Sikkim Manipal University

A thesis proposal submitted to business administration

masters program
On
June, 2010
Addis Ababa

By
Habtamu Denbel
Id No. 540811356

Under supervision of
Prof. C. Rao
 LIST OF CONTENTS
CONTENT PAGE
CHAPTER ONE 1
1. INTRODUCTION 1
1.1 BBACKGROUND 1
1.2 PROBLEM STATEMENT 3
1.3 OBJECTIVES 4
1.3.1 General Objective.............................................................4
1.3.2 Specific Objectives...........................................................5
1.4 RESEARCH QUESTIONS 5
1.5 SIGNIFICANCE OF THE STUDY 5
1.6 SCOPE OF THE STUDY 6
1.7 DESCRIPTION OF STUDY AREA 6

CHAPTER TWO

2. Literature Review
2.1 Definitions and concepts
2.2 Features of MSEs
2.3 History of MSEsh
2.4 The role of MSEs
2.5 Empirical Literature
2.6 Challenges facing MSEs
2.6.1 Lack of clear and pragmatic nation Policy
2.6.2 Lack of access to capital and credit
2.6.3 Lack of premises and land
2.6.4 Lack of sufficient marketing and promotion support
2.6.5 Lack of coordination
2.6.6 Lack of adequate business development service
2.7 Opportunities for MSEs
2.8 Government polices and MSEs

CHAPTER THREE
3. Research methodology
3.1 Research design
3.2 Source of Data
3.3 Sampling techniques
3.4 Data collection method
3.5 Data analysis
REFERENCES
ANNEX-A-QUESTIONAIRES
List of Acronyms/Abbreviations

AGOWA: African Growth Opportunity Act

BDS: Business Development Services

CSA: Central Statistics Authority

DDMFI: Dire Dawa Micro Finance Institution

DDMSEs: Dire Dawa Micro and Small Enterprises Development

Agency

FDRE: Federal Democratic Republic of Ethiopia

FeMSEDA: Federal Micro and Small Enterprises Development Agency

ILO: International Labor Organization

MoTI: Ministry of Trade and Industry

MSEs: Micro and Small Enterprises

 CHAPTER ONE
1. Introduction

1.1 Background
The world is rapidly becoming urban; in 2001, half of its population
(three out of six billion) is living in urban areas, by 2025; this proportion
will have increased to two- thirds. The current urbanization rate is
particularly high in the poorest countries. In sub Saharan- Africa, for
instances, the urban population is growing at 6% per year, and will
double in the next 12 years (Mike Albu, 2001). This urban growth in the
world prevailed by rapidly growing number of poverty, combined with
slow economic growth in the formal sector have faced a large portion of
population to enter self-employment (World Bank, 1998).

According to, ILO (2002) informal enterprises represent nearly half or

more of the total non-agricultural employment in all regions of the
developing world. It ranges from 48% in North Africa, to 51%in Latin
America, 65%in Asia and 72%in sub-Saharan Africa (Mulu Gebreeyesus,
2007).

As a result, today the governments of both industrialized and developing

countries give a great deal of attention to assist MSEs, which are a
crucial for stimulating economic development. Thus, the industrial
policies of developing countries are revise to encourage and promote
small-scale enterprises (Abraham, 1997).

In Ethiopia 38.79 percent of the population is below poverty line. A

survey conducted by the central statistics authority (2005) indicates that
unemployment rate for the country is 20.6 while that of the rural area is
only 2.67.Inaddition, Ethiopian urban centers are characterized by a
poorly developed economic base, a high level of unemployment and a
worrisome incidence of poverty’s a result of weak economic growth, weak
environmental linkages, short comings in human, material, lack of
access to credit and inadequate strategic and participatory
planning(MWUD,2006).

Based on the nation wide sample survey conducted in 48 major

towns, by the central statistical Authority (CSA), in may 1997, showed
that there are 584, 913, and 2,731 informal sector activity operators and
small scale manufacturing industries respectively, that absorb 739, 898
labor force. The survey revealed that micro enterprise on an average
engages one person, and the average annual operating surplus is about
birr 1300(FeMSEDA, 1997).

Regarding the diversity of the informal sector activity (Micro enterprise),

the survey indicated that a large number of informal sector operators are
concentrated in a limited area of activities i.e. 47% in manufacturing,
42% in Trade, Hotel and Restaurant activities. About 6% in community
and personal services and the rest 5% are involved in Agriculture,
hunting, forestry and fishing, mining and quarrying, construction and
transport activities. On the other hand, the survey in small scale
manufacturing industries showed that the small manufacturing
industries are mainly engaged in the manufacture of food, fabricated
metal, furniture, and wearing apparels. These sub-sectors constitute
more than 85% of the surveyed small scale manufacturing industries
(FeMSEDA, 1997).

The situation in Dire Dawa city; the tighter control system markedly
minimized contraband trade and most of the people involved in this
illegal activity turned to be unemployed. The defective education policy of
the former regime produced vast school leaver unemployed. Nowadays,
the unemployment condition worsened deepening poverty condition in
the city which is manifested by increased number of marginalized groups
like street- children, beggars, commercial sex workers, and addicts,
juvenile delinquents (economy study team).

According to CSA(2004),there where 29,899 unemployed persons of age

ten years and over in Dire Dawa city of which 21,232 are females with
unemployment rate of 46.6% and 8,667 are males with unemployment
rate for Dire Dawa reaches 33.5% , which is higher than the national
urban un employment rate of 22.9%.

To turn this situation, the provisional administration of Dire Dawa

introduced a wide range of fundamental reform programs. As part of this
reform the regional integrated development programs was prepared in
2005/6 for five years period (2005/6-2010/11). In this program,
development and promotion of MSEs was taken as the main strategy to
reduce unemployment rate in the urban area. According to IDP (2006),
nine important projects have been prepared. These programs include
training, cooperative formation, technology transfer; research and
development, capacity building, construction dressed stone pavement
roads, access to finance, business development service, provision of
input for MSEs, provision of working and selling premises.

However, the success of Dire Dawa Micro and Small Enterprise is

encountered by different challenges. Some are like weak coordination
among stakeholders (micro finance, housing project), lack of land for
urban agriculture, lack of clear defined linkage with kebeles MSEs.
This study intends to assess the challenges and prospects of Dire Dawa
MSEs and to examine whether programs are working effectively or not.
1.2 Problem Statement
In most developing countries, small business face a wider range of
constraints and problems and they are unable to address the problems
they face on their own, even in effectively functioning market economics.
The constraints relate, among others, to the legal and regulatory
environment, access to markets, finance, business information, business
promises (at affordable rent), the acquisition of skills and managerial
expertise, access to appropriate technology, access to quality business
infrastructure, and in some cases discriminately regulatory practices
(Mike Albu, 2001).

In Ethiopia’s situation, since these have not been any organized policy
and support systems that cater for the sector, MSEs have been
confronted by various problems which are of policy, structures and
institutional in nature. To start with, lack of smooth supply of raw
materials, and lack of working premises were the major bottlenecks for
small scale manufacturing industries to commence their activities,
(FeMSEDA, 1997).

Similarly, the MSEs of Dire Dawa City also facing a number of

challenges. These are problem of working and selling premises, business
skill and training, financial constraint, technology and technical
constraints and inadequate infrastructure were the leading problems
facing the MSEs sector. This study will focus on challenges and
prospects of MSEs in the city (IDP, 2006).

1.3 Objectives

1.3.1 General Objective

The study intends to identify and analyze challenges and prospects of
micro and small enterprises in Dire Dawa city With regard to, existing
situation and assistance programs of MSEs.
1.3.2 Specific Objectives
The study would also try:
 To examine the existing situation of MSEs (in credit service,
working premises, technology/ technical supports and inadequate
infrastructure )
 To examine the potential challenges which affect the formation
growth and expansion of MSEs.
 To assess the program of MSEs.
 To forward possible interventions for policy on MSEs

1.4 Research Questions

 Are the majority of MSEs have provided credit service, working
premises, technology/ technical support and adequate
infrastructure?
 What challenges do MSE operators face in growing their business?
 How is the MSEs assistance program performing?
 How should an enabling business environment for stimulating the
MSEs sector be created?

1.5 Significance of the Study

The role of micro and small enterprises in employment and income
generation is increasingly recognized and has become a major playing
field for policy makers by enhancing growth and alleviating poverty.
Specifically, MSEs engage in manufacturing, services and urban
agriculture have the greatest advantage in contribution of decreasing
rate of unemployment. However, MSEs face so many problems on their
day-to-day activities. This study identifies the general problems and
some of specific challenges that the enterprise faces would be fertile
grounds by having a better insight to those challenges of MSEs. The
findings under those selected kebeles also be useful for officials works in
the sectors of MSEs, and the valuable suggestions after the findings is
useful in adjusting the necessary enabling environment, institutional
and opportunities which favor the development and improvement of
MSEs.

1.6 Scope of the Study

The scope of this study is limited mainly to manufacturing, service and
urban agriculture of MSEs in three kebeles 02, 04, and 07 of Dire Dawa
city. Main issues will be covered in areas of challenges, prospects and
assessing programs of MSEs sustainability.

1.7 Description of Study Area

DireDawa is the second largest city next to Addis Ababa in Ethiopia. It
was one of the fast growing cities in Ethiopia owing to its strategic
location on the train way line, which connect the capital Addis Ababa to
the Djibouti port. This has been sensible in the early 60’s when small
and medium scale industries start flourishing and real to urban
migration increases the urban population. It is a primary trading center.

Location: Dire Dawa administration council is located between 9 0 27 N

and 90 49 N latitude and 42 0 19’ E longitude. East Hararge administrative
zone of Oromia regional state borders it in the south and southeast, and
Shinile zone of Somalia regional state in the north, east, and west. Dire
Dawa city is accessible by airplane, train, and car, and is about 525 km
road distance to the east Addis Ababa and 311 KMs to the west of
Djibouti port. The total area of the region is about 128, 802 ha, out of
this urban account for 2, 684 ha (2%) and the balance 98% is forward
population.
Climate: the region is predominantly low land and has a mean
monthly temperature of 24.8c.The average elevation is about 1500-2000
meter above see level and the average annual rain fall is about 623mm.
Population: Based on, the 2007 census conducted by the central
statistical agency of Ethiopia, Dire Dawa has a total population of 342,
827 of whom 171, 930 were men and 170, 897 women; 232,854 or
67.92% of the population are considered urban in habitants, with an
estimated area of 1,213.20 square kilometers, there were 75,693
household in D.D administration council with an average of 4.5 persons
per household. The major ethnic groups in D.D include the Oromo
(46.08%) Amhara (20.09%), Somali (24.24%), Gurage (4.54%), Hareri
(1.08);the remaining 3.97% of the population consists of all other ethane
groups.70.9% of D.D Dawns are musilim,25.6% orthodox Christian ,
2.8% protestant,0.4% catholic, and 0.3% followers of other regions.
Administration: Dire Dawa is a chartered city and has two tires of
government structure; administrative council and kebele level. There are
9 urban and 25 rural kebeles.
Economy: Dire Dawa is industrial and commercial town due to its
nearest location to Djibouti and relatively economic development.
According to CSA (1997) report on small scale manufacturing industrial
puts Dire Dawa the third major town, next to Addis Abeba and Mekele.
 Chapter Two

2. Literature Review

2.1 Definitions and concepts

The definition of MSEs various from country to country and even can
vary with one country. Many developing countries apply based on
specific parameters, which include factors such as the number of
employees, asset, capital, sales turnover, etc. This definition clearly
identifies specific target groups for any preferential treatment of the
various actors in the MSEs.
Recognizing that, there are no standard definitions of MSEs. How ever,
some developing countries are presents here and define this fact.

China: has defined the micro enterprises have 1-5 employees and small
enterprises 8-100 employees.
Egypt: the recent micro and small establishments law (2005) has defined
the micro enterprises as the ones that employ less than 10 workers,
which the small enterprises employs 10-49 workers.
Malaysia: are defined the micro enterprises as the ones that employ less
than 5 workers or those enterprises with sales turn over less than RM
250,000 ,and small enterprises employs 5-50 workers or with sales turn
over between RM 250,000 and less than RM 10 million.
Malawi: in Malawi MSEs defined based on number of employees and
sales turn over. Defined as micro enterprises has 1-4 employees or with
sales turn over up to 120,000and small enterprise has 5-20 employees
or with sales turn over between 120,001 to 4 million.
In case of Ethiopia, there is lack of uniform definition at the national
level to have a common understanding of the MSEs. Given by the
Ministry of Trade and Industry (1997) defines MSEs enterprises
according to the paid up capital. And also the central statistics authority
(CSA) uses number of employment is as follows:
Micro enterprises: - are those business enterprises with a paid up
capital of not exceeding birr 20,000 and excluding high technology
establishment. Those business activities are independently owned and
operated have a small share of the market, are managed by the owner,
and employing 5 or less employees
Small enterprise:- are those business enterprises with a paid up capital
of above birr 20,000 and not exceeding birr 50,000 and excluding high
technology, consultancy firms and other high technology establishment.
Those business activities, which have the first three features of micro
enterprises employing 6-49 employees.
Medium Enterprise: - Those business enterprises with a paid up capital
of above birr 500,000 and including high technology consultancy firms
and other high technology establishment. Those business activities have
a large share of the market are managed by managers and employing
50up to 99 employees. (FEMSEDA, 1997).

Informal sector
In advance industrialized countries, all enterprises in including micro
enterprises must have by law a legal entity. How ever, this is not the case
with many developing countries. Practically all micro enterprises and
some small-scale enterprises can operate in the economy, although they
do not have legal entity. They are known as the informal sector (Hepi T,
2001).
The 1992 International labor office (ILO) study on Kenya used the term
“informal sector” to describe a set of activities, which had been neglected
in previous economic analysis and policies. Hence, it is more useful to
identify the informal sector on the bases of size of establishment,
measured by number of employees. A working definition of the informal
sector is adopted to cover micro (Zero to nine employees) and small
enterprises (10-40employees) to serve as a criterion to determine the
beneficiaries. There are three types of workers in the informal sector:
working owners, paid workers, and un-paid family workers .most
enterprises employ, fewer than five workers in addition to the owner. The
owner the overall level of employment per establishment is on average
about 1.7 workers including the owner (World Bank, 1994).

According to the ILO, enterprise is characterized by the facility of access

to activities, the urbanization of local resources. The family ownership of
enterprises, the restricted scale of operations, and techniques with high
intensity of work force, qualifications acquired through apprenticeship
out side of the education system and markets beyond any regulation.

Moreover, the concept of informal sector in Ethiopia based on the Central

Statistical Authority conducted a nation wide urban informal sector
survey in January 2003. It defined the sector as home based, or
individual activity operated by the owner with few or no employees,
unregistered and operating on a very small scale and with a low level of
organization very low level productivity and income, have little or no
access to organized markets, to credit institutions, to modern technology,
to formal training and to many public services and amenities; beyond
social protection, labor legislation and protective measures at the work
place .in addition, the households operators at least one member must
be engaged in productive activity and number of persons engaged (if
any)including the operator must be less than 10.
2.2 FEATURES OF MSEs
MSES are to be finding in every economy, in advanced industrialized as
well as in developing countries. According the industrial pyramid, in
every economy there are only few large enterprises followed by a large
number MSEs, and at the bottom, there is a very large number of MSEs.
This basic industrial scale structure remains even if an economically
backward country develops in to an economically advanced country.
Only there is more dynamism in terms of entries and exists among the
group of MSEs. In addition, many MSEs go easily bankrupt but instead a
large number of new MSEs springs up (Lepi T, 2001).

Like wise, according to Tarmidi (1999), MSEs are mange by their own
owners and are family business and therefore their success depends on
the entrepreneurial and managerial capabilities of the owners. And
generally they are weak in terms of mentality, education motivation in
exploring opportunities, access to technology and capital.

Entrepreneurial behavior is a key accelerating the generation,

dissemination and application of innovative ideas. Entrepreneurship is
regard as a strategic assets owning to its non-constable nature Arzeni
1999 in Yu, 2001. The dynamic of small manufacturing firms in Hong
Kong were principally attributed to adoptive entrepreneurship.
Entrepreneurial vision is the key to determine the future of the firms.
This implies that since owner’s entrepreneur leads most micro
enterprises their experience and socio economic backgrounds limit the
capabilities of these firms. Most entrepreneurs of small firms often gain
their industry experience from their previous employment and start their
own firm’s vir-spin off (Yu, 2001).

The term business environment encompasses a wide range of policies

affecting the economic setting of firms. Chief among these are the
regulatory environment, provision of infrastructure, and access to
primary inputs such as, finance, labor, and land (Lall and Taye, 2005).
However, there is no consensus over what a sound investment climate
for small enterprise growth look like. The issue of whether the same or
different investment climate is need for large and small enterprise still
debated among experts and policy makers.

Since, the nineteenth century more elaborated theories had been use to
explain the success of MSEs. Some of these recent views include flexible
specialization. The industry based on the manufacturing of custom-made
products by use of multi purpose technology and flexible production
methods operated by skilled workers. In flexible specialization, a firm
relies on other firms that specialize in the manufacturing of certain
components on sub process and concentrates on its own sub component
and process serving its own requirements and that of others as well.
Inter firm sub contracting is the basis of sectored specialization.

2.3 History of MSE

Before the British Industrial Revolution of the eighteen and early
nineteenth centuries, and even during its initial phase, manufacturing
industries took place either in workers’ cottage or in small workshops.
The potential for raising industrial productivity by increasing labor
division and linking the process with market availability can achieved
through the production process, which is broken down in to smaller
component parts and system (Hallberg 2000)

But later on the born of steam power and power loom became dominate
the role of small scale manufactories and followed by Great Britain,
France, Germany, the USA, Russia etc used large factories to
industrialize their countries. A partial exception large factory approach
was Japan, which began to modernize the Meiji Restoration of 1868 but
continued for several decades to rely heavily on small scale industries
with traditional bases. After colonies independence, following the
European model, Most Latin America and some Africa countries
identified industrialization for aspiration of economic development
(Snodgross & Biggs, 1996)

However, the employment crisis of the 1970s forced an ideal blue print
for the promotion of small-scale enterprises and industries. Such
programmes become standard components of every national development
plan. As to Snodgrass and Biggs (1996), major causes for such
promotions were:
 Though large amount of capital resources are allocated to large-
scale industries, a growing share of employment is still in the small
enterprise.
 The growing understanding of government policies that changed
from large-scale and capital intensive industries to policies that are
more neutral might induce more efficient use of scarce capital and
improved the distribution of income through small-scale
enterprises.
 The promotion of industries seen as part of the rural-led or
agricultural-led development strategy that increasingly advocated
for its applicability in low-income agriculture countries as an
alternative to the more traditional approach emphasizing
industrialization and urbanization.
 The promotion of small-scale industries seen as, a response to the
growing concern of rising unemployment. This promotion also,
favoring the participation of female labor force. More over, the
lobar absorption of agriculture was very low and it did not attract
the growing number of educated first time job seekers.
All these issues were seen in the 1970s” employment crisis” ,which might
be ameliorated by a class of enterprises that would absorb workers
whom the government and large private enterprises were unable to
employ.
To sum up, the conventional development strategy that was favors of
large scale industries was criticized due to failure of achievement of
equitable growth and efficiency in production. According to Tegegne and
Helm Sing (2005), this change in the world, economy climate in late
1970s and 1980s results the importance of MSEs. Taking the example of
sub Saharan Africa in which the work force is abundant and largely
engaged in the agriculture and related activates, the emphasis is
naturally given to MSEs in the urban areas mainly focusing on creation
of employment opportunity to majority of labors absorption.

The history of small enterprises has been one the most controversial
stories in economic development in the world. The role of small
enterprises in the economy has frequently been undermined and even
misinterpreted. In the past, small businesses were believed to impede
economic growth by attracting scarce resources from their larger counter
parts(Act and Audretch,1993).starting from the industrial revolution up
to the scale were considered as the driving force of growth and
development(Act,2003). The emergence of computer based technology in
production, administration, and information has, how ever, reduced the
role of economies of scale in many sectors. Acts and Audretch (1993)
have shown a shift towards an increased role for small enterprises.

The transitional government of Ethiopia and later the federal democratic

republic of Ethiopia, after the downfall of the Derg has declared free
market economy to be its policy, and the economy transferred from
command economy to free economy. To reverse the economic decline and
worsening poverty situation in the country with the ultimate goal putting
the economy on the long term growth path, the government of Ethiopia
has implemented structural adjustment program in 1992 and also, in
order to address the social cost of adjustment program the government
has been introduced a safety net program as a component structural
adjustment program.

2.4 The Role of MSEs

In the developing country context, the link between small enterprise and
poverty alleviation takes particular significance. In the context of
economic liberalization, deregulation and thus global economic
integration, small enterprises are often viewed as the best way to
overcome poverty and inequality in developing countries (Raynaold &
Forstater, 2002). Moreover, a number of reasons emerge to support this
view such as small enterprises tend to be more labor intensive, there by
contributing to increasing employment opportunities and income
generation. And with a high proportion of small industrial enterprise
have proved to have more equitable income distribution. Meed, (1998), in
Rogersm (2001) states that make a critical contribution to assisting large
numbers of people to survive at times when there is no better option.

According to the survey of statistical abstract (1995) cited by Ministry of

Trade and Industry (1997) in successful developing countries, MSEs by
virtue of their size, location, capital investment & their capacity of
generate greater employment have proved their powerful the propellant
effect for rapid economic growth. The MSEs is also known as an
instrument in bringing about economic transition by effectively using the
skill and talent of the people without requesting high level training,
much capital and sophisticated technology.
The MSEs sector is also described as the natural home of
entrepreneurship. It has the potential to provide ideal environment for
enabling entrepreneurs to optimally exercise their talent and to attain in
their personal and professional goals. In all successful economies, MSEs
as seen as an essential spring board for growth, job creation & social
progress. The small business enterprise is also seen as an important
force to generate employment and more equitable income distribution,
active completion, exploit niche markets, and enhance productivity and
technical change and through the combination of all of these measures
to stimulate economic development. While we can not deny the
importance of large industrial and other enterprise for the growth of
Ethiopia economy, there is ample evidence to suggest that the labor
absorption capacity of the small business enterprise is high, the average
capital cost per job created is usually lower than in big business, and its
role in technical & other innovation activities is vital for many of the
challenges facing Ethiopia (FEMSEDA; 2004).

2.5 Empirical Literature

Studies has recently been conducted in a number of countries that
provide a framework for better understanding of patterns of enterprise
births, survival or closure, and growth. These studies of small firm
dynamics are important, because they provide insights into the feasible
and desirable patterns of growth in out put and employment (Hiedholm
and Paiker, 1989), as pointed out by Mead and Lielholm (1998),
empirical evidence on new business starts in developing countries,
through limited in number makes clear that new small enterprises are
being established as a substantial rate. The result of those studies
revealed that the annual rate at which new enterprise all started in the
served countries average over 20% ranging from just below 200% in
Kenya, to over 30% in Botswana. These surprisingly high figures are
substantially above 10% rates typically high figures are substantially
above 10% rates typically reported for small enterprises in industrial
countries. As indicted in many literatures, relatively little is known about
the factors driving the MSEs new start rate. However, a recent study
focusing on MSEs in Zimbabwe indicates that determinants of new starts
differ between high & low return activities.

For high return activities, initial capital requirements, experiences of the

entrepreneur and the level of regulations are all inversely related to new
start rates for low returns activities, the rate new starts is reflect
(inversely) only to the aggregate level economic activity for these firms;
the lower level of aggregate economy the higher rate new starts. Lielhom
and parker(1989) indicates that excess demand for the goods of a small
firms and excess supply of labor, capital or other inputs to be
responsible in stimulating firm starts in Africa. Somewhat, more
empirical evidence exists on the closure rate of small firms in developing
countries (Liedholm and Mead, 1999). They also noted that most
empirical studies have indicated that mortality rates are inversely related
to firm size, which means closure rates decline as on move to large size
categories of firms. Nevertheless, one of the relationships found most
consistently in empirical studies of firm’s dynamics is between firm
closure and the age of the firm. Virtually, all the empirical studies
indicates that there is a strong inverse relationship between the age of
the firm and the failure rate. Indeed, most disappearances occur during
the early years of a firm’s existence. Liedholm and Mead (1999) hold that
empirical relationships between new start rate of MSEs firms and other
variables have not been systematical examined in any developing
country. Empirical evidence on new business starts in developing
countries makes clear that new MSEs are being established at a
substantial rate. Moreover, it is indicated in study works conducted on
MSEs in Africa that vast majority of new firms being created are one-
person establishments.

2.6 Challenge Facing MSEs

In most developing countries, MSEs face a wide range of challenges and
they are often unable to address the problems they face on their own
even ineffectively functioning market economics. For instance, cited in
Botswana full report (2001) Describes as, Human capital constraints,
lack of an entrepreneurial tradition, Insufficient backward/ forward
linkages, competitive pressures constraints of market demand, financial
constraints, lack of premises, Technology/Technical constraints,
Institution constraints and Information and ICTS constraints.

Paul Lehlohonolo (sep, 2004), the most common problems of MSEs are
lack of managerial skills, use of obsolete equipment, through lack of
capital and perhaps ignorance of new technologies, which heads to lower
productivity and poorer product quality, lack of financial records and
collateral to secure finance and poor access to markets for their out put.
Problems that are more specific or pronounced in a developing country
context include; lack of demand and product diversification inadequate
infrastructure, and limited access to raw materials (Rogerson, 2001).

According to the CSA report (1994-1995), the major obstacles

experienced by small-scale manufacturing industries were the irregular
and erratic supply of raw materials and a shortage of suitable working
premises. The lack of working premises was also found to present
difficulties for the informal sector operators who, faced with insufficient
capital, were often impeded from the start.
It suggested that the problems of raw material shortages, lack of working
capital and effective marketing, which face small manufacturing
industries, result in the failure of this business to expand. Where as the
same set of problems, when experienced by informal sector operators,
have the effect of preventing their expansion almost from the beginning
of their operations. For instance, the results of the survey on “Urban
informal sector activities” showed that out of the 584, 913 informal
sector activity operator, about 50% replied that their first major difficulty
when starting their operation was the lack of sufficient initial capital.
According to their responses, this problem becomes more critical when
they intended to expand their businesses.

2.6.1 Lack of clear and pragmatic national policy

In June 2000, the ILO recognizes the role of small and medium- sized
enterprises and recommends broad policy orientations conducive to their
growth. An appropriate policy environment can be considers a crucial
ingredient of strategies to create more and better jobs through small
enterprise development.

Some authors insist on the need for policies to privilege small enterprises
so as to enable them to compete with larger enterprises and explore their
employment creation potential, the dominant opinion is that there are o
generally valid reasons for economic policies to favor any specific size
class of enterprises.

Small scale enterprises in developing countries reported significantly

more problems than did large firms in almost all dimensions of the
institutional frameworks access to information about policy changes, the
predictability of judiciary, discretionary bureaucracy and corruption
(Abraham, 1997).
According to Gebrehiwot and Wolday (2001), there have been serious
attempts by the government to liberalize and improve the policy and
regulatory environments of the MSEs. However, the information at the
grass root level indicates that there is a divergence between policies and
directives issued and their implementation on the ground.
Generally, despite the strategies such as the above mentioned and other
rules & regulations that are in vigor in theory, most interventionist
policies regarding MSEs are in appropriate and impractical. For
examples, most government’s policies have a tendency over regulation
and limit the growth of private sector enterprises and they are over
bureaucratized and unfriendly to support small enterprises.

2.6.2 Lack of access to capital and credit

Lack of adequate investment capital, lack of sufficient loan, inefficient
financials market in terms of facilitating financial resources to
entrepreneurs are the major obstacles in doing business, particularly in
the micro and small enterprises. Most MSEs are highly risky ventures
involving excessive administrative costs and lack the experience in
dealing with financial institutions and do not have a track record of
credit worthiness with banks. Since most banking, institutions are
reluctant to provide small enterprises with loan and credit, most MSEs is
unable to secure collateral requirements. Because of absence in
financing, the creation of new enterprises and the growth and survival of
existing ones will be impeding. Access to finance is a major bottleneck for
the rapid growth & financial needs of small-scale enterprises.

Most MSEs do not have access to micro finance institutions & most
banks are reluctant to avail credit facility to small enterprises unless
they have acceptable collateral, agreed on high interest rate and
consensus of short repayment period (Assefa, 1997). The standard of
loans appraisal, the long delay the banks takes to sanction loans
unfavorable disposition towards small loans and the limited collateral
requirement, which is over 100% of the loan amount, are the major
obstacles that small- scale enterprises all facing at present. In addition,
the interest rate by most micro finance institutes, which is higher than
the lending rate of formal banks, inhabits the effectiveness in addressing
the needs of micro enterprises. The difficulty of access to capital is
certainly one of the major problems that affect the quantity and quality
of investments made by these enterprises.

2.6.3 Lack of premises and land

For micro and enterprises lack of premises in unquestionably a serious
problem most micro operators do not get access to suitable locations
where they can get enough space for their machinery and equipments,
storage and access to markets. The issue of acquisition and transaction
cost has become very prohibitive to the emergence of new enterprises
and to the growth and survival of existing ones. The issue of land
provision and the land system has greatly constrained the chance of
MSEs which aspire to start up business.

2.6.4 Lack of sufficient marketing and promotion support

Lack of market information as well as lack of markets has also been the
major impediments to the development MSEs in Ethiopia owing to lack of
market research and information many of small scale industries often
concentrate in the production of similar commodities, which puts them
in the intense competition with one another. There are lack of sufficient
institutional facilities that nurture the promotion, growth and
development of micro and small enterprises. Marketing their products
effectively as well as accessing and acquiring information on business
opportunities are the major bottlenecks that small and micro
entrepreneurs face all over the country. As a result, the design & quality
of products of MSEs are below standard. In addition, lack of marketing
skills, weak infrastructural facilitates renders small business to
uncompetitive (Assefa, 1997).

2.6.5 Lack of coordination

The other factor that hinders growth and expansion of micro and small
enterprises is the effectiveness with which they interact with large or
similar firms. In other words, formal and informal linkages or business
cooperation through networking are not common. large public
enterprisers and the few foreign affiliates do not outsource some of their
operations to local MSEs. The legal and institutional mechanisms to
enforce contractual obligations and government policy to design
appropriate incentive mechanism to encourage the expansion of business
linkages/sub contracting managements is at its infant stage (Assefa,
1997).

2.6.6 Lack of adequate business development service

Business development services (BDS) include a wide variety of non-
financial service. According to Hall Berge (2000), BDS include labor and
management training, extension, consultancy and counseling; marketing
and information services, technology development and diffusion; and
mechanisms to improve business linkages through sub contracting,
franchising, and business cluster. This kind of service can enhance the
managerial and entrepreneurial ability of MSEs.

Most micro and small enterprises in developing countries face a general

lack of knowledge, entrepreneurial and managerial capacity, and
marketing experience, lack of skilled labor. which in turn leads to
problems in production, due to the unfamiliarity of workers with rapid
changing technology, lack of coordination of production process, and
inability to trouble shoot failures on machinery and/or equipments is a
critical problem that micro and small enterprises are facing since they
can not afford to employ specialist in the fields of planning, finance and
administration, quality control, and those with technical knowledge.

2.7 Opportunities for MSEs

The problems faced by small enterprises and their role in the economy
governments donor agencies non-governmental organization (NGOs) and
the private sector have involved themselves with small enterprises
support and development in various capacities over the years. The
services designed to support and develop small enterprises can be
broadly focuses in to financial service and business development services
(Rutherford et al, 2002).

In Ethiopia also micro enterprises are generally considered to be the

domain of poor urban dwellers. Cognizant of the potential in employment
of creation and generation of income to the poor, governments are
advocating the importance of these enterprises and using the as a
strategy for enhancing development and growth. The Federal government
of Ethiopia focused on the expansion of MSEs in urban development,
because such enterprises will play the key role in urban poverty
reduction and bringing accelerated and sustainable development. In
addition micro and small enterprise activities have absorbed a large
number of an employed people. Therefore, support for MSEs has to
include skill upgrading programs for MSEs operators and strengthening
the use of appropriate modern technologies that boost their capacity to
create long-term jobs (FeMSEDA, 1997).

Government could encourage micro and small enterprises in particular

handicrafts and cottage industries create preferential access to markets
with some developing countries. Include the following:
  The African growth and opportunity Act (AGOA), given to export
tax and quota free to the US market.
 Every thing but armament (EBA) scheme that European Union
offer.
 Preferences given to, Ethiopia from bilateral agreement with
Canada and Japan.
 Increasing attraction of Ethiopia residing abroad to be involved in
MSEs. They can play a role in market assessment and promotion
activities acting as agents, distributions/importers, retailers and
consumers.
 The changing foreign policy of the country, and the roles in
promoting and facilitating export trade. Now a days, trade is
getting due attention no less than political issues. With their
regard, the governments focus to strengthen commercial attaches
is highly desirable.

2.8 Government polices and MSEs

The importance of MSEs as a vehicle to address the challenges of
unemployment economic growth and equity was not properly
acknowledged in Ethiopia. In recognition of the socio economic role of the
sector and its potential contribution to the country’s economic
development, the development of the micro and small enterprise sector is
becoming a subject of national importance. Recently the government
began to pay due attention to the promotion and development of MSEs.
Moreover, a different strategy has developed. These are as follows:

In November 1997, the federal government of Ethiopia developed a

strategy for the development and promotion of MSEs. The primarily
objective of the strategy is to create enabling environment for MSEs.
Given such an enabling environment, it is expect that hundreds and
thousands of MSEs will themselves be responsible for the operation,
growth and progress of their enterprises. In addition to this basic
objective, the national MSEs strategy has the following specific
objectives:-

- Facilitate economic growth and bring about equitable development

- Create long term jobs
- Strengthen cooperation between MSEs
- Provide the basis for medium and large scale Enterprises
- Promote export
- Balance preferential treatment between MSEs and bigger enterprises

The national MSE strategy outlined the various supports, include with
regard to creating an enabling legal framework and stream ling
regulatory conditions that hinder the coming up of new and expansion of
existing MSEs. In addition, to facilitating access to finance, provision of
incentives, promotion of partnerships, training, access to appropriate
technology, access to market, access to information and advice,
infrastructure and institutional strengthening of the private sector
associations and chambers.

The strategy further made it clear that major organs to be involved in the
implementation of the strategy are Ministry of Trade and Industry,
Regional Bureau Federal MSE development agency, Regional MSE
development agencies, or the designated organs, NGOs and business
associations.

Industrial Development strategy: the strategy stresses the importance

of encouraging graduates of the education system to create their own
business. Those who will be successful can gradually develop to be the
owners of middle and large companies. So the sector is conducive to
create developmental investors. The strategy further emphasized that the
participation of MSEs should not be restricted only to industry sector.
Their participation should also cover areas like modern agriculture,
trade, service etc (IDP, 2006).
Urban Development strategy, the policy outlines the need to shift the
urban governance from the administrative attitude to one of urban
entrepreneurialism. Where by private enterprises and the communities
are recognized as key partner of local development. One of the policies,
that strategy proposed from this perspective is to support MSEs and
establish centers for the development of entrepreneurship through:
enabling the regional MSEs and industry bureau to provide the following
services: Advisory service in terms of product marketing ,accessing new
markets, preparing project profile, modern management, sales and after
sales service ,encouraging out sourcing and public procurement
,encourage proactive import substitution, and “buy local “campaigns and
strategies etc(IDP,2006).

The Dire Dawa context: provisional administration trade and industry

Bureau is establish the Dire Dawa micro and small Development Agency.
The Agency prepared business plan for five sectors including:
construction, woodwork and metalwork, tailoring and weaving, food and
food related items, and fruit and vegetables trade. In addition,
established and MSEs forum. The forum constitutes representatives of
various government organizations and its main objective is to discuss on
the overall problems of MSEs in Dire Dawa, to analyze specific problems
of each enterprise and propose rectifying measures (IDP, 2006).
The above strategy shows that Federal and Regional government are fully
committed to support the MSEs and will create and strengthen
supportive facilities and allocate the scarce public resources to be
channeled in the most effective way to bring about rapid developmental
change and growth. However, MSEs particularly in Dire Dawa face
various problems to start up new ones and to operate the existing once.
The major problems are lack of marketing, finance, working and selling
place, skill and experience, coordination among concerned institutions
and information, attitudinal and infrastructure facilities.

Chapter three

3. Research methodology

3.1 Research design

This study will use both primary and secondary data. The research
design is mainly based on descriptive and statistical Analysis.

3.2 Sources of data

To get more representative information concerning the challenges and

prospects for MSEs, the study will make use of both primary and
secondary data sources. The primary data will be collects through
questionnaires; personal observation and interviews with MSE operators,
and secondary data are collected documents and reports from Dire Dawa
Micro Small Enterprises agency and micro finance, internet, paper and
books available in the library and journals.

3.3 Sampling techniques

The studies will conduct in three kebeles of Dire Dawa Administration.
Those engage mainly in the manufacturing, service and urban
agriculture and respected officials from Dire Dawa MSEs agency,
cooperative office and Dire Dawa microfinance. The sample size does not
include street vending, repair motor vehicles and forestry. Hence, the
studies takes sample size of 113 operators and 3 officials from Dire Dawa
MSEs, 3 from cooperative office and 2 officials from Dire Dawa micro
finance will select using an appropriate sampling technique.

In the selected areas, there are 1125 micro and small enterprises
operators of these 259 engage in manufacturing industry, 810 service
and 56 in urban agriculture. The list of MSEs operators are obtained
from Dire Dawa city administration kebeles. The sectors are select using
convenient sampling techniques and sample size is 10% of for all strata.
Moreover, it is stratify according to situation of sub sector using
systematic sampling. Based on that table 3.1 below indicates the sample
size each stratum of sectors.

Table 3.1 Stratified sampling for MSEs operators

Category of Number Ni ni =Ni(10%) Sample
operators Source
Manufacturing 259 25.9 26 own
Service 810 81 81
Urban 56 5.6 6
Agriculture
Total 1125 112.5 113
computation, 2010
Therefore, the respondents selected based on stratified sampling will be
manufacturing 26 out of 256, service 81 out of 810 and urban
agriculture 6 out of 56. The reason behind choosing random sampling is
for sake of providing an equal chance of inclusion for selected sectors of
the sample.

3.4 Data collection method

The necessary data will be collect through questionnaire, structural
interview and different documents from Dire Dawa administration and
MSEs agency. That is, the collection of data incorporates both primary
and secondary data. In order to include facts and opinion towards the
challenges and prospects of MSEs from operators and officials, both
close ended and open-ended question as well as structural interview are
use.

Since the study is including respondents with relatively low academic

status, the questionnaires are translated to local language to Amharic, so
certain in conveniences and communication barriers will be avoided. To
successfully collect the necessary information through questionnaires
from the MSEs enterprises. The researcher select data collectors and will
give them for one day training concerning techniques before starting
their work. Hence the actual data collection from MSEs enterprises is
held for four weeks, where each data collector at least gather the require
information from respondents a day. Where as, the types of information,
which is collect from structural interview and questioner from officials, is
conduct by researcher. In addition to this, during the period of data
collection, the researcher holds a continuous monitoring and
supervisions, to ensure the quality of the data collects by those data
collectors

3.5 Data analysis

The study will use both qualitative and quantitative approaches to
analyze collecting data. Which are obtain through open and close-ended
questionnaires, interview and observation are analyze using descriptive
methods of data analysis that including percentages and ratios, and it is
present with the help of graph, figures, tables and charts. In addition to
this the data are interpret with the help of excel.
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beyond.

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Global value chains.

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Ababa, Ethiopia.

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 Mulat Demeke and Wolday Amha (2004). Training Needs and Approaches for the
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 Paul Lehlohonolo (2004).Entrepreneurial Support in South Africa: a case study of
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(www.erf.og/cms/get file.php? id = 347)
Questionnaire for Data Collection
Socio economic Background
Part-One

1. Sex of the operator a) Male  b. Female 

2. Age of the operator a) <18  b) 18-30  c) 13-45  d) over 46
3. Marital Status a) Single  b) Married  c) Widow  d) divorced 
4. Family size a) 0-3  b) 4-5  c) 6-11 d) above 11 
5. Education level a) Illiterate  b) can read & write
c) 1-4 elementary  d) 5-10 secondary 
e) Diploma 10-12  f) Above 12 Degree 

Part- Two
1. Type of business sector
a) Manufacturing (wood and metalwork) 
b) Service (wholesale, retail trade) 
c) Urban agriculture 
f) Other

2. When has the enterprise established?

a) Less than one year ago  b) 1-2 years 
c) 2-5 years  d) greater than 5 year 

3. How did you choose your particular field?

a) To get more market potential  b) To develop skill /knowledge 
c) Lack of other alternative  d) Influence by family
e) Other

4. Enterprises establishment
a) Sole proprietorship  b) Partners 
c) Cooperative  d) family based 
5. In your opinion which types of enterprise more advantageous ?

6. What is the reason about your choice?

7. If you are working in cooperative, what problems you faced?

8. What employment status you employed in your business?

a) Educated labor  b) Illiterate labor 
c) Family member  d) un - employed labor (Youth) TVET 

9. What is the contribution of your business in city development?

a) Create job opportunity  b) Transfer knowledge 
c) Facilitate economic growth (by paying tax)  d) other

Part three: Challenges of the enterprises

A. Finance Related
1. How much was your start up capital?
a) Less than Birr 500  b) 501-1500 Birr 
c) 1501 to 5000  d) 5001-20,000 Birr 
e) Above Birr 20,000 

2. How did you get initial capital?

a) Borrowing from relative & friends  b) Borrowing from Micro finance 
c) From NGOs  d) personal saving 

3. What kind of problems do you face when getting credit?

a) Lack of collateral  b) Problems among cooperatives
c) Problems of credit service d) lack of information (get finance) 

4. If getting from microfinance, is the amount of loans adequate?

a) Yes  b) No

5. If No, how much do you suggest?

6. Do you have saving? a) Yes  b) No

8. If yes, where do you saving?

a) Dire Dawa Microfinance b) Bank  c) In the house  d) Other

9. What is the source of capital for your saving?

a) From business profit  b) From micro finance 
c) Other
10. How much do you have in your account? (If you have saving)

B. Access to working place & physical infrastructure

1. Is it appropriate your work place for infrastructure?

a) Yes  b) No

2. If yes, what type of infrastructure?

a) Electricity  b) Water  c) Telephone 
d) Road  f) Other 

3. If No, what impact brings on your business?

4. Does your enterprise have enough places for running the business?
a) Yes  b) No

5. If yes, how did you get the working place?

a) By Renting  b) By city administration (gov’t) 
c) Family’s resident  d) other 
6. If you got from city administration. How was the procedure of
transferring the work place?
a) Bureaucratic  b) good  c) very good 

7. From where are you finding input for your enterprises?

a) Local market  b) from rural
c) From other city (like Harer & Addis Ababa) 
d) From producer  e) other place 

8. Is any problem to get inputs?

a) Not accessible (available)  b) High cost 
c) Shortage of finance  d) other (transport, quality, inflation etc) 

9. How is your business performance?

a) Increase  b) constant  c) fluctuate d) decreases
10. If your answer in Q. #9 decreases, what is the reason?
a) Constraint of market problem  b) High competition in the market 
c) Poor production quality  d) other reason 

c) Managerial skill and training

1. Do you have enough skill to carry out your business?
a) Yes  b) No

2. If yes, what type of skills does you has.

a) Marketing  b) Managerial 
c) Technical  d) Book keeping (accounting) 

3. Which institution gave you training?

a) City administration (TVET)MSEs)  b) NGOs 
c) Private sector  d) other 

4. What benefit do you get from the training?

a) Improve the quality of the production b) Increase profit 
c) Effectively efficient manage the business 
d) Facilitate my interaction with customer and supplies 

5. If don’t take the training, why?

a) Not necessary 
b) No opportunity to get training 
c) Not got training related with my business 

6. Identify the major problems of your enterprise and rank them

1.
 2.
3.
4.
7. What are the possible solutions for the problems?
1.
2.

Part four: Government Assistance programs

A. For operators
1. Did you get support? A) Yes  B) No 

2. If yes, which institution supports you?

a) City administration  b) NGOs 
c) Community (Edir)  d) other 

3. What type of support did you got?

a) Training  b) credit 
c) Counseling  d) Land for urban agriculture 
e) Market place 
f) Other or two or above from the list

B. For Government officials

Questions to interview key information from officials in the study
area
1. What kind of MSEs activities provided by the Agency?

2. How many operators benefited from the MSEs agency

Could you mention in a given table (1998-2000 E.C)
Activities Provide service
Market place Credit Material Land Training
engaged
Plan Achieve Plan Achieve Plan Achieve Plan Achie Plan Achieve
 ment ment ment ve ment
ment
Manufacturing
Service
Urban
agriculture
Total

3. How do you found the performance of the enterprise?

a) Strongly increasing  b) Increasing 
c) At constant (no change)  d) Decreasing 
e) Strongly decreasing 

4. Currently, what are the challenges of the MSEs agency?

a) Lack of human resource  b) Lack of clear rules & regulation
c) Lack of enough budget 
d) Lack of coordination among relevant stakeholder  e) other or

5. What remedy action do you take to reduce the challenge that hinder
the performance of MSEs office
a) Request the administration Additional budget 
b) Better to implement business-processing reengineering (BPR) 
c) Establish coordination net work system among stakeholders 
d) Try to improve rules & regulation to hinder the works is 
e) Other solution 