ASSESING THE FACTORS AFFECTING THE PERFORMANCE OF

MICRO AND SMALL SCALE ENTERPRISES THE CASE OF YEKA

SUB-CITY, ADDIS ABABA

1
Table of Contents Page
List of abbreviations........................................................................................................................ii
List of tables...................................................................................................................................iv
List of figures...................................................................................................................................v
CHAPTER ONE: INTRODUCTION..............................................................................................1
1.1. Background of the study.......................................................................................................1
1.2. Statement of the problem......................................................................................................3
1.3 Objectives of the study...........................................................................................................4
1.3.1 General Objective..........................................................................................................4
1.3.2 Specific Objectives..........................................................................................................4
1.6 Research questions.................................................................................................................4
1.7 Significance of the study........................................................................................................4
1.7 Scope of the study..................................................................................................................4
CHAPTER TWO: LITERATURE REVIEW..................................................................................6
2.1 Introduction............................................................................................................................6
2.2 Definition of MSEs................................................................................................................6
2.2.1 The Improved Definition of MSEs in Ethiopia...................................................................6
2.3 The concepts of business performance..................................................................................7
2.4 Factors affecting the performance of micro enterprises.........................................................7
2.4.1 Internal Factors................................................................................................................7
2.4.2. External Factors..............................................................................................................8
2.6. MSEs Strategy in Ethiopia..................................................................................................11
2.6.1 The MSE Development Strategy of 2011.....................................................................13
2.7 The Conceptual Frame Work...............................................................................................13
CHAPTER THREE: RESEARCH METHODOLOGY................................................................15
3.1. Introduction.........................................................................................................................15
3.2. Research design...................................................................................................................15
3.3 Sampling Technique and Sampling Size.............................................................................15
3.4. Variables and Measurements..............................................................................................16
3.5. Instruments of Data Collection...........................................................................................17
3.5.2. Secondary Data Sources...............................................................................................17
3.6. Procedures of data collection..............................................................................................17

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 3.7. Data processing and analysis..............................................................................................18
3.7.1. Data Processing............................................................................................................18
3.7.2. Descriptive Analysis.....................................................................................................18
3.7.3. Inferential Analysis......................................................................................................18
3.7.4. The Pearson Product Moment Correlation Coefficient................................................18
3.7.5. Linear Regression Analysis..........................................................................................19
3.7.6. Regression Functions...................................................................................................19
3.7.7. Regress Performance on Selected Variables................................................................19
REFFERENCES............................................................................................................................20

ii
List of abbreviations

Art. Article

ETB Ethiopian Birr (Local currency)

CSA Ethiopian Central Statistics Authority

FMSEDA Federal Micro and Small Enterprises Development Agency

FP Food Processing

GEM Global Entrepreneurship Monitor

GTP Growth and Transformation Plan

HASIDA Handicraft and Small Scale Industries Development Agency

LDCs Least Developed Countries

MN Mean

MoTI Ministry of Trade and Industry

MSEDA Micro and Small Enterprises Development Agency

MSMEs Micro, Small and Medium Enterprises

NMSEDPS National Micro and Small Enterprises Development

Promotion Strategy

RMSEDAs Regional Micro and Small Enterprise Development Agencies

SD Standard Deviation

SSA Sub Saharan Africa

SPSS Statistical Package for Social Science

T&G Textile & Garment

W&M Wood & Metal

iii
List of tables

Table 1: The improved definition of MSEs in Ethiopia...............................................................................7

iv
List of figures

Figure 1: Conceptual frameworks (Own Model).......................................................................................14

v
CHAPTER ONE: INTRODUCTION
1.1. Background of the study

Micro and small businesses are essential to a nation's industrial advancement and economic
expansion. They play a crucial role in advancing the economic and social development of a
nation by promoting large-scale employment, investment, the development of native talent, the
encouragement of entrepreneurship and innovation, increasing exports, and creating an industrial
base on various stages (Nasir, 2016).

Small businesses are important generators of employment and economic growth, accounting for
more than 50% of GDP and 60% of employment in industrialized economies. In developing
nations, however, these businesses account for less than 30% of employment and 17% of GDP.
In fact, according to an ILO survey done in Africa, just 20% of the working-age inhabitants of
numerous African countries were reported to be employed in the small business sector (GIRMA,
2022).

Utilizing enterprise-level data from the MSEs sector, micro-econometric studies have shown that
many of these businesses have poor levels of productivity, create low-quality goods, and only
develop during their early years. This is remarkable considering the fact that manpower and land
are in plentiful supply in many developing nations, which makes it possible to participate in
labor-intensive industrial activity. Then, the question of why the MSE sector has not expanded
more by utilizing the readily available labor force at a low cost and by implementing production
organizations that are appropriate for low-wage economies would arise. (Tihitina, 2018).

1
This is primarily a result of the MSE sector's poor performance and growth, which was
hampered by a number of factors in Africa, including the owners' managerial and entrepreneurial
skills, their mindset toward seizing opportunities, their aptitude for doing so, and their access to
capital and technology. Developing nations' infamously, onerous institutional and regulatory
environments frequently impeded the expansion of small businesses. Econometric analysis
emphasizes how these difficulties adversely affected smaller businesses more than larger ones.
For example, severe rules and hefty taxes tended to keep businesses small and unorganized.
These factors contribute to Sub Saharan Africa's (SSA) MSE performance being significantly
worse than that of other developing nations (Zekarias, 2019).

Ethiopia, one of the emerging nations in the sub-Sahara, has included MSEs as tactical tools in
the Growth and Transformation Plan (GTP) and has advanced MSE development plans to
advance the industry. However, the industry had to deal with a number of issues that hindered its
ability to function well and reach its full potential (Zekarias, 2019).

Therefore, the goal of this study was to evaluate the key variables that influenced MSE
performance in Yeka Sub City, Addis Ababa, in the context of Addis Ababa business settings
and in light of Ethiopia's MSE growth objectives.

There have been numerous studies done on MSEs, but most of them were conducted several
years ago and were primarily concerned with success and growth. As a result, there was a time
gap due to the recentness of the information and the progressive policies and strategies used to
promote MSEs; the study aimed to close this information gap.

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1.2. Statement of the problem
Ethiopia recognized the significant contribution that MSEs might make to lowering poverty,
creating jobs, and developing the private sector while increasing the country's GDP. Only 40%
of the MSE operators are located in Addis Ababa, despite the fact that MSE employs half of the
workforce in Ethiopia.
On the other hand, the nation has one of the highest rates of unemployment, with 1.1 million
more people unemployed in metropolitan areas and 37% of urban residents living in poverty.
Thus, the government presented the MSE Development Strategy in 1997, 2003, and 2011 to
encourage the growth of MSE and improve its performance to address the issue of
unemployment and poverty reduction (Amha, 2019).

The sector was severely constrained by low productivity, poor performance, and stagnant growth
despite the government's various promotional initiatives. Unfavorable legal and regulatory
frameworks, underdeveloped infrastructure, poor business development services primarily
brought on these issues, limited access to finance, and ineffective and poorly coordinated
institutional support. MSEs run into issues throughout both the setup and establishment phases.
The majority of MSEs are survivalists who work to meet an entrepreneur's basic needs but
lacking the resources, expertise, and knowledge necessary to run a successful firm. All of these
caused businesses to manufacture subpar goods and work with lesser productivity, which
resulted in subpar performance and stagnant growth. Additionally, a study revealed that MSEs
fail at a rate of 85% (Fadahunsi, 2017). As a result the contribution of MSEs to the national
economy was very low as compared with that of other African countries of Kenya, Tanzania and
Uganda (Worku, 2019).

The purpose of this study was to identify the various elements that affect MSE performance and
to determine which of these factors had a substantial impact on MSE performance in the Yeka
Sub City of Addis Ababa.

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1.3 Objectives of the study
1.3.1 General Objective
The main objective of the study was to assess factors that was mainly affecting the performance
of MSEs in Yeka sub-city.

1.3.2 Specific Objectives

The specific objectives of the study are:

To assess and identify the external factors that affected the performance of MSEs.
To identify which external factors significantly affected the performance of MSEs
To assess and identify the internal factors that affected the performance of MSEs.
To identify which internal factors significantly affected the performance of MSEs.

1.6 Research questions

1. What are the external factors that affected the performance of MSEs?

2. What are external factors significantly affected the performance of MSEs?

3. What are the internal factors that affected the performance of MSEs?
4. What are internal factors significantly affected the performance of MSEs?

1.7 Significance of the study

One of the government's top priorities in the fight for growth and development is MSEs. This
research might also be considered as a component of an endeavor to uncover the elements
affecting MSE performance.

The results of this study will give policy makers a basis for analyzing how to design MSEs'
promotional packages and practical inputs that will help MSE offices in Yeka sub-cities make
informed decisions about the issues they face on a daily basis. In addition, MSE operators in
Yeka Sub City will have the chance to look inward at their businesses and analyze the factors
unique to individual businesses. This report gave significant highlights before beginning the
study, so interested scholars would at least be able to have a base for additional investigation.

1.7 Scope of the study

The FMSE office established comparable political-legal business settings in all of Addis Ababa's
sub-cities by adhering to similar institutional frameworks, regulations, processes, promotional
packages, and practices. Therefore, the results of the study, which was carried out in the Yeka

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sub city, one of Addis Ababa's sub cities, are relevant to all MSEs in the city. The pre assessment
study revealed that the selected manufacturing sectors are commonly available in all sub cities of
Addis Ababa because all enterprises are established under almost similar business environments,
so the study's findings are applicable to all sectors of MSEs. These two factors led to the study's
exclusive focus on the manufacturing sectors of TG, FP, and WM MSEs.

CHAPTER TWO: LITERATURE REVIEW

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2.1 Introduction
This chapter elaborate MSEs based on literatures, and it comprises of six sections, these are
Definitions of MSEs, the Role of MSEs in poverty reduction, and the MSE sector in Ethiopia,
the Concept of business performance, Empirical studies and the conceptual framework

2.2 Definition of MSEs

There is not a single, widely accepted definition of what constitutes a small business. This is the
case since the standards and methods for classifying businesses as micro and small vary from
one institution to another and from one country to another, largely dependent on the degree of
development of the latter. Definitions also evolve throughout time, even within the same nation,
because of alterations in the cost of goods, technological advancements, or other factors. The
amounts of capitalization, sales, and employment vary across businesses. Therefore, definitions
that use size metrics (number of employees, turnover, profitability, net worth, etc.) when applied
to one area could result in all enterprises being categorized as tiny, but using the same size
definition to a different sector could result in a different conclusion. (Ageba & Amha, 2016).

2.2.1 The Improved Definition of MSEs in Ethiopia

Micro and small businesses are divided into the industrial and service sectors. Micro enterprises
are defined as businesses that work with 5 persons, including the owner, and/or whose total
assets do not exceed Birr 100,000 under the industry sector (manufacturing, construction, and
mining). Micro enterprises are defined as businesses that operate with 5 people, including the
business owner, and/or have total asset values under Birr 50,000 in the service sector (retail,
transportation, hotels, and tourism). Small businesses are defined as those operating with 6 to 30
employees and/or with a paid up capital of total assets of Birr 100,000 and not exceeding Birr 1.5
million under the industry sector (manufacturing, construction, and mining). Small businesses
are those that employ six to thirty people, have assets totaling less than 500,000 Birr, or engage
in the service industry (retail, transportation, hotels, tourism, and maintenance). Total assets are
used as the main yardstick whenever there is a conflict between personnel and total assets as
previously described. (MSEDS strategy, 2011).

Table 1: The improved definition of MSEs in Ethiopia

6
 Level of enterprise enterprise Sector Human Power
Micro Enterprise Industry ≤5 ≤ Birr 100,000 ($5000)
Service ≤5 ≤ Birr 5000 ($2500)
Small Enterprise Industry 6-30 ≤ Birr 1.5 mil ($75000)
Service 6-30 ≤ Birr500000 ($ 25000)
Source: Ethiopian Micro and Small Enterprise Development Strategy (2011)

2.3 The concepts of business performance

Simply enough, performance is defined in terms of outputs like profitability or specified goals. In
the literature on small businesses, performance has been the focus of considerable and growing
empirical and conceptual research. (ABATE, 2018).

Performance is the act of doing; of doing something successfully; employing knowledge as

opposed to merely possessing, according to the Global Entrepreneurship Monitor (GEM). Cross-
comparison is challenging because performance appears to be understood, operationalized, and
measured in various ways. The most frequently cited operational are profitability, staff growth,
and survival. The financial and non-financial measurements could be used by a company
enterprise to assess its performance. The non-financial measures concentrate on factors relating
to customer satisfaction and customer referral rates, delivery time, waiting time, and employee
turnover, while the financial measures cover profit before tax and turnover. Modern small
business owners and managers have embraced a hybrid strategy that uses both financial and
nonfinancial metrics since they are aware of the drawbacks of depending entirely on either the
financial or the nonfinancial measures. (Elaine, 2017).

2.4 Factors affecting the performance of micro enterprises

2.4.1 Internal Factors
Studies on the success of small businesses tend to focus more on the larger-scale effects of
variables like structure, finances, and supportive business environments than they do on
entrepreneurship. However, a company's expansion is, in part, dependent on the choices made by
its individual employees. This is especially noticeable for owner-managed microenterprises.
According to prior research, personal background, individual competencies, and motivation are
crucial components for the success of micro and small businesses (Abdissa & Fitwi, 2019).

i. Entrepreneurial factors

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Studies related to psychological factors of business success for developing country firms are very
scarce. Most of the macro-based studies have tended to assume entrepreneurs with similar
experiences and demographic characteristics. However, none of these factors alone can create a
new venture or drive success. Accordingly, personality traits play a key role in driving ventures
towards success. The ‘big five’ model advocated for by Johnson (1990) is widely used as a
robust indicator of personality traits. These big five factors that are generally agreed as
personality traits or characteristics include: extraversion, emotional stability, agreeableness,
conscientiousness and openness to experience. Based on the big five model, researchers have
further classified entrepreneurial personality traits in to five categories: need for achievement,
locus of control, motivation, risk-taking propensity, and self-efficacy. These traits are important
psychological factors that would influence the success of microenterprises (Naji, 2019).

ii. Management factors

Lack of managerial experience is the primary cause of failure. Managers of insolvent companies
lack the expertise, wisdom, and vision needed to govern their organizations. It shouldn't come as
a surprise when determining the core causes of small business failure that owner-managers'
ineffective management practices are one of them. Every facet of a firm is impacted by
managerial effectiveness, which is frequently seen as the main cause of small business failure.
The management concepts and abilities of firm founders are valued far more highly than their
technical expertise and production-related concerns, which has led to an overall improvement in
organizational performance (Abzari & Teimouri, 2012).

2.4.2. External Factors

i. Marketing Factors

For micro and small business enterprises to be successful in the long run and survive in the
future, they must have marketing skills such as finding new prospects, demonstrating effective
corporate positioning, handling customers, finding ways to advertise efficiently, and having the
ability to come up with new ideas. Product marketing, market research, demand forecasting, and
other marketing activities have a stronger impact on the performance of small enterprises.
(Tekele, 2019).

ii. Working place factors

8
Lack of concept is clearly a big issue for MSEs. The majority of informal business owners lack
access to convenient places from which they may easily access markets. The issue of acquisition
and transaction costs has significantly hampered the development of new businesses as well as
the expansion and survival of those that already exist. The issue of land availability and the
system of land leases have significantly reduced the prospects of micro, small, and medium
companies (MSMEs) that want to launch operations. Entrepreneurs gain from operating in
formal residential zones because location is a crucial component in small businesses' sales and
profitability. Logically, this finding stems from the higher per capita income and demand density
in developed urban areas. Demand density also makes taxi ranks and train stations more
lucrative. These spaces are limited and thus a source of competitive advantage that cannot be
copied or re-created (Zafar et al., 2017).

iii. Technology

Another critical element influencing MSE expansion is technological preference and

inventiveness. The proper technology paradigm views MSEs as passive recipients of
technological advancements rather than active participants. It views technology as a resource that
MSEs can only use to increase factor productivity and lower unit costs. It also emphasizes the
incremental selection of and suitability for MSEs functioning in environments with a large,
inexperienced labor pool, a low-income consumer base, and low-quality inputs. The suitable
technological paradigm is contested, nevertheless, due to its limited impact and inability to close
the gap between MSEs and larger businesses. The technical competence paradigm has arisen
because of the appropriate technology paradigm's disappointing results, with the aim of
improving MSEs' abilities to apply innovative technologies since the majority of novel
technologies are adopted from distinct workshops. In order to adapt these technologies to various
climatic conditions, raw materials, and market demands, institutional, technical, and engineering
capabilities are required. (Feleke, 2015).

iv. Financial factors

The main barriers to doing business, particularly in the informal sector, are a lack of adequate
capital, a lack of sufficient loans, and an inefficient financial market in terms of facilitating
financial resources to entrepreneurs. The majority of micro and small businesses are extremely
risky undertakings with significant administrative costs, no prior experience dealing with

9
financial institutions, and no track record of bank credit worthiness. Most MSEs are unable to get
the necessary collateral because the majority of banking institutions are reluctant to lend money
to small businesses. Lack of funding will limit the development of new businesses as well as the
expansion and survival of current ones (Popa & Ciobanu, 2014).

Due to the targeted mechanisms put in place to meet the financial needs of small-scale
companies, access to credit is a significant barrier to the rapid growth and development of MSEs.
The majority of micro and small businesses lack access to microfinance institutions, and the
majority of banks are hesitant to offer credit to small businesses unless they have appropriate
collateral. The main challenges that small-scale businesses face are the standard of loan
assessment, the lengthy time it takes banks to approve loans, the banks' adverse attitude toward
small loans, and the minimal collateral demand, which is greater than 100% of the loan amount.
Moreover, the interest rate by most micro finance institutes, which is higher than the lending rate
of formal banks, inhibits effectiveness in addressing the needs of micro enterprises (Devereux &
Schiantarelli, 2013).

v. Infrastructure
A positive impact on lowering operating costs is provided by good infrastructure. MSE owners
in Ethiopia reported that the success of their companies is being hampered by a lack of an
infrastructure that is effective, dependable, safe, and inexpensive. To satisfy the rising demand of
MSE operations, Ethiopia's physical infrastructural facilities have not been sufficiently
developed and expanded. Due to this, the majority of MSEs have issues with their commercial
properties, including rising rent and a dearth of basic amenities like phone lines, power,
sewerage, and water. (Naji, 2019).

Serious barriers to private investment include inadequate infrastructure (road, banking, energy,
telecommunication, and other services) that prevent efficient operation. Even if access to
infrastructure is not perceived as a major issue, lack of access to water and ignorance of the
benefits of media and telephones have a negative or minor impact on the expansion of
businesses. The results of the same study show that most MSEs have simple access to
transportation. However, there are just a few businesses that have access to the remaining
infrastructures, like the telephone, television, radio, and water (Cherkos et al., 2018).

10
2.5. Empirical studies

The isolation of MSEs, which limits access to markets, information, funding, and institutional
support, rather than their small size, is the primary factor affecting their performance in
developing nations. The claim that small enterprises in Africa are essential to the growth of the
continent's economy and the generation of jobs is not new. Although this may be the case, the
great majority of new businesses are typically run by a single person (Abera, 2012).

Due to this, the MSE entrepreneur's journey has a tendency to be transitory in many cases; the
failure rate of MSEs in Africa is estimated to be 98%. Scholars have given a number of
explanations for these failures, including the absence of supportive legislation for MSE
development, fierce competition with the replication of microbusinesses, and manager traits such
as a lack of experience and abilities. (Mulugeta, 2014).

This has tended to ensure that the MSE entrepreneur's journey is frequently brief; the failure rate
of MSEs in Africa is estimated to be 98%. Scholars have given a number of explanations for
these failures, such as the absence of legislation that favor the development of MSEs, fierce
competition with the replication of microbusinesses, and manager traits including insufficient
training and experience (SHIMELS ZELEKEW, 2021).

2.6. MSEs Strategy in Ethiopia

Examining institutional role in assisting MSE growth in Ethiopia began much later, after the
1950s. Manufacturing businesses were required to obtain a temporary license with a six-month
validity in the 1940s and 1950s, as well as a permanent license if they were completely formed.
The Investment Proclamation No. 242/1966 offered tax relief, access to land and buildings,
public services, and other administrative and consultative facilitations to MSE. Socialist
declarations and the nationwide nationalization of businesses and firms marked the beginning of
the period from 1974 to 1991 (Ageba & Amha, 2016).

The purchase of private firms was restricted to a single license, with a capital ceiling of 300,000
birr for wholesale trade, 200,000 for retail trade, and 500,000 for industrial facilities. In the latter
part of 1977, the Development Agency for Handicrafts and Small Scale Industries (HASIDA)
was established. After more than 20 years of policy failure, the Derg unveiled a new program for
the creation of a mixed economy. It thus immediately issued two declarations: Decree No. 9

11
/1989 permitted the establishment of small firms by cooperatives, business associations, and
individual businesspeople. The capital requirement for small firms was raised from 500,000 to
between two and four million birr by decree, allowing the Diaspora to participate. Decree No.
17/1990, which likewise sought to encourage people to join in an unlimited number of firms,
repealed Proclamation No. 76/1975, which restricted private sector participation to a single
license. The attempt to create a mixed economy was, however, only fleeting (Esubalew &
Raghurama, 2020).

The Derg was overthrown in 1991. The condition of the growth of MSEs in the nation does not
appear to be significantly changed by the new EPRDF Proclamation No. 41/1993: Definition of
Powers and Duties of the Central and Regional. Temporary permits were issued with no
restrictions and for a small fee, which led to an oversupply of such licenses. In order to give
MSEs access to lending facilities, counseling services, and income-generating projects through
micro-finance institutions, the licensing and supervision of micro financing institutions
proclamation (Proclamation No. 40/1996) was issued in 1996. This act gives informal sector
operators chances and security by strengthening legality and formalization by increasing the
capabilities of MSEs. (Hadis & Ali, 2018).

In 1995, the plan for private sector development and Agricultural Development Led
Industrialization was adopted. The growth of MSEs was a priority of one of these strategies: The
main goals of the 1997 formulations of the Federal Micro and Small-Scale Enterprises Strategy
(FMSES) and Regional Micro and Small-Scale Enterprises Strategies (RMSES) were to exploit
local raw materials, create opportunities for productive employment, adopt new and appropriate
technologies, and advance the growth of MSEs with extensive backward and forward linkages.
Aiming to provide a package of material and technical government support to MSEs, including,
among other things, the provision of utilities and infrastructure, raw materials, and access to
credits, the government issued an Industrial Development Strategy in 2003R in order to
operationalize FMSEDA and RMSEDAs. (Bereket, 2010).

Early in the new millennium, the World Bank unveiled a strategy to combat poverty in less
developed nations that was in accordance with the MDGs. The Sustainable Development and
Poverty Reduction Program (SDPRP) and the Plan for Accelerated and Sustained Development

12
to End Poverty are the two phases of the program that apply to Ethiopia (PASDEP) (Endris &
Kassegn, 2022).

2.6.1 The MSE Development Strategy of 2011

In addition to its traditional focus on the poor and less skilled, the new MSE Strategy (2011)
featured a new group of target groups, the graduates, to organize cooperatives and create their
own jobs. The establishments are supposed to deliver new corporate management skills and
technical transfer to the country in addition to creating work for the populace. the construction
industry, the urban agriculture sector, the retail sector, the service sector, which is relatively new
but not entirely new, and the manufacturing sector, which includes the majority of the previously
described regions. These industries attracted attention because they are either considered
manufacturing-related or are anticipated to replace imports. According to this strategy the
supports these enterprises receive is dependent up on their level of growth and is relatively a
tailored one. The growth stages of the MSEs are three in number and they are the start-up stage,
the growth stage and the maturity stage (Corrall, 2012).

2.7 The Conceptual Frame Work

Political, legal, workplace, technological, infrastructural, marketing, and financial considerations
were all considered external factors. These elements have a significant impact on the
performance of the company, but it is remarkable that management has little or no control over
them (Amha, 2019). However, the variables must be carefully watched to make sure that either
strict measures are implemented at the most advantageous moment to seize the possibilities or
counteract the hazards present in the external environment. Management and entrepreneurial
variables are two types of internal elements that affect a company's performance. Business
performance is the dependent variable to match the conceptual framework with the research
objectives, but politico-legal, working environment, technological, infrastructural, marketing,
financial, management, and entrepreneurial elements are all independent variables. The
relationship can be expressed and shown in figure 1.

13
Figure 1: Conceptual frameworks (Own Model)

14
CHAPTER THREE: RESEARCH METHODOLOGY
3.1. Introduction
To determine the key variables influencing MSEs' performance, both internal and external
elements were considered in this section. This chapter discusses the procedures and activities
undertaken, including research design, questionnaire design, data collection, sampling strategy,
data processing and analysis, and instrument development. The research approach used for this
study falls under the category of mixed methods strategies.

3.2. Research design

In order to describe the situation as it was during the study period and to explain the link between
correlated variables in order to assess the combined influence of the factors on performance, the
study used both descriptive and explanatory types of research. The study then went on to explain
and evaluate critically the variables influencing MSE performance in the Yeka sub-city of Addis
Ababa. Through the use of a cross sectional methodology, all pertinent data were gathered from
a single moment in time. Data was collected using both qualitative and quantitative methods in
order to balance out the flaws of each method with the advantages of the other. In Designing of
the Instruments a questionnaire comprised of a Five Point Likert Scale questions were
constructed, the type of scales used to measure the items on the instrument was continuous scales
(strongly agree to strongly disagree) , multiple choice questions and interview questions
developed in consultation with literature, advisor’s comment and through pilot study test.

3.3 Sampling Technique and Sampling Size

A stratified random sampling technique will be used to choose samples of businesses from the
overall population of MSEs in order to provide a representative sample of businesses from each
sector taken into consideration for this study. This method will be chosen since it helped to
reduce bias while dealing with the population. Using this method, the sampling frame will be
divided into roughly homogeneous groups (strata) before the sample's constituent parts were
chosen. The strata included the MSEs' TG, WM&FP, and other sectors. Simple random sampling
will be used to choose samples of MSE operators from each strata (sector) from a comprehensive
list of business owners in the sub city. Sectors of MSE systematically selected from the complete
list of the FMSE, those sectors commonly available in all sub cities of Addis Ababa and those
enterprises from privately own manufacturing sectors selected for the study because data’s from

15
manufacturing sectors are measurable the sectors selected include TG,WM,&FP. Although there
are no general rules, the sample size usually depends on the population to be sampled. In this
study to select sample size, a list of the population formally registered by the Federal MSE
Bureau (FMSEB) until May 2013 will be used. A list containing names, address and the type of
MSE business engaged, of the total population of the study area will be found from the FMSE
Bureau .A total population of 190 enterprises that comprised of FP (63), T&G (18) and W&M
(99). The sample size selected here will be considered as representative of FP, TG and WM
respectively. To estimate the sample representatives the following formula was applied. Since it
is relevant to studies, where a probability sampling method is used (Watson, 2001:5). Once the
sample size from the total population was determined, samples of the different sectors were
selected proportionally from the total number of samples obtained through Watson mathematical
method.

p(1− p)
n=⌈ 2
⌉
A p(1−P)
+
Z
2
N
R
Where,

n = sample size required = 65

N = number of population = 190

P = estimated variance in the population = 50%

A = margin of error = 5%

Z = confidence level = 1.96 for 95% confidence

R = estimated response rate = 96%

3.4. Variables and Measurements

Due to the lack of widely accepted standard performance measurements, corporate organizations
were free to select their own metrics, which might not accurately reflect their performance.
Market share, sales volume, firm reputation, return on investment (ROI), profitability, and
established corporate identity are just a few examples of these performance indicators. While the

16
majority of these performance indicators are suitable for large corporations, small businesses
may not always be able to fully utilize them. In this study, the performance of MSEs will be
evaluated and measured using owners and operators' opinions of business profitability as a
dependent variable. Here, the performance of the survey's participating businesses' dependent
variables will be gauged by how profitable they are seen to be from various perspectives. Three
factors account for the majority of this. First of all, unlike to other performance criteria, MSEs
place a greater emphasis on profitability, according to other studies. Second, because
microenterprises typically have low levels of education and don't keep records, most of them
gauge their performance by covering home expenses. Additionally, because MSEs are primarily
founded as a source of self-employment, growth in the companies' employment levels would not
be another viable alternative metric of performance. Political-legal, workplace-related,
technological, infrastructural, marketing, financial, management, and entrepreneurial factors are
the independent variables.

3.5. Instruments of Data Collection

3.5.1. Primary Data Collection
MSE operators will be surveyed and interviewed to gather primary data. Owner managers or
operators of the MSEs will fill out a well-designed five-point Likert scale questionnaire for the
study in order to collect primary data. In addition, a set of five open-ended interview questions
will be created.

3.5.2. Secondary Data Sources

From the FMSE office database and Magazine, complete information about the MSE operators
in the study area, Policies, and support provided, will be gathered. In order to make the study
successful, a variety of books, published and/or unpublished government papers, websites,
reports, and newsletters will have been examined.

3.6. Procedures of data collection

The required number of samples from each sector will be drawn using a lottery technique once
the entire list of operators has been organized by sectors and numbers from the list have been
written on paper, rolled, and placed in a hut for draw. The number picked from the list, together
with its name and address. To make it easier for those who cannot write or understand the
proportionate pilling used to assess their factors, the structured five-point Likert scale

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questionnaire will be translated into Amharic. Interviews with chosen MSE operators will be
undertaken.

3.7. Data processing and analysis

3.7.1. Data Processing
The collected data will be manually edited, encoded, classified, and tabulated during the data
processing phase. Data cleaning will be done to find abnormalities, mistakes, and omissions in
responses as well as to ensure that the questions are answered consistently and accurately. To
condense responses into a small number of classes or categories, numbers are allocated. Data
with similar characteristics will be grouped together, resulting in the division of the entered data
into various groups. Finally, the raw data will be tabulated and shown using pie charts.
Employing descriptive and inferential (statistical) analysis to transform the processed data and
search for relationships and patterns between and/or among data groups. The data gathered from
primary sources will be analyzed using the Statistical Package for Social Science (SPSS).

3.7.2. Descriptive Analysis

By tabulating the data and measuring central tendency, descriptive analysis will be utilized to
condense the information into a summary manner. Additionally, pie charts will be utilized to
describe the fundamental traits of businesses. Comparing the various components is the purpose
of descriptive statistics. Additionally, the interview questions will be examined through a
contemporaneous triangulation technique employing descriptive narrations.

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3.7.3. Inferential Analysis
Through study of the data, inferential statistics enables one to determine the link between two or
more variables and how various independent variables may contribute to the variance in a
dependent variable. For the investigation, the following inferential statistical techniques will be
used.
3.7.4. The Pearson Product Moment Correlation Coefficient
Conclusions will be drawn based on the findings; hence, generalizations about the population
from the samples will be formed. Pearson Moment Correlation for Products When two variables
are correlated continuously and linearly, the statistical procedure known as the coefficient can be
employed to get an index of the correlations between the two variables. to determine whether
there is a statistically significant correlation between the performance of the firm and politico-
legal, technological, infrastructure, marketing, financial, managerial, and entrepreneurial
elements. A correlation coefficient's value can be between -1 and +1. A perfect negative
correlation is represented by a number of -1, and a perfect positive correlation is represented by a
value of +1. There is no association when the value is 0.
3.7.5. Linear Regression Analysis
Linear regression is a method of estimating or predicting a value on some dependent variable
given the values of one or more independent variables. Like correlations, statistical regression
examines the association or relationship between variables. Unlike correlations, however, the
primary purpose of regression is prediction. In this study, multiple regressions will be applied.
Multiple regression analysis takes into account the inter-correlations among all variables
involved. This method also takes into account the correlations among the predictor
scores .Multiple regression analysis, will help to see more than one predictor are jointly
regressed against the criterion variable. This method is used to determine if the independent
variables explain the variance in the dependent variable.

3.7.6. Regression Functions

Regressions on this study's equation are typically constructed using two sets of variables:
dependent variables (performance) and independent variables. (Political and legal aspects,
workplace amenities, technology, infrastructure, marketing, financing, management, and
entrepreneurial talent). Regression analysis will be used in this study with the basic goal of
improving the study's ability to describe, comprehend, and forecast the specified variables.

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3.7.7. Regress Performance on Selected Variables

Yi = β0+ β1X1 + β2X2 + β3 X3 + β4X4 + β5X5 + β6X6 + β7X7 + β8X8

Where: Y = is the response or dependent variable- performance X1= politico-legal, X2=

working premises, X3= technology, X4= infrastructure, X5= marketing, X6= finance, X7=
management and X8= entrepreneurial skills are the explanatory variables.β0 is the intercept
term- constant which would be equal to the mean if all slope coefficients are 0.β1, β2, β3, β4, β5,
β6, β7, and β8 are the coefficients associated with each independent variable which measures the
change in the mean value of Y, per unit change in their respective independent variables.
Accordingly, this statistical technique will be applied to explain the following relationships.
Regress performance (as dependent variable) on the selected linear combination of the
independent variables using multiple regressions.

20
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