Dissertation (Impact of SMEs On Economic Growth) - Alexander Maluza

The Impact Small to Medium Enterprises (SME) on Economic Growth 2014
THE CATHOLIC UNIVERSITY OF MALAWI
FACULTY OF SOCIAL SCIENCE
DEPARTMENT OF ECONOMICS
THE IMPACT OF SMALL TO MEDIUM ENTERPRISES ON ECONOMIC

GROWTH
ECONOMICS DISSERTATION
ALEXANDER MALUZA
BSOCECO/45/02/11
Submitted to the Faculty of Social Science in Partial Fulfilment of a

Bachelors in Economics
1
JANUARY 2015
Alexander Maluza | BsocEco/45/02/11

DECLARATION
I declare that this dissertation, hereby submitted in partial fulfilment of the requirements for
the award of a degree of social science in Economics; is my original work. The opinions
expressed in the study are those of the researcher and do not necessarily represent the views of
the supervisors or any institutions. Where other researchers’ work has been used, due
acknowledgements have been made accordingly. I further declare that this dissertation and all
work contained herein has never been submitted in any university or any institution of high
learning for similar purposes.
Candidate:_______________________________________
Alexander Lino Pascal Maluza Junior
Date: ___________________________________________

STATEMENT OF APPROVAL
I declare that this Dissertation is the student’s own work and effort and where he has used other
sources, acknowledgement has been duly made. Hence the thesis is submitted with my approval
on behalf of the Catholic University of Malawi, Chiradzulu, and Nguludi
Supervisor: _____________________________________
Mr N Kamanaga
Dean of Faculty of Social Science
Date: __________________________________________

DEDICATION
I dedicate this work to the only two individuals who have always remained by my side, have
given me unfaltering, unwavering, unquivering and unequivocal support and have never for
even a flickering, most trivial instance lost faith in me, regardless of my endless mischief,
misgivings and shortcoming; that my God the father in heaven, and Mr N.L.P Maluza, my very
loving and caring uncle.

ACKNOWLEDGEMENTS
I would like to acknowledge my parents; my late Dad (Mr ALP Maluza) for he is the genesis
of my education. I would have truly loved for you to see your work come to fruition, none the
less, I accept that God’s plan is best, keep resting in peace dad. I would like to acknowledge
my aunt Catherine, my Uncle Professor Mathews Chikaonda and my Uncle Crescent. I would
also like to acknowledge all my family, Benedicto Maluza and Bernard Mkunthi. I would also
like to acknowledge my best friend Ellah Mtawali – who equally sat through mountains of
economic jargon, which I hope to explain one day! My roommate Steven M’bwana, for all
those endless nights spent as we worked on our dissertations and my Dog Jip, who sat and
stared at me for hours as I sat on the veranda trying to conceptualise this work, but never got
bored. My gratitude goes out to every individual who implicitly or explicitly contributed to this
work
In a very special way; my sister Immaculate Maluza; who has been very supportive materially
and emotionally, even though I doubt she understood all the economic concepts I was throwing
at her during writing this dissertation as I tried to make her understand what it was, I was trying
to accomplish-but the simple nod of head was enough sis! And to A.J for instilling in me
Aristotle’s philosophy that “anyone can become angry – that is easy. But to become angry for
the right reason, to the right degree, in the right time and in the right way – that is not easy
My biggest acknowledgement and sincerest gratitude goes to the Dean, and my supervisor Mr
Kamanaga, who has been a father figure to me since my first year, and without whom, I would
have managed this work.

ABSTRACT
Theoretically, a growth in the private industry, leads to a growth of the economy at large. In
developing countries, more so in our dearly beloved Malawi, the Small to Medium Enterprise
sector (SME) forms a substantially large part of the private industry. Empirical research that
has tried to understand the impact of this relatively large sector on the Malawian economy is
extremely rare-if anything, studies conducted have been highly descriptive! Non – the – less,
the diminutive work that is there, all alludes to the importance of this sector to economic
growth. This study carried out time series and panel data research on the impact of Small to
Medium Enterprises on the Malawian economy; further, the research investigated those factors
that are most pertinent to the performance of the Small to Medium size enterprise.
The research found that the Small to Medium Enterprise output was statistically at 1, 5 and
10% significance levels, and explained over 97% of the variations in GDP. The study then went
on to investigate the determinants of the SME performance and found that start-up capital,
owner characteristics (such as age, business skill and education level) and access to loans
were the most pertinent determinants, significant at 5% and 10% levels of significance.
Policy implications emerged from this study. There is a need to direct policy attention to the
rural, and woman owned SME, which turned out to be the worst performer. Beyond this, access
to resources for rural SMEs needs to be improved, setting up pooled resource centres could
increase agglomeration economies for rural SMEs, who are far from town – thus enhancing
this apparently critical vehicle of economic growth; the SME.

TABLE OF CONTENTS
DECLARATION………………………………………………………………… ii
STATEMENT OF APPROVAL………………………………………………… iii
DEDICATION…………………………………………………………………… iv
ACKNOWLEDGEMENT……………………………………………………… v
ABSTRACT……………………………………………………………………… vi
TABLE OF CONTENTS………………………………………………………… vii
LIST OF ACRONYMS………………………………………………………… viii
CHAPTER ONE: INTRODUCTION…………………………………………. 1
1.1 Background……………………………………………………… 9
1.2 Problem Statement……………………………………………… 11
1.3 Main objective of Study………………………………………… 12
1.3.1 Specific Objectives……………………………………… 12
1.4 Research Questions……………………………………………… 12
1.5 Hypothesis of study……………………………………………. 13
1.6 Research Scope………………………………………………… 13
1.7 Research Justification…………………………………………… 14
1.8 Organisation of Paper…………………………………………….. 14
CHAPETER TWO: OVERVEIW OF THE SMALL TO MEDIUM SECTOR… 16
2.1 Introduction to Overview……………………………………….. 16

2.2 Overview of the SME sector; a global perspective……………… 16
2.3 SMEs in the Sub continental perspective………………………… 16
2.4 SME sector in Malawi…………………………………………… 17
CHAPTER THREE: LITERATURE REVIEW………………………………… 18
3.0 Introduction……………………………………………………… 18
3.2 Theoretical Review……………………………………………… 20
3.3 Empirical Review………………………………………………… 20
CHAPTER FOUR: METHODOLOGY 7
4.1 Introduction……………………………………………………… 22
4.2 Research Design…………………………………………………… 22

4.3 Research site: Population, data sources……………………………. 22

4.4 Research tools……………………………………………………… 22
4.5 Model Specification……………………………………………… 23
4.6 Description of Variables………………………………………….. 24
4.7 Diagnostics tests…………………………………………………….26
4.7.1 Test for goodness of fit……………………………………. 27
4.7.2 Model Specification Test………………………………… 27
4.7.3 Stationarity (Augmented Dickey Fuller)………………….. 27
4.7.4 Normality Test……………………………………………... 27
4.7.5 Multicollinearity…………………………………………… 27
4.7.6 Heteroskedasticity………………………………………… 28
4.7.7 Serial Correlations ………………………………………… 28
CHAPTER FIVE: EMPIRICAL RESULTS AND INTERPRETATION OF DATA
5.0 Introduction………………………………………………………… 30
5.1 Descriptive Statistics……………………………………………….. 32
5.2 Diagnostic tests results……………………………………………... 32
5.3 Results for Estimated Models……………………………………… 34
5.4 Interpretation of Parameters……………………………………….. 35
CHAPTER SIX: CONCLUSIONS AND POLICY IMPLICATIONS……………..39
6.0 Introduction………………………………………………………… 39
6.1 Summary of Findings……………………………………………… 39
6.2 Policy Implications………………………………………………… 39
6.4 Limitations of the Study ………………………………………….. 41
6.5 Areas of Further Study……………………………………………. 41
6.6 Concluding Remarks……………………………………………… 42
BIBLIOGRAPHY…………………………………………………………………. 49
APPENDICES…………………………………………………………………….. 43
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ACCRONYMS AND ABBREVIATIONS
DEMAT Development of Malawian Entrepreneurs Trust
EU European Union
EOBI Ease of doing Business Index
GDP Gross Domestic Product
GDP/Capita Gross Domestic Product, divided by the total population
GoM Government of Malawi
ILO International Labour Organisation
MGDS Millennium Goal Development Strategy
MIRTDC Malawi Industrial Research and Technology Development Centre
MIPA Malawi Export Promotion Council and the Malawi Investment Promotion
Agency
NSO National Statistics Office
SME’s Small to Medium Enterprises
SMEDI Small to Medium Enterprise Development Institute
SMSE Small to Medium Scale Enterprise
SEDOM Small Enterprise Development Organisation

CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
Human civilisation and existence is one that is almost always certainly based on the concept of
growth. Given minimum constraints, every human settlement has tended to grow progressively
over time. This concept is articulated by the fact that a synopsis of human history will reveal
that human civilisations were founded only in the places which contained optimal resources
for growth; the Egyptian empire was founded and concentrated on the lower reaches of the Nile
river, because of the fertile soils and transport advantages (Cerney, 1975), the British empire
grew and thrived because of its strategic location off the north western coast of Europe which
gave it considerable military advantages (Mathias, 2001) and one of the largest historical
empires. Modern developmental economics is founded on the same concept of continual,
successive and progressive economic growth. The understanding is that as the volume of the
economy grows, the gross domestic product per capita improves. Growth is at the centre of
every government’s concern and this concern is ever more so pertinent for developing
economies. The focus the rests on the factors that lead to economic growth, and thus require
attention, in the pursuit of economic growth.
Recent assessments of economic growth point to an understanding that there must be a sound
productive sector, which will integrate the economy through trade and investment and provide
the government with money, which will then enable it to put in place an institutional
environment in which contracts can be enforced and property rights can be established (Ayres,
2004). The issue of a good regulatory framework (an institutional environment) is even more
pertinent in Malawi where the country does not perform well in the area of legal and regulatory
frame work conducive to business creation (ILO, 2013). Considering the Ease of Doing
Business Index (EOBI), the country has worsened from 2008 to 2012, moving from 127 to 157
in a ranking from 1 to 185. Malawi performs worse in this respect than Mozambique, Tanzania
and Zambia (ILO, 2013). There is a vicious cycle then, between private sector performance
and growth (and thus economic growth) and a good regulatory framework. A good framework
will lead to faster growth, but to have a good framework the private sector need to perform, so
government can use the tax returns from the same to improve the trade environment. However, 10
while governments make policies in trade and investment areas, it is enterprises that trade and
invest. Therefore, supply-side bottlenecks in the trade and investment areas and how

governments, development partners and the private sector itself address these constraints have
direct implications on the economic growth potential of transition and developing countries.
The logical ending of this discourse is simple, and is as thus: The private sector is an important
area in the discourse of reducing the “production bottlenecks” that exist, hindering economic
growth. An inherent and substantial part of the private sector is the category of Small to
Medium Enterprises (SME’s). The Malawi Government defines SME’s as “the category of
micro, small and medium enterprises which employ fewer than 250 people and which have an
annual turnover not exceeding 149,000,000 million Kwacha (GoM, 2012). SMEs play a key
role in transition and developing countries. Typically SMEs account for more than 90% of all
firms outside the agricultural sector, and constitute a major source of employment and generate
significant domestic and export earnings (Fjose, 2010). Developing countries, especially in Sub
Saharan Africa, tend to have large agricultural sectors due to the aggravated presence of
subsistence farming. Subsistence farming itself can also be considered its own category of
SMEs, because the farmers simultaneously produce for consumption and the market and will
contribute to the GDP. SMEs thus have an important role in the context of developing
economies, in terms of economic growth and poverty reduction because of the connection
between SME performance and growth and economic growth.
A recent survey by the National Statistics Office (NSO) found that SMEs employ 1,050,320
individuals of the total workforce of 6,100,000, whereas the formal sector has a recorded
440,000 employed (GoM, 2012) representing 17.21% and 7.21% of the total labour force
employed respectively. The remainder; 4,605,680 are recorded to be unemployed or having
seasonal employment. The SME sector in Malawi is thus the largest employer, and taking
cognisance of this fact the International Labour Organisation (ILO) conducted a research on
constraints faced by SMEs in Malawi for policy making purposes to induce growth in the SME
sector, such that the sectors employment potential can grow. A growth in the SME sector then
will have a twofold effect; increase aggregate demand by individuals, as they are now earning
more income. This increased aggregate demand will be met by increased production by firms,
yielding an increase in the real monetary value of all goods and services produced which is
termed economic growth (Mankiw, 2002). Further the African Developed Bank concluded
Malawi’s economic growth was going to be export led and that SME’s are “target drivers” in
that they are the key to increasing exported output (Bank, 2012). In as much as there has been 11
considerable literature generated about SME’s and Economic growth in Malawi, there is a
missing gap in that thus far, a research that quantitatively provides the exact nature of the

impact of SMEs on economic growth has not been done yet. Furthermore, the research on the
determinants of SME performance and growth is mainly descriptive and narrative. This
research aimed to fill that gap, in the pursuit of understanding exactly how important SMEs are
to achieving economic growth, and the policy implications that arise from such a critical
analysis
1.2 PROBLEM STATEMENT
SMEs employ 1,050,320 individuals of the total workforce of 6,100,000, whereas the formal
sector has a recorded 440,000 employed (GoM, 2012) representing 17.21% and 7.21% of the
total labour force employed respectively and leaving a gargantuan 4,609,680 unemployed! The
World Bank Poverty Manual (2005) identifies SMEs as “the vehicle for unlocking the potential
of the poor to earn income, and move them from below the poverty line.” Given these forgoing
facts and statistics, the SME sector’s importance in the Malawian economy cannot be
understated and requires distinct understanding and attention by the government in its efforts
of improving the welfare of individuals (through increased employment in the SME sector) and
developing and growing the economy. A poorly performing SME sector is not only
incapacitated to employ the number of people it could potentially possibly employ, but also is
under contributing to GDP hence national growth.
Given the foregoing understanding, the Government of Malawi (GoM) has put in positive
incentives to encourage SME growth. To this extent, GoM has created a number of SME
support institutions which include the Malawi Industrial Research and Technology
Development Centre (MIRTDC), the Development of Malawian Entrepreneurs Trust
(DEMAT), the Small Enterprise Development Organisation (SEDOM), Malawi Entrepreneurs
Development Institute (MEDI), Malawi Export Promotion Council and the Malawi Investment
Promotion Agency (MIPA) (Kachale, 2013). GoM further supported the establishment of SME
support institutions in the private sector including several non-governmental organisations
(NGO) such as the National Association of Small and Medium Enterprises under the Chamber
of Commerce and Industry, National Association of Business Women, Malawi Union of
Savings and Cooperatives, Malawi Rural Finance, and several skills training centres under
NGOs (Kachale, 2013). Given all these efforts, the SME sector is still plagued by problems
that retard its growth. Problems like Limited access to credit , lack of clear policies supporting
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and guiding the promotion of SMEs, limited access to raw materials and inputs, lack of
entrepreneurship and management skills, unfavourable fiscal and taxation policies, lack of
access to qualified staff to assist SMEs with business planning and appraisal, lack of access to

information on investment opportunities, lack of knowledge on taxation systems, lack of

understanding and necessary support in quality and standardisation, lack of technical skills,
lack of knowledge of existing policies (Fjose, 2010) affect the growth of the SME sector.
On a landscape of a poorly performing SME sector, Malawi remains a very poor country,
ranking 153 out of the 160 on world poverty rankings (IMF, 2012) in the face of a struggling
SME sector which has a substantial amount of potential. The problem at hand was thus to
understand the factors which affect SME performance and thus growth; further - to understand
which ones are most pertinent to which policy efforts can be directed, such that the sector
experiences growth. Having determined the significance of the factors that affect SME growth,
it was vital to establish the exact impact of the SME sector on economic growth because
establishing this significance will be fundamental in policy designs and implementations which
aim to improve SME performance, and thus increase the pace of economic growth.
Furthermore all the current studies on the importance of SME growth in Malawi are descriptive
and theoretical in nature, there has not yet been an empirical study that has analysed the impact
and importance of SMEs not only in Malawi, but Sub – Saharan Africa. This study aimed to
fill this void.
1.3 MAIN OBJECTIVE
The primary concern of this study was to determine the impact of SMEs on the economic
performance of Malawian economy. The secondary objective was to establish the factors that
affect the performance of SME’s; thus identify policy alternatives that could be applied to
improve SME performance, and thus economic growth. This general objective was achieved
through the following specific objectives:
1.3.1 SPECIFIC OBJECTIVES
I. Determining the impact of the growth of the SME sector on economic growth.
II. Determining the effect of the factors intrinsic to the SME (such as managerial skill and
start-up capital) on SME performance.
III. Assessing the effect of the National Small Medium Enterprise policy on SME
performance
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IV. Examine the effect of government’s expenditure on education and vocational training
on SME performance and economic growth.

1.4 RESEARCH QUESTIONS
I. Does the growth of the SME sector have any impact on economic growth?
II. To what extent do variables intrinsic variables to the SME have an impact on the
performance of the Small to Medium Enterprise.
III. Does the National SME policy have any effect on the performance of SMEs in Malawi?
IV. Does the government’s expenditure on education have an effect on SME sector
performance and growth?
1.5 HYPOTHESES
1.5.1 NULL HYPOTHESES (H0)
The researcher aimed to test the following null hypotheses.
H01: The performance and growth of the SME sector has no impact on economic
growth.
H02: Factors intrinsic to the SME sector do not have any impact on performance of the
sector
H03: The National SME policy has no effect on the performance and growth of the SME
sector.
H04: Government’s expenditure on education has no effect on the growth and

performance of the SME sector.
1.6 RESEARCH SCOPE
Neo – Classical economics growth theories give that there are four primary elements
(consumption, private investment, government expenditure and net exports (Mankiw, 2002))
that affect a country’s national income, and hence the growth of the same. Government policies
and internal characteristics1 of the economy can be oriented in such a way that any of these
four variables can affect economic growth, but their effects are going to be different. This study
aimed to focus on the effect of private investment, (which SMEs are part of) on economic
growth.
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1
These are characteristics such as those given in (Porter M. , 1991) economic theory of growth: Factor conditions (such as human resources,
related and supporting industries, competitive conditions, government conditions on supply chains and chance events.

1.7 RESEARCH JSUTIFICATION
Economic growth is at the centre of every nation’s macroeconomic policy. Economic growth
generally entails a reduction of unemployment rates and an improvement of the social welfare
of individuals in the country. One of the influences on economic growth is private investment,
which can generally be categorised into two distinct categories; large scale industry, and
medium and small scale industry, the latter being classified as SMEs. The Small to Medium
Enterprise (SME) sector, forms a substantial part of any economy (Fjose, 2010), and this
certainly holds true for the Malawian Economy where the SME sector was projected to have
contributed 40% to the GDP (FinScope SME Survey, 2012). Given the importance of the SME
sector in the economy, it is essential that sufficient attention and understanding be put to SME
growth and performance. This findings from this study will deepen the current understanding
on this little understood sector of the economy and provide policy makers with information that
can better equip them to develop comprehensive and effective pro SME policies.
1.8 RESEARCH STRUCTURE
The rest of the proposal is organized in the following way: chapter two presents the overview
of the concept of the SME. Chapter three presents the theoretical and empirical literature on
SMEs and economic growth. Chapter four outlines the methodological approaches employed
in this study, chapter five and six presents the empirical findings and policy implications
respectively.
Figure two below outlines the structure of the research.
15

Chapter 1: Introduction
Chapter 2: Overview of the SME
Chapter 3: Literature Review
Chapter 4: Methodology; Research plan and execution
Chapter 5: Research findings, Presentation and Analysis
Chapter 5: Policy Implications
Figure 2: Outline of the Research
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CHAPTER TWO
OVERVIEW
2.1 INTRODUCTION
The overview compares and evaluates the relationship between the determinants of SMEs and
performance of the SME, and how this subsequently relates to economic growth. The author
first reviews the concept of the SME from a global perspective, with special emphasis on SMEs
in developed countries. The author then presents an overview on the concept of the SME as an
engine of growth from a Sub – Saharan perspective; the researcher finally concludes the
overview by an analysis of literature on the SME in Malawi.
2.2 AN OVERVIEW OF SMALL TO MEDIUM ENTERPRISES; THE GLOBAL

PERSPECTIVE.
SME’s are considered as an engine for economic growth as well as for economic development
especially in the developing countries. Small and medium enterprises play an important role in
the development of a country (Sattar, 2013). SMEs contribute to economic development in
various ways by creating employment for rural and urban growing labour force, providing
desirable sustainability and innovation in the economy as a whole. There is a large number of
people relying on the small and medium enterprises as a source of employment, especially in
the Malawian case (GoM, 2012).
According to the statistics in industrialized countries, SMEs are becoming less important, and
tend to contribute less to GDP than they do in less developed economies. Empirical studies
have shown that SMEs contribute an average of 45 % of GDP and 65% of total employment in
high income countries. This is in contrast to SMEs and informal enterprises in middle and low
income economies where they account for over 60% of GDP and over 70% of total employment
and 70% of GDP and 95% of total employment respectively (World Bank, 2012).
SMEs are the major growing force behind the fastest growing economy of China in terms of
contribution to the national GDP (accounting for 40%), scale of assets, diversification of
products, and the creation of employment. Similarly, the role of SMEs is well acknowledged
in other countries such as Japan, Korea and all other industrialized economies in terms of
creating employment, reducing poverty and increasing the welfare of the society (Walczak,
17
2011).
Given the above global statistics, the importance of SMEs as a sector of the economies around
the world cannot be overstated. Empirical evidence on SMEs and their interaction with the

wider economy is more readily available in the developed economies than in the developing
economies; perhaps one of the reasons that SMEs do not contribute as much as they do in
developing economies as the latter is the lack of information on SMEs. In as much as the
importance of SMEs in other countries has been established, the exact significance and impact
of SME growth on economic growth in Malawi has not been established and the available
literature on the variables the affect SME growth is mainly narrative, if anything rare (Fjose,
2010).
2.3 SME’S IN THE SUB SAHARAN REGION; REGIONAL AND SUB REGIONAL
MARKETS (THE ROLE OF SMEs IN ECONOMIC DEVELOPMENT).
Small to Medium Enterprises in developing countries, especially in the Sub Saharan region
take on a perspective that is unique to the area. The informal sector in many Sub-Saharan
countries represent between 40-60 percent of GDP (Rogerson, 2004). This is in contrast to the
significance (or presence) of the SME in highly developed countries, as has been reviewed by
the author. SMEs constitute 95% of all firms in the sub – Saharan region, and are thus a major
constituent of private investment.
The first thing to note is that there has been a shift toward higher and persistent growth in the
Sub – Saharan Africa region. Research argues that the most important drivers behind this shift
are increased public and private investments, fuelled by an improved business environment,
which also propels SME activity (Fjose, 2010). In addition there has been a sustained rise in
several commodity prices including exports, which have generally increased the GDP of
countries in the region, the (IMF, 2012) report especially cites a sustained rise in prices of
agricultural commodities. Furthermore there has been an increase in Foreign Direct Investment
in the region, the Malawi Investment and Trade Centre reports that in 2012, Malawi attracted
FDI worth US$1.2 billion representing 22% of the FDI flows to Southern Africa (MITC, 2014).
This increase in the FDI ultimately leads to an increase in private investments, hence an
increase in SME activities, which will lead to a growth in the sector. There still remain
problems however with the SME sector in the Sub – Saharan region with SME growth. SMEs
are severely hampered by a weakly developed business environment; red tape, corruption and
complex entry regulations provide few incentives to become (or remain) active in the formal
18
part of the economy. Consequently, in many of these countries, a large share of SMEs is not
participating in the formal economy (Fjose, 2010). Without being a formal enterprise, access
to finance, new markets opportunities and public sector services is severely hampered. A better

understanding of the SME sector would help policy makers to improve the business
environment for SMEs even more; the better the business environment, the more SMEs will be
established.
2.4 OVERVIEW OF THE SME IN MALAWI
The Government of Malawi understands and realises the importance of the SME sector in
Malawi. The element most unique about the SME sector in Malawi is the employment
potential. The latest statistics indicate that there are almost one million MSMEs in Malawi (987
480). The fact that there are far less business owners (758 118) indicates that some people own
more than one business. The sector employs over a million people generating an income of
MK 326 billion (FinScope SME Survey, 2012), and is a significant contributor to Malawi’s
economy. However, the majority of SMEs in Malawi are very small. 59% are individual
entrepreneurs who employ no other people, while the remaining 41% of businesses generate
employment; however the majority of them are micro businesses. The majority of SMEs (87%)
are retailers, that is, they sell something, particularly agricultural products. The remaining 13%
of SMEs render services for instance professional services (accountant, lawyer, consultants)
and skilled services (hair salon, plumber, and mechanics). The large majority of MSMEs (85%)
are located in rural areas, the Central (49%) and Southern Region (40%).
Given the fact that the majority of SMEs are micro businesses, the net profit of many
businesses is relatively low with 35% of MSMEs making MK 11,000 to 25 000 a month.
MSMEs mainly operate either from a trading centre/market (42%) or from home (42%). Many
of those businesses are in the growth phase (3 – 5 years of existence). This phase of a business
requires special attention with regards to expansion and support. Further. The large majority of
MSMEs trade informally (91%), being neither registered nor licensed. 2The segment of the
MSME that requires support forms part of the aim of the researcher in pursuing this research.
Having established the significance of the variables that affect growth of the SMEs, how can
further growth be achieved.
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2
These statistics were sources by the researcher from a FINSCOPE MSME survey conducted in 2012 by FINSCOPE in conjunction with
the African Develop Bank, USAID, JAICA, EU and World Bank.

CHAPTER THREE
LITERATURE REVEIW
3.0 INTRODUCTION
The author reviews relevant literature on the theory and empirical evidence of factors that affect
SME growth, and SMEs influence on economic growth. This chapter has been divided into two
sections; theoretical review and empirical review.
3.1 THEORETICAL REVIEW
Keynesian macroeconomic has theorised there is a direct proportionality relationship between

private investment and GDP such that, Yi is proportional to Iinvestment where Yi and Iinvestment
denotes GDP and private investment respectively (Mankiw, 2002). The theoretical underlining
is such that if private investment increases, then so will GDP. SMEs are part of an economy’s
private investment, thus an increase in performance and growth of the SME sector, will
increase private investment and consequently GDP. The Classical theory of stages – of –
growth has related private investment to growth in the economy.
ROSTOWS STAGES OF GROWTH MODEL
(Rostow, 1960) in his Stages of Growth theory argued that a country passes through sequential
stages in achieving development. The advanced countries, he was argued, had all passed the
stage of “take-off into self-sustaining growth,” and the underdeveloped countries were still in
the traditional society stage and had only to follow a certain set of rules of development to take
off in into self-sustaining economic growth (Rostow, 1960). One of the methods in which an
economy can achieve the take off stage, is the mobilisation of savings, in order to generate
investment and achieve economic growth. This mechanism (of turning savings into investment
and thus economic growth) is described by the Harod Domar Growth Model.
THE HAROD DOMAR GROWTH MODEL
The Harod Domar growth model is a functional economic relationship in which the growth rate
of gross domestic product (g) depends directly on the national net savings rate (s)3 and inversely
on the national capital-output ratio (c)4 (Todaro, 2011). The model explains that every economy 20
must save a certain proportion of its national income, if only to replace worn-out or impaired
3
A is expressed as a proportion of income not consumed over a period of time.
4
A ratio that shows the units of capital required, to produce one unit of output over a period of time.

capital goods (buildings, equipment, and materials). However, in order to grow, new
investments representing net additions to the capital stock are necessary. The Harod Domar
Growth Model is represented as: ……….……………………..…[1]

which simply states that the rate of growth of GDP (ΔY/Y) is determined jointly by s and c.
From equation [1] it can be seen that if changes in s are larger than changes in c, the economy
will grow. The Harod Domar growth model gives that s = Iinvestment, thus the larger Iinvestment is,
and the larger the growth of GDP. Growth of the SME sector then, represents a growth in
private investments (Iinvestment) which will yield a growth in GDP.
3.2 EMPIRICAL REVEIW
Empirical evidence of the impact that SMEs have on economic growth in the Sub – Saharan
region, let alone Malawi is extremely rare, if anything in narrative form. However from the
literature that the researcher found, in a study conducted in Pakistan (Sattar et al) found a
positive correlation between SME performance and economic growth. This study was aimed
at analysing the impact of process innovation5 on the performance of small and medium
enterprises and the impact of a strong SME sector on economic development. The study further
went on to examine the effects of national expenditure on education, on SME performance,
and found a positive correlation between expenditure on education and SME performance and
economic growth. The study further found that characteristics like lower interest and tax rates,
more available start-up capital and access to loans are positively correlated with SME growth
at 5% and 10% levels of significance, which itself is positively correlated to GDP growth.
(Anthony et al) found similar results in Ghana in a study on access to credit and SME growth
found that access to credit, age of firm and managerial skill of the owner of the SME are
positively correlated to SME growth at 5% level of significance. (Anthony et al) however did
not go on to investigate impact of this sector growth on economic growth, but concluded that
the growth in SMEs leads to an improvement of welfare.
A study by (Nelson et al) supports the findings of (Sattar et al, 2012) on education expenditure
increasing SME performance. (Nelson et al) found that the rate of increase in technology level
21
5
The study used three main measures for process innovation; number of patent applicants, number of trademark applicants, high-tech exports
and high-tech exports as percentage of manufacturing exports.

is an increasing function of educational attainment and that there existed a positive correlation
at a 5% level of significance, between education attainment and absorption of technology in
their study of the effects of education and technology and SME growth. This is especially
appealing to the researcher because both Malawi and Pakistan are developing countries, and
one of the focuses of the SME strategy paper developed by the GoM in 2012, is oriented
towards increased expenditure in education (especially in entrepreneurial studies). In a related
study (Levine, 2005) analysed the influence of SMEs on economic growth and the
effectiveness that SMEs have in poverty reduction and found SME growth to be positively
correlated with economic growth at a 1% level of significance. Levin further found access to
credit facilities by the SME to be a significant determinant of SME performance at 5% and
10% levels of significance. The contrast between these two studies was that (Levin,2005)
approached the study from the perspective that a reduction in unemployment is inversely
related to growth, whereas (Sattar et al) analysed an increase in innovation leading to SME
growth and hence economic growth but both arrived at the same conclusion.
The conclusions arrived at by the studies thus far are one side of the coin. The other is that a
growth in the SME sector does not lead to a growth in the economy. In a study by (Cravo,
2010) which analysed the impact of strong SME’s sector on economic growth of Brazilian
economy. The author examines the relationship between SME sector and economic growth for
a panel of 508 Brazilian micro-regions for the period 1980–2004. It observes the significance
of SME sector with respect to two main variables; the share of the SME employment in total
employment, and the level of human capital in the SME sector. The empirical findings show
that Brazilian SME sector has no significant correlation with economic growth but SMEs’
human capital is more important for growth in more developed regions.
22

CHAPTER FOUR
METHODOLGY
4.1 INTRODUCTION
This chapter describes the techniques and procedures used by the researcher in executing and
collecting data for the research, by outlining the research design: sampling techniques, sources
of data, data collection, analysis and presentation.
4.2 RESEARCH DESIGN

The research employed both primary and secondary data and data that are both quantitative
and qualitative in nature, the research further employed both panel and time series data; in order
to investigate the pertinence of factors intrinsic to the Small to Medium size enterprise and the
impact of the same, on economic growth respectively.
4.3 RESEARCH SITE, POPULATION DATA SOURCES.

The interest of this research was to measure the impact of the SME sector on economic growth
(over time). For this the researcher employed time series data of GDP, government expenditure
on education, inflation and the Output of the SME sector, year on year; from 1964 to 2014.
This data was gathered from the National Statistics Office, Ministry of Education and Ministry
of Economic Planning and Development. Beyond this primary interest, a secondary objective
was to then investigate the determinants of the sectors performance by sampling 100 SMEs
from rural and urban Blantyre; of the SMEs interviewed, the final usable sample was 70 SMEs.
Blantyre was chosen as the site for collection of primary SME data by the researcher because
of the ease of access.
4.4 RESEARCH TOOLS

The research used primary data that will was obtained from a survey. The primary tool for
collecting these data was a structured questionnaire, with a combination of open and closed
questions to gather sales turnover and firm specific data.
4.5 MODEL SPECIFICATION

23
The purpose of this study was to examine the impact of SME growth on and economic growth,
by examining the impact of SME annual output on annual GDP. Secondary to this purpose, the

study set out to investigate the determinants of SME performance. The research thus specified
two separate models to achieve these purposes.
To investigate the relationship between SME growth and GDP growth, the model was specified
as follows;
GDP = β1 + β2SMEYt + β3INFLt + β 4PEDGUGt + β5VOCTRt + U where t is the time period
from 1960 to 2013. The research denoted this model as A.1.
Where GDP is the real Gross Domestic Product (in 2005 United Stated Dollar terms), SMEG
is the monetary value of goods and services produces by the SME sector, INFL is the inflation,
PEDGUG is the portion of the national budget allocated to education and VOCTR is the portion
of that education budgetary allocation that was allocated to various training programs to equip
individuals with entrepreneurial skills, ranging from basic business skills to advanced
craftsmanship.
To investigate the effects of independent variables on SME performance, the model was
specified as follows:
lnSMEP = α1 + α2 lnLOC+ α3lnGEN+ α4 lnEDU+ α5lnACL+ α6lnDISTcbd+ α7lnAGEO +

α8lnAGEF + α9lnSUC + α10lnAVOCTR + α11lnPOL + U. The research denoted this model
as A.2. The author chose to use a double log model for A.2 because it would allow analysis of
the elasticity of SME performance to changes in the independent variables, to enhance the
understanding of the impact of the determinants on SME performance.
Where lnSMEP is the proxy for SME performance, measured by the annual sales turn over for
the year 2013.
LOC is the location of the SME (whether rural or urban), GEN is the gender of the owner, and
EDU is the education level of the owner. ACL is the SMEs access to a loan facility, DIST is the
distance from the nearest Central Business District, AGEO is the age of the owner, AGEF is
the time the SME has been in existence, SUC is the start-up capital, AVOCTR ascribes as to
whether or not the SME owner has had some form of business training and POL is whether or
not the SME owner has felt the impacts of the SME policies that have implemented by the
government.
4.6 Description of variables and expected signs

24
This section provides a very brief summary of the variables, and the expected signs of their co
– efficient.
Dependent Variables: Economic Growth (Model A.1) SME Performance (Model A.2)

Independent Variables;
Value of SME sector output (SMEYt)
This is the monetary value of measured goods and services produced by the SME sector in the
period 1960 to 2013. An increase in the total value of goods and services produced by the SME
sector will increase the total value of goods and services produced in Malawi, therefore it was
expected that (β2 > 0).
Inflation (INFLATIONt)
Inflation is the sustained increases in price levels over time (Mankiw, 2002). This research used
the GDP deflator as the proxy for inflation because unlike the CPI, the GDP deflator does not
have a fixed basket of goods, but allows changes to the basket to be made, to reflect changes
in expenditure over time (Ivestopedia, 2006). Because inflation reduces the real purchasing
power of money, it is expected that aggregate demand will reduce as inflation rises, therefore
it was expected that (β3 < 0).
Public Expenditure on Education (PEDGUGt)
This is the amount of money, spent by the government on education. Public expenditure on
education is anticipated to have a positive relationship with GDP and SME performance
because education increases the productivity of individuals, and improves the quality of
business decisions by SME owners, it was thus expected that (β4> 0).
Public Expenditure on professional training (VOCTRt)
This is the expenditure out of the national budget that is allocated to professional training
activities that are oriented to increase the entrepreneurial skills of individuals in the country
through training programs like TEVETA6. Since the emphasis of the vocational training
activities is on the SMEs, and thus an increase in VOCTRt would have a positive impact on
GDP, it was expected (β5 > 0)
Location (LOC)
Location specifies whether the SME is in rural or urban Blantyre. A predictor variable with the
value of 1 and 0 denoting rural and urban Blantyre respectively, the research anticipated that
25
6
The Technical Entrepreneurial and Vocational Training (TEVET) authority has a vision of adequate and competitive workforce for export
– led socio economic growth of Malawi, by providing high quality training and skills to various workmanship requirements across the board
(TEVET, 2014).

(α2<0) because urban SMEs were expected to perform better than rural SMEs because of the
higher incomes at the disposal of urban customers
Gender (GEN)
This is the gender of the owner of the SME. A predictor variable with the value of 1 and 0
denoting female and male respectively, the research anticipated that (α3<0) because female
owned SMEs were likely to perform worse than male owned SMEs because women are more
averse to risk for instance innovating, loan taking, expanding the enterprise (Crowe, 2014)
Education level of SME owner (EDU)
This variable specifies the highest academic achievement of the owner of the SME. The
research anticipated (α4>0) because the higher the education level, the better the quality of
business decisions made, hence better performance of the enterprise.
Access to Loans (ACL)
This refers to access to loans from both the formal and informal and informal sector, like
financial institutions and personal savings and family assistance respectively. A predictor
variable with values of 1 and 0 denoting no access and access to loans respectively, the research
anticipated that (α5<0) because those SMEs with no access to loans would have less start-up
capital, and would have more difficulty in expanding their enterprise.
Distance from nearest CBD (DISTcbd)
This is the distance from the nearest Central Business District (CBD) of other location where
the SME could acquire inputs, commodities or raw materials. The reference points in this
research were Blantyre and Limbe. The research anticipated that (α6<0) because the further
away from a resource source the SMEs is, the more difficult it would be for the SME to provide
with the continuity, the intended commodity, good, or service.
Age of Owner (AGEO)
This is the age of the owner. The research anticipated that (α7>0) because the older the owner,
the higher the quality of business decisions, due to experience gained.
26

Age of Firm (AGEF)
This is the duration that the SME has been in existence. The research anticipated that (α8>0)
because the longer the enterprise is in business, the higher its capacity to grow due to
accumulated assets, credibility with loan facility providers, familiarity with the industry or
sector of business and capacity to satisfy customers.
Start-up Capital (SUC)
This is the amount of paid up capital in Malawi Kwacha during the start-up. The research
anticipated (α9>0) because the higher the start-up capital, the greater that volume of trade at
start up.
Access to Vocational Training (AVOCTR)
This referred to whether or not the SME had access to some shape or form of professional
training from programs like TEVETA.A predictor variable with the values 1 an 0 denoting no
access and access respectively, the research anticipated (α10<0) because those enterprise
owners who had no training in either operational skill or general entrepreneurial skill were
expected to perform worse than those who did.
Effect of Policy
A predictor variable that described the impact of SME policy effect on the SME owner, with
values 1 and 0 denoting policy non effectiveness and effectiveness effectively, the research
anticipated that (α11<0) because SME policy non effectiveness would affect performance
adversely.
4.7 DIAGNOSTIC TESTS

This section discusses the tests that the research performed on the data to ensure that the results
of the estimated models were valid and inferable.
4.7.1 GOODNESS OF FIT
The goodness of fit measures how well the model specified fits the data being analysed, and is
measured by the Pearson Correlation Co-efficient (the “R2”)
27
4.7.2 MODEL SPECIFICATION TEST
The researcher intends to tests for any model misspecification (model under fitting, over fitting,
incorrect functional form, correlation between residuals or explanatory variables) by using

RAMSEYS reset test. Here the null hypothesis (H0) was that the model A.1 was correctly
specified. H0 is accepted where the F statistic of the Ramsey’s RESET test is greater that the
Probability of the estimated. The link test was used to test the model specification for model
A.2, where the null hypothesis (H0) is accepted if the predicted squared variable is statistically
insignificant at all conventional levels of confidence (the predicted squared variable does not
have any determination power).
4.7.3 STATIONARITY TEST

One of the assumptions of the Classical Linear Regression Model is the Stationarity of mean,
variance and auto covariance (such that they are constant over time). If the assumption holds,
the data is inferable and the results of the model are not spurious7. The null hypothesis, H0 is
that the variables used are stationary, and is accepted where the F statistic of the Dickey Fuller
test is greater than the F Statistic that the model returned at all conventional levels of
confidence8.
4.7.4 NORMALITY TEST

The research used the Jarque Bera and the Shapiro – Wilk test for normality to test the
distribution of Model A.1 and A.2 respectively. In both tests, the null hypothesis of normality,
H0, would be accepted if the Jarque – Bera and the Shapiro – Wilk statistic was greater than
the 10% level of significance.
4.7.5 MULTICOLLINEARITY
Multicollinearity is a term that as developed by Ragnar Frisch, and originally meant a perfect,
or near perfect relationship between some or all of the explanatory variables (Gujarati, 1998).
The researcher anticipated some variables to be correlated in the research. The research
anticipated some of the variables to share a linear relationship, for instance government
expenditure on education, PEDGUGt and expenditure on vocational training, VOCTR
(because the latter is determined by the earlier). The researcher also anticipated a linear
relationship between SME output, SMEYt and VOCTRt and PEDGUGt since SMEYt is likely
to move together with VOCTRt and PEDGUGt because the higher the educational expenditures
and vocational training the better SMEs were more likely to perform. Multicollinearity was
28
tested by analysing pair wise correlations among the explanatory variables, and the researcher
7
A spurious regression is one whose output is “nonsense (Gujarati, 1998)” and unusable.
8
The Unit Root test was only applied to model A.1 because the discourse of a unit root is moot in panel data (Model A.2)

used the thumb rule suggested by (Gujarati, 1998) that if the pair wise correlation≥0.8, then
Multicollinearity existed. However (Peck, 1992) suggested that the presence of
Multicollinearity not be remedied as it was an inherent characteristic of the data.
4.7.6 HETEROSKEDASTICITY
One of the assumptions of the Classical Linear Regression Model is that the variance of all
disturbance terms U be equal to some constant value (Gujarati, 1998). Estimation in the
presence of heteroskedasticity yields estimators that are linear and unbiased, but are inefficient
because they no longer retain minimum variance. The research employed Whites general
heteroskedasticity test for model A.1 where the null hypothesis, H0 (homoscedasticity) would
be accepted if the test statistic was greater that the P value of the model and the Bruesch –
Pagan test for heteroskedasticity for model A.2 where H0 would be accepted if p>0.05.
4.7.7 SERIAL CORRELATION

Autocorrelation occurs when the disturbance term related to any observation is influenced by
the disturbance term related to any other observation, (Gujarati, 1998). An unpretentious
approach of understanding serial correlation is that it is the relationship between a given
variable and itself over time intervals (Ivestopedia, 2006), hence the test was done on Model
A.1 only. The Researcher anticipated autocorrelation in Model A.1 because as GDP grows over
time for instance, allocations to education expenditure on vocational training would grow,
which would in turn directly influence GDP, by increasing it. In the end, the increased GDP,
would cause increased expenditure on vocational training expenditure, thus increases in
vocational training expenditure in one period, would cause future vocational training
educational expenditure to increase. Estimation in the presence of autocorrelation is a problem
because the OLS estimators are no longer efficient because they have large standard errors9
(Kmenta, unknown). The research employed the Durbin Watson d – statistic to test for
autocorrelation where the null hypothesis, H0, of no serial correlation would be accepted, if the
Durbin Watson d statistic was close to or equal to a value of 2. Because the research anticipated
serial correlation in Model A.1, the Newey - West method was the suggested corrective
measure procedure. This method reduces the standard errors on the estimators, by reducing
serial correlation of the error terms as they increase with time. 29
9
In the presence of serial correlation, and wide confidence intervals, coefficients, which were otherwise insignificant, would be declared
significant.

CHAPTER FIVE
EMPIRICAL RESULTS AND INTERPRETATION OF DATA
5.0 INTRODUCTION
The author presents the empirical findings of the research in this section. Section 5.1 presents
the descriptive statistics analysis, section 5.2 presents the results of the diagnostic tests
performed on the data and results, 5.3 presents the interpretation of parameters and 5.4 presents
the results of the estimated models A.1 and A.2.
5.1 DESCRIPTIVE STATISCTICS

5.1.2 Descriptive Statistics for Model A.1
INFLATION PEDGUG
Variable GDP (MWK) (%) (MWK) SMEY (MWK) VOCTR (MWK)
Mean 1,770,000,000.00 15.37 49,752,144.00 521,000,000.00 5,898,171.00
Maximum 3,640,000,000.00 77.22 140,000,000.00 1,430,000,000.00 12,168,930.00
Minimum 500,000,000.00 (2.05) 1,870,655.00 49,062,572.00 192,885.30

Standard
Deviation 908,000,000.00 15.24 43,910,652.00 410,000,000.00 3,739,214.00
Table 5.1.2 Descriptive Statistics for Model A.1
The average level of Real Gross Domestic Product (Constant 2005 USD) for the period from
1961 to 2013 was MK1, 770 Million with a maximum and minimum of MK3, 640 Million and
MK500 Million respectively. The Standard Deviation of MK908 Million is indicative of a high
magnitude of variability in the variable as shown in Table 5.1.2. The average inflation over the
53 year period was 15.37% with a minimum and maximum inflation of -2.05% and 77%
respectively. From the standard deviation of 15.24% show in table 5.1.2, inflation also
exhibited a high degree of variability. Public expenditure on education had an average value of
MK49.752 Million and a minimum and maximum value of MK1.870 and MK49.752 Million
respectively. The standard deviation of MK43.910 Million shows a high degree of variability
in the education expenditure. The average output of SME’s over the period of observation was 30
MK521 Million, with a minimum and maximum local currency value of MK49.062 and MK1,
430 Million respectively. Given the standard deviation of MK410 Million in the value of SME

goods and services produced over the observation period, it can be noted that there was an
extremely high level of variability. The average expenditure on vocational training and related
activities was MK5.898 Million, with a minimum and maximum expenditure of MK0.192
Million and MK12.168 Million respectively. Table 5.1.2 shows a standard deviation of
MK3.739 Million, there is high variability of government expenditure on vocational training
and related activities.
5.1.3 Descriptive Statistics for Model A.2
Revenue Age of Firm Age of Owner Startup Capital Distance from CBD
Variable (MWK) (Years) (Years) (MWK) (KM)
Mean 18,000,000.00 8.18 32.06 5,573,337.00 11.53
Maximum 150,000,000.00 18.00 78.00 59,900,000.00 44.00
Minimum 135,000.00 2.00 12.00 54,000.00 1.00

Standard
Deviation 33,800,000.00 5.19 12.14 10,100,000.00 9.29
Table 5.1.3 Descriptive Statistics for Model A.2
Revenue for the year 2013 was used as a proxy for SME performance for the panel data model
estimation. The average revenue was MK18 Million and the minimum and maximum MK0.135
Million and MK150 Million. Table 5.1.3 shows a standard deviation of MK33.8 Million, which
is a high degree of variability. The average age of the SME’s sampled was 8.18 years of
existence and the maximum and minimum ages of the sampled SME’s was 2 and 18 years
respectively. Given a standard deviation of 5.19, the age of firm had a high degree of variability.
The average age of SME entrepreneur sampled was 32.06, with a minimum and maxim age of
12 and 78 years of age respectively. Given a standard deviation of 12.14, there was a high
variability in the age of the SME entrepreneur sampled. The average start – up capital employed
was MK5.573 Million, where the minimum and maximum start-up capital was
MK0.054Million and MK59.9 Million respectively. Table 5.1.3 shows that the standard
deviation of the capital employed was MK10.1 Million, showing a high degree of variability
in the start-up capital of the sample. The average distance from the nearest resource centre
(CBD) was 11.53KM with a minimum and maximum distance of 1KM and 44KM respectively. 31
Given a standard deviation of 9.29KM, there an extremely high variability in the distance away
from either Limbe or Blantyre, in the observed sample.

5.2 DIAGNOSTIC TESTS

5.2.1 GOODNESS OF FIT TESTS FOR MODELS A.1 AND A.2
Model A.1, which set out to investigate the impact of SME growth on Economic growth over
the period from 1960 to 2013 reported an R2 value of 0.9926. This value implies that the model
employed nearly perfectly fits the data, as 99.69% of variations in GDP are explained by the
explanatory variables.
Model A.2, which set out to determine the effects on performance, of factors that are intrinsic
to SMEs returned an R2 value of 0.8792. Again, this value of R2 gives us confidence that the
model employed is a very good fit for the data, as 87.92% of variations in SME performance
are jointly explained by the determinants of SME performance investigated by the research.
5.2.1 MODEL SPECIFICATION TEST

The research employed the Ramsey RESET to test how well Model A.1 was specified.
Appendix A1.7 shows the RESET test result, where F=11.7. The F statistic is greater than the
model’s p value of 0.0000, we thus accept H0; that the model was correctly specified. To test
the model specification of Model A.2, the research employed the link test method. Appendix
A2.2 shows that the predicted squared variable (_hatsq) has a p value of 0.163, making it
insignificant at all levels of confidence. In this case, H0 is accepted because _hatsq has no
determining power.
5.2.2 STATIONARITY TEST

The research employed the Dickey Fuller test, to check for the presence of a unit root in the
variables used in Model A.110. The null hypothesis (H0), that a unit root does not exist in the
variables employed by Model A.1, was accepted in the model because the ADF statistics shown
in Appendix A1.3 are all greater than the DF or Mackinnon Values; for all the variables
employed by Model A.1.
5.2.3 NORMALITY TEST

The research used the Jarque Bera and the Shapiro – Wilk test for normality to test the
distribution of Model A.1 and A.2 respectively. The normality test results for Model A.1 in
Appendix A1.5 and the normality test result for Model A.2 in Appendix A2.5 both show that
32
the Jarque Bera and Shapiro – Wilk Statistic are greater than the 10% level of significance. In
10
Model A.2 was a panel data estimation therefore the unit root test was not applicable.

both tests, the null hypothesis of normality, H0, is thus accepted; that both models are normally
distributed!
5.2.4 MULTI COLLINEARITY TESTS

The research used the pair wise of zero order correlation examinations to test for
multicollinearity in the variables employed in Models A.1 and A.2. The rule of thumb is that
if the pair wise zero order correlation is ≤ 0.8, then multicollinearity is not a problem. Appendix
A2.3 shows the pair wise zero order correlation for model A.2, and they are all less than 0.8;
we thus accept the null hypothesis that the determinants of SME performance investigated in
the research, share no relationship with each other. For model A.1 however, we reject H0, and
accept that the variables in the model are linearly related. An analysis of the pair wise zero
order correlation in Appendix A1.6 shows that all pair wise correlation coefficient between the
variables PEDGUG, SMEY and VOCTR >0.8 indicating a linear relationship between the
variables. The research anticipated this result because budgetary allocation to vocational
training (VOCTR) is a function of the overall allocation to education expenditure (PEDGUG).
SMEY and VOCTR was also expected to be linearly related because VOCTR directly
determines SMEY, as a higher allocation to vocational training will naturally lead to more
SMEs being established, as the trained individuals put their acquired skills and training into
practice. Since this is a natural character of the data set, (Gujarati, 1998) suggested that no
attempts be made to correct multicollinearity.
5.2.5 HETEROSKEDASTITIY TESTS

The research employed the Whites general test, to test for the presence of heteroskedasticity in
the Model A.1. The results of the test in Appendix A1.7 show that the F statistic of the test is
greater than the estimated model’s p value, and thus null hypothesis of homosekedasticity is
accepted. To test for heteroskedasticity in Model A.2, the research employed the Bruesch –
Pagan test. Appendix A2.4 shows that the p value = 0.0205, thus the null hypothesis of
homosekedasticity is accepted.
5.2.6 SERIAL CORRELATIONS TESTS

The research used the Durbin Watson d statistic to test for serial correlations in the error
33
variables in Model A.1. The regression output in Appendix A1.1 shows a DW d – statistic of
1.29 suggesting that the error term in the model were auto correlated, thus the research rejects
the null hypothesis. To correct the research used the Newey – West method. A comparison of
the regression results in Appendix A1.1 and A1.2 shows that both regression return the sae
value of R2, but the HAC standard errors are significantly less than those of the OLS estimation
model, thus the HAC t – ratios are smaller much smaller, making estimation much more
accurate. Inquisitively, the DW d – statistic in both estimations is the same, but the HAC
procedure has accounted for the low d – statistic by reducing the standard errors on the
coefficients.
5.3 RESULTS FOR THE ESTIMATED MODELS

This section presents the results of the estimated OLS Models A.1 and A.2 and the estimated
parameters at the conventional levels of significance, the consequent section presents the
interpretation of the parameters.
Table 5.3.1; OLS Estimation results for Model A.1

Standard
Variable Coefficient Error P -Value
Constant 500,000,000 22,979,100 0.000
Inflation -425,866.50 630,484.60 0.5026
Public Expenditure on
Education 313,946.90 220,750.50 0.581
SME Output 518,946.80 419,640.60 0.000
Public Expenditure on
Vocational Training 153,289.20 98,570.00 0.000
Number of Obs 50
F Stat 1664.758
P>F 0.000
R - Squared 0.993
DW - d Statistic 1.292
The F statistic of 1664.758 and the P value of 0.000 indicates that the variables jointly explain
changes in GDP in Malawi even though they may have an insignificant effect on GDP
individually. The consequent section presents a detailed interpretation and significance of the
parameters of the estimated models.
34

Table 5.3.2; OLS Estimation results for Model A.2

Standard
Variable Coefficient Error P -Value
Constant 13.767 0.518 0.000
Access to Vocational
Training 0.244 0.286 0.399
Distance from CBD -0.030** 0.012 0.015
Start-up Capital 5.95E-0.8*** 1.39E-0.8 0.000
Access to Credit Facilities -0.139* 0.077 0.078
Education Level of owner 0.184** 0.088 0.042
Age of Owner 0.035*** 0.010 0.001
Age of Firm 0.072** 0.029 0.016
Effects Of governments
SMEs Policy on SME -0.618** 0.024 0.013
Location -0.590** 0.291 0.047
Gender of SME Owner -0.587** 0.263 0.050
Number of Obs 70
P>F 0.000
R - Squared 0.892
*** Indicates the significance of the variable at the 1% conventional level
** Indicates the significance of the variable at the 5% conventional level
* Indicates the significance of the variable at the 10% conventional level
5.4 INTERPRETATION OF THE MODELS’ PARAMETERS

Model A.1; The regressand of inflation was found to be statistically insignificant at all
conventional11 levels of significance in the determination of variations in GDP. The coefficient
of the inflation conveys that, holding all other factors constant, a unit increase in inflation will
decrease the value of real GDP by MK425, 866.5. The insignificance of the variable at all
conventional levels of significance naturally leads to the conclusion that inflation is not a strong
determinant of real GDP, as it only becomes significant at 50.26%! The research included this
variable in the model to test the effects in reduction in aggregate demand due to a rise in
inflation. The insignificance thus means that inflation did not have a significant effect on
aggregate demand of individuals of general goods and services (and concurrently of SME
goods and services).
The variable public expenditure on education was found to be statistically insignificant at all
35
levels of significance. The coefficient of public expenditure on education conveys that holding
11
Where the Conventional levels of significance are 1,5 and 10%

all other factors constant, a unit increase in this expenditure would increase Real GDP by
MK313, 946.90. Again, the insignificance of the variable at all conventional levels of
significance naturally leads to the conclusion that inflation is not a strong determinant of real
GDP in Malawi. This is contrary to the finding of (Sattar et al, 2012) who found expenditure
on education to be statistically significant at 5 and 10% conventional levels of significance, in
their attempt to determine the impact of SME growth on economic growth in Pakistan. This is
probably due to the fact that this expenditure is non-productive in the Malawian context, as a
comparatively smaller percentage of individuals who acquire education, put their knowledge
into use by venturing into meaningful12 entrepreneurial activity (whose effect would then be
captured by the growth in the SME sector, due to new individuals setting up new enterprises).
The regressor SME output was found to be statistically significant at all three conventional
levels of significance. The coefficient on SME output conveys the holding all other things
constant, a unit increase in SME output will increase the Real GDP by MK518, 946.80. The
research thus accepts the alternative hypothesis that SME output is a significant determinant of
GDP in Malawi. This result is in tandem with the findings of (Sattar et al, 2012), who
investigated the significance of the SME on the Pakistani economy, and found it to be
significant at 5 and 10%. Further this result in agreement with the study conducted by (Nelson
et al, 2012) who found that a growth in the SME sector has a positive influence on economic
growth and development and poverty reduction.
The variable expenditure on vocational training and related activities was significant at all
levels of significance. The coefficient of this variable conveys that holding all things constant,
a unit increase in vocational training will increase GDP by MK153, 289.20. The allusion is
that vocational training is an important determination of GDP. This result is intuitive because
vocational training foes directly into giving individuals skills and training, to start up new
entrepreneurial endeavours (SMEs), which contribute positively to GDP.
The research methodology was such that having determined the significance of SME growth
on economic growth, it would then be determined as to what factors determine the performance
of the individual SME firm – for appropriate policy application.
Model A.2; The variable access to vocational was found to be statistically insignificant at all
levels of significance. The coefficient of this variable conveys that a percentage increase in this
36
12
For instance rather than subsistence farming, the individual applies his basic knowledge of agriculture to
produce food beyond just the satisfaction of his family, but rather for the market (IFPRI, 2002).

variable will increase SME performance by 24.4%. This result is contrary to the findings of
(Sattar et al, 2012) which found vocational training to be significant at 5 and 10% significance.
The variable distance from CBD was found to be statistically significant at 5% and 10% levels
of significance. The coefficient of the variable suggest that a percentage increase in distance
away from Blantyre or Limbe will cause a 3% reduction in revenue. The research attributed
this fact to a slower response in meeting demands, or producing goods and services due to a
longer lag time (that increased with distance) in acquiring resources.
The variable start – up capital was significant at all levels of significance. Table 5.3.2 shows
that start-up capital had a coefficient of 0.00000005.96 meaning a percentage increase in start
– up capital, will only lead to a 0.000006% SME performance. Thus, in in as much as this
variable is significant at all three conventional levels of significance.
Access to credit facilities was significant at the 10% level of significance. The coefficient of
Access to credit facility shows that no access to a loan facility will yield a 13.9% reduction in
performance of the SME. This is in agreement with the findings (Sattar et al, 2012), (Levin,
2012) and (Anthony et al, 2012) who found access to credit to be significant at 5% and 10%
levels of significance.
Education level of owner was found to be significant at 5% and 10% levels of significance.
The coefficient of education level of owner coveys that with a unit increase in the level of
education of the SME owner (say from primary to secondary for instance), there was an 18.4%
increase in SME performance.
The age of the owner of the SME was found to be significant at all levels of significance. The
coefficient of the variable conveys that a 1% increase in the age of the SME owner, yielded a
3.5% increase in SME performance. This fact was mainly attributed to the fact that the older
SME owner had more entrepreneurial experience, and thus made better business decisions.
The age of the SME firm (years in existence, or years in operation) was found to be statistically
significant at the 5% and 10% levels of significance. The coefficient of the variable conveys
that a1% increase in the age of the SME would cause a 7.2% increase in performance of the
SME. The research attributed this result to an increase in capital base over time, improving the
availability of capital through a wider access to third party credit facilities.
The variable effect of policy on SME was statistically significant at the 5% and 10% levels of
significance. The coefficient of the variable entails that a 1% increase non effectiveness of
37
policy on SMEs, led to a 61.8% reduction in performance. The effect of the various SME policy
and various projects and programs aimed at improving the presence, visibility, performance

and survival of the SME was thus the greatest determinant of SME performance for the
observed sample.
The variable location of the SME was statistically significant at 5% and 10% levels of
significance. The coefficient of the variable conveys that being located in rural Blantyre
entailed a 59% drop in performance, compared to those SMEs that are located in urban
Blantyre.
The variable gender of the owner of the SME was significant at 5% and 10% levels of
significance. The coefficient of the variable conveys that on average, the female owned SME
performed 58.7% below the male owned SME.
38

CHAPTER SIX
CONCLUSIONS AND POLICY IMPLICATIONS

6.0 INTRODUCTION
This chapter concludes the entire study. It provides a summary of the findings, the ensuing
policy implications, the limitations the study encountered and areas of further possible study.
6.1 SUMMARY OF FINDINGS
The overall objective of the research was to determine the significance of the SME on economic
growth. This involved estimating an OLS model with GDP as the regressand, and Inflation,
government expenditure on education, the monetary value of all goods and services produced
by the SME sector and expenditure on vocational training and related activities over the period
of 1960 to 2013. The primary hypothesis was that the SME sector is strong determinant of GDP
growth in Malawi. The research thus accepted the alternative hypothesis that SME output has
a strong positive influence on the growth of GDP.
Secondary to the overall objective, the research set out to then determine (having determined
the significance of the SME sector) the factors that influence or determine the performance of
the SME sector by collecting panel data, and estimating an OLS model, to determine those
factors that were deterministic in influencing SME performance. The distance from the nearest
CBD, start – up capital, access to credit facilities, education of the owner of the SME, age of
the owner of the SME, the years the SME had been in operation (or existent), the effect of the
various SME policies GoM had been putting in place, the location of the SME (whether rural
or urban Blantyre) and the gender of the SME owner. Contrary to expectations of the research,
access to vocational or some other professional (whether formal or informal) training was
insignificant at all the conventional levels of significance.
6.2 POLICY IMPLICATIONS
The overall objective of the research was to answer the question as to whether SME growth
had a significant impact on economic growth and the research has found a conclusively
resounding agreement to that question. As a result some significant policy implication arise
from the results of the research. It can now be agreed that the SME sector is one worth investing 39
in and focusing an elevated amount of policy attention to, as is has been empirically proven
that the allusions to the fact that the SME is the potential engine of growth for the Malawian

economy. Model A.2 demonstrated that the SME policy is the most pertinent determinant
factor of SME performance. It further turned out that those SMEs which did not feel the
effectiveness of the various policy implementations recorded below par performance. This
leads to only one conclusion, the policy makers need to widen their scope and horizon in terms
of the comprehensiveness and coverage of policies related to SME growth. Focus should not
be on a particular group of SME group (like access to credit for retail SMEs through specially
tailored loan facility programs, and resource availability enhancement to small scale farmers
for through the Farm Input Subsidy Program for instance), but rather cover the entire spectrum
of SME category. This is more so because the research found access to loans as a strong
determinant of SME performance.
The Malawi Poverty Reduction Strategy Paper (MPRS) recognises the importance of SMEs as
a vehicle for increasing the socio economic welfare of individuals in the country. The research
found that distance away from Blantyre and Lilongwe decreased performance of the SME. The
research suggest creating pooled resource centred for similar categories of SME, to enhance
access to resources and inputs. This could be done for instance by utilising the ADMARC
structure, which has an exceptional country wide coverage to increase access to inputs for those
SME involved in farm produce. This would reduce lead and downtime times, improving the
SMEs capacity to produce to meet demand. The same is true for other category of SMEs;
improving road access, utilities and market facilities would encourage the lager entrepreneurs
to set up their enterprises further away from the main towns; improving the access to some
basic inputs that the SME owners have to rave long distances to acquire; for instance bread
flour to make mandasi (dough noughts). This more so pertinent because the research found that
the rural based SME performed poorer than the urban based SME. The original supposition of
the research was the fact that the rural customer faced lower incomes, causing the SME to face
reduced demand, but it turned out that the longer the distance to input acquisition points, the
less efficient the SME was.
As aforementioned, the research found that access to loans was one of the primary determinants
to SME performance and eventual growth. The respondents that the researcher questions
ubiquitously agreed that the lack of collateral for the SME was the main reason that they failed
to access loans from the Banks. Again, as mentioned before, The GoM, through its Malawi
40
Poverty Reduction Strategy paper realises the potential of the SME as a vehicle of poverty
reduction (through employment and income earning), and in response, GoM has thus
introduced a tailor made loan facility in its wholly owned bank, Malawi Savings Bank (MSB,

2014). This will help the incidence of the need for collateral which the SMEs do not meet. A
recommendation made by the research is to orient this SME banking service to increase access
to loans of the younger owner owned, rural and especially the female owned SME, who
performed poorly due to lack of access to capital facilities.
6.3 LIMITATIONS OF THE STUDY
The study set out to investigate the effects of macro-economic variables such as corporate tax,
income tax and inflation on SME growth over a progressive period (1996 to 2013). However
this was not possible due to the fact that a majority of the sample was unregistered, and thus
paid no corporate tax, individuals who purchases from rural SMEs are mostly involved in
informal income earning activities; thus generalising the income tax as a determinant of SME
growth would have introduced bias into the results. Further, the effect of inflation for instance
could not be measured on the given sample, as a majority of the SMEs did not exist over a long
enough period, to be able to yield inferable results.
6.4 AREAS OF FURTHER STUDY
The research found that vocational training was an insignificant determinant of SME
performance, yet literature suggests otherwise. This is probably due to the size of the sample
employed by the research, such that if it were increased, the effect of vocational training on
SME performance would be significant. An estimation with the variable SMEY as a regressand
and VOCTR as the regressor in Model A.1 returns an R2 value of 0.913, meaning the budgetary
allocation to vocational training explained 91.3% of the variation in national SME output, thus
supporting this null hypothesis; that an increased sample size would make the AVOCTR
variable a significant determinant of SME performance in Model A.2. Beyond this, there are
regional differences, which would affect the results of both of the models employed to
investigate the Small to Medium Enterprise. The study focused on rural and urban Blantyre as
a research site, but if the study were expanded to cover s sample of districts across all three
regions of the country, region and district specific significant determinants of SME
performance would be observed, which would allow a more comprehensive policy response to
developing the Small to Medium Enterprise as a vehicle of economic growth and socio
economic development. One aspect of the rationalisation of undertaking this research was the 41
fact that the SME has potential in reducing unemployment. This is a logical deduction made

from the fact that an increase in SME activity, will naturally mean more “self-employed”
individuals, but perhaps a further area of study would be quantifying this aspect of this sector.
6.5 CONCLUDING REMARKS
In conclusion, the SME sector should be a priority for the government, because it holds a vast
amount of potential in reducing employment, growing the economy and increasing Malawi’s
competitiveness in regional and sub – continental trade. Malawi as country has a rather
primitive productive sector, whose growth can be purported by an export led SME sector. To
do this however, government need to orient its trade and industry policy in such a way as to
support the growth of this sector, which combined, contributed a gargantuan 60% of GDP in
2013.
42

APPENDICES
APPENDIX A1 IMPACT OF SME GROWTH ON ECONOMIC GROWTH
APPENDIX A1.1 ESTIMATED OUTPUT FOR MODEL A.1
Dependent Variable: GDP

Method: Least Squares
Date: 12/23/14 Time: 12:51
Sample: 1960 2013
Included observations: 54
Variable Coefficient Std. Error t-Statistic Prob.
INFLATION -425866.5 913430.2 -0.466228 0.6431
PEDGUG 313946.9 518789.4 0.515712 0.6084
SMEY 518141.8 814525.0 9.047709 0.0000
VOCTR 153298.2 117999.2 8.078853 0.0000
C 5.00E+08 22979100 21.75015 0.0000
R-squared 0.992695 Mean dependent var 1.77E+09
Adjusted R-squared 0.992099 S.D. dependent var 9.08E+08
S.E. of regression 80750101 Akaike info criterion 39.33964
Sum squared resid 3.20E+17 Schwarz criterion 39.52380
Log likelihood -1057.170 F-statistic 1664.758
Durbin-Watson stat 1.292204 Prob(F-statistic) 0.000000
APPENDIX A1.2 NEWEY WEST RGRESSION OF MODEL A.1
Dependent Variable: GDP

Method: Least Squares
Date: 12/23/14 Time: 12:57
Sample: 1960 2013
Included observations: 54
Newey-West HAC Standard Errors & Covariance (lag truncation=3)
Variable Coefficient Std. Error t-Statistic Prob.
INFLATION -425866.5 630484.6 -0.675459 0.5026
PEDGUG 313946.9 220750.5 0.555276 0.5812
SMEY 518141.8 419640.6 7.315641 0.0000
VOCTR 153298.2 98570.8 5.492272 0.0000
C 5.00E+08 35672290 14.01085 0.0000
R-squared 0.992695 Mean dependent var 1.77E+09
Adjusted R-squared 0.992099 S.D. dependent var 9.08E+08
S.E. of regression 80750101 Akaike info criterion 39.33964
Sum squared resid 3.20E+17 Schwarz criterion 39.52380
Log likelihood -1057.170 F-statistic 1664.758
Durbin-Watson stat 1.292204 Prob(F-statistic) 0.000000
43

APPENDIX A1.3 STATIONARITY TESTS FOR VARIABLES IN MODEL A.1
44

APPENDIX A1.5 NORMALITY TEST FOR MODEL A.1
APPENDIX A1.6 MULTICOLLINEARTY TEST RESULT OF MODEL A.1
APPENDIX A1.7 HETEROSKEDASTICITY TEST RESULTS OF MODEL A.1
45

APPENDIX A1.7 MODEL SPECIFICATION TEST RESULT FOR MODEL A.1
APPENDIX A1.8 OUTPUT OF REGRESSION OF VOCTR ON SMEY A.1
46

APPENDIX A2 IMPACT OF SME GROWTH ON ECONOMIC GROWTH
APPENDIX A2.1 ESTIMATED OUTPUT FOR MODEL A.2
APPENDIX A2.2 MODEL SPECIFICATION TEST RESULT FOR MODEL A.2
47

APPENDIX A2.3 MULTICOLLINEARITY TEST RESULT FOR MODEL A.2
APPENDIX A2.4 HETEROKEDASTICITY TEST RESULT FOR MODEL A.2
APPENDIX A2.5 NORMALITY TEST RESULT FOR MODEL A.2
48

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The Impact Small to Medium Enterprises (SME) on Economic Growth 2014

THE CATHOLIC UNIVERSITY OF MALAWI

FACULTY OF SOCIAL SCIENCE

THE IMPACT OF SMALL TO MEDIUM ENTERPRISES ON ECONOMIC

Submitted to the Faculty of Social Science in Partial Fulfilment of a

Alexander Maluza | BsocEco/45/02/11

Alexander Lino Pascal Maluza Junior

Alexander Maluza | BsocEco/45/02/11

Alexander Maluza | BsocEco/45/02/11

Alexander Maluza | BsocEco/45/02/11

Alexander Maluza | BsocEco/45/02/11

Alexander Maluza | BsocEco/45/02/11

CHAPETER TWO: OVERVEIW OF THE SMALL TO MEDIUM SECTOR… 16

2.1 Introduction to Overview……………………………………….. 16

Alexander Maluza | BsocEco/45/02/11

4.3 Research site: Population, data sources……………………………. 22

Alexander Maluza | BsocEco/45/02/11

ACCRONYMS AND ABBREVIATIONS

DEMAT Development of Malawian Entrepreneurs Trust

EOBI Ease of doing Business Index

GDP Gross Domestic Product

GDP/Capita Gross Domestic Product, divided by the total population

GoM Government of Malawi

ILO International Labour Organisation

MGDS Millennium Goal Development Strategy

MIRTDC Malawi Industrial Research and Technology Development Centre

NSO National Statistics Office

SME’s Small to Medium Enterprises

SMEDI Small to Medium Enterprise Development Institute

SMSE Small to Medium Scale Enterprise

SEDOM Small Enterprise Development Organisation

Alexander Maluza | BsocEco/45/02/11

Alexander Maluza | BsocEco/45/02/11

Alexander Maluza | BsocEco/45/02/11

Alexander Maluza | BsocEco/45/02/11

information on investment opportunities, lack of knowledge on taxation systems, lack of

1.3 MAIN OBJECTIVE

1.3.1 SPECIFIC OBJECTIVES

Alexander Maluza | BsocEco/45/02/11

1.4 RESEARCH QUESTIONS

1.5.1 NULL HYPOTHESES (H0)

The researcher aimed to test the following null hypotheses.

H04: Government’s expenditure on education has no effect on the growth and

1.6 RESEARCH SCOPE

Alexander Maluza | BsocEco/45/02/11

1.7 RESEARCH JSUTIFICATION

1.8 RESEARCH STRUCTURE

Figure two below outlines the structure of the research.

Alexander Maluza | BsocEco/45/02/11

Chapter 2: Overview of the SME

Chapter 3: Literature Review

Chapter 4: Methodology; Research plan and execution

Chapter 5: Research findings, Presentation and Analysis

Chapter 5: Policy Implications

Figure 2: Outline of the Research

Alexander Maluza | BsocEco/45/02/11

2.2 AN OVERVIEW OF SMALL TO MEDIUM ENTERPRISES; THE GLOBAL

Alexander Maluza | BsocEco/45/02/11

Alexander Maluza | BsocEco/45/02/11

2.4 OVERVIEW OF THE SME IN MALAWI

Alexander Maluza | BsocEco/45/02/11

3.1 THEORETICAL REVIEW

Keynesian macroeconomic has theorised there is a direct proportionality relationship between