entrepreneurship. With this shift came the
renewed perception of the important role of
entrepreneurship.
Evidence of the change that economic activity moved
away from large firms to small firms in the last few
decades. The most impressive and also the most cited is
the share of the 500 largest American firms, the so-
called Fortune 500. Their employment share dropped
from 20 per cent in 1970 to 8.5 per cent in 1996. similar
case in Europe.
There is ample evidence
• Causes of the change
Scholars provide evidence concerning
manufacturing industries in countries in varying
stages of economic development.
They advance the following explanations for the
shift toward smallness.
• The first deals with fundamental changes in the
world economy from the 1970s on-wards. These
changes relate to the intensification of global
competition, the increase in the degree of
uncertainty and the growth in market
fragmentation.
• The second explanation deals with changes in the
character of technological progress.
• They further show that flexible automation has various
effects resulting in a shift from large to smaller firms.
• The pervasiveness of changes in the world economy, and
in the direction of technological progress results in a
structural shift affecting the economies of all
industrialized countries.
Also others argue that the instability of markets in the
1970s resulted in the demise of mass production and
promoted flexible specialization.
This fundamental change in the path of technological
development led to the occurrence of vast diseconomies
of scale.
Others stress the influence of two trends of industrial
restructuring:
• That of decentralization and vertical disintegration (the
breaking up of large plants and businesses) and
• That of the formation of new business communities.
• In their view, globalization and technological
advancements are the major determinants of this
challenge of the Western countries.
• Consequences of the change
There are four consequences of the increased
importance of small firms:
•A vehicle for entrepreneurship,
•Routes of innovation,
•Industry dynamics and
•Job generation.
We can claim that small firms:
• Being the source of considerable innovative activity!
• Stimulating industry evolution and creating an
important share of the newly generated jobs!
• Play an important role in economy serving as agents of
change by their entrepreneurial activity!
Clearly, there are many more consequences of the
increased share of small firms than the four
mentioned.
• For instance, an increase in the share of small
firms may lead, ceteris paribus to;
•a lower orientation towards import,
•a lower propensity to export employment,
 • a qualitative change in the demand for capital
and consultancy inputs,
• more variety in the supply of products and
services.
Despite their entirely different approaches
studies show a positive correlation between
entrepreneurship and economic growth.
• The growth penalty
The industry structure is generally shifting towards
an increased role for small enterprises. The shift
in industry structures has been heterogeneous
and apparently shaped by country-specific
factors.
 2.2. Innovation and Special Issues with regard to Micro, Small, and Medium Enterprises

Overview
Many governments around the world
seem to have openly accepted the
functional economic theory of small and
micro enterprise development as a
pathway toward economic
development.
•Innovation is a key to technology adoption
and creation, and to explaining the vast
differences in productivity across and
within countries.
2.2.1. Innovation in Micro, Small, and Medium
Enterprises
•An innovation is defined as “the
implementation of a new or significantly
improved product (good or service), or
process, a new marketing method, or a
new organizational method in business
practices, workplace organization or
external relations”.
•The minimum requirement for an
innovation is that the product, process,
marketing method, or organizational
method must be new or significantly
improved to the firm.
•This includes both innovations that the
firm in question is the first to develop, as
well as those adopted from other firms or
organizations.
•This general definition of innovation, can
be split into subcomponents of
innovation, defined as:
1. Product innovation: the introduction of a
good or service that is new or
substantially improved.
2. Process innovation: the introduction of a
new or significantly improved production
or delivery method. Involves creating a
new way of producing, selling or
distributing an existing good or service.
3. Marketing innovation: the
implementation of a new marketing
method involving significant changes in
product design or
packaging, product promotion or pricing.
4. Organizational innovation: involves the
creation or alteration of business
practices, workplace organization, or
external relations.
5.Administrative innovation: occurs when
creation of a new organization design
better supports the creation, production
and delivery of goods and services.
Economic models of innovation have
typically focused on product innovation,
and distinguish further two distinct types.
i. The first type is horizontal innovation,
which consists of producing a new
product that does not displace existing
products, thereby expanding the variety
of products produced.
ii. The second type is vertical innovation,
where the introduction of one product
makes an existing product obsolete.
 2.2.2. The Link of SMEs Development with the
Process of Poverty Reduction
Q Define the concept poverty in your own
words (4 min)
The Concept of Poverty
•The concept of poverty includes material
deprivation (i.e. food, shelter) and access
to basic services (i.e. health, education).
•It now also tends to encompass a range of
nonmaterial conditions, such as a lack of
rights, insecurity, powerlessness and
indignity.
•The combination of these two types of
conditions provides a more complete
understanding of poverty.
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)!
•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.
Poverty is a vicious circle of poor health,
reduced working capacity, low
productivity and shortened life
expectancy.
Poverty is comprising multiple dimensions of
deprivation that relate to human
capabilities, including consumption and food
security, health, education, rights, voice,
security, dignity and decent work, We can
speak of poor households when the
income generated by the economically active
members is insufficient to satisfy the needs
of all members.
•The 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/operators and workers, as their
dependents, as the unemployed who may
benefit from job creation, and as customers.
The strategy is based on the promotion of the
four elements of decent work, namely,
productive remunerative employment; rights
at work; social dialogue; and social security.
•Poverty reduction should, in addition, be
conducted in the context of environmental
sustainability and gender equity.
•In Attacking Poverty, the World Bank
accepted the view that poverty encompassed
not only material deprivation(measured by
an appropriate concept of income or deprivation)
but also low achievements in education and
health.
•It broadened further the notion of poverty,
however, to include vulnerability and
exposure to risk, and voicelessness and
powerlessness.
•There is increasing recognition that private
sector development has an important role
to play in poverty reduction.
•The private sector, including small and micro
enterprises, creates and sustains the jobs
necessary for poor people to work and earn
the income needed to purchase goods and
services.
A consensus is emerging in the area of Small
and
Micro Enterprise Development (SMED)
about what is needed to support the
creation and expansion of enterprises.
Key areas include:
•A policy, regulatory and legal
environment that is simple, fast,
inexpensive and free from corruption;
•Finance that is accessible at low cost and
does not require the poor to provide
physical collateral;
 •Access to affordable business development
services; workers who are trained in
appropriate skills; basic health and
education that strengthens human capital;
•A culture that supports and rewards
entrepreneurship; access to domestic and
global markets on a fair and equal basis
with large enterprises; and reliable
infrastructure (transport, energy,
telecommunications, etc.).
At the same time, a number of critical
concerns remain:
•First, it is unclear how to move the small
enterprise economy from one dominated by
micro and small enterprises (MSEs) to one
dominated by small and medium enterprises
(SMEs).
•Second, there is still insufficient effort being
made to accurately measure the impact of
SMED activities on poverty reduction.
•Thirdly, there remains the critical question
of the extent to which SMED activities
should involve funded intervention and to
what extend they should be commercially
self-sustaining.
The process of working out of poverty has the
following technical areas which contribute to
poverty reduction:
Vocational training,
Entrepreneurship,
Micro-finance,
Cooperatives,
Reducing discrimination,
Working to end child labor,
Ensuring income and
Basic social security and work safety.
• The major social insurance program is known as S ocial
Security.The Social Security program (excluding
Medicare) has grown from less than one-half of 1 percent
of U.S. GDP in 1950 to 4.3 percent of GDP today. That
percentage is projected to grow to 6 percent of GDP in
2030 and slightly higher thereafter. Social Security
contributions are payroll taxes—taxes based on wages
and salaries—used to finance
• Two compulsory Federal programs for retired workers:
Social
• Security (an income-enhancement program) and Medicare
•There are a range of approaches to Small
and Micro Enterprise Development
Programs that can direct to be poverty
reducing and in which different countries are
currently engaged.
These include:
• Reform of the policy, legal and regulatory
environment to make it easier for enterprises to
set-up, grow and create employment; the
building of representative small and micro -
business associations which can advocate for
members and provide growth-enhancing services;
•The creation of private-public-
partnerships which simultaneously create
employment and improve pro-poor
services (such as waste and sanitation);
•Improvements in job quality that increase
productivity, thereby increasing income
and wages;
•Facilitation of better market access;
•The development of rights and services
for the informal economy;
 •Facilitating business development
services such as management training;
and
•The promotion of women’s
entrepreneurship and gender equality.
The lack of effective impact assessment for
many of these activities makes it difficult to
determine the extent to which poverty has
been reduced among target groups. It is
clear, however, that in most cases the
target groups are comprised of poor
people and that the activities are likely to
benefit them.
The Nature of Poverty and the Millennium
Agenda
•Central to the problem of poverty is the
availability of work. Work allows people to
produce for themselves and earn the
money needed to buy goods and services.
•It is also from work that wealth is created
which, through taxation, allows
governments to fund pro-poor services
such as health care, clean water and
education.
Work, more specifically decent work, is not
easily created, however. It develops out of
a complex and balanced system of
economic, social and political activity.
•Small and Micro Enterprise Development
(SMED) is about creating an environment
so that owners and workers can work
smarter, work safer and work more
productively.
•In doing so, they can reduce their poverty.
There is an emerging consensus on
poverty
reduction and small enterprises that is
comprised of two central elements:
•The first is that much of the population in
poor countries operates or works for Micro
and Small Enterprises (MSE) and that even in
richer countries, a substantial portion of the
population is employed in Small and
Medium Enterprises (SMEs).
• In poor countries, MSEs are where the poor
are working – either out of choice or out of
necessity.
The second element of the consensus is that the
general functional areas of how to support
private sector development in general, and Small
and Micro Enterprises in particular, are being
established.
The general areas include:
• A policy, regulatory and legal environment that is
simple, fast, inexpensive and free from corruption;
• Finance that is accessible at low cost and does not
require the poor to provide physical collateral;
• Access to affordable business development
services;
• Workers who are trained in appropriate skills;
• Basic health and education that strengthens
human capital;
• A culture that supports and rewards
entrepreneurship;
• Access to domestic and global markets on a fair
and equal basis with large enterprises; and
• Solid infrastructure (transport, energy,
telecommunications, etc.).
۩The emerging consensus is reassuring and
generally helpful in developing pro-poor Small
and Micro Enterprises Development (SMED)
strategies. There is, however, much that
remains untested, unexplored and
unquestioned in this consensus.
 QReflection
 Discussion on AGOA, what is it? Its
objectives?
 Are the objectives realized?
There are three major concerns:
•First, while MSEs are important for
employment in poor countries, we have
not yet fully grasped the long-term
process by which a MSE sector that
provides low incomes and poor working
conditions is transformed into a vibrant
SME sector that provides stable
employment, a good income and decent,
productive working conditions.
•Second, the impact of SED activities on
poverty reduction is not proven.
•Our understanding is growing but it is still
not clear how to assess impact and even
those techniques that are known are often
not used.
•This is a critical problem for donors, NGOs,
governments and international agencies.
• And third, the appropriate balance between
freeing up markets and commercially driven
processes, on the one hand, and support and
intervention from non-private actors is still not
known.
• The implementation of strategies for pro-poor
SED policies and programmes is still in its
infancy.
• A great has been learnt but the learning process
has only begun.
 2.2.3. Special Issue of Small Business
Economics
•The social dynamics of small and micro
enterprise in terms of the business firms as
a catalyst for economic activity affected the
aggregate level of an entire economy.
•Entrepreneurship is the ‘social process
involving the efforts of individuals in
activities that ultimately have economic
implications at a regional and/or national
level’.
•The process of the formation of small and
micro enterprises from a capitalist’s
perspective is centrally concerned with
opportunity recognition, discovery and/or
creation and appropriation of value.
•However, a new or small firm with growth
ambitions does not benefit from the
breadth and depth of resources and
capabilities of its larger corporate relative.
•This suggests that the mainstream business
strategy support is inadequate for the
entrepreneurial context and more particularly
falls well short of dealing with strategy that
relates to the entrepreneur and their interaction
with a small and micro enterprises ecosystem
containing resources not under their control.
2.3. Debates on and Major Problems of Micro
and Small Enterprises
Overview
•The existences of micro and small business
enterprise have significant contribution
towards job creation, poverty reduction,
innovation etc.
• Successful small businesses are the primary
engines for economic development such as
income growth and poverty reduction in many
of the developing countries.
• These businesses can also build foundation for
stable communities and gender equality.
• Nonetheless, poor infrastructure, weak public
service, inadequate mechanisms for dispute
resolution and lack of markets to their product
and formal financing remain major
impediments to small business growth.
2.3.1. Arguments on Small Enterprises
What is a Small Enterprise?
• Definitions of small enterprises vary widely.
• The World Bank Enterprise Survey (WBES)
classifies enterprises with 5-19 employees as
small and those with 20-99 as medium.
• The World Bank Group in-house definition
considers enterprises with 10-49 employees as
small, 0-10 as micro-enterprises and 50-299 as
medium-sized.
• Some argue that firm size categories are arbitrary
and note that enterprise characteristics are better
described by classifications such as ownership,
degree of formality/informality and
technological sophistication.
Do they Drive Employment Creation?
• Donor support to small enterprises is often
justified by their significant employment share.
The weighted average of researcher findings have
shown that nearly a one-fifth of jobs are with
small enterprises, and almost a half is with SMEs
with both shares rising in low income countries.
How Productive are they?
•A common criticism of small enterprises
is that they have lower levels of
productivity. For instance, a survey made
at Sub Saharan African countries found
that firms with 30 employees have twice
as much value-added per worker than
firms with 5 employees (for firms with 100
employees, it is three times as much),
largely linked to smaller enterprises lower
levels of capital stock per worker.
• Small firms are also less likely to engage in
innovative activities, such as adding new product
lines and incorporating new technologies.
• In contrary, some studies highlight that some small
enterprises are very productive and innovative.
Are they More Pro-Poor than Other Firms?
• Small enterprises also receive significant support
as they are seen as providing more opportunities
for poorer people.
•Over the last decade in Sub-Saharan Africa,
the employment share of household and
micro-enterprises increased more than
formal enterprises as the labor force
increased more rapidly than the formal
sector could create jobs.
•Smaller firms also tend to have lower entry
requirements in terms of skills, education
and qualifications.
•Small enterprises are also important
employers of marginalized groups who
have difficulties finding employment in
larger firms. 
What is Holding Back Small Enterprises?
• Small enterprises report more business
obstacles than larger enterprises- however a
debate exists on what the key obstacles are,
with significant implications on policy
responses.
• Access to finance is often viewed as the most
significant obstacle, coming out as the top
constraint in World Bank Enterprise Surveys of
over 45,000 enterprises in 196 countries.
•This is in part as banks see small enterprises
as higher risk and more expensive to
service in proportion to the loan amount.
Women-owned businesses are particularly
handicapped as they have fewer securities-
able assets and weaker property rights.
•Small enterprises also face significant
obstacles in other aspects of the business
environment, such as taxes and regulation,
inflation, corruption and street crime.
• Infrastructure is also a significant problem, in
particular access to electricity, both for smaller
and larger enterprises.
How are Development Actors supporting
them?
• External actors can and do help some small
enterprises grow faster and employ more
people, pay higher wages and better serve the
poor, and development agencies use a number
of approaches in order to do to this.
• Increasing support to national governments to
improve the business environment for small
enterprises is recommended by many scholars.
•  No known meta-evaluations evaluate impacts on
small enterprises, but a number of assessments
are online highlighting how reforms can
stimulate access to finance. Though it is unclear
how much this assists survivalist enterprises.  
• Several argue it is often not institutional hurdles
holding them back, but rather that they are
looking to manage risk not expand and, as such,
are unlikely to be significantly affected by
changes.  
• Still others contends such measures need to be
complemented by more pro-active support, such
as for venture finance, education and training.
•Development agencies also provide this
more direct support, using programmed
approaches which increasingly aim to
build up markets sustainably, such as
value chain development and local
economic development.
•Other stress that interventions should
support enterprises without exposing them
to excessive risk, such as through promoting
access to local markets and crop
diversification. They also call for interventions
to actively rebalance power disparities in
 2.3.2 Central Problems which in turn Affect
the Performances of SMEs
•There are some central problems that are
faced by every economy of a country and
in turn have an impact up on the
formation and development of small and
micro enterprises.
•Production, distribution and disposition
of goods and services are the basic
economic activities of life. In the course of
these activities, every society has to face
scarcity of resources.
Because of this scarcity, every society has to
decide how to allocate the scarce
resources.
This leads to following Central Problems
that are faced by every economy:
1) What to produce?
2) How to produce?
3) For whom to produce?
These problems are called central problems
because these are the most basic
problems of an economy and all other
problems revolve around them.
•They are directly related with the problem of
‘Allocation of Resources’. Allocation of
resources refers to the problem of assigning
the scarce resources in such a manner so that
maximum wants of the society are fulfilled.
•In nutshell, an economy has to allocate its
resources and choose from different
potential bundles of goods (what to
produce), select from different techniques of
production (how to produce), and decide in
the end, who will consume the goods (for
whom to produce).
1. What to Produce:
• This problem involves selection of goods and
services to be produced and the quantity to be
produced of each selected commodity. Every
economy has limited resources and thus,
cannot produce all the goods. More of one
good or service usually means less of others.
The problem of ‘What to produce’ has two
aspects:
• What possible commodities to produce: An
economy has to decide, which consumer goods
(rice, wheat, clothes, etc.) and which of the
capital goods (machinery, equipment’s, etc.)
are to be produced.
•  How much to produce: After deciding the
goods to be produced, economy has to
decide the quantity of each commodity that
is selected. It means, a decision regarding
the quantity to be produced, of consumer
and capital goods, civil and war goods and
so on.
•Guiding Principle of ‘What to
Produce':
•Allocate the resources in a manner
which gives maximum aggregate
satisfaction.
• In Labor intensive technique, more labor and less
capital (in the form of machines, etc.) is used.
• In Capital intensive technique, there is more
capital and less labor utilization.
2.How to Produce:
• This problem refers to selection of technique to be
used for production of goods and services.
• A good can be produced using different techniques
of production. By ‘technique’, we mean which
particular combination of inputs to be used.
Generally, techniques are classified as: Labor
intensive techniques (LIT) and Capital
intensive techniques (CIT).
3. For Whom to Produce:
•This problem refers to selection of the
category of people who will ultimately
consume the goods, i.e. whether to produce
goods for more-poor and less-rich or more-
rich and less-poor.
•Since resources are scarce in every economy,
no society can satisfy all the wants of its
people. Thus, a problem of choice arises.
The problem can be categorized under two main
heads:
• Personal Distribution: It means how national
income of an economy is distributed among
different groups of people.
• Functional Distribution: It involves deciding the
share of different factors of production in the total
national product of the country.
•Guiding Principle of ‘For whom to
Produce':
•Ensure that urgent wants of each
productive factor are fulfilled to the
maximum possible extent.
It should be also noted that in addition to
‘Allocation of Resources’, there are two more
Central Problems:
•Problem of fuller and efficient
utilization of resources and
•Problem of Growth of resources.
2.3.3. Major Problems of Micro and Small
Enterprises
Some of the major problems faced by micro and
small enterprises are as follows:
1. Problem of Raw Material
A major problem that the micro and small
enterprises have to contend with is the
procurement of raw material.
The problem of raw material has assumed the shape of:
(i) An absolute scarcity,
(ii) A poor quality of raw materials, and
(iii) A high cost
2. Problem of Finance:
The problem of finance in micro and small sector is mainly due to
two reasons.
• Firstly, it is partly due to scarcity of capital in the country as a
whole.
• Secondly, it is partly due to weak credit worthiness of micro and
small enterprises in the country.
3. Problem of Marketing:
• Their products compare unfavorably with the quality of the
products of the large-scale industries. Therefore, they suffer from
competitive disadvantages adversative to large-scale units.
 4. Problem of Under-Utilization of Capacity:
• On an average, we can safely say that 50 to 40 per
cent of capacity were not utilized in micro and
small enterprises.
• The very integral to the problems of under-
utilization of capacity is power problem faced by
micro and small enterprises.
In short, there are two aspects to the problem:
• One, power supply is not always available to the
small units on the mere asking, and whenever it is
available, it rationed out, limited to a few hours in
a day.
Second, unlike large-scale industries, the micro and
small enterprises cannot afford to go in for
alternatives; like installing own thermal units,
because these involve heavy costs.
5. Other Problems:
In addition to the problems enumerated above, the
micro and small enterprises have been
constrained by a number of other problems also.
These include:
• Technological obsolescence,
• Inadequate and irregular supply of raw
materials,
• Lack of organized market channels,
 •Imperfect knowledge of market conditions,
•Unorganized nature of operations,
•Inadequate availability of credit facility,
•Constraint of infrastructure facilities
including power, and
•Deficient managerial and technical skills.
There has been lack of effective co-ordination among the
various support organizations’ set up over the period for
the promotion and development of these industries.
Quality consciousness has not been generated to the
desired level despite various measures taken in this
regard.
 Q Quiz (10%)

Think of the MSE and the SMEs in Ethiopia. As

you know the government is exerting effort to
expand them. How ever the result is not as
expected. Assess the major problems.
Start with overall information, and discuss;
What major problems did you observe.
What are the causes of the problems?
What should be done?
 UNIT THREE
CONTRIBUTIONS OF ENTREPRENEURSHIP
AND SMEs FOR ECONOMIC
DEVELOPMENT