Micro and Small Enterprises in Assosa Town. A Case Study of Factors Affecting Performance

Master's Thesis , 2016 , 123 Pages

Economics - Case Scenarios

Micro and Small Enterprises (MSEs) in Assosa town do not show the necessary performance level and some of the enterprises disappear from the market in their infant age. Hence, this study was conducted with the objective of assessing factors affecting performance of micro and small enterprises in Assosa town.

After statistical analysis, the study concludes that both external and internal factors affect performance of MSEs and their existence could be improved. Variables such as political, legal, financial, marketing, working premises, infrastructural, opportunity seeking, persistence, commitment to the work, demand for efficiency and quality, goal setting, risk taking, information seeking, and self-confidence positively influence to performance of MSEs (profit) and significantly affect performance of MSEs. Similarly, for capital, variables such as political, legal, financial, marketing, working premises, technological, opportunity seeking, persistence, commitment to the work, demand for efficiency and quality, risk taking, information seeking, and self-confidence positively influence the performance of MSEs (capital) and significantly affect performance of MSEs.

In order to reduce the influence of external and internal factors on performance of MSEs, policy makers and the service provider institutions need to consider and revise the extent, intensity, and quality of support and their linkages.

TABLE OF CONTENTS

STATEMENT OF THE AUTHOR

DECLARATION

ACKNOWLEDGMENTS

LIST OF ACRONYMS AND ABBREVIATIONS

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURE

LIST OF APPENDIX

ABSTRACT

CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
1.2. Statement of the Problem
1.3. Research Question
1.4. Objectives of the Study
1.5. Significance of the Study
1.6. Scope of the Study
1.7. Limitation of the study
1.8. Organization of the paper

CHAPTER TWO
LITERATURE REVIEW
2.1. Introduction
2.2. The Definition of Micro and Small Enterprises (MSEs)
2.3. Measurement of Performance of MSEs
2.4. Contribution of Micro and Small Enterprises (MSEs)
2.5. Theoretical Background on Micro and Small Enterprises
2.6. Empirical Study on Factors Affecting Performance of MSEs

CHAPTER THREE
RESEARCH METHODOLOGY
3.1. Introduction
3.2. Description of Study Area
3.3. Research Design
3.4. Sources of Data
3.5. Target Population
3.6. Sample size Determination
3.7. Sampling Procedure
3.8. Variable Definition and selection
3.8.1. Dependent
3.8.2. Independent Variables
3.9. Methods of Data Collection
3.10. Method of Data Analysis
3.10.1. Descriptive Analysis
3.10.2. Multiple Regression Analysis
3.11. Validity and reliability analysis
3.11.1. Validity
3.11.2. Reliability

CHAPTER FOUR
RESULTS AND DISCUSSIONS
4.1. Introducti on
4.2. Demographic Characteristics of Sample Respondents
4.2.1. Age and Gender of the respondents
4.2.2. Education Level and of the Respondents
4.3. The General Information of MSEs
4.3.1. Business Sector and Position of the Respondents
4.3.2. Duration of the enterprises in operation
4.3.3. Number of Employees, Annual Profit and Capital of MSEs
4.4. Factors Affecting Performance of MSEs
4.4.1. External Factors Affecting Performance of MSEs
4.4.2.Internal Factors Affecting Performance of MSEs
4.5.Inferential Statistical Analysis
4.5.1. Pearson's Product Moment Correlation Coefficient
4.5.2. Regression Analysis

CHAPTER FIVE
5. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1. Introduction
5.2. Summary
5.3. Conclusions
5.4. Recommendations
5. 4.1. Areas for further research

REFERENCE

DECLARATION

This is to certify that this thesis entitled “An Assessment of factors affecting the performance of Micro and small scale enterprises in Assosa town” accepted in partial fulfillment of the requirements for the award of the Degree of Master of Arts in Business Administration by the School of Graduate Studies, Wollega University through the College of Business and Economics, done by Dereje Muleta Lencho is a genuine work carried out by him under my guidance. The matter embodied in this thesis work has not been submitted earlier for the award of any degree or diploma.

The assistance and help received during the course of this investigation have been duly acknowledged. Therefore, I recommend that it can be accepted as fulfilling the research thesis requirements.

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WOLLEGA UNIVERSITY

SCHOOL OF GRADUATE STUDIES FINAL THESIS APPROVAL FORM

As members of the Board of Examining of the Final M. A. /MSc. thesis open defense, we certify that we have read and evaluated the thesis prepared by Dereje Muleta Lencho under the title An Assessment of factors affecting the performance of Micro and small scale enterprises in Assosa town” and recommend that the thesis be accepted as fulfilling the thesis requirement for the Degree of Master of Arts in Business Administration.

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Certification of the final paper

I hereby certify that all the correction and recommendation suggested by the board of examiners are incorporated into the final thesis entitled “An Assessment of factors affects the performance of micro and small enterprises in Assosa town” by Dereje Muleta Lencho.

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ACKNOWLEDGMENTS

First, I wish to thank and give glory to the lord almighty for the precious gift of life and wisdom and whom without his will and blessing, it would not have been possible for me to write this thesis.

My special thanks go to my major advisor Dr. Amsalu Bedemo and co-advisors, Mr. Adugna Hunde and Mr. Abebe Shanko for their guidance, constructive suggestions, careful reading of my drafts, their precious time devotion, patience and encouragement that by going through my work, guiding and encouraging me throughout my research greatly contributed for completing this thesis.

I would like to express my appreciations to workers of Assosa town Micro and small-scale enterprises development office, and the study respondents of MSEs owners/managers in giving valuable information during data collection.

In addition, I would like to thanks Benishangul Gumuz Bureau of Finance and Economic Development for financial support to complete my MBA study.

Lastly, I would like to thank my Wife Yeshewahareg Kefiyalew, my brother Anbessa Aga and my friend Temesgen Desta for their support during my study.

LIST OF ACRONYMS AND ABBREVIATIONS

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LIST OF TABLES

Table 3.1 List of Micro and small Enterprises (MSEs)

Table 3.2 Sample size of for the study

Table 3.3 Reliability Statistics

Table 4.1 Age and Gender of Respondents

Table 4.2 Education level of the respondents

Table 4.3 Business sector and position of the Respondents

Table 4.4. Duration of enterprise in operation

Table 4.5 Number of employees, Current capital and Annual Profit of MSEs

Table 4.6 Political factors

Table 4.7 Legal factors

Table 4.8 Technological factors

Table 4.9 Infrastructure factors

Table 4.10 Marketing factors

Table 4.11 Work premise factors

Table 4.12 Financial Factors

Table 4.13 Opportunity seeking factors

Table 4.14 Persistence factors

Table 4.15 Commitment to the work factors

Table 4.16 Demand for efficiency and quality factors

Table 4.17 Risk taking factors

Table 4.18 Goal setting factors

Table 4.19 Systematic planning and monitoring factors

Table 4.20 Information seeking factors

Table 4.21 Persuasion and networking factors

Table 4.22 Self-confidence factors

Table 4.23 the relationship between independent variables and performance

Table 4.24 Regression analysis of annual profit on the selected variables

Table 4.25 Regression analysis of capital on the selected variables

Table 4.26 Regression analysis of number of employees on the selected variables

LIST OF FIGURE

Figure 2.1 Conceptual framework

LIST OF APPENDIX

Appendix A Questionnaire for Micro and Small Enterprises in Assosa town

Appendix B Correlation Matrix

Appendix C -Regressions Tables

ABSTRACT

Micro and Small Enterprises (MSEs) in Assosa town does not show necessary performance level and some of the enterprises ceased from market in their infant age. Hence, this study conducted with the objective of assessing factors affecting performance of micro and small enterprises in Assosa town. The study has used both descriptive and explanatory research designed. Data for the analyses collected both from primary and secondary sources where the primary data collect through questionnaire and focus group discussions. The study has used stratified random sampling technique to select 155 MSES from 252 find in Assosa town. The study has identified that the external and internal factors affected performance of MSEs and their existence could improve the normal operation of micro and small enterprises performance. The study has used correlation and regressions to establish the relationship between variables. Correlation coefficients revealed a significant positive relationship between performances of MSEs. Variables such as political, legal, financial, marketing, working premises, infrastructural, opportunity seeking, persistence, commitment to the work, demand for efficiency and quality, goal setting, risk taking, information seeking, and self-confidence are positively influence to performance of MSEs (profit) and significantly affect performance of MSEs. Similarly, for capital, variables such as political, legal, financial, marketing, working premises, technological, opportunity seeking, persistence, commitment to the work, demand for efficiency and quality, risk taking, information seeking, and self-confidence are positively influence to performance of MSEs (capital) and significantly affect performance of MSEs. In addition, for number of employees; variables such as political, financial, marketing, working premises, opportunity seeking, persistence, commitment to the work, demand for efficiency and quality, information seeking, and goal setting are positively influence to performance of MSEs and significantly affect performance of MSEs in terms of number of employees. Hence improving those variables increase performance of MSEs (profit. capital and number of employees). Multiple regression analysis has also revealed that 78.4% the variance in profit, 69.4% the variance in capital and 73% the variance in number of employees are explained by independent variables and improving those variables increase performance of MSEs (profit, capital, and number of employees). The study recommends that MSEs office could be transparent at the time of allocating the working place to the MSEs, better to design close supervisor of MSEs and linking the MSEs with other private contractors working around Assosa town, support the establishment and strength of business development services. Similarly, the MSEs office could increase the capacity and skill of the operators through continuous trainings, and create linkage with entrepreneurship development center to fill entrepreneurial skill gaps of MSEs of owners/ mangers. Moreover, in order to reduce the influence of external and internal factors on performance of MSEs, policy makers and the service provider institutions need to consider and revise the extent, intensity, and quality of support and their linkages.

Key words: Micro and small enterprises, Performance, Assosa town.

CHAPTER ONE INTRODUCTION

This chapter includes topics such as; back ground of the study, statement of the problem, research questions, objectives of the study, significance of the study, scope of the study, limitation of the study, key terminology as well organization of the paper.

1.1. Background of the Study

Micro and Small Enterprises (MSEs) have become engines of poverty reduction, employment creation and business development among others in various countries worldwide (Chittithaworn et al., 2011). In the current global economy, micro and small enterprises progressively being regarded as powerful engines for economic performance and development of most economies (Muzenda, 2014). Industrial development policy authorities in most developing countries globally have realized the substantial contribution made by MSEs towards attainment of sustainable local economic development and poverty reduction through creation of job opportunities (Swerczek & Ha, 2003).

Performance of MSEs sector is closely associated with the performance of the nation and their contribution in each nation economy (ILO, 2009). The importance and emphasis of MSEs has been draw attention to the mind of policy maker, planer and industry because of a society is not through the large scale but through individual and small initiatives by visionary from MSEs, and they are base for shift form agrarian to industrial knowledge base (Haily, 2007).

In Africa the MSE sector provides certain benefits to the economy, key among them is the recognized potential of the MSE sector to generate incomes and provide jobs to a large number of peoples (Fjose, Grunfeld, and Green, 2010).

Similarly, in Ethiopia Micro and small enterprises (MSEs) play crucial role for socio-economic development and serves as vehicles for employment opportunities and ways of enhancing wealth creation by support the economic growth (GFDRE, 2011). They have become significant employment contributors and can function successfully in many areas of Ethiopia. However, their effectiveness depends on the nature, performance, and productivity level of employment and available resource. Limited access to financial services, lack of partnership and networking, absence of technical and business skills among other are major obstacles in the sector.

In line with the country strategy government of Benishangul Gumuz Regional, state (BGRS) promotes the development of Micro and small enterprises in order to generate income and provide job opportunity for unemployment. According to Benishangul Gumuz Regional state Bureau of Urban Development and Construction (BoUDC) annual report, Micro and small scale enterprises created employment opportunities for 6,429 peoples in sectors such as Manufacturing, construction, trade, urban agriculture and service (BGRS BoUDC, 2014).

In Assosa town Micro and Small Enterprises Development Office (AMSEDO) established in 2010, with responsibility to promote and facilitate the growth of MSEs in order to enable them to play their role in the economy (AMSEDO, 2015). Micro and small enterprises in Assosa town plays essential function in solving unemployment and provide job opportunities to those graduated from university and TVET. However, the performance of micro and small enterprises in Assosa town was not significant as expected.

1.2. Statement of the Problem

Micro and small enterprise account for the vast majority of enterprise and contributed major share to employment and economy growth in the European countries, Japan and US (Muller et al., 2014). Similarly, many of the countries in Sub-Saharan Africa reported to have high number of MSEs in the economy (Tvedten, Wende, Hansen, Jeppesen, 2014).

In Ethiopia, Micro small and enterprises (MSEs) have a tremendous potential to generate employment for the majority of the urban labor force (GFDRE 2011). The government-revised strategy strives to create an enabling environment for MSEs through putting in place a national strategy framework and coordinated programmes at Federal, Regional, and Local levels. Currently, MSEs obtains direct support from the Ethiopian government. The government is also committed to facilitate cooperative ventures and development of MSEs clusters, as well as to promote subcontracting and business linkages between smaller and larger companies (GFDRE, 2011).

Several studies have been identifying factors affecting performance of Micro and small enterprises in other region of Ethiopia such as Addis Ababa, Hawassa, Mekele and Bahirdar (Weldegbriel, 2012; MUDC survey, 2013 ; Berihu, Abebaw & Biruk, 2014). For instance, study conducted by Admasu (2012), utilized multiple regression analysis and the finding indicated, external factors and internal factors affect performance of micro and small enterprises (MSEs). He mentioned external factor includes finance factors, marketing factors, workings premises factors, infrastructure factors and internal factors such as management and entrepreneurial factors. His study only focused on manufacturing sectors particularly in textile and garment, food processing and wood and metal work and recommended for further study factors affecting the performance of micro and small enterprises including other sectors such as construction, urban agriculture and trade sectors.

So far, significant number of micro and small enterprises in Assosa town does not show necessary performance level and some of the enterprises ceased from market in their infant age. According to the data from Assosa town Micro and small enterprises office (2014), from total 256 MSEs, 80 MSEs are failed to continue their operations at the end of the year (Assosa MSEDO, 2014). This motivated the researcher to undertake the study.

Study conducted by Birhanu (2012) in Assosa town on Challenges and opportunities of micro and small scale enterprises using descriptive analysis, result showed that, factors such as environmental, financial, human resource and managerial as well as market related factors constraining the growth of MSEs. His research question focused on internal and external factors hindering the growth and survival of MSEs, however, the study does not clearly indicated those of internal factors. In addition, his study has not indicated clearly measurement of growth and survival of MSEs.

Therefore, the major focus of this research was internal and external factors affecting the performance of Micro and small enterprises of all sectors such as construction, manufacturing, urban agriculture, trade and service.

1.3. Research Question

The research answered the following questions.

- What internal factors affect the performance MSEs in Assosa Town?
- What external factors affecting the performance of MSEs in Assosa Town?
- To what extent internal factors affect performance of MSEs?
- To what extent external factors affect performance of MSEs?

1.4. Objectives of the Study

The general objective of the study is to identify factors affecting the performance of micro and small enterprises in Assosa town. Specific objectives are to:

1) Identify the external factors affecting performance of MSEs in Assosa Town.
2) Analyze internal factors affecting the performance of MSEs in Assosa Town.
3) Examine the extent to which external factors affect the performance of MSEs.
4) Examine the extent to which internal factors affect the performance of MSEs.

1.5. Significance of the Study

Findings from this study help academicians for further study in the area by providing a deeper understanding of the critical factors that affect the performance of MSEs. In addition, the regional government uses the findings of this study to overcome critical factors that affect the performance of MSEs. Moreover, the findings of this study help the policy makers and financial institutions in consideration to areas where the strategies should be focused so as effectively promote MSEs performance.

1.6. Scope of the Study

The study assessed factors affecting the performance of MSEs in Assosa town. This study delimited to internal and external factors affecting MSEs formally registered under sectors such as manufacturing sector, construction sector, trade, services and urban agriculture due to considering the time, energy and financial resources required to accomplish the study. In addition, this study was delimited to measurement of performance of Micro and small enterprises (MSEs) in terms of profit, capital, and number and ignoring other performance measurement.

1.7. Limitation of the study

In studying factors affecting performance of MSEs in Assosa town the researcher planned to carry out in successfully way, however some limitations suspected for conducting this study.

The registered and actual MSEs are not equal. Some of MSEs were closed due to different problems. The MSEs office doesn’t have updated information and hence it affects the sampling of the study. To overcome this limitation the researcher identified the currently existing MSEs in communicating with the MSEs Offices and adjusting the sample accordingly keeping as scientific ways.

Another problem encountered in the study has to do with the operator’s reluctance to cooperate due to suspicion that disclosing information may lead to negative effect on their business. The researcher convinced MSEs Owners/ managers by oriented the study objectives is for academic purpose and does not have negative effect on their business. It is very important to note that these limitations did not have any significant interference with the outcome of the study.

1.8. Organization of the paper

The thesis divided into five major parts. The first introductory part of the study contains background of the study, statement of the problem, objectives of the study, significance of the study, scope of the study, limitation of the study, definition of terms & concepts and organization of the study. The second chapter will devote to the presentation of literature reviews of related researchers and conceptual framework. The third chapter deals with research methodology of the study which presents the research design, data sources, instruments and procedures of data collection, sampling strategy, data analysis and presentation, validity and reliability. The fourth chapter will be the analysis and discussion of data collected. The final chapter summarizes, concludes the results obtained from the findings and suggests the necessary recommendations; and finally attached bibliography and annexes relevant for the study.

CHAPTER TWO LITERATURE REVIEW

2.1. Introduction

This chapter reviews related literature under different sub-topics relevant to the study objectives. This includes definition of Micro and small enterprises (MSEs), measurement of performance of MSEs, contribution of micro and small enterprises to the economic development. It also discusses the theoretical background and empirical study on micro and small-scale enterprises (MSEs) included the factors that influence performance of MSEs such as Finance, marketing work premises, technology, infrastructure, and personal entrepreneurial characteristics on MSEs performance. Finally presents the conceptual framework, which gives a grasp picture of the study.

2.2. The Definition of Micro and Small Enterprises (MSEs)

The definition of micro and small enterprises around the globe vary from country to country and depend on the phase of economic development as well as their prevailing social conditions. The definition uses number of full time employee, total asset, net asset and paid capital, and annual turnover as criteria independently or in combination (Haily, 2007). According to European Commission’s the recommended official definition of micro and small enterprises base on criteria of the number of employees and one of the two financial criteria, such as either the total turnover or total balance sheet. Based on this definition small enterprises has number of employees less than 50 and micro enterprise has less than 10 employees (EFILWC, 2001).

Similarly, in Africa the definition of Micro and small scale enterprise is differing from countries to countries. For instance, Kenya’s definition of micro and small enterprises used two criteria such as number of employees and the company’s annual turnover. For enterprises in the manufacturing sector, the definition takes into account the investment in plant and machinery as well as the registered capital. Accordingly, for micro enterprise number of employees less than 10 and annual turnover is not exceeding ksh 500,000. And small enterprise has less than 50 employees and annual turnover between ksh 500,000 to 5 million (Khrystyna, Mirmulstein, & Ramalho, 2010).

According to Ethiopian’s Federal Micro and Small Enterprises Agency the improved definition of micro enterprises is an enterprise operates with 5 people including the owner and/or their total asset is not exceeding Birr 100,000 under industry and the values of total asset is not exceeding Birr 50,000 for service sector. Small enterprise is those enterprises hired 6 up to 30 employee or total asset amount birr 100,000 up to 1.5 million birr for industry sector and 50,000 up to 500,000 for services sector (GFDRE, 2011).

Hence, the definition of micro and small enterprise given by Ethiopia revised MSE strategy, 2011 used for this study. Accordingly, micro enterprise defined as an enterprise operates with 5 people including the owner and/or their total asset not exceeding Birr 100,000 (one hundred thousand) under industry sector such as manufacturing, construction and mining and the values asset not exceeding Birr 50,000(fifty thousand) under service sector such as: retailer, transport, hotel and Tourism, ICT and maintenance service. In similarly way the definition of small enterprises is as an enterprise operates with 6-30 persons and/or with a paid up capital of total asset Birr 100,000 (one hundred thousand) and not exceeding Birr 1.5 million under industry sector and total asset, or a paid up capital is with Birr 50,000 and not exceeding Birr 500,000 under service sector.

2.3. Measurement of Performance of MSEs

Performance definition is not common for all scholars. Global Entrepreneurship Monitor (GEM, 2004) defined performance as the act of performing; of doing something successfully; using knowledge as distinguished from merely possessing it. However, performance seems to be conceptualized, operationalzed and measured in different ways thus making cross-comparison difficult.

The measure of performance of MSEs are performance indicators which are commonly used to help an organization define and evaluate how successfully in terms of making progress towards its long term organizational objectives (Gibbson 1990). Therefore, quantifiable measurements agreed to beforehand, that reflect the critical success factors of an organization. Measurement of actual performance must, be done in the same terms in which standards have been laid down so that comparisons are easier and meaningful.

Li, Zang and Chan (2005) uses three indicators for performance measurement of efficiency, growth, and profit. The business performance is the phenomenon of multiple aspects that are difficult to quantify (Sanchez and Marin, 2005). A variety of the literature shows that both quantitative and qualitative indicators have limitations and recommended to used interchangeably. Measuring quantitatively: such as ROI, profit, sales, and so on. While qualitative measurements are often called as performance indicators, performance measurement is using the approach of a certain scale of performance variables such as knowledge and business experience, the ability to offer quality products and services, the capacity to develop new products and processes, the ability to manage and work in groups, labor productivity, and corporate responsibility to the environment. Sanchez and Marin (2005) measured the performance of small and medium enterprises with reference to the three aspects namely profitability, productivity, and market. While Lee and Tsang (2001) using performance effort represented by the growth venture consisting of sales growth, the growth of the company's assets, and profit growth.

Study conducted on micro and small enterprises (MSEs) result shows that performance of small business determined by owner/manager personal value (Zoysa dan Herath, 2007; Lee and Tsang, 2001; Street and Cameron, 2007; Nimalathasan, 2008). All of which stated that the owners/manager is a key factor in business performance. Zoysa and Herath (2007) examined the relationships among owner/manager with business performance at different stages of business growth, when owner/managers of MSEs are more entrepreneurial minded in the introductory and decline stages of growth, their performance tends to be higher, and the same is true for the growth and maturity stages when they are more administrative minded. This suggests that owner managers need to become more entrepreneurial oriented in their strategies and actions in order to achieve better performance in the introductory and decline stages.

Based on review of related literature, performance of micro and small enterprises (MSEs) measured in terms of increase in profit, capital growth and increase in number of employees for this study.

2.4. Contribution of Micro and Small Enterprises (MSEs)

As already mentioned, micro and small enterprise contribute to the economic growth of a country by providing new jobs, introduction of innovation, simulate competition, aid big business and produce goods and service efficiently (Haily, 2007). In many countries, there is now a wide recognition of the contribution of micro- and small enterprises (MSEs) to economic growth. In a cross-section of both developed and emerging economies, the contribution of the MSEs sector to total employment, entrepreneurship and innovation cannot be underestimated. For example, this sector generates about 59 percent of the aggregate employment in the United States, 88 percent in China, about 56 percent in Malaysia, 62 percent in Singapore and about 70 percent in Canada (ACCA, 2010).

Across the European Union countries at the end of 2013, 21.6 million SMEs in the nonfinancial business sector employed 88.8 million people and generated euro 3,666 trillion in value added. Expressed another way, 99 out of every 100 businesses are SMEs, as are 2 in every 3 employees and 58 cents in every euro of value added(Muller,et a/.,2014).

Micro-enterprises accounted for 92.4% of all enterprises in the European Union countries non-financial business sector. However, the distribution of employment and value added across the three groups of SMEs was more equal, with micro, small and medium enterprises accounting for 43%, 31% and 26% of European union countries SMEs employment, respectively, and 37%, 31% and 32% of value added generated by SMEs in the European Union countries non-financial business sector(Muller,et a/.,2014).

The potential advantages of a dynamic MSEs sector have generated high expectations in many developing countries about the contributions of this sector to job creation and poverty reduction. Add to this the optimism that the full development of the MSEs sector can foster competitiveness in the economy and achieve a more equitable distribution of the benefits of economic growth in both developed and developing economies. Such considerations have motivated many governments to put in place national policies to stimulate the growth of this sector in service, distribution and manufacturing-related economic activities (Fjose, Grunfeld, and Green, 2010).

According Fjose, et al. (2010), micro and small enterprises in Sub-Saharan sub African countries play a pivotal role in industrial development and restructuring, satisfying rising local demand for services, allowing for increased specialization and supporting larger firms with inputs and services. In this regard, MSEs become engines that sustain growth for long-term development. Accordingly, the Micro enterprise size account 90% of share of all firms and 30% share of employment. Similarly, small enterprise size account share 8% of share of all firm and 20% share of employment of pattern in the economy.

Even though most of the firms in developing countries are micro and small enterprises (MSEs) and despite the substantial amount written about the significance of MSEs to developing economy there is limited literature evidence on the contribution of MSEs to economic growth. According to Ethiopian Development Research Institute studies conducted on micro and small enterprises, MSEs sector performance in terms of its contribution to growth domestic product, employment and export and total manufacturing output is mostly unknown (Berihu, Abebaw, & Biruk, 2014).

Based on the review of the literature on the study area indicated that there is information gap on the contribution of MSEs Sector all over the economy of the country.

2.5. Theoretical Background on Micro and Small Enterprises

A theory represents the coherent set of hypothetical, conceptual, and pragmatic principles forming the general frame for reference for the field of enquiry. These are some of the theories that have been, advanced for micro and small Enterprises, which are part of entrepreneurship. Entrepreneurship considered as an approach to management, defined as a process by which individuals either on their own or inside organizations pursue opportunities without regard to the resources they currently control in an innovative, risk-taking and proactive manner (Todorovic, 2006)

From the above definitions, entrepreneurship covers an individual’s motivation and capacity independently or within an organization to identify an opportunity and to pursue it in order to produce new value or economic success. Entrepreneurs pursue opportunities to grow a business by changing, revolutionizing, transforming or introducing new products or services (Hansen, 2011). The three important themes in this definition are (1) the pursuit of opportunities, (2) innovation, and (3) growth link entrepreneurship to industrialization process.

According to Kruger (2004), the relationship between entrepreneurial process and performance is an important empirical question and prevents the assumption that first movers or firms that incur the greatest business and financial, risk spending the most on innovation always rewarded in the market place. MSEs are managed by their own owners and are family businesses, and therefore their success depends primarily on the entrepreneurial and managerial capabilities of the owners.

Behavioral theory argues that the managerial skills such as ability to search business related information, identify opportunities, deal with risk, establish relationships and networks, make decisions under pressure and learn from experience are crucial for the success of an enterprises (Veciana, 2007). According to trait theory, entrepreneurs have different psychological profile than the rest of the population, and successful entrepreneurs have a psychological profile distinct from the less successful ones (Veciana, 2007). According to Kuratko and Hodgetts (2007), persistence considered as one of the most important attributes of successful entrepreneurs and the decision to start a business a single time but they must make the decision to persist with the venture many times. Often individuals make the decision to persist, almost automatically, with little thought for alternative actions. Persistence is one of the essential characteristics for success entrepreneurship (e.g. Kuratko and Hodgetts, 2007). As an entrepreneur considers whether to persist with an existing venture or to pursue a new opportunity, a higher value of persisting will have a more substantial impact on the decision when expectancy is low than when expectancy is high. Hence, conditions that prompted a more serious evaluation will likely influence the way that expectancy and value used in the decision policy (Grilli, 2011). Even more, the persistence decision is fundamentally different than the start-up decision in that the entrepreneur is choosing whether to continue with a decision that has been previously made. This simple difference may introduce potential biases into the decision-making process, such as self-justification or normative pressure to persist ( DeTienne , Shepherd and De Castro , 2008)

Entrepreneurs utilize the contacts in their social networks to found firms, because individuals’ contact networks concentrate in the region in which they work and live, and because established firms produce many of the resources consumed in new venture creation new firms in an industry tend to arise in the same locations as existing ones (Sorenson and Audia,2000). The concentration of a prospective entrepreneur’s network contacts in space, together with the multifaceted influence of networks on the entrepreneurial process, implies that those individuals most able to enter an industry reside in the regions that have concentrations of those businesses already (Sorenson and Audia ,2000) .

According to Simpeh (2011), explaining personality traits means making inference from behavior. Some of the characteristics or behaviors associated with entrepreneurs are that they tend to be more opportunity driven, demonstrate high level of creativity and innovation, and show high level of management skills and business knowledge. They have also been found to be optimistic, emotionally resilient and have mental energy, they are hard workers, show intense commitment and perseverance, thrive on competitive desire to excel and win, tend to be dissatisfied with the status quo and desire improvement, entrepreneurs are also transformational in nature, who are lifelong learners and use failure as a tool and springboard. They also believe that they can personally make a difference, are individuals of integrity and above all visionary.

Similarly, Li (2009) argues that personal factors influence business success in MSEs consists of personality traits and competencies of the individuals in the process of entrepreneurship. Study on personality traits often conducted to examine the factors that determine the business successes at small business are the characteristics of an entrepreneur.

In MSEs, the key entrepreneurs or founders function as the CEOs (Burger-Helmchen, 2008) and play a dominant role in the development of the firm and their powerful and influential position will affect firm performance( Wincent &Westerberg, 2005).

Entrepreneur trait has been, extensively studied in the literature with mixed results (Wincent &Westerberg, 2005; Cools and van den Broeck, 2007). Some studies convincingly asserted that that some traits have positive and significant relationship with firm performance (Hmieleski & Carr, 2008) while other studies find insignificant relationships.

As part, one’s personality Entrepreneur trait also shows a stable and inherent character (Ciavarella et al., 2004) that will affect how the entrepreneurs conduct their businesses. Entrepreneurs also tend to choose businesses that show a fit between their Entrepreneur trait and the requirements for success. Additionally, they will also tend to manage their firms based on the strengths of their specific traits (Dvir, Sadeh, & Malach-Pines, 2010).

Poon, Ainuddin and Junit (2006) examined relationships among three self-concept traits, entrepreneurial orientation, and firm performance using survey data from 96 entrepreneurs by applying path analysis to test the direct and indirect effects of the trait variables on perceptual measures of firm performance. Entrepreneurial orientation-operationalized to reflect the dimensions of innovativeness, pro activeness, and propensity to take risks-was used as the mediating variable for explaining the relationship between self-concept traits and firm performance.

The results indicated that internal locus of control positively related to firm performance, and entrepreneurial orientation did not play a mediating role in this relationship. In contrast, generalized self-efficacy had no direct effects on firm performance; however, it influenced firm performance positively through its effect on entrepreneurial orientation. Finally, self-attributed achievement motive was not significantly related to entrepreneurial orientation or firm performance (Poon, Ainuddin and Junit , 2006))

Based on the above, discussions it is clear that the field of entrepreneurship have some interesting and relevant theories, which supported by empirical research evidence. This development holds a rather brighter future for the study, research, and practice of entrepreneurship.

2.6. Empirical Study on Factors Affecting Performance of MSEs

Based on the reviewed of past studies conducted on micro and small enterprise the internal (Personal entrepreneurial characteristics) and external business environments affect performance of MSEs. Accordingly, some of empirical studies discussed as follows;

Adegbite et al. (2006) evaluated the impact of entrepreneurial characteristics on the performance of small-scale manufacturing industries in Nigeria using descriptive and inferential statistics to examine 10 Personal Entrepreneurial Characteristics (PECs). The study concluded majority (7) of the 10 Personal Entrepreneurial Characteristics (PECs) such as: persistence, commitment to work Contact, opportunity seeking and initiative, risk taking, goal setting, networking and persuasion and independence and self-confidence of the respondents made negative contribution on the sales revenue. The other PECs demand for efficiency and product quality, information seeking; and systematic planning and monitoring had positive impact.

Ajay (2008) have revealed many facts concerning the socioeconomic and motivational factors affecting street entrepreneurship. It found that among many socio-economic and motivational factors, size of initial investment, number of workers, family business and promising demand of product/ services were some of the major determinants of street entrepreneurial success.

Ejaz Ghani, William and Stephen (2011) in their working paper have analyzed the spatial determinants of entrepreneurship in India in the manufacturing and services sectors. Among general district traits, quality of physical infrastructure and workforce education were the strongest predictors of entry, with labor laws and household banking quality also playing important roles. Looking at the district-industry level, they found extensive evidence of agglomeration economies among manufacturing industries.

UNO Conference Paper (2004) the paper discussed that the governments can promote entrepreneurship through information programmes to build awareness of the opportunities afforded through entrepreneurship. It further discussed that they could introduce people to existing economic incentives for entrepreneurial activities and motivates them to take advantage of them. The more entrepreneurial opportunities are recognized, the more likely they are to be pursued. The paper concluded that the promotion of entrepreneurship rests on two primary pillars: strengthening of entrepreneurial skills and improvement of entrepreneurial framework conditions. These two pillars should be considered as an interlinked set of policies for the following reason: on the one hand, entrepreneurs do not act in a vacuum, but whether and how they use their skills and motivations to transform business ideas into profit opportunities is shaped by existing framework conditions. On the other hand, entrepreneurial behavior can always be traced back to individuals and their entrepreneurial attitudes, skills and motivations. Experience showed that when these attitudes and skills exist, adverse framework conditions cannot totally suppress them, and individuals will seek to find ways that allow them to capitalize on their ideas.

Benjamin and Rebecca (2009) have presented in their research paper that there was a high rate of entrepreneurial failure among their respondents despite the provision of various supports from the governments. The missing links to successful entrepreneurship identified to be entrepreneurial competencies, defined as the cluster of related knowledge, attitudes, and skills, which an entrepreneur must acquire or possess to enable him, produce outstanding performance and maximize profit in the business. These entrepreneurial competencies were the critical success factors to entrepreneurship, and they deserve serious consideration in entrepreneurial discourse and not to be neglected.

Admasu (2012) analyzed the factors that affect the performance of MSEs in Addis Ababa using sample household survey data collected in 2011. He used both descriptive data analysis and multiple regression model to identify the factors affecting MSEs. His finding indicated that finance factors, marketing factors, infrastructure factors, technological factors, work premise factors, management factors and entrepreneurial factors hindered the performance of MSEs.

Nuwagaba and Nzewi (2013) analyzed the factors affecting the performance of MSEs in Uganda and, Nigeria using descriptive research design based on a sample of 60 MSEs. The study concluded that environmental constraints such as high taxes, limited access to market, costly and erratic electricity supply and lack of skilled and competent human resources hinder performance of MSE’s. The other key factors are access to market is an important factor for MSE’s to perform better. Managers in MSE’s may need to position their firms by producing relatively high quality products and undertaking joint marketing strategies in order to penetrate differentiated market segments

Hove and Tarisai (2013) analyzed Internal Factors affecting the successful growth and survival of small and Micro Agri-business Firms in Alice communal Area of South Africa using quantitative and qualitative research design based on a sample of 80 MSEs. The study concluded that: business plan, marketing strategy, mission/vision, SWOT analysis and finance are the most significant internal factors that affect the growth and survival of small and micro agribusiness firms in Alice communal area. The study recommended strategies and policies to small and micro agribusiness firms in Alice communal area to positively improve their growth and survival.

Sarwok, Armanu, Hadiwidjojo (2013) analyzed the influence of entrepreneurial characteristics and competencies on business performance in small and medium enterprises (SMEs) in Malang regency East Java Indonesia using Structural Equation Modeling based on a sample of 147 SMEs owners. The results of the study indicate that the entrepreneurial characteristics have a significant influence on business performance.

Kinyua (2014) analyzed the factors affecting the performance of MSEs in in the Jua Kali sector in Nakuru town of Kenya using descriptive and explanatory research design based on a sample of 262 MSEs. The study concluded that factors such as access of finance, marketing, entrepreneurial skills, corruption and infrastructure affect the performance of MSEs sectors.

Kamunge, Njeru, and Tirimba (2014) analyzed the factors affecting the performance of small and micro enterprises in Limuru town of Kenya using descriptive research design based on a sample of 274 MSEs. The study concluded that access to finance and availability of management experience are the key socio-economic factors affecting the performance of businesses. The other key factors that affect the performance are access to business information, access to infrastructure and government policy and regulations. The study recommended that the government should start offering basic business and financial management skills as this will enable entrepreneurs to make informed investment decisions as well as enhance their entrepreneurial skills that enable them to recognize and exploit the available business opportunities.

Hailay, Aregawi, and Assmamaw(2014) analyzed the factors affecting the growth of MSEs in Feresmay town using descriptive statistics and econometric model based on a sample of 274 MSEs. The study concluded that growth of MSEs measured in terms of employment change affected by factors including owners/operators age, education level, prior experience, family size, MSE’s age, MSE’s distance from raw materials, access to credit, infrastructure and market. The study recommended that government, non-government organizations and MSEs development agencies should motivate, help and advise the owners of MSEs on their overall business activities; give training on business issues, arrange forum and exhibitions for experience sharing; and solve the credit, infrastructure, supply and market access problems in collaboration with MFI, banks, Ethiopian Electric Power Corporation, suppliers and other organizations.

2.7. Conceptual Framework

The conceptual framework shows relationships between independent and dependent variables. Since business performance is influenced by both internal and external factors, operators need to understand what influences businesses to reach expected performance. The external factors include political, legal, finance, marketing, work premise, technology, and infrastructure factors. The internal factors included personal characteristics of entrepreneurial (10PCEs) such as opportunity seeking, persistence, commitment to the work, demand for efficiency and quality, risk taking, goal setting, systematic planning and monitoring, information seeking, persuasion and networking, and self-confidence.

In line with the study objectives, performance of MSEs, which measured interims of profit, capital and number of employees, were dependent variable whereas the external and internal factors affecting MSEs performance were used as independent variables. Such factors includes: political, legal, finance, marketing, work premise, technology, infrastructure, opportunity seeking, persistence, commitment to the work, demand for efficiency and quality, risk taking, goal setting, systematic planning and monitoring, information seeking, persuasion and networking, self-confidence were.

The relationship between and factors affecting MSEs performance as independent variables and performance as of dependent variable show as below in figure.

illustration not visible in this excerpt

Figure 2.1 Conceptual framework (Adopted from Admasu, 2012 and CDC)

CHAPTER THREE RESEARCH METHODOLOGY

3.1. Introduction

This section presents the description of study area, the research design used, target population, sources of data, sample selection techniques, sample size, variable definition and selection data collection and data analysis techniques used in assessing factors affecting performance of MSEs in Assosa town.

3.2. Description of Study Area

The study area, Assosa town is the capital of Benishangul Gumuz regional state. It has 4 urban kebeles, total area approximately 14.58 square kilometer and located at a distance of 687 km in West of Addis Ababa (BoFED, 2012). According to CSA 2012 population projection Assosa town has total population of 37,365 residents and among these 19,232 are Male and 18,133 are Female. It has largest urban population in the region. The average household size is 3.6 (CSA, 2007). The rainy season Starts from April/May up to October/November with an average annual rainfall that ranges from 800 mm to 2000 mm. The temperature ranges from 20° C - 35° C (highest) to 12° C - 20° C (lowest).

3.3. Research Design

The types of research used under this study are both descriptive and explanatory research. This study describes and critically assesses factors affecting the performance of MSEs in Assosa town. Second, the study employed explanatory approach to understand factors affecting performance of MSEs by discovering and measuring the causal relationship between the dependent and independent variables.

Moreover, the study utilized cross-sectional in the sense that all relevant data was collected at a single point in time. The reason for preferring a cross-sectional study is due to the vast nature of the study and the limitation of time.

[...]

• Author: Dereje Muleta (Author)
• Publication Year: 2016
• Pages: 123
• Catalog Number: V371768
• ISBN (eBook): 9783668496224
• ISBN (Book): 9783668496231
• Language: English
• Tags: ASSESSMENT OF FACTORS AFFECTING PERFORMANCE OF MICRO AND SMALL SCALE ENTERPRISES: A CASE STUDY OF ASSOSA TOWN BY DEREJE MULETA LENCHO