ADMAS UNIVERSITY

FACTORS AFFECTING GROWTH IN SELECTED SMALL AND

MEDIUM ENTERPRISE IN ETHIOPIA:
A CASE OF ADDIS ABABA

BY TEMESGEN

SUPERVISOR: ZERAYEHU SIME (PHD)

CO-ADVISOR: DERESE KEBEDE (MSc)

ADMAS UNIVERSITY
DEPARTMENT OF BUSINESS ADMINISTRATION

A THESIS SUBMITTED TO ADMAS UNIVERSITY IN PARTIAL

FULFILLMENT FOR THE REQUIREMENTS MASTERS OF SCIENCE
DEGREE IN BUSINESS ADMINISTRATION

MAY 2021
ADDIS ABABA, ETHIOPIA
LIST OF TABLES
Table 4.1 Depicts the Gender Distribution of Entrepreneur Respondent’s.........Error: Reference
source not found
Table 4.2 Distribution of MSE Owners By Level of Education at the Time of The Business
Run.......................................................................................... Error: Reference source not found
Table 4.3 Reasons for Getting to Specific Business...............Error: Reference source not found
Table 4.4 Business Experience of the Owner of the Enterprises.......Error: Reference source not
found
Table4.5 Manager of the Enterprises Employed or the Owner Himself..Error: Reference source
not found
Table 4.6 Total Number of Leather Goods Manufacturing MSE In Addis Ababa..............Error:
Reference source not found
Table 4.7 Source of Finance Initial Capital of LGM MSE.....Error: Reference source not found
Table 4.8 Enterprise Category by Growth Stage.....................Error: Reference source not found
Table 4.9 The LGM MSE Growth Stage................................ Error: Reference source not found
Table 4.10 Legal Forms of The Business................................Error: Reference source not found
Table 4.11 Future of The Business..........................................Error: Reference source not found
Table 4.12 Enterprise Business Plan....................................... Error: Reference source not found
Table 4.13 Marketing Intensive Strategy................................ Error: Reference source not found
Table 4.14 The Customer of the Produced Product of The Enterprise....Error: Reference source
not found
Table 4.15 Source Of Raw Material........................................Error: Reference source not found
Table 4.16 Market Linkage Provided by The Government for the MSE Firms. Error: Reference
source not found
Table 4.17 The Manager/Owner of the LGM MSE Firms Taking Marketing Training......Error:
Reference source not found
Table 4.18 Market Integration Within MSE Firms.................Error: Reference source not found
Table 4.19. Evaluation of Their Company Profitability..........Error: Reference source not found
Table 4.20 Record Keeping and Financial Control System of the LGM MSE...Error: Reference
source not found
Table 4.21 Examine Variance Inflation Factor (VIF).............Error: Reference source not found
Table 4.20 The Result of the Estimated Model in Linear Regression Model.....Error: Reference
source not found
 Table 4.21 Examine Variance Inflation Factor (VIF).............Error: Reference source not found

LIST OF FIGURES

Figure 4.1: Educational Backgroun of Owner/Manager of the Enterprise........Error: Reference

source not found8
Figure 4.2 Enterprise Catagory............................................. Error: Reference source not found2
Figure 4.3 Customer of Product............................................ Error: Reference source not found7
Figure 4.4 Componey Profitability........................................Error: Reference source not found0
LIST OF APPENDICES

Appendix 1: Linear Regression Output

Appendix2: Robust Regression Output

Appendix 3: Questionnaire
ACRONYMS/ABBREVIATIONS
Addis MSEB-Addis Ababa Micro and Small Enterprise Burueo
CLS- Conditional List Square

CSA- Central Statistics Agency

CSA-Central Statistical Agency

Cuc-Current Capital of Enterprises

EC-Enterprise Category

Educ-Educational Background of Owner/manager

ES-Enterprise Stage

FeMUDH-Federal Ministry of Urban Development and Housing

FiN-Finance

GTP- Growth and Transformation Plan

LGM-Leather Goods Manufacturing

Mark- Marketing Strategy

Mgt-Business Management Principles Skill

MSE- Micro and Small Scale Enterprise

TECH-Technology

TES-Technical Job Skill

UNICTAD-United Nation Conference on Trade Development

UNIDO-United Nation Industrial Development
 CHAPTER ONE: INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Small and Medium scale Enterprises (SMEs) play a significant social and economic role in
both developed and developing nations (Maryam I, 2019).They are considered as a catalyst
in the socio-economic development of any country (Jagongo, 2012).They are considered as
backbone or building block for a country's economy economic development.

In developed countries in the OECD area, SMEs are the predominant form of enterprise,
accounting for approximately 99% of all firms. They provide the main source of
employment, accounting for about 70% of jobs on average, and are major contributors to
value creation, generating between 50% and 60% of value added on average (OECD, 2016).
In emerging economies, SMEs contribute up to 45% of total employment and 33% of GDP.
When taking the contribution of informal businesses into account, SMEs contribute to more
than half of employment and GDP in most countries irrespective of income levels (IFC,
2010).

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in
developing countries. SMEs account for the majority of businesses worldwide and are
important contributors to job creation and global economic development. They represent
about 90% of businesses and more than 50% of employment worldwide (WORLDBANK,
2019)

From the perspective of job creation, Small and Medium Enterprises (SMEs) comprising over
90 percent of the private sector among developing countries, create more than 50 percent of
jobs in their respective economies. The growth and vibrancy of these firms is also important
for broader economic growth, diversification of economic base and as a source of innovation
that is exhibited by some of the start-ups (Worldbank, 2017).They are deriving forces for
economic growth, in production, export, job creation and poverty reduction in developing
countries.

According to the UNCTAD report, MSMEs represent about 90% of businesses and more than
50% of employment worldwide; formal MSMEs contribute to 40% of GDP. However,
because of the pandemic (covid-19) effect the global trade is annual declined by 20% the
growth of SME is challenging (UNCTAD, 2020).

The SMEs the backbone of most economies worldwide and play a key role in developing
countries. In Ethiopia, according to a survey conducted by the country's Central Statistical
Agency (CSA) in 2002 revealed that there were about 974,679 micro enterprises, generating
a means of livelihood for about 1.3 million people (CSA,2002).

Despite of the relevance in economic development of country governments have established

different policy and strategies to achieve sustainable growth of the business firms. Growth
may refer to earning profits, growth in sales/turnover, growth in productivity, growth in
number of employments, avoiding losses, being cost efficient, surviving in the market, or
performing well compared to competitor.

There is no unified theoretical model on firm growth, due to divergence in theoretical and
empirical perspectives a~ interpretations, as well as the complexity of the phenomenon of
growth. The situation is further compounded by the heterogeneous nature of growth, i.e.
firms grow in a very dynamic way following different patterns. A recent review on growth of
SMEs by Gupta et al. (2013) showed the path of firm growth is rarely linear or predictable or
other authors argued that firm growth is fairly opportunistic and unpredictable.

A study by Haibo and Gerrit, (2009) on Dutch small and medium firms, growth was
measured by employment growth. According to Evans, (1987) turnover is best to describe
SME growth.

However in this research both turnover and employment growth were used as growth
measurement instruments. Since it makes the study reach in understanding about the growth
of

SMEs than using a singleBgrowth measurement tool and it also leads the thesis result to be
more sound.

Though it is clear that SMEs have significant contribution to build the economy of countries
they are hampered by factors affecting their growth and even some of them lead to collapse at
all. Previous studies have tried to address the relationship between growth and firm
characteristics (for instance: - using traditional size and age determinants).
Growth pattern of small and medium enterprises is affected by a number of factors which
could be internal and external factors. Growth relationship with size and age of firms had
been started with the law of Gibrat, (18)31).It states that the growth rate of a given firm is
independent of its size at the beginning of the period examined. However this low has been
empirically rejected by many researches, for example a study by Evans, (1987) found that
firm growth decreases with firm size and age by considering data on manufacturing firms in
USA. And a study done on small Italian manufacturing firms showed Gibrat's law failed to
hold immediately following start-up when small firms rush to achieve a size large enough to
assure their survival (Francesca

L. et al, 1999). A more detailed analysis is needed apart from the traditional size and age
factors on growth of SMEs which is useful for economics and policy makers. Trovato and
Becchetti,

(2002) considered external finance, access to foreign markets and ownership structure besides
size and age using small Italian manufacturing firms. And they found that external finance
and access to market are crucial determinants for growth of small firms.

A more integrated analysis on the determinants of firm growth was done by Haibo. and
Gerrit, (2009) by classifying firm determinants in to three dimensions:- individual,
organizational and environmental determinants by considering 523 Dutch small and medium
enterprises. And they found that individual motivation is basic for growth; besides this,
organizational determinants and availability of finance affect firm growth. In organizational
determinants, firm strategies (market orientation and entrepreneur orientation) are crucial
determinants of firm growth. Firms with good market orientation are able to respond quickly
to their customer needs by coordinating their internal process with their customers which in
turn leads to firm growth.

In Ethiopia there are few studies which are related to this study topic:- A study on Addis
Ketema sub city by Endalkachew (2008) discussed on underlying causes of micro and small
business failures. The study found financial problems, poor business plan, lack of access to
market are some of the main factors leading them to failure. Similar study conducted by
Abiyu (2011) on factors constraining the growth and survival of micro and small enterprise in
case of Burayu subcity identified marketing, management, finance and government supports
hindering their growth.
Mulu (2009) discussed innovation and micro enterprise growth in Ethiopia and explained
factors that affect the innovative activity in micro enterprises. Benyam (2008) studied
financial and operating performance of women operated micro and small enterprises
organized under WISE (women in self-empowerment). Apart from those few studies
conducted, there is lack of integrated empirical stud~ taking the main determinants which
controls the growth variable in

Ethiopia. As it is shortly described above growth of SMEs is affected by firm specific factors
which includes: human capital, size, age, managerial competence.

1.2. STATMENT OF THE PROBLEM

SMEs sector has as a major component for economic development and employment (Mead et
al, 1998) .It has seen as the engines of employment, alleviating poverty and upgrading the
standard of living of citizens which is understood by both developed and developing
countries. As a result, country/regional leaders had designed policy and strategy and allocated
larger proportion of their economic development budget in funding micro and small
enterprise research and support service initiatives.

Ethiopia is one of the developing countries in the world small and medium enterprise firms
policy and strategy has been designed to reducing unemployment and alleviate poverty,
creating Job opportunities, boost the economy as well as promotes Entrepreneurship culture,
enhance self-employment and serves as fertile ground for the emerging of Medium and Large
Industries, and to ensure the sustainability of the development achieved in all economic
sectors of the country (FeMSEDA, 2011).

Regarding on the context, SMEs sector is one of the prioritized economic sector it designed
to play a great role to expand production of locally produced products in terms of both variety
and quality, as substitute for imported products, increase foreign exchange earnings, and
strengthen the technological capacity of the industry to increase income, reduce poverty and
enhance equitable distribution of income, to contribute towards competitive and sustainable
economic growth there by creating foundations for industrial development and linkages with
rural development; and to create broad-based developmental investors in city. The
(FeMSEDA, 2011), offer the possibility of earning income, training, work experience and
employment to millions of poor people, Moreover, these SMEs help to adopt new
technology, innovation and increases earnings for those low-income level societies.

According to the government policy and strategy the enterprises are classified them based on
their capital, employment opportunity and size of the firms in to: 1 Micro 2 small 3 medium
and 4 large (industry) category. Those categories are measured by their growth stage; start-
up stage, growth stage and maturity stage.

The SMEs enterprises in Addis Ababa city administration growth status report shows that
75.4% are micro enterprises, 20.9% are small enterprises and the remaining 3.7% are medium
and large enterprise (FeMSEDA, 2009). There is a big gap between the three categories.
Most micro and small enterprises never grow beyond a certain size and only a small minority
manages to upgrade to the next level. Similar to this Addis Ababa city administration micro
and small enterprise bureau collaboration with Civil Service University study on MSMEs
report indicates from the total of 257 enterprise are 220 micro enterprise and 37 small
enterprise established over the period of 2004/5-2017 (Addis MSEB, CSU, 2017). This
shows in 13 years 14 percent of the firms only upgrade to the next level.

Various studies have been conducted on determinants of growth MSE in Ethiopia. Their
major focuses of study are on challenges and prospects of small scale enterprises in Ethiopia
(Arega et al, 2016), 2016), Assessment of the Challenges of Micro and Small Scale
Enterprises to Contribute to Sustainable Development (Yodit, 2015) , assessing factors
affecting transitional development of small scale to medium scale enterprise in Sebeta town
challenges, opportunities and prospects (mekonen, 2014): problems of micro and small
enterprises (Weldegebriel, 2012) and study on financial source of micro and small enterprise
in the case of Gulele Subcity (Ermias, 2011) . Most of the researchers conducted their
research area in general MSE sector.

As per the Government of the Federal Democratic Republic of Ethiopia revised strategy
report of a year 2012 shows challenges facing the growth of SMEs sectors identified from the
government side includes mismatch between credit demand and supply due to less capacity
of most finance institutions to deliver services. Failure in working for sustainable and quality
capacity building, problems in cluster development to ensure market development and
technological growth. Failure in providing trainings on the basis of need/interest and result
oriented. Challenges arising from within the SMEs members and owners include, lack of self-
reliance sprit, innovative culture for job creation with entrepreneurs. Absence of readiness to
accept and use new technology and readiness for change, non-competency in production and
service they supply and lack of work commitment (MoUDH, 2016). This study report point
out challenges of all sectors of the federal micro and small enterprises in the country.

The micro and small enterprise owner/ manager of the enterprises who they have good
business management skill in planning, organizing, directing and controlling their business;
good marketing strategy: good technical skill in design, innovation and operating tasks; good
finance and modern technology: educational background firms within and new entry in to the
business are grow their capital. This imply the capital growth of the firms driving the
enterprises to create job opportunity, increasing firm size, upgrading their category to the
next and transform to industry. If there is a capital growth the firms grow their employment
opportunity and upgrade their category in each growth stages.
However the Addis Ababa city administration micro and small leather goods manufacturing
enterprises sector over the period of 2005-2017, from 257micro enterprises only 14 percent of
them upgrade their stages and transform to the next (small category) level (Addis MSEB,
CSU, 2017).This shows that the growth of the enterprise is limited by the knowledge within
it, marketing strategy, business management skill, technology and technical skill and
financial constraint challenges the firms to achieve their establishment objective and fail to
grow as expected government policy and strategy.
Therefore the purpose of this study was to examine the challenges of growth of the micro and
small leather manufacturing enterprises that limiting its rate of growth of the enterprises in
Addis Ababa city administration by using parametric and non-parametric apporaches.

1. 3. OBJECTIVE OF THE STUDY

1. 3.1. GENERAL OBJECTIVE

The general objective of this study is to examine the critical growth challenges of micro and
small leather goods manufacturing enterprises in Addis Ababa city administration.
 1. 3.2. SPECIFIC OBJECTIVES

 To identify the factors affecting growth of small and medium enterprises s in Addis
Ababa city administration.

 To assess the performance challenges and determinants of leather goods

manufacturing MSE firms in Addis Ababa city administration.

1.4. RESEARCH QUESTIONS

The following research questions need to be addressed:

 What are the performance challenges and prospects of leather goods manufacturing
MSE firms?
 What are the growth challenges and determinant of leather goods manufacturing MSE
firms?
1.5. HYPOTHESIS OF THE STUDY
In pursuit of the research problems and realization of the objectives of this study, the
following null hypotheses are raised and would be tested as a guide to the study.
H0: β1, β2, β3, β4, β5, β6, β7, β8, β9 and β10= 0
There is no relationship between β1 (finance), β2 (technology), β3 (education/intensive
training), β4 (technical skill), β5 (current capital), β6 (marketing strategy), β7 (business
management principles skill), β8 (enterprises category), and β9 (enterprises stage) with
growth of MSE = 0
H1: β1, β2, β3, β4, β5, β6, β7, β8, β9 and β10 ≠ 0
There is relationship between β1 (finance), β2 (technology), β3 (education/intensive
training), β4 (technical skill), β5 (current capital), β6 (marketing strategy), β7 (business
management principles skill), β8 (enterprises category), and β9 (enterprises stage) with
growth of MSE at least one β’s ≠0.

1.6. SIGNIFICANCE OF THE STUDY

Many researchers study on micro and small scale enterprises general (whole) sector
however, this study is conducted on the micro and small leather goods manufacturing
enterprises specific sector; to examine critical growth challenges and to provide
comprehensive overview for policy makers, government institutions and other concerned
bodies. This study is important as policy implication for the Addis Ababa city administration
micro and small enterprise bureau and a source of document for other researchers interested
in this area.

1.7. SCOPE OF THE STUDY

The scope of this study is limited on micro and small leather goods manufacturing enterprises
specifically in Addis Ababa city administration. The study area is chosen because getting
relevance information and data. This study will focus on growth challenges in micro and
small leather goods manufacturing enterprises over the period of (2005-2017) GC. The study
included only leather goods manufacturing enterprise in Addis Ababa city administration and
excluded the other sectors of micro and small enterprises in Ethiopia.

1.8. ORGANIZATION OF THE STUDY

The thesis comprises five chapters. In Chapter One, the background information on the
evaluation of the MSEs in Ethiopia Addis Ababa in particular and in other countries in
general is discussed. The statement of the problem, the objectives of the study and the
significance of the study are outlined. Chapter Two is devoted to the presentation and
discussion of relevant literature. Literature concerning management of MSEs at both national
and international level is discussed. The chapter also discusses the theoretical framework that
informs this study about issues of growth challenges MSE firms, business management,
marketing strategy and technical skills, finance, technology, management theories and the
performance of the MSEs in the manufacturing sector. Chapter Three discusses the research
methodology, design and instrumentation used in the study. In addition, the population of the
study and the sampling procedures are described. The data collected were presented,
discussed and analysed in Chapter Four. The discussion in the section was carried out bearing
in mind research questions as well as cross reference with information from literature review
chapter. Finally, chapter five presented conclusions, summary of the research findings,
contribution made by the investigation, recommendations and areas for further study.
 CHAPTER TWO: LITRATURE REVIEW

2.1. DEFINITION

This section of the study defines the key words as used in the research.

Micro and Small Enterprises: These are a very heterogeneous group of businesses usually
operating in the service, trade, agri-business, and manufacturing sectors. MSEs are often
classified by the number of employees and/or by the value of their assets. The size
classification varies within regions and across countries relative to the size of the economy
and its endowments.

In Ethiopian context according to the Federal Ministry of Urban Development and Housing
Micro and Small Enterprise revised Policy and Strategy (FeMUDH, 2016) MSE defined as:
Micro Leather goods manufacturing enterprises: manufacturing enterprises employing
maximum of five persons, including the enterprise owners and family members, with a total
asset of not more than ETB 100,000 (USD 4,630); and
Small Leather goods manufacturing enterprises: this refers to enterprises employing 6-30
persons and with a total asset of from ETB 100,001 up to ETB 1,500,000 (USD 4,630 up to
USD 69,500)

MSE up grading /growth stage: developing from a stagnant business with constant income,
productivity and employment to a growing business that increases its productivity, income or
number of paid workers (FeMUDH, 2016).

Start-up Stage: Enterprises at this level are in the process of obtaining a legal entity and are
yet to begin producing commodities or services.
Growth stage: demonstrates its competitiveness in the market in terms of price, quality and
productivity as well as offers credible evidence as to its long term profitability
Maturity stage: arrives when an enterprise receiving support becomes competitive and
profitable in the market, makes additional investment to increase its market share, and meets
the definition of and criteria for transformation into a medium level enterprise. An enterprise
operating as a micro or small enterprise level that maintains its market competitiveness and
profitability can also be considered to have reached maturity.
Business management principle: is guideline for the decisions and actions of managers in
planning. Organizing, leading/directing, coordinating and controlling of the business tasks
( (Henery, 1916).
Management: Management is the act of getting people together to accomplish desired goals
and objectives using available resources efficiently and effectively. Since organizations can
be viewed as systems, management can also be regarded as human action including design, to
formulate the production of useful outcomes from a system.

Manager: The individual that has the power and responsibility to make decisions in order to
manage an enterprise when legitimately given the authority to do so.

Business Owner: The entrepreneur who mobilizes resources to start up a business with the
aim of making profit. (www.thelawdictionary.org/business-owner/, n.d.) Identifies business
owner as an individual who owns and operates a business whether it be small or large. This
individual also profits from the net gains of the company.
Innovation: Entrepreneur improvements in products quality, process, marketing strategy.
Entrepreneurship: United Nations Conference on Trade Development report (UNCTAD,
2005) explains entrepreneurship as the manifestation of the ability and willingness of
individuals, on their own, in teams, within and outside existing organizations, to perceive and
exploit new economic opportunities and to introduce their new ideas in the market in the face
of uncertainty and other obstacles by making decisions on location, form and the use of
resources and institutions
 2.2. THEORETICAL LITRETURE

The word growth can be expressed as an increase, as in size, number, value, or strength,
extension or expansion of business and we can be used in the context to evaluate the growth
of micro and small enterprise firms.
The several definitions of the term Micro Small scale enterprises (MSEs) are varying from
country to country and varying between the sources reporting the MSEs statistics. The
commonly used criteria at the international level to define MSEs are the number of
employees, total net assets, sales and investment level. If employment is the criterion to
define, then there exists variation in defining the upper and lower size limit of MSEs.

In developing countries, microenterprises constitute the vast majority of the small business
sector—a result of the relative lack of formal sector jobs available for the poor.
Microenterprises in developing countries, then, tend to be the most frequent form/size of
business. As explained by (Aneel, 2010): Most microcredit clients are not micro
entrepreneurs by choice. They would gladly take a factory job at reasonable wages if it were
available. We should not romanticize the idea of the "poor as entrepreneurs."

In Ethiopia the past definition of Micro and Small Enterprises was based on paid up capital
only. An enterprise is categorized as micro if it’s paid up capital is less than or equal to Birr
20,000. Similarly, an enterprise is considered small when its paid up capital is less than or
equal to Birr 500,000. However, this does not provide information on the size of jobs or
number of employees in the MSE. It also did not tell the size of the total asset for the MSE
and did not differentiate between manufacturing (industry) and services. Current definition
considers human capital and asset as the main measures of micro and small enterprise to
addresses the limitations of the old definition. People: "own-account workers. The
FeMSEDA report indicated MSE enterprise were classified them in to industry and service
sectors. The industry sector micro enterprises categorized having <100,000 birr and <5
working manpower and the service sector micro enterprise category having <50, 0000 birr
asset and <5 working manpower. The second small enterprises category industry sector
having <1.5million asset and 6-30 manpower; and the service sector small enterprises
category having <500,000 birr asset and 6-30 working manpower (FeMSEDA, 2011). This
implies the micro and small Leather goods manufacturing enterprise were categorized in in
the industry manufacturing sectors subsector.
What is growth in MSE? What is the yardstick to say one firm is growing while the other is
stagnant? In this study, firm growth for MSEs is defined as an increase in the number of
employees, size and capital over time. MSE owners are typically able to remember their
number of employees over time, even if they fail to maintain reliable written records. In
addition, using the number of employees helps to avoid the need to deflate or otherwise
adjust currency figures, which is necessary when using revenue and other monetary metrics.
Employing other measures of growth may influence findings (Mead et al, 1998).

To date no theory specific to MSE growth in developing countries has been stated.
Traditional neoclassical economics hypothesize that workers are added until the value of the
marginal product of the last worker is equal to the wage paid to that worker. This implies that
firm growth will occur as a reaction to changes in technology, the wage rate, or the price of
the product. As a result, if one is interested in why small firms in developing countries grow,
this simple theory suggests that one's attention must focus on the factors that have an impact
on supply and demand for the product produced by the MSE. The 'stochastic' models
extended this simple static model by consideration is given to the evolution of firms over
time. These models also introduced firm -specific costs. In this framework, firms draw each
year's growth rate from a distribution. 'Lucky' firms repeatedly draw high rates and grow over
time. These models were based on Gibrat's Law, the stylized fact that firm growth and firm
size are independent. However, researchers began to find fault with the assumptions of the
stochastic models, and empirical work demonstrated that Gibrat’s Law does not hold. This
stochastic model was superseded in the theoretical literature by (Jovanovic, 1982) 'learning
model'. In this framework, efficient firms (that is, firms with able managers) grow over time,
expanding each period when their managers observe that their guesses about their managerial
efficiency turn out to have understated their true efficiency. Jovanovic's model, in its simplest
form, predicts that the annual growth rate of a firm will be a function of the accuracy of the
manager's predictions regarding their ability, as well as the price of the product.

The learning model also has implications about the relationships between growth rates and
firm size and age. On average older firms grow more slowly than younger ones. With respect
to firm size, bigger firms grow more slowly controlling for firm age. Bigger firm have small
values of the cost parameter (that is, they are more efficient). Such firms have less and less
room for further increases, given that the information distribution has a lower bound.
The Jovanovic model has been criticized for the immutability of the efficiency parameter. In
that model, managers are born with an efficiency level, and while they learn what that level is
over time, they cannot alter it. (Pakes et al, 1987) Extended the basic model to allow this
parameter to be changed through human capital formation. Those firms with managers
possessing greater stocks of human capital should be more efficient, and therefore should
grow relatively faster. Another aspect of the literature involves economies of scope at the
firm level. (Teece, 1980), building on the work of (Penrose, 1959) and (Williamson, 1975),
theorizes that when the market for proprietary know-how does not function efficiently, or
when an input is specialized and indivisible, a firm may find it more sensible to expand
(diversify) than to sell the know-how or input to another firm producing a different product.
This approach emphasizes the internal dynamics of the administrative structure of each firm.
While this aspect seems likely to offer some useful insights into the process of firm growth,
such an analysis is beyond the scope of this paper.

2.3. EMPIRICAL LITRETURE

The Studies of the dynamics of firm growth have overturned the conclusion of the firm’s
growth towards cited in (Awoyemi, Sangosany , 2015) . Gibrat’s “Law of Proportionate
Effect” which holds that current firm growth is dependent on its previous factors. The law
emanated when Gibrat challenged the traditional economic theory which postulates that a
negative relationship between size and firms’ growth rate exist. This is premised on the
assumption that large firms operate close to the optimum level and so would grow very little
and might even have to shrink. But a small firm would be far below the optimum size and
would need to grow faster. In its simplest interpretation, the law states that both big and small
firms have equal chances of growing at a given rate during any period of time. The
combinations of findings of some empirical invalidation of this law (Audetsh, 1995) and
(Hart et al, 1996) as well as the outcome of some studies and further reflections resulted in
the belief of the “bigger the better”. This belief expresses a positive relationship between firm
size and growth. The argument runs that, large firms have an advantage over the smaller ones
in the sense that, the larger firms can enter into all the product lines that the small firms enter
while the reverse is not true in the presence of size and scale advantages. The argument has
further extended by that larger firms have an easier access to capital and money market than
the less well known small firms. Indeed, access to external sources of finance is now widely
recognized as important to the firms’ ability to survive and grow over time.
However, after challenging the (Gibrat's, 1931) “Law of Proportionate Effect”, other
empirical studies have evolved in ascertaining other determinants of firms in relation to
traditional and modern theoretical propositions. Positing that factors like access to finance,
managerial capability, market structure, firm’s age, firm’s organizational structure, industry
exists rate, government policies (in terms of restriction, quota, taxes and levies), and
macroeconomic performance and stability.

Many other studies show that the growth rate of manufacturing firms and the volatility of
growth are negatively associated with firm size and age. In dynamic terms, the sector is
viewed as being populated by firms, most of which have considerable growth potential.

Large enterprises in developing countries achieve productivity increases to a great extent

simply by borrowing from the shelf of technologies available in the world ( Christopoulos
and Tsionas, 2004). As capital becomes less scarce and the range of technologies available
expands on the world, firms need productivity increases if they are to maintain or increase
their contribution to overall development.
Brown etal, investigated into what makes small firms grow in Romania. They examined
growth variables such as Finance, Human Capital, Technical Assistance and Business
Environment (Brown et al, 2004). Their result reveals that financial constraints through loans
has positive impacts on the sales and employment growth while reinvested profit is estimated
to have a strong positive effect on both sales and employment. The effect of the human
capital variables on employment and sales growth are weaker in general than those for
financial constraints.

Technical assistance is identified to be associated with faster employment and sales growth
but the estimated coefficient becomes statistically insignificant when firm fixed effects are
added. There is no evidence that, business environment proxies by corruption, red tape,
predatory behavior of public agencies, constrains the growth of micro and small firms.

Aregbeyen investigated in his research that, the determinants of firm growth selected from
the Nigerian firms that are quoted on the Nigerian Stock Exchange (Aregbeyen, 2007). The
study sampled 188 firms for the period of 1995-2005. The results obtained revealed that for
the manufacturing firms, the size of the firms, capital intensity, foreign equity holding,
governance structure, inflation, financial constraints and vertical integration are significant in
explaining the firm’s growth rate. Contrary to postulations of the theory the result obtained
showed that the more financially constraints the manufacturing firms are, the better the
growth performance. Moreover, if a firm want to attain sustained expansion, it must satisfy a
number of requirements for growth: it must increase its sales, it must have access to
additional resources, it must expand its management team, and it must extend its knowledge
base. Each set of requirements establishes a different set of barriers.

Barber et al (1989) recommended that some of these barriers are external to the firm, a
feature of the firm's operating environment that is impracticable to alter. But many of the
barriers are tend to be internal and firm specific, generated by the growth of the firm. The
principal obstruction Barber et al pinpointed were management attributes, lack of finance,
and the external labor market and market structure.
Burns’ had a European Journal of Business and Management broadly similar list. He wrote
that barriers/determinants of growth might include the product (poor quality, wrong costs),
funding (inappropriate funding/equity), psychological/motivational factors (low levels of
ambition, risk aversion, fear of loss of control), managerial deficiencies (finance,
organizational, production, marketing), and government policy (taxation, incentives and
licensing) (Burns', 1994). Though internal determinants of firm growth outweigh the growth,
the majority of research studies focus on the analyses of external factors.

Burns’ (1994) examination of a survey in five European countries comes across with the
great barrier as the depressed state of European economies. Second was competition from
home and abroad, next was the cost and availability of funds (particularly for small
companies), and finally, government bureaucracy. The principal short-term barriers were cost
of finance, shortage of orders, and domestic legislation. The primary long-term obstacles
were limited market demand, accessing new markets, and the cost and availability of finance.
The majority of the studies identified the key barriers to growth as being internal, with sales
and marketing the most foremost, followed by internal financial management, human
resource management, general management, and then the regulatory environment. These
rankings were different to those that they ascertained for the startup stage of the firm where
external finance scored highly and organizational management issues scored lower.

There are three categories of determinants of MSE Growth (Mervi and Jyrki, 2007).The first
group of factors is that of the entrepreneurs’ individual resources. These are factors that can
be identified prior to the establishment of the business. The second group of factors is firm
specific characteristics such as the firm's size, age and legal form and the third group is
formed by the strategic choices made by the entrepreneur or the owners of the firm.
A further look on specific growth predictors compiling mostly UK studies from the late
1980s and early 1990s, but without combining them in an integrated model, Storey (Storey,
1994) compiles the evidence in the categories the entrepreneur, the firm, and strategy.
Support for influence is found in all three categories. Among the variables associated with the
individual a majority of studies found that for motivation, education, management
experience, number of founders and functional skills the influence of growth is positive,
although the last factor had only been investigated in two studies. Unemployment as start-up
reason was mostly negatively associated with growth, whereas for prior self-employment,
social marginality (ethnicity), training, age, prior sector experience and gender the evidence
was mixed or most studies suggested they had no effect on growth.

The leather-goods manufacturing MSE enterprise (footwear, bag, jacket) is highly fashion
oriented.  Moreover, articles made of (genuine or simulated) leather are complementing
clothing. Leather products (shoes, garment, and leather goods) is important export earner for
many developing countries. In many countries leather products export ranks within the first
three places in the total export.  Especially the footwear industry’s importance to the national
economies in developing countries is underlined by the fact that it is the main contributor to
the country’s export and – being a labour intensive industry – provides employment to the
most vulnerable groups of the society (including a large number of women) in towns and
villages where other job opportunities are very scarce.  The most of the leather products and
footwear industry is dominated by small- and medium-scale operations. These SMEs lack of
design information, product development knowledge, information and educated personnel for
applying up-to-date quality assurance techniques and productive technology.  The
institutional background is weak in providing necessary services, support and professional
training needed for becoming competitive and thus remaining in business
(providing/maintaining working opportunities). UNIDO with other institutions and
organizations through tailor made technical assistance assisted to up-grade and enhance
leather products sector.

Osotimehin et al, investigates that evaluating the growth challenges of MSE firms have been
conducted also in Nigeria, they study used 100 MSE firms and analyzed using non-
parametric simple percentages and Z - test statistical technique. They found the Z_ test
analysis 4.18, 4.4 financial constraint and lack of management skill are a series main
challenges of MSE firms respectively (Osotimehin et al, 2012).
The study by Yadollah and Sid study result shows success or failure of the small businesses
can be related to managing technical skill, selecting appropriate personnel with relevant skill,
education and paying more attention to personnel training, application of management
conceptual skills, financial issues, better human relation, recognize the economic
situation ,planning and organizing of their business and informal issue.

Adigwe study report implied that each enterprise has to perform the four functions of
management, which are, planning, organising, leading and controlling (Adigwe, 2012). The
results of the research by Adigwe (2012) seem to confirm the results of the investigation by
Mudavanhu, Bindu, Chiguiswa and Muchabaiwa (Mudavanhu, etal, 2011) which showed that
lack of general knowledge on the management activities of planning, organising, leading and
controlling lead firms to realise a slackened business performance.

Management skills are critical to the success of MSE growth. Poor management skills in
MSEs in the manufacturing sector are recognised as a critical problem worldwide.
Managerial deficiencies are therefore a key factor in the failure of MSEs internationally
Dumbu and Chadamoyo (Dumbu, 2010).
Yodit indicated on her study report the Challenges of Micro and Small Scale Enterprises to
Contribute to Sustainable Development: the case of Manufacturing Enterprises in Addis
Ababa, Ethiopia. The study used exploratory approach based on primary data collected from
120 MSE manufacturing firms. To measure the sustainable development of manufacturing
firms they identify the factors, weak economic performance of firms, business constraints as
marketing problems, finance constraints, land, non-effective human capital management,
input adopted by the MSEs and lack of relevant knowledge considerer as input variables and
contribution on sustainable development is an output variable. The study found under the
GRI assumptions, market constraint, finance land constraint that accounts for 31%, 25% and
18% of the respondents respectively. The fourth major constraint and constraint is input
constraint and accounts for 13% of the respectively. The assumption show that market and
finance constraint are more hinder the growth of the firms (yodit, 2015).

The success MSEs is dependent on the performance of their management who are often the
owners or manages having skills of management in planning, organizing, staffing, monitoring
and controlling are crucially important to the improved performance and survivability of the
MSEs in the manufacturing sector of the economy. Therefore, there is need for entrepreneurs
in the manufacturing sector to acquire the necessary management principle skills and
technical skills to enhance the future survival in the stiff competitive business environment. If
the MSE firms are managed with people with inadequate management knowledge and skills,
the firms may be successful in the short run but will not be in a position to realise their full
potential in the long run (Zindiye, 2008). This study shows as the firms are not up-grade their
levels and not transform based on their strategic plan.

2.3. CONCEPTUAL FRAMEWORK

The micro and small leather goods manufacturing enterprise to grow and to obtain
sustainable economic development in the country the new entry and those who they are
running their business owners/managers of the enterprise should have education/ intensive
training on problem solving, commitment, and self -confidence on innovation knowledge to
have technical skill in product design, operating technics and entrepreneurs. Business
management principles in planning, organizing, directing, motivating and controlling their
operations: marketing strategy on market networking/integration within and different firms,
promotion, supply chain and price fixing to be competitive in the competition market and
technology to easily produce demanded quality product. Financial accessibility (initial
capital) also mandatory for the success of the firm. If this is so, the enterprise will be
upgrading their growth stages, category and achieve sustainable development based on the set
government policy and strategy.

However if the enterprise have not apply the indicated variables such as lack of management
skills, technical skill, marketing strategy and technology and finance that challenges the firms
 growth. The theoretical consideration on the link between growth challenges and the growth
potential or performance of MSEs can be viewed from different angles. Lack of management
and technical skills limit the performance of the firms’ productivity, products quality and
integration system. Poor marketing strategy they may challenges a firm’s ability to
competitive in the market and they may challenge the firms’ sales, profitability, job
opportunity and they are forced to operate in low manpower and low income market segment.
The growth challenges analysis is anticipated to limit their transformation, upgrading and
firms’ growth potential and performance. Due to poor quality of institutions that are
established to support MSEs, rules and regulations will not be enforced and the enterprises
will not get the intended support.

CONCEPTUAL FRAME WORK

MARKETING STRATEGY
Market integration
Price, product quality
Market intensive
MSE
GROW
TECHNOLOGY
TH
Available machinery
Information/communication

FINANCE
GROWTH CATEGORY OF
GROWTH STAGE OF MSE

Loan/credit
accessibility
Book keeping
KNOWLEDGE OFsystem
BUSINESS
MANAGEMENT PRINCIPLES
Large/industry
Maturity stage

Start-up stage
Growth stage

Planning
Medium

Organizing
Micro
Small
MSE

Directing
Motivating
controlling
TECHINICAL SKILL
Pattern/design
Technology usage
Innovation
Entrepreneur skill
Experience

EDUCATION/INTENSIVE TRAINING
Motivation/commitment
self confidence
problem solving ability
knowledge of innovation
CHAPTER THREE: METHODOLOGY

The study is entirely supported by different techniques and methods which are relevant to the
total sum of the needs operation. Basically the final outcome of the study is depending on
those sources the research originally seeking for. Primary and secondary data collection
methods will be followed and the study use analytical descriptive approach.

3.1. MODEL SPECIFICATION AND DESCRIPTION OF VARIABLES

The study in general tries to use different kinds of techniques for the collection and
assessment of the data so as to draw out conclusion. Data mining can be done from individual
excel. With this reference, the study uses simple random sampling and drawing of the sample
is based on equal chances of opportunity. Geoffery indicated that “the main target of
regression is prediction” (Geoffery M.et al, 2005).
Then study used multiple linear regression models to examine the growth challenges of MSE
leather manufacturing firms based on the relationship of the dependent and independent
variables.
The study specified the growth of capital model as follows:
Capital growth=
Yi=β0+β1X1+β2X2+β3X3+……… βnxn+ε¡
Yi= the dependent variable
β0= a vector of constant term
β1= a vector of coefficient of explanatory variable
X= a vector of explanatory variable or independent variable
ε¡= error term
Based on the linear regression model growth is response variable and determined by
enterprises category, enterprises stage, current capital, initial capital, finance, marketing
strategy, technology, technical skill, business management principles skills and
education/intensive training are predictor variables.

OPERATIONAL DEFINITION OF THE VARIABLES

The following variables were considered to estimate the growth of MSE firms and the
challenges effects:
Business management principles skill: The ability of properly planning, organizing,
directing, motivating and controlling the business activities.

Marketing strategy : It represents the availability of adequate market linkage and

information on their product, creating market integration, supply chain, market development,
market penetration and product development strategy

Current capital: Total asset of the enterprise when data collected

Initial capital: Startup capital of the enterprise

Enterprise category: Category given to the enterprises based on their current capital (Micro,
medium & small)
Enterprise growth stage: Stage given to enterprises based on their progresses (start up,
growth & maturity stage)

Technical skill job skill : It represents the knowledge and abilities of the entrepreneurs in

accomplishing the leather goods manufacturing tasks.

Capital: Working capitals that include machinery and other asset of MSE

Technology: The machinery and other equipment that used to operate their business.

Finance: managing assets and liabilities in book keeping and loan/credit financial facilities

Education: acquiring particular knowledge or skills in this business sector.

3.3. RESEARCH DESIGN

Among different research design, both qualitative and quantitative exploratory and analytical
research design is used for the purpose of this study which enable the researcher to interpret
the finding adequately and accurately.

Exploratory research is used because of the lack of available empirical and statistical
information about the challenges of MSEs to contribute to SD in Ethiopia. (Creswell, 2003)
points out that exploratory research is conducted when there is a lack of sufficient
information about the topic, and goes on to state that such exploratory studies may show if
the topic is worthwhile or feasible or used to familiarize the researcher with the context and
guide the selection of data elicitation method to be used. He states that the application of the
exploratory method is conducted in two phases. The first is a qualitative stage followed by a
quantitative phase. The aim of the first phase is to explore the phenomenon under study,
develop and test the data collecting instrument, and use the result to develop the quantitative
phase. This is a mixed method research approach.

Analytical research is used to assess characteristics of MSEs and their impacts to SD.
(Kathari, 2004) indicated that analytical research aims at critical evaluation of the given
phenomenon in fact, figures and narrative information i.e. it looks beyond the facts and
figures already collected and assumes that behind the accumulated data there is something
more important and revealing than the facts and figures.

A. SOURCE OF DATA SAMPLING TECHNIQUES AND SAMPLE SIZE

In order to measure growth challenges as well as analyze determinants of capital growth of

leather goods manufacturing micro and small enterprise in Addis Ababa, primary source of
data was used. All data on growth challenges were collected by using questionnaires. The
data collected include all challenges of growth i.e. business management skill, marketing
concept, technical operational skill, technology and finance on leather goods production. The
determinants that supposed to explain growth of leather manufacturing were part of data
gathered though questioners.

In order to conduct the study, various literatures have been surveyed from various sources
like government reports, journals and thesis. Collected primary data through questioner and
interview from the firm owner/manager have been organized, analyzed and presented.

B. SAMPLING DESIGN

In order to represent both micro, small scale and large and medium scale MSE leather
manufacturing firms used simple random sampling techniques. To get the final sample size of
the MSE leather manufacturing firms in in Addis Ababa city administration for the survey the
formula developed by Yamane (Yeman, 1967) used accordingly,

(1)

Where
= is the sample size

= is the population size,

= is the level of precision or sampling error at 10%

Data for the analysis of the study was collected through questioner from 71 MSE leather
manufacturing firms from the total population of 257 MSE firms covering the period 2005-
2017 (Addis MSEB, CSU, 2017).

C. DATA COLLECTION APPROACHES

This study entirely limits with two sources of information for which the final analysis and
presentation of the report depicted. These sources are primary and secondary. The primary
data is basically looking to acquire information which is directly obtained from the MSE
managers and owners. This type of data collection is supported by interview and
questionnaire, survey, observation. Questionnaire and interview will be used largely for this
thesis project in most cases, structure interview will be used to cover all parts of research
questions on the other hand, the secondary data is the method of the research in which data is
collected from the already existed sources. The expected data would be gathered from the
enterprise office reports, firms profile, reports and other written documents which are
relevant to the study.

3.3. ESTIMATION TECHNIQUES AND METHOD OF DATA ANALYSIS

3.3.1 METHOD OF DATA ANALYSIS

For this research both descriptive analysis and inferential/statistical analysis will be used for
examining the growth challenges of leather goods manufacturing MSE firms in Addis Ababa
city administration. Tabulation, percentage, measurement of central tendency, Measurement
of dispersion, measurement of asymmetry and data transformation and index number and
based on judgmental ability is the methods of data analysis, respectively.

Quantitative and qualitative data collected in the field survey will be coded and interpreted
using different types of application software STATA 14.2 version and MS-Excel.

3.3.2 ESTIMATION TECHNIQUE

Based on the sampling theory and inferential statistics estimation parameters of this study
used least square (LS) method of data analysis .These methods will be fitted with the
estimation of the growth parameters.

The model considers the following variables and parameters

Response or dependent variable=Y (growth)

Auxiliary or independent variable= X1, X2….X9 (growth challenges)

Parameters = β1, β2 ….β9

The equation of regressions on this study is generally built around two sets of variables,
namely dependent variable Y=(Growth) and independent variables =X growth challenges
(Current capital, marketing strategy(mark), Business management principle(Mgt), Technical
skill of the owner of the firm(TES),education background of owner/manager(Educ), and
technology(TECH). The basic objective of using regression equation on this study is to make
the study more effective at describing, understanding and predicting the stated variables.

Regress growth of MSE on Selected Variables

Y=β0+β1X1+β2X2+β3X3+ β4X4+ β5X4+ β5X5+ β6X6+ β7X7+ β8X8+ β9X9+ε

Where:

Y is the response or dependent variable- capital growth

X1=Finance (FiN), X2=Marketing management concept (mark), x3= modern technology

(TECH), X4=Enterprise current stage (ES), X5= Enterprise category (Ec), X6= Current
capital of enterprise(Cuc), X7= Educational status of owner/manager of the firm(Educ),
X8=business management principles( Mgt) and X9= technical skill of the owner of the
firm(TES) and ε, is random disturbance or error.β0 is the intercept term- constant which
would be equal to the mean if all slope coefficients are

β1, β2, β3, β4, β5, β6, β7, β8, and β9 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 was used to explain the following relationships.
Regress capital (as dependent variable) on the selected linear combination of the independent
variables using linear regression.
 Bibliography

UNCTAD. (2020). The International Day of Micro, Small and Medium Enterprises (MSMEs). Geneva:
UNCTAD - Palais des Nations.

Worldbank. (2017). TARGETED FINANCING FOR SME’S AND EMPLOYMENT EFFECTS. World Bank
Group,JOB.