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 INTRODUCTION ....................................................................1
1.1 BACKGROUND ...........................................................................................................................................1 1.2 PROBLEM STATEMENT ................................................................................................................................4 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

REFERENCES.......................................................................30

List of Acronyms/Abbreviations
AGOWA: BDS: CSA: DDMFI: DDMSEs: FDRE: African Growth Opportunity Act Business Development Services Central Statistics Authority Dire Dawa Micro Finance Institution Dire Dawa Micro and Small Enterprises Development Agency Federal Democratic Republic of Ethiopia

FeMSEDA: Federal Micro and Small Enterprises Development Agency ILO: MoTI: MSEs: International Labor Organization Ministry of Trade and Industry Micro and Small Enterprises

CHAPTER ONE 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 povertys 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 subsectors 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 access to quality expertise, access to appropriate technology, infrastructure, and in some cases business

discriminately regulatory practices (Mike Albu, 2001). In Ethiopias 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 60s 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 90 27

N and 90 49 N latitude and 420 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 15002000 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
1. 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 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). 5-20

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 unpaid 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 owners 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 firms 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 largescale 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 smallscale 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 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, that would absorb workers whom the government and large private enterprises were

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 an greater employment have proved their powerful the propellant effect for rapid economic growth. The MSEs is also known as 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 firms 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 firms 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, Institution lack of premises, and Technology/Technical and ICTS constraints, 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 constraints Information

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 & For regulations policies examples, that most are in vigor are in in theory, most and a interventionist impractical. regarding MSEs appropriate policies

governments

have

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).

1.6.5 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 nonfinancial 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 countrys 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: the enabling the regional MSEs and industry bureau to provide services: Advisory service in terms of product following

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: industry Bureau is establish provisional administration trade and 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 259 810 56 ni =Ni(10%) 25.9 81 5.6 112.5 Sample Source 26 81 6 113 own operators Manufacturing Service Urban

Agriculture Total 1125 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 closeended 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.

References
Andu Alem Tegene (1997). SmallScale Entrepreneurship Development in Ethiopia. Enterprise and

Andualem Tegegn (2004).Challenges in the effective development promotion of MSEs in Ethiopia: Some suggested approach. In proceeding of the International Workshop on Role of Micro and Small Enterprises Development of Ethiopia. Arzenis (1999).Entrepreneurship and Job Creation, p.p 19 22. Assefa Admassie (1997). A Comparative Analysis of the Development Small Scale Industries in Region 14 with other Regions. Addis Ababa. Burns, Paul (2007), Entrepreneurships and small business. Christine Kessides (2005). The Urban Transition in Sub-Saharan Africa. Implication for Economic Growth and Poverty Reduction. CSA (2003).Central statistic Authority Report on urban Informal sector sample survey, Addis Ababa

Dandena Chemeda (2004).Micro and small Enterprises (Handi Crafts: Development Constraints, Export Potentials and Opportunities. Addis Ababa. Definition of MSM sized enterprises www.europa.eu/Scadplus/eg/en/lub/n26026.htm. (August 2007).

Fantahne Meles (2004). The EthioGerman Micro and Small Enterprises Development Program. Addis Ababa. Federal micro and small Enterprise Development strategy (1997) proceeding of the international work shop on the role of MSEs of Ethiopia, Addis Ababa

Gebrehiwot and wolday (2004). MSEs Development in Ethiopia: Survey Report Research Institutional .Addis Abeba. Hatten and Timothy (2006), Small business management: entrepreneurship and beyond.

http://www.ilo.org/public/english/employment/paper. http://www.Micro links.organization/file.down load.php+pdf.Trade, MSEs, and Global value chains.

ILO (1996 2008). Job Creation and entrepreneur development. Industry and Urban Development package, FDRE, MWUD April 2006, and Addis Ababa, Ethiopia.

Lall Smeik and Taye Mengiste (2005). Business Environment, Clustering and Industry location: World Bank Policy Research Working Paper 3. Lepi.T. Tarmidi (2001). The Importance of MSEs in Economic Developing APEC Countries, University of Indonesia. Malawi Government (2005).Ministry of Commerce and Industry on Micro and Small Enterprise Policy Statement. Mead.Dc and Lielholm.C (1998). The Dynamic of MSEs in Developing Countries in Zambia Journal of Small Business Management. Mike Albu (2001) manufacturing micro and small enterprises matter. MSEs potentials and success Determinants in Egypt 2003 2004 Mulat Demeke and Wolday Amha (2004). Training Needs and Approaches for the Informal Sector in Africa. Addis Ababa. Mulu Gebreeyesus(2007),first draft on Growth of micro enterprises: Empirical evidence from Ethiopia

Paul Lehlohonolo (2004).Entrepreneurial Support in South Africa: a case study of a Small Enterprise Support Center in Johannesburg. Report on performance Evaluation and Review of Integrated Development Program projects, February 2006, Dire Dawa.

Snodgrass D. and Biggs.T (1996).Industrialization and Small Firms: Patterns and Policies, a co publication of the International Center for Economic Growth and the Harvard Institute for International Development .Sanfrancisco, California. Solomon Wole (1997). The Micro and Small Enterprise Sector in Ethiopia, Addis Ababa.

Taye Berhanu (1997). The Reform Process and the Role of Associations in the Development of Small Scale Enterprises, Addis Ababa. Yu Tony (2001).Towards Capabilities Perspectives of the Small Firms, International Journal of Management Reviews, vol.3. World bank (1998).A frame work for world bank Group support development of MSEs , and Rural finance in sub-Saharan Africa. (www.erf.og/cms/get file.php? id = 347) for

Questionnaire for Data Collection

Socio economic Background
Part-One

1. Sex of the operator

a) Male

b. Female b) 18-30 c) 13-45 d) over 46 b) Married c) Widow d)

2. Age of the operator a) <18 3. Marital Status 4. Family size 5. Education level a) 0-3 a) Single

divorce

b) 4-5

c) 6-11

d) above 11

a) Illiterate

b) can read & write d) 5-10 secondary f) Above 12 Degree

c) 1-4 elementary e) Diploma 10-12

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 c) 2-5 years b) 1-2 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 e) Other d) Influence by family

4. Enterprises establishment a) Sole proprietorship c) Cooperative b) Partners 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 c) Family member b) Illiterate labor d) un - employed labor (Youth) TVET

9. What is the contribution of your business in city development? a) Create job opportunity c) Facilitate economic growth (by paying tax) d) other b) Transfer knowledge

Part three: Challenges of the enterprises

A. Finance Related 1. How much was your start up capital? a) Less than Birr 500 c) 1501 to 5000 e) Above Birr 20,000 2. How did you get initial capital? a) Borrowing from relative & friends c) From NGOs d) personal saving b) Borrowing from Micro finance b) 501-1500 Birr d) 5001-20,000 Birr

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

a) Lack of collateral

b) Problems among cooperatives d) lack of information (get

c) Problems of credit service 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 c) Other 10. How much do you have in your account? (If you have saving) b) From micro finance

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 d) Road b) Water f) Other c) Telephone

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 (govt) d) other

c) Familys resident transferring the work place? a) Bureaucratic

6. If you got from city administration. How was the procedure of 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) c) Shortage of finance etc) 9. How is your business performance? a) Increase decreases 10. If your answer in Q. #9 decreases, what is the reason? a) Constraint of market problem c) Poor production quality b) High competition in the market d) other reason b) constant c) fluctuate d) b) High cost d) other (transport, quality, inflation

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 c) Technical b) Managerial d) Book keeping (accounting)

3. Which institution gave you training? a) City administration (TVET)MSEs) c) Private sector 4. What benefit do you get from the training? a) Improve the quality of the production c) Effectively efficient manage the business d) Facilitate my interaction with customer and supplies 5. If dont 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. b) Increase profit b) NGOs d) other

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 c) Community (Edir) b) NGOs d) other

3. What type of support did you got? a) Training c) Counseling b) credit 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 engaged
Market place Credit Plan Achieve ment

Provide service
Material Plan Achieve ment Land Plan Achie ve ment Training Plan Achiev e ment

Plan

Achieve ment

Manufacturing Service Urban agriculture Total

3. How do you found the performance of the enterprise? a) Strongly increasing b) Increasing d) Decreasing

c) At constant (no change) e) Strongly decreasing

4. Currently, what are the challenges of the MSEs agency? a) Lack of human resource c) Lack of enough budget d) Lack of coordination among relevant stakeholder e) other or b) Lack of clear rules & regulation

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