ANALYSING FACTORS AFFECTING THE

PERFORMANCEOF SMALL AND MEDIUM SCALE

ENTERPRISES THE CASEOFADDISABABA-
CITYADMINISTRATION

BY:ENYEW TILAHUN YIMANIE

ADVISOR:EYASU (PHD)

A THESIS SUBMITTED TO SCHOOL OF GRADUATE

STUDIES OF QUEENS COLLEGE IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR MASTER
OFBUSINESSADMINISTRATION

JANUARY, 2024

ADDISABABA,ETHIOPIA
 Declaration
I, the under signed, declare that this thesis titledThe Factors Affecting The Performance OfSmall
And Medium Scale Enterprises The Case of Addis Ababa-City Administration ismyoriginal
work and has not been presented for a degree in any other University, and that all
thesourcesofmaterialusedforthe thesishavebeendulyacknowledged.
Name:EnyewTilahun
Signature
Date

i
 Certification
This is to certify that the thesis prepared by EnyewTilahun entitled with The Factors Affecting
ThePerformanceofSmallandMediumScaleEnterprises TheCaseofAddisAbaba-CityAdministration
which is submitted in partial fulfilments of the requirements for the degree ofMasters of Business
Administration (MBA) complies with the regulation of the College andmeet the accepted
standard with respect to originality and quality. Therefore, this thesis has
beensubmittedwithmyconfirmationas advisortothe candidate.
Name:Eyasu(PhD)Signature

Date ………………………

ii
 EXAMINER’SAPPROVAL
ThisistocertifythatthethesispreparedbyEnyewTilahun,entitled:FactorsAffectingthePerformance
of Small and Medium Enterprises in Addis Ababa The Case of KolfeKeranio Subcity submitted
in partial fulfilment of the requirements for the Degree of Master of BusinessAdministration
complies with the regulations of the College and meets the accepted
standardswithrespecttooriginalityandquality.
SignedbytheExaminingCommittee:
Examiner Signature
Date
Examiner
Signature
Date
Advisor
Date
Signature

iii
 ACKNOWLEDGMENT
ThesuccessfulcompletionofthisstudywasdonewiththesupportofalmightyGodtowhomIoweagreatgr
atitude,asIshallcontinuetoremainthankfultohim.
MyheartfeltthanksgotomyadvisorEyasu(PhD)for hiscommitmentonthethesisateachstageandfor
makinginvaluablecommentsand suggestionthatguidedmeitsgood end.
I further wish to thank for KolfeKeranio sub city Labour Enterprise and Industry
DevelopmentOffice for their cooperation and kindness in providing access to information
regarding MSEs andto manufacturingenterprisesoperatorsforgiving their time torespond
questionnaires

Content

iv
s
CHAPTERONE................................................................................................................................................11
1.1. BackgroundoftheStudy..............................................................................................................................11
1.2. StatementoftheProblem.............................................................................................................................12
1.3 Researchquestion........................................................................................................................................15
1.4. Objectivesof theStudy...............................................................................................................................15
1.4.1. GeneralObjective....................................................................................................................................15
1.4.2. SpecificObjectives..................................................................................................................................15
1.5. SignificanceoftheStudy.............................................................................................................................15
1.6. LimitationsoftheStudy...............................................................................................................................16
1.7. Delimitation oftheStudy............................................................................................................................16
1.8. Definitionofterms......................................................................................................................................16
1.9. Scopeofthe Study.......................................................................................................................................17
1.10. Organizationsofthe Study........................................................................................................................17
CHAPTERTWO...............................................................................................................................................18
REVIEWOF RELATED LITERATURE........................................................................................................18
2.Introduction...................................................................................................................................................18
2.1. Conceptualliterature..................................................................................................................................18
2.1.1. DefinitionofMicroandSmallEnterprises(MSEs).....................................................................................18
2.1.2. EthiopianMicroandSmallEnterpriseStrategy..........................................................................................19
2.1.3. Ethiopia’sMicroandSmallEnterprisePromotionPolicy...........................................................................21
2.1.4. DefiningBusinessPerformance...............................................................................................................22
2.1.5.Measuresofbusinessperformance.............................................................................................................23
2.1.6. FactorsInfluencingPerformanceofMSEs................................................................................................24
2.1.7. Accessmanagement ExperienceonPerformanceofSMES.......................................................................25
2.1.8. Accesstobusinessinformation servicesandperformanceofSMEs............................................................26
2.1.9 AccessFinancialControland Planningon PerformanceofSMES..............................................................28
2.1.10 AccessMarketing Skilland StrategyandPerformanceofMSES..............................................................32
2.2Theoreticalliterature....................................................................................................................................32
2.2.1ResourceBasedViewTheory(RBV)..........................................................................................................32
2.2.2 SignallingTheory.....................................................................................................................................33
2.2.3 TheBalancedScorecard............................................................................................................................33
2.2.4 ThePeckingOrderTheory.........................................................................................................................34

v
2.2.5 EmpiricalLiterature.................................................................................................................................34
2.2.6 SynthesisoftheReview.............................................................................................................................37
2.3. Conceptual framework..............................................................................................................................38
CHAPTERTHREE...........................................................................................................................................39
3. Introduction..................................................................................................................................................39
RESEARCHMETHODOLOGY......................................................................................................................39
3.1. ResearchDesign.........................................................................................................................................39
3.2. ResearchApproach.....................................................................................................................................39
3.3. SourceofData.............................................................................................................................................39
3.3.1. PrimaryDataCollection.......................................................................................................................39
3.3.2. SecondaryDataSources.......................................................................................................................40
3.4. TargetPopulation.......................................................................................................................................40
3.5. SamplingFrame.........................................................................................................................................40
3.5.1.SamplingTechniques...........................................................................................................................40
3.5.2.SampleSize..........................................................................................................................................40
3.6.MethodofDataCollection........................................................................................................................41
3.7.MethodsofDataAnalysisandInterpretation..................................................................................................41
CHAPTERFOUR.............................................................................................................................................45
4.DATAPRESENTATION,ANALYSISANDINTERPRETATION...............................................................45
4.1 Descriptive Analysis...................................................................................................................................45
4.1.1. GeneralCharacteristicsofTheEnterprises............................................................................................45
4.1.2ResultsofMeasuresofCentralTendencyandDispersion..............................................................................48
4.2. ResultsofInferentialStatistics.....................................................................................................................53
4.2.1.Pearson'sProductMomentCorrelationCoefficient................................................................................53
4.2.3. RegressionsAnalysis...........................................................................................................................54
CHAPTERFIVE...............................................................................................................................................58
CONCLUSIONSANDRECOMMENDATIONS.............................................................................................58
5. Introduction..................................................................................................................................................58
5.1. Conclusions...............................................................................................................................................58
5.2. Recommendations.....................................................................................................................................59
Appendix..........................................................................................................................................................63
Queens CollegePostgraduateProgram..........................................................................................................63

vi
 ACRONYMS
CSA: CentralStatistics Agency
ECSA:EthiopiancentralStatistics Agency
EFDRSMEs: EthiopianfederaldemocraticrepublicSMEsstrategyMoTI MinistryofTradeandIndustry
MSDA: MicroandSmallEnterprisesDevelopmentAgenciesSMEs: Smallandmediumenterprise
SPSS: StatisticalPackagefor SocialScience
OECD:OrganizationforEconomicCooperationandDevelopmentICT:Informati
oncommunicationTechnology
LEIDO: Labour,EnterpriseandIndustryDevelopmentoffice

vii
 ListofTables
Table 2-1TheNewMSEDefinition(2011).......................................................................................20
Table 3-1NumberofpopulationandSample Size.............................................................................41
Table 4-1ReliabilityTest................................................................................................................47
Table 4-2DemographicCharacteristics ofRespondents..................................................................48
Table 4-3Politico-legalfactorsthataffectthe performanceofMSEs.................................................49
Table 4-4Marketingfactorsthataffectthe performanceofMSEs......................................................50
Table 4-5Financialfactorsthataffectthe performanceofMSEs........................................................51
Table 4-6Managementfactorsthataffecttheperformance ofMSEs..................................................51
Table4-7 Businessinformationservicefactorsthataffectthe performanceofMSEs..........................52
Table 4-8Comparisonofthemajorfactors........................................................................................52
Table4-9The relationship betweenindependentvariablesand performance....................................53
Table 4-10RegressionTest.............................................................................................................54

vii
 ListofFigures
Figure2-
1Frameworkoftheresearchthatshowstherelationbetweentheindependentvariableswithdependentvar
iable................................................................................................................................................38
Figure 4-1Response rate bysubsectors...........................................................................................46
Figure 4-2RespondentsbySubsectors.............................................................................................47

ix
 Abstract
This research paper aims to investigating factors affecting the performance of MSEs of
fivesubsectors under manufacturing:Wood, metal and engineering, Leather and textile, Agro-
processing and pharmaceutical, Chemical and construction materials in Addis Ababa city
kolfekeraniosubcity.Inordertomeettheobjectivesofthestudy,datawascollectthroughquestionnaires
and analyse using statistical analysis such as descriptive and inferential
analyses.Informationwas
gatherusingafivepointLikertscalequestionnairefromasampleof239medium and small operators.
The sample operators was select using stratified sampling
andsimplerandomsamplingtechniques;Theempiricalstudyelicitsfivemajorindependentvariables
which seem to affect performance of MSEs which include: government regulation andpolicy,
business information service, management experience, marketing skill and strategy
andfinancialcontrolmechanismandplanning.The study found that financial factors shortage of
working capital andhigh collateral requirement from banks and other lending institution as main factors of
MSEs for allsectors. Marketing factors include inadequacy of market, lack of demand forecasting, lack of
marketinformation and absence of relationship with an organization/association that conduct marketing
research.The main management factors identified were include lack of well trained and experienced
employees,Lack of low cost and accessible training facilities and lack of clear division of dutiesand
responsibilityamong employees. Lack of government support,
Lackofaccessibleinformationongovernmentregulations that are relevant to my
businessandtheunreasonabletaxleviedonbusinessisthemainfactorfrompolitic-regulationfactors. . We
recommend thatThe Addis Ababa city government bodies should provide affordable alternative sources
offinance for MSEs. This can be done by communicating with the banks and other credit institutions
tolessen their requirements. This should be done so that MSEs can get enough access to finance for
theirbusiness activities. The strengthening of government institutions at different levelswould play a
majorrolein positivelyinfluencingthedevelopmentof MSEs,thus
toreducedelaysinprocessinglegalrequirements.

Key words:-Micro Small Entreprise, manufacturing,Addis Ababa.

x
 CHAPTERONE
INTRODUCTION
1.1. BackgroundoftheStudy
There is no universally agreed definition of Micro and Small Enterprises (MSEs). Some of the commonly
used criteria are the number of employees, value of assets, value of sales and size of capital or turnover,
the capital invested and the total balance sheet (asset, liability and capital). According to the Ethiopian
Micro and Small Enterprises Development Strategy (EMSEDS, 2016), MSEs are those business
enterprises with a paid up capital of not exceeding Birr 20,000 and excluding high tech consultancy
enterprises and other high-tech establishments, whereas small enterprises are those business enterprises
with a paid up capital above Birr 20,000 and not exceeding Birr 500,000 and excluding high-tech
consultancy enterprises and other high- tech establishments.

MSEs are widely recognized and accepted for their contribution in terms of poverty reduction,
employment creation, and income generating. As a result MSEs become a great concern to many
government policy makers and researchers globally because of their realization of economic contribution
to GDP and tool of poverty reduction (Ababiya, 2013;Admasu, 2012; James et al, 2014). Therefore,
having recognized the contribution made by MSEs, direct intervention and support of government and
academician researchers is crucial to enhance the performance of MSEs.

Small and Medium Enterprises (SMEs) play a big role in the job creation and country‟s employment
rateand serve as a mechanism to fight against poverty as evidenced in the literature ( (Akanji, 2006),
2006;Akintoye and Oladejo, 2008; Akande, 2013). Particularly developing economies have started to
focus onthe critical role thatSMEs can play in their development(Maad, 2008). Only very few
enterprisespromote to medium and higher level enterprises and large number of enterprises may dissolve
in theprocess due to different internal and external factors although they are the only means to create
stronginvestors.
There are a number of studies carried out in various countries have concluded that small and
mediumbusinessplaysmajorroleinjobcreation(DobbsandHamilton,2007).SMEsplayconsiderableresponsibil
ity in providing further employment and transformation of economy. It is also implicit
thatsectorscapturedbySMEsarebetterable todevelopdynamiceconomiesofscale.
The dynamic role of small and medium enterprises (SMEs) in developing countries as engines
throughwhich the growth objectives of developing countries can be achieved has long been recognized. It
isestimated that SMEs employ 22% of the adult population in developing countries (Daniels, 1994;
Daniels&Ngwira, 1992; Daniels &Fisseha, 1992; Fisseha, 1992; Fisseha& McPherson, 1991; Gallagher

11
&Robson,1995citedinDalitsoandPeter,2000).
In Ethiopia, next to the agriculture sector, the SME is the second largest employment generating
segment(Fiona Meehan, 2004). Thus, the government of Ethiopia gave due attention to the growth of
SMEs,especiallyforwomen,asameansto reducepovertyandemploymentcreation(Raheland Issac,2010).
According to the 2012, Ethiopian Federal Democratic Republic of Small and Medium enterprise
strategy,SMEs is one of the institutions given recognition in the country‟s industrial development plan
and is thefactthatitservesasvehiclesforemploymentopportunities aturbancentres
andasitsupporttheeconomicdevelopment,sourcesforsustainablejobopportunitiesandthesectoremploysabout(
2009/10),1.5 million job opportunities were created, of which construction sector take the lion share
increatingjobopportunities.
The purpose of this specific research is to evaluate to what extent both internal (internal management
andentrepreneurship)andexternal(accesstofinance,workingplace,governmentpolicy,marketandinfrastructur
e) factors affect the growth of SMEs sector in Addis Ababa city administration. There arevarious
studiesinEthiopiathathaveinvestigatedthedeterminantsofsmall andmediumenterprisesector.Some of them
such as (Fetene, 2010 and Dereje, 2012) are focused in access to finance in SMEs. Thisstudy was using
statistical test of significance to appraise the determinants of SMEs using many indicatorssuch as, access
to finance, working places, government policy, marketing, entrepreneurship,
internalmanagementandinfrastructurefactorsareconsidered.However,thepreviousstudyusedsimpledescripti
ve analysis and didn‟t include the most important variables in the study. This study was try toidentify to
what extent internal and external factors affect the growth of SMEs in Addis Ababa cityadministration.

1.2. StatementoftheProblem
Small and medium-sized enterprises (SMEs) play a very important economic and social role, both
throughtheir importance in the economy and in job creation, a role which is greatly appreciated in these
times ofcrisis and rising unemployment. In a fast growing population countries particularly, the
development ofSMEs can help to face many challenges linked with economic development, inequalities,
very
highunemployment,demographicdevelopmentsandtheneedforstructuralchange(Oualalou,2012).According
to Government of the Federal Democratic Republic of Ethiopia Micro and Small EnterpriseDevelopment
Strategy, provision framework and methods of implementation approved (2011, 35- 38),says SMEs faces
the following challenges in each stage of development;During at the growth level, lackof financial support
on the basis of their business nature, credit amount and time as they have no access tocollateral,lackof
consistentandintegratedtechnology andskillthathelptoenhance andimproveproductivity, quality and

12
standard, Lack of access for manufacturing and sales shop, developing sense ofrent seeking attitude and
failure to run business on legal basis. During the medium growth level, as thepast experiences showed
successful enterprises have been tackled many challenges in transforming fromsmall to medium level.
One of the reasons for this is that lack of incentive and support that fits theirbusiness.During maturity
level, failure in keeping up productivity and quality of product in order to becompetent, lack of
knowledge in an international standard products and production system, and limitationin technological
ability and factors of production that ensure competency in the markets Access to financeis the most
influential factor from among all adverse factors hindering the growth and development of
theSMEssectorinEthiopia(ZelekeWorku,2009citedinAdmasu,2012).
In Ethiopia, SMEs have a problem of finance when establishing the business most individual sources
offinance come from family & friends, personal savings and loans acquired from relatives, and
moneylenderswithhighamountofinterests(MoTI,2005).
Mensah et al., (2016) ranked high cost of production, access to credit, input price variability,
inadequateknowledgeinbusinessmanagementandlackofaccesstoreliableelectricityrespectivelyasthemost

critical constraints hindering the growth of micro and small scale enterprises. Kamunge (2014) in
hisanalysis of factors affecting the performance of small and microenterprises in Limuru market found
that;access to business information services, access to finance, availability of managerial experience,
access toinfrastructure, and government policy and regulations were major contributing factors for
improvement inbusinessperformance.Mulugeta (2008) identified internal factors such as poor record
keeping, wrongpricing, negative cash flow, management problems, trouble among partners; external
factors such as lackof capital, land and premises, taxation, poor market and market information, business
support services asmajor causes of small and micro business failure in his analysis of underlying causes of
micro and smallbusiness failures in Addis Ketemasubcity. Mezgebe (2012) employed binary logistic
model to identifyfactors affectingtheperformanceof MSEs.Accordingly,hefoundfactors
suchasfavourability ofbusinessenvironmentcompletion,level,institutional
quality,accesstorawmaterialandmarketingsignificantly affecting MSEs performance. Chane (2010)
identified factors affecting performance ofsmall and micro enterprises using Likert scale as economic,
socio cultural and legal and administrativefactors. He found that economic factors as the most binding
factors affecting performance of
MSEs.Ababiya(2013)employedlinearregressiontoidentifyfactorsaffectingtheperformanceofmicroenterpris
es. According to his finding, age of the enterprise, age of the operator, educational level
oftheoperator,numberofemployees,amountofinitialcapital,entrepreneurialskill,andbusinessexperience of

13
the manager, access to training, and access to market were significant variables affectingbusiness
performance (Benefit-cost ratio).Mulatu et al., (2006) identified working capital as majordeterminant of
performance. Skills in business training and technical knowledge are lacking for the mostpart. Owners of
small businesses lack the necessary capacity to benefit from innovative management andexpand their
businesses. As the small marketis shared among too many operators, income earned isbarely enough to
meet subsistence requirement. The majority of operators have joined the enterprises forlack of better
opportunity. The weak purchasing power of the rural community for the products has beenidentified as
one of the major bottlenecks for the growth of the enterprises. In addition, the businessenvironment is
hardly conducive for their sustainable development. Also, as stated in WB (2012); land,finance, input
industries, entrepreneurship skills, worker skills, bureaucracy in registration and licensingand taxation
were key factors inhibiting the performance of MSEs. The survey conducted by MUDC(2013) on Micro
and Small Enterprises in selected major cities of Ethiopia identified numerous challengesencountered by
the MSEs, although their extent varied across cities. Consequently, shortage of finance(42%) was
principal challenge followed by lack of working premise (28.3%) and lack of access to market(18.1%) for
MSEsintheregionalcites.Conversely,lackofaccesstoland wasthemostcrucialbottleneck

(26.4%)followedbyproblemsoffinance(25.6%)andaccesstomarket(25.1%)forconstrainingperformances of
MSEs in Addis Ababa. According to EEA (2015), problems related to finance, access tomarket and low
competiveness, business information, working premises, poor acquisition of technicalskills and
managerial expertise, appropriate technology, and access to quality infrastructure are causes fora fall in
MSEs performance short of expectations.However, most of the researcher is focused on factorsaffecting
the growth and performance of micro and small enterprises including report financial problem,working
space problem, marketing problem, skill gap in entrepreneurship, infrastructure, and input supplyproblem
as the most binding constraint inhibiting the performance of MSEs. But still the productivity ofSmall and
Medium Enterprisesis 55% asAddisAbabaLabor, Enterprise and Industry Developmentoffice in 2015 E.C
report and also there‟s no latest study on analysing factors affecting performance
ofmediumandsmallenterprisesinAddisAbaba.
Therefore, the researcher believes that the study fills an important gap by considering other
determinantsof manufacturing small and medium enterprises including government regulation and policy,
businessinformationservice,managementexperience,marketingskillandstrategyandfinancialcontrolmechani
smandplanning.
In view of the problems, the central question of this study is:What are the factors affecting the growth
ofMSEsinAddisAbabaCityAdministration?

14
Specifically,thefollowingsub-questionsareraised.
1.3 Research question
Thisstudywasbeingguidedbythebelowresearchquestions:
1. WhatiseffectofgovernmentregulationandpolicyonperformanceofMSE?
2. WhatiseffectofavailabilityofbusinessinformationserviceonperformanceofMSE?
3. WhatiseffectofmanagementexperienceonperformanceofMSE?
4. Whatiseffectofmarketing skilland strategyonperformanceofMSE?
5. Whatiseffectoffinancialcontrolmechanismandplanning onperformanceofMSE?
6. Which factor affect most on policy performance of MSE
1.4. Objectivesof theStudy

1.4.1. GeneralObjective
ThemainobjectiveofthestudyistoexaminethefactorsaffectingthegrowthofsmallandmediumenterpriseinAddisAba
bacityadministration.

1.4.2. SpecificObjectives
Specific Objectives ofthe Studyis to:
 Assess theeffectofgovernmentregulationandpolicyonperformanceofMSE.
 IdentifytheeffectofavailabilityofbusinessinformationserviceonperformanceofMSE.
 IdentifytheeffectofmanagementexperienceandonperformanceofMSE.
 IdentifytheeffectofmarketingstrategyandonperformanceofMSE.
 IdentifytheeffectoffinancialcontrolmechanismonperformanceofMSE.
1.5. SignificanceoftheStudy
The finding of the study is important in a number of ways: First, small & medium enterprise found
inAddis Ababa city administration can use the result to determine and to what extent factors affecting
thegrowth of theirenterprises.Inparticular,thisstudywasfocusonthegrowthanddevelopmentofentrepreneurs
operatingmicroenterprises,resultinginlittle effortbeing directed atdevelopingandexploiting the inherent
potential. Second, the study was also significant to researchers as it provides basisupon which further
studies can be carried out and useful in providing information on small and mediumenterprisesinAddis
Ababacityadministrationasawhole.
Finally, the study provide information for government and other stakeholders in policy formulation and
inthedevelopmentofappropriateapproachesforfuturegrowth,soastoeffectivelyprovideforentrepreneurs in
small and medium enterprises sector. It is also hoped that this study add to the availablebody of
knowledge and increase the understanding of how to best empower entrepreneurs in the small &medium

15
enterprise sector, so that they in turn can contribute more meaningful to economic
developmentforthecountryingeneralandtothecityinparticular.

1.6. LimitationsoftheStudy
Large sample size is essential for in-depth understanding of the underlying causes of small and
mediumbusiness failures; the study is limited to Addis Ababa city kolfekeranio sub city, due to financial
and timelimitation.

1.7. Delimitation oftheStudy

The study assessed factors affecting the growth of business in SMEs in Addis Ababa City
administrationKolfeKeranioSubcity. Although there are different issues that can be researched in relation
to SMEs, thisstudy is delimited to the government regulation and policy, business information service,
managementexperience,marketingskillandstrategyandfinancialcontrolmechanismandplanningfactors.

1.8. Definitionofterms
Enterprise: can be defined as an undertaking engagedin production and/or distribution of goods
&servicesforcommercialbenefits,beyondsubsistence(household)consumptionatthehouseholdlevel.

Factors: A factor is a contributory aspectsuch as governmentregulation, business information service,and

management experience, marketing and financial management influences that affect performance
ofmicroandsmallenterprises.
Micro Enterprise: when the numbers of its employees (including the owner or family) are not greater
than5 & total asset is ≤ 100,000 ETB for industrial sector and ≤ 50,000 ETB for service sector
(MSEDS,2011).
Small Enterprise: means a business engaged in commercial activities whose capital is not exceeding
birr1.5million and 6-30 employees for industries and 500000 for service other than high technology
andconsultancyserviceinstitutions.
Medium Enterprise: Industrial sectors operates with more than 30 persons and/or with a paid up capital
oftotal asset of more than birr 1.5 million other than high technology and consultancy services (CSA,
2011).Informal enterprise: there is consensus that they are small scale, and operate outside registration,
licenseandtaxframeworks.
Formal enterprise: are defined as establishments principally engaged in production of marketed goods
andservices but formally registered at respective government agencies to undertake the business and
hencehavelicenses tooperate.

1.9. Scope of the Study

16
Thescopeofthisresearchwasbeingdelimitedtoitsscopeonlytoenterprisesonlyfromthoseoperatingin
KolfeKeranio Sub City Administrations in Addis Ababa involving in manufacturing sectors and extentto
which stated success variables affect their performance. Although, there are different factors that affectthe
performance of MSEs, this study is delimited to government regulation, business information
service,management experience of the owners, marketing strategy, financial control mechanism, and
availabilityofbusinessinformation.

Theinstruments weredevelopedby theresearcherbasedontheliterature&limitedtodescriptivestatistics which

needs more statistical tests in order to establish a more robust validity and reliability. Thusthe instruments
could be further fined to more closely capture each of the problem areas identified in theliterature.
Replication of this study using larger samples broader geographic, longitudinal wide study
issuggestedforcross-validationpurposes.

1.10. Organizationsofthe Study

The study was organizedin tofivemajor parts. Thefirstpartcomprises background of thestudy,statement of

the problem, objectives of the study, significance of the study, scope and limitation of thestudy,
hypothesis and organization of the paper. The second part incorporates on reviewing of relatedliterature
on the issues under study. The third part clarifies on the research methodology adopted. Thefourth part
present the major findings of the research and the last part provide summary, conclusions
andrecommendations.

17
 CHAPTERTWO
REVIEWOF RELATED LITERATURE
2.Introduction
As a component of the review of related literature have four major sections, the first part begins
withconceptual literature like defining whatmicroandsmallbusinessenterprises arein general
andinEthiopian context in particular. The second part discusses the relevant and enough theoretical
perspectiverelatedtofactors influencingSMEperformance, the thirdpartempiricalliterature
reviewbasedonprevious research evidence regarding those factors and the fourth part synthesizing the
reviewed literatureanddrawsconclusioninterms ofexistingknowledgebase,researchgap.

2.1. Conceptualliterature
2.1.1. DefinitionofMicroandSmallEnterprises(MSEs)
As per Quartey and Kayanula 2000, there is no single and universally acceptable definition of a
smallenterprise. This is so because the criteria and ways of categorizing enterprises as micro and small
differfrom institution to institution and from country to country depending essentially on the country‟s
level ofdevelopment.
A definition forwarded for MSE differs from country to country, depending on the stages of
economicdevelopment and population. In USA and Europe MSE defined on the bases of number of
employmentand turnover.European Commission and Organization forEconomicCooperation and
DevelopmentdefinesMSEas havingbelow250employees (Habtamu,2010).
In developing countries, the definition is a little bit different from developed nations. For instance,
inTanzania to be MSE the major variables are level of employment and capital investment; in
Zambiaannual revenue and capital investment are major requirement. Likewise, the definition given to
MSE inEthiopia includes the variables such as employment, capital investment, production capacity, level
oftechnology and sub sector (World Bank, 2010) Even within the same country, definitions also
changeovertimedueto changesinpricelevels,advancesintechnologyorother considerations(Emma,2009).
Firms differin theirlevels of capitalization,sales and employment.Hence,definitions thatemploymeasures
of size (number of employees, turnover, profitability, net worth, etc.) when applied to one sectorcould
lead to all firms being classified as small, while the same size definition when applied to a
differentsectorcouldleadtoadifferentresult.
In the past the definition of Micro and Small Enterprises was based on paid up capital only. An
enterpriseiscategorizedasmicroifit‟spaidup capitalislessthanorequaltoBirr20,000.
Similarly,anenterpriseisconsidered smallwhenitspaid-upcapitalislessthanorequaltoBirr

18
500,000.However, this does not provide information on the size of jobs or number of employees in
theMSE. It alsodidnot tell the size of the total assetfor the MSE and didnot differentiate
betweenmanufacturing (industry) and services. Current definition considers human capital and asset as the
mainmeasuresofmicroandsmallenterprise toaddressesthe limitationsofthe olddefinition.
Table2-1TheNewMSEDefinition(2011)

Levelofenterprise Sector HumanPower TotalAsset

Industry ≤5 ≤Birr100,000
MicroEnterprise
Service ≤5 ≤Birr50,000
Industry 6-30 ≤Birr1,500,000
SmallEnterprise
Service 6-30 ≤Birr500,000
Source: EthiopianMicro andSmallEnterpriseDevelopmentStrategy(2011)
AccordingtoAlasadi andAbdelrahim (2007)MSEs consideredas avital componentof thesocio-economic
development of both developed and developing countries, usually some of these enterprisescollapse
within the first few years of their start up. Of those operating, some grow rapidly, while othersgrow
slowly. Thus, it is important to identify the cause factors of success because it helps new entrants ofthe
sector to consider the factors and use for their future in thebusiness. These factors could vary
fromonecountrytoanotherduetotheeconomic,geographicalandculturaldifferences.Thiskindofinvestigation
of the success factor is very important for developing countries like Ethiopia because theinvestigation
deduction could be useful for the economic development planners as well as to
individualentrepreneursandbusinessownersinthecountriesconcerned.

2.1.2. EthiopianMicroandSmallEnterpriseStrategy
In contrast to many MSE related studies, the working definition of MSE in Ethiopia is based on
capital.According to the Micro and Small Enterprises Development Strategy; (1) Micro Enterprises: are
thosebusinessenterpriseswithapaid-
upcapitalofnotexceedingBirr20,000andexcludinghightechconsultancyfirmsandotherhigh-
techestablishments;(2)SmallEnterprises:arethosebusinessenterprises with a paid-up capital above Birr
20,000 and not exceeding Birr 500,000 and excluding hightech consultancy firmsand otherhigh-tech
establishments (FDREMinistry of Trade and Industry 2007:5). Hence, in this case the definition is based
on capital and the level of technical and technologicalcapacities adopted. The information on MSE in
Addis Ababa indicated that from all the total licensedenterprises,75.4% are micro enterprises, 20.9%are
small enterprises and the remaining 3.7% are mediumandlargeenterprises (AddisReMSEDA2009).

19
During the socialist regime (1974-1991) due to extensive nationalization of private sector, many of
theformer private sector firms ceased to exist. But after 1991, the
currentgovernmentadoptedseveralpolicies and regulations aimed atsupportingtheinformal sector. MSE
serves as sourcesfor sustainablejob opportunities not only for developing countries like Ethiopia, but also
for developed countries likeUSA. Thus they are given prior attention as they are important and serve for
sustainable source of jobopportunities to our country. As a resultmany important overall policy and
institutional reforms havebeen undertaken including: safety net, decentralization, market economy,
agricultural development ledindustrialization(ADLI),etc.
Moreover, a number of sector specific policy reforms and restructuring of regulatory institutionsmayhave
contributed to the process of creation of micro and small enterprises. One of the frameworks wasrelated to
issuance of the National Micro and Small Enterprises Development Strategy in 1997 and theissuance of
Proclamation No. 33/98 to provide for the establishment of the Federal Micro and
SmallEnterprisesDevelopmentAgency(AddisReMSEDA2009).
TheMSEbranchhasbeenorganizingpeoplewithdifferentskillsintoindividualbusinessandcooperatives by
creating job opportunities and providing various supportive services in coordination withNGOs to create a
favourable environment for the growth of the sector. Organizing and licensing was doneby the
cooperative office and a working premise was provided by the sub-city administration, and
otherconcerned housing and land agencies. Space was provided depending on the size of the available
land byassigning four square meters per person for a monthly fee of Birr 1.00/m2for the food processing
sectorandmonthlyfeeBirr2.00/m2forthemetalandwoodworkssectors(AddisReMSEDA2009).
In November1997,theEthiopianMinistry ofTradeandIndustry publishedthe"MicroandSmallEnterprises
Development Strategy", which enlightens a systematic approach to alleviate the problems
andpromotethegrowthofMSEs (MOTI,1997).
Elements of the program include measures with regard to creating an enabling legal framework
andstreamlining regulatory conditions that hinder the establishment of new and expansion of existing
MSEs.In addition, specific support programs also include measures related to providing working
premises,facilitatingaccesstofinance,provisionofincentives,promotionofpartnerships,businessskilldevelop
ment training, access to appropriate technology, access tomarket, access to information andadvice,
infrastructure and institutional strengthening of the private sector associations and chambers ofcommerce.

20
 2.1.3. Ethiopia’sMicroandSmallEnterprisePromotionPolicy
TheroleofMicroandSmallEnterprises(MSEs)isindispensableinpovertyreductionthroughemployment
generation. Cognizant of this, a national MSEs Development Strategy was formulated in1997. Ethiopia‟s
MSE Policy envisages not only reducing poverty in urban areas but also
nurturingentrepreneurshipandlayingthefoundationforindustrialdevelopment.
The strategy was revised in 2010/11 with renewed interests and more ambitious targets on
employmentandnumberofentrepreneursandtransitiontomediumsizelevel(AddisReMSEDA2009)MSEdevel
opment, being one of the key focus areas of the country‟s development strategy, receives massivesupport
from the government in the form of access to finance, market, technology, training and workingspace.
The government strongly believes that MSEs are the right solution to reduce urban unemploymentand
hence reduce poverty. This ambition is reflected in the GTP. For instance, it plans to create threemillion
new jobs in the MSE sector in the five years growth and transformation period. Therefore, MSEpromotion
and support is the vital strategy to fulfil this national plan of employment creation in the short-
runandachievingindustrializationinthelong-run.
Ethiopia adopts a layered policy support in which MSEs are categorized into start-ups, growing
middleand maturity. Start-up stage enterprises refers to those enterprises found at their establishment
stage andcomprises a group or individual aspiring entrepreneurs that seek various supports to make their
enterpriseoperational. The basic challenges at this stage include lack of initial and working capital, poor
knowledgeof business management and entrepreneurship andlack of knowhow about the different
governmentpoliciesanddirectives relatedtothesector.
In order tomitigate these challenges, FEMSEDA has designed a strategy thatfocuses onfacilitatingaccess
to initial capital, supporting MSEs in formalization and legalization process and provision oftraining on
business management, entrepreneurship and production technique. Growing stage enterprisesrefers to
those enterprises that are competent in the market in terms of price and quality and successfullyutilize the
various government support packages and are profitable in their business. However,
enterprisesatthisstagealsosufferfromdifferentchallengeslikefinancialconstraint,stage,knowledgeofinternati
onalstandardsandbetterproductiontechnologyaredisseminatedtoenterpriseslackofappropriate technology
and technical skill, absence of sufficient working and sales premises and rentseekingbehaviour.
Toalleviatethesespecificchallenges,FEMSEDAhasformedanationalstrategythatfocusesonfacilitation of
financial support and skill and technological development program. On the other
Hand,enterprisesareconsideredtohavereachedthematuritystagewhentheyarefullyprofitableandengaged

21
in further expansion and investments in the sector. At this stage FEMSEDA has a strategy that aims
tostrengthen enterprises in terms of productivity and product quality. Moreover, at this stage, knowledge
ofinternationalstandardsandbetterproduction technologyare disseminatedtoenterprises

2.1.4. DefiningBusinessPerformance
Two significant management dimensions in the domain of success measuring of business systems
areeffectiveness and efficiency. Effectiveness dimension is oriented towards the choice of the right
goals(doing the right things) which was have the market verification by consumers while efficiency
dimensionis determined by the degree of rational use and engagement of available resources (doing things
in theright way). It is possible to be successful only with effectiveness but for a short time, while the
completesuccessis guaranteedwhenbothdimensionsare realizedatthe highlevel.
The analyses of some literature in the field of management, business and entrepreneurship with a view
ofsearchingforsuccesscriteriaofowners/entrepreneurs/managerscangivenumeroustermsusedfordefining the
mentioned category. Business performance, entrepreneurial success and owners‟ successgoalscanbemet.
The category of success/performance is set as a dependent variable primarily in relation to
managementpractice and the volume of management activities in small businesses in order to explain
connections andpossibleinfluencesinthe directionofimprovingbusiness results.
Therefore,itbecomesnecessarytopreciselyunderstandandrestrictthenotionsofsuccessandperformances that
are usually used as synonyms. It is also necessary to define criteria which reallymeasure success of
microand small businesses.Beaver (2002), has commented there arevery realproblems with the term
success (good performance) and its various Interpretations and perceptions in thesmall firm sector. The
subject of success factors in small businesses has become more popular in recentyears amongst business
researchers and entrepreneurs, each attempting to provide a definitive formula forsuccess (Beaver, 2002).
Success is often viewed in terms of growth or profitability, but this becomes morecomplicated when
trying to determine the factors that lead towards it. It is important to recognize thatwhile a common
measure of success in business is still to be defined, there are some general factors
foundtoinfluencethesuccess potentialofbusinesses (Beaver,2002).
Previous research into the relationships between various factors and small business success has
beenlacking a comprehensive theoretical framework, and many small business owners are aiming to
discoverthe management strategies, business objectives and personal characteristics most closely linked to
smallbusinesssuccess (WalkerandBrown,2004).

22
According to Martin (2010:67) performance is defined simply in terms of output terms such as
quantifiedobjectives or profitability. Performance has been the subject of extensive and increasing
empirical andconceptual investigation in the small business literature (Bidzakin K.J., 2009:31). The issues
that remainunresolved are the goals against which performance should be assessed and from whose
perspective thegoals should be established (Etzioni, n.d:128). Rami Alasadi and Ahmed Abdelrahim
(2007:6-13) on theirstudydefinedperformanceasfollows.
The most commonly adopted definition of success [good performance] is financial growth with
adequateprofits.Otherdefinitions of success [good performance]are equally
applicable.Forexample,someentrepreneurs regardsuccess [goodperformance]as thejobsatisfaction they
derivefrom achievingdesired goals. However, financial growth due to increasing profits has been widely
adopted by mostresearchersandpractitionersinbusinessperformancemodels.
A business enterprise could measure its performance using the financial and non-financial measures.
Thefinancial measures include profit before tax and turnover while the no-financial measures focus on
issuespertainingtocustomers‟satisfactionandcustomers„referral
rates,deliverytime,waitingtimeandemployees‟ turnover. Recognizing the limitations of relying solely on
either the financial or non-financialmeasures, owners-managers of themodern smallBusinesshas adopted a
hybrid approach of usingboththe financialandnon-financialmeasures(Chong,2008).

2.1.5.Measuresofbusinessperformance
Business success is usually measured in terms of economic performance. As Walker and Brown
(2004),small business success can be measured by financial and non-financial criteria although the former
hasbeen given most attention in the literature. Traditional measures of business success have been based
oneither employee numbers or financial performance, such as profit, turnover or return on
investment.Implicit in these measures is an assumption of growth that presupposes all small business
owners want orneed to grow their businesses. For businesses to be deemed successful these financial
measurementsrequireincreasesinprofitorturnoverand/orincreasednumbersofemployees.
As Walker and Brown (2004) cited from the Study of Hall and Fulshaw (1993), „the most
obviousmeasures of success are profitability and growth‟. In economic terms this is seen as profit
maximization.Economic measures of performance have generally been popular due to the ease with
which they can beadministeredand applied since they are very much
hardmeasures.Furthermore,Walkerand Brown(2004) suggested, „all businesses must be financially viable
on some level to continue to exist‟.
However,giventhatsomebusinesseshavenointerestingrowth,therebyimplyingthatfinancialgainisnottheir

23
primary or only motivation, then there must therefore be other non-financial criteria that these
smallbusinessowners use tomeasure theirbusiness success.
Insmaller,entrepreneurialandindependentfirms,measuresofsuccessmayhavemorecomplexDimensions than
just financial performance (Mohan-Neill 2009). Non-financial measures of success
usedbybusinessowners,suchasautonomy,jobsatisfactionortheabilitytobalanceworkandfamilyresponsibilitie
s (Walker and Brown, 2004; Mohan-Neill, 2009) are subjective and personally defined andare
consequently more difficult to quantify. The hard measures previously mentioned therefore, are easierto
understand and can be used in a comparative way against existing data and as benchmarks for
futuremeasures.
Non-financial measures are based on criteria that are personally determined by the individual
businessowner although commonalties within the partners of small business owners occur. These non-
financialmeasures presume that there is a given level of financial security already established; it may be
that this iswithin the business, or that the small business owner does notrequire the business to be the
primarysourceofincome(WalkerandBrown,2004).
The election of performance measures that reflect the true situation of small businesses with some
degreeofcertaintyandreliabilityisindeedacrucialprocess.Thelackofuniversallyacceptedstandardperformance
measuresleftthedooropentobusinessorganizationstodecideandchooseitsownperformance measure that
might not truly reflect its performance (Alasadi and Abdelrahim, 2007). Suchperformance measures
include but not limited to:sales volume, Organization reputation, return-on-investment (ROI),
profitability, and established corporate identity. While some might argue that most
oftheseperformancemeasuresareappropriateforlargecorporations;theyarenotalwaysperfectlyapplicable
tosmallbusinesses.
In this study profitability was adopted to measure performance of these MSEs. This is mainly because
ofthe pilot study clearly indicates these MSEs aremore focusing on profitability than other modes
ofperformancemeasures.

2.1.6. FactorsInfluencingPerformanceofMSEs
Micro and small enterprises considered as a vital component of the socio-economic development of
bothdeveloped and developing countries, usually some of these enterprises collapse within the first few
yearsof their start-up. Of those operating, some grow rapidly, while others grow slowly. So, it is important
toidentify the cause factors of success because it helps new entrants of the sector to consider the factors
andusefortheirfutureinthebusiness(AlasadiandAbdelrahim,2007).Thesefactorscouldvaryfromone

24
country to another due to the economic, geographical and cultural differences. This kind of
investigationof the successfactorisveryimportantfordevelopingcountrieslike Ethiopiabecause the
researchconclusion could be useful for the economic development planners as well as to individual
entrepreneursandbusiness ownersinthecountries concerned.
There can be various factors like socio-economic, political and motivational factors that affect the
successof small business in general and MSEs in particular. Searching on the literature of MSEs Success
acrossthe world, we can find various factors affecting their success. In the following section of the review
ofrelated works of previous researchers regarding each of theindependentvariables (performancefactors)of
thisstudy theresearcherhaschosenfivesuccessfactorstoinvestigateanddiscuss.Theseare:management
experience of the owners‟, business information service, government regulation and
policy,financialcontrolandplanningandmarketingskillandstrategymechanismofthe principalowner.

2.1.7. Accessmanagement ExperienceonPerformanceofSMES

Management experience may provide entrepreneurs with prior knowledge of markets, ways to
servemarkets, and of customer problems. Zeleke (2009) conducts a study on the efficiency of
management as adeterminant of long-term survival in micro, small and medium enterprises in Ethiopia,
and his researchascertainsthathighlevelofmanagerialskillssignificantlypromoteslong-
termsurvivalandprofitabilityin small businesses and enterprises. Successful businesses are significantly
associated with the ability togenerate profit on a sustainable basis. Profitability has enabled successful
businesses to achieve their nextlevelofgrowthaswellas thepotentialtostaycompetitiveinbusiness.
The main reason for failure is inexperienced management. Managers of bankrupt firms do not have
theexperience, knowledge, or vision to run their businesses. In diagnosing the root causes of small
firmfailure itshouldnotbe surprising thatthisturns out tobe themanagementinefficiency of owner-managers
(Zeleke 2009). Managerial effectiveness influences every aspect of a business and is oftenbelieved to be
the most important factor contributing to small business failure. The management skills andmanagement
concepts of business founders are deemed much more important than their technical skillsand their
concern about production which has resulted in an overall positive organizational
performance(LinandYeh-Yun1998).Incontrast,thestudyreportofRose,KumarandYen(2006),indicates
„management experience Prior owning businesses were found not significant for the success of
smallenterprises.
Apparently individuals who were found successful in their small business venture were less dependent
upontheirpreviousbusinessskills.Inaddition,theirstudyshowsthat;marketingfunctionssuchas

25
„promoting company and its product and services‟, „understanding market needs‟, ‟customer
feedback‟and „marketanalysis‟ensure thelongtermsuccessofbusinessventures.
In addition, Temtime and Pansiri (2004) also reported in their study managerial of background has
lesssignificance on the success of the enterprises. This may arise from the fact that most managers of
failedenterprisesdonotacceptthefactthattheirlackofmanagerialeducationandexperienceisalsoresponsibleforf
ailure.
Lin and Yeh-Yun (1998),in their study of, Successfactors of small and medium sizedenterprises,suggested
that the management skills and management concepts of business founders are much moreimportant than
their technical skills and their concern about production which has resulted in an overallpositive
organizational performance. They arguedin theirstudy that, „although technical skillsmayguarantee the
survival of a given SME, for an enterprise to truly thrive, founders need to enhance theircapabilities in
carrying out contemporary management concepts,such as satisfying employees'
growthneeds,delegatingresponsibility,andparticipativemanagement‟.
Another study done by O.Okpara (2011), on MSEs operating in Nigeria supports the argument that,
lackof management experience of the small business owners is the other major reason to small
businessfailure. As the findings of this study shows that, most business owners who do not Have
managementexperience and adequate training and skills to operate a business faces a problem of collapse
of theirbusinesses.

2.1.8. Accesstobusinessinformation servicesandperformanceofSMEs

Information is the „life blood‟ for business enterprises. Organizations cannot survive without
information.They need information on market, raw materials, government directions and others. Access to
businessinformation services has been identified as one area that needs attention from governments and
businessservices providers if the SMEs sector in developing countries is to achieve sustainable levels of
growthand development. Many firms in Africa Operate in an poor information environment due to lack
ofadequatebusinesssupportservicesandthepoorinformationtechnologicalinfrastructures(Oshikoya&Hussain
, 2007). Access to information hashowever been not given the same attention asother constraints to
growth of SMEs like access to finance, markets, technology or training. Accessingbusiness information
services has over the years been greatly enhanced with the emergence of
variousinformationandcommunicationtechnologies.Indevelopedcountries,becauseofwell-
developedinformation and communication technologies (ICTs) infrastructure and easy access to computer
hardwareandsoftware,SMEsenjoyeasyaccesstobusinessinformationservices.Indevelopingeconomiesthere

26
are many challenges regarding ICTs infrastructure and the cost of IT hardware and software. This in
itselfhascreatedmanyproblemsintheareaofbusinessinformationservicesfortheSMEssector.Asgovernmentsa
ndbusinessserviceproviderstry toaddressthemanychallengesfacingtheSMEsector,itis also important that
the present use of ICTs in accessing business information services be identified
inordertoprovidemoredevelopmentsupportinthisarea(Levy,2000).
For the SMEs sector in developing countries, including Ethiopia to observe sustainable levels of
growthand development, availability of business information services has been identified as one area that
needsattentionfromgovernmentsandbusinessservicesproviders.ManySMEsinAfricaandEthiopiaspecifically
, operate in an information insufficient environment due to lack of adequate business supportservices and
the poor information technological infrastructures (Oshikoya and Hussain, 2007). Access
toinformationhashoweverbeennotgiventhesameattentionasotherconstraintstoimprovetheperformanceofSM
Eslike accesstofinance,markets,technologyortraining (Kauffmann,2005).
Availability of businessinformation servicesforSMEs overtheyearshas been enhancedwiththeemergence of
various information and communication technologies. In developed countries, SMEs enjoyeasy access
tobusinessinformation services due towell-developedinformation andcommunicationtechnologies (ICT)
infrastructure and easy access to computer hardware and software while in developingeconomies there are
many challenges regardingICT infrastructure and the cost of IT hardware andsoftware. This has brought
many challenges in the area of business information services for the
SMEssector.Despitetheeffortofgovernmentsandbusinessserviceproviderstrytoaddressthemanychallenges
facing the SME sector, it is also necessary to note that SMEs identify and adopt the present useof ICT in
accessing business information services in order to provide more development support in thisarea
(Levy,2000).
A research study conducted by Cacciolatti, Fearne and McNeil (2011)indicated that SMEs that makegood
use of structured marketing information services experienced higher probability of performancegrowth.
Mahmoud (2011) concluded that the higher the level of market information resulted in greater thelevel of
performance in Ghanaian SMEs. The study of Keh et al (2007) showed that there was a
positiverelationshipbetweenavailabilityandutilizationofbusinessinformationandtheperformanceofthefirm.

Accessgovernment regulationandpolicyonperformanceofMSES
The Government can occur up with policies that can boost and support the growth of novel
technologies,products,andsolutions.Ontheotherhand,GovernmentcanlikewiseseemtohinderSMEfirm

27
performance when it introduces policy which can restrict the autonomy, as well as the
entrepreneurialfreedomofsomevariety.
InEthiopia,allMSEsareformal,properlylicensedandsubjecttopayingtaxesasperthetaxproclamation of
thecountry.AccordingtoAddisAbabaMicroandSmallEnterpriseDevelopmentBureau, there are as much if
not more informal firms as are formal firms in Addis Ababa. Some of thereasons attributed to the
informality are high transaction costs during licensing, contraband, illegal underinvoicingofimports.
This implies that in Ethiopian SMEs operate in a difficult business environment due to the
governmentfailure in addressing the above overall problems. Among other things the lack of sources and
access
tofinance,overregulatedbusinessenvironment,limitedsupportservicesforinnovation,technologydevelopment
,andmarketinglimittheircontributiontoeconomicdevelopment.
Recall that it was mentioned earlier in that government policy bias favouring larger corporations was
citedas a challenge for development of SMEs. They take the form of various incentives targeting the
largecorporations under the guise that they was speed up industrialization. For instance, in the last five-
yeardevelopmentpolicy,dubbedthe“PlanforAcceleratedandSustainedDevelopmenttoEndPoverty(PASDEP)
”is a proof for the above claim because the plan grants various financial and non-
financialbenefitsforlargescalefirms.
The PASDEP provides mechanisms to wave taxes on imported raw materials and industrial
machineriesspecifically for textile and garment, cement and steel, meat and leather, and sugar industries
with littlebenefit for SMEs (MoFD, 2006) The absence of government commitment to ensure an enabling
businessenvironmentandenhance thecapacityofSMEsis anotherobstacle.
AccordingtoWorldBank(2005),indevelopingcountriessuchasEthiopiathelegalandpolicyframework that
govern the business environment is heavily regulated. Consequently, SMEs‟ operate inthis difficult policy
and regulatory environment have twoalternative options; to compliance with rulesand regulations and or
to operate the business in informal manner. But study shows that, conforming theregulation create a
problem for SMEs operation in terms of expansion, access to competitive market,
andsecuringprofit.WorkingintheinformalsectorpreventsMSMEsfromobtainingavailablelimitedservices(Es
hetuandMammo2009,12-13)

2.1.9 AccessFinancialControland Planningon PerformanceofSMES

ThemajoruniversallyindicatedkeyproblemforSMEsislackofaccesstocredit/
finance.Creditconstraintsoperateinvariety of
waysinEthiopiawhereundevelopedcapitalmarketforcesentrepreneurs

28
to rely on self-financing or borrowing from friends or relatives, is not enough to enable SMEs
undertaketheir business activities optimally. Insufficient access to long-term finance for SMEs has forced
mostSMEs in Kenya to rely on high cost short term finances. The various financial challenges that SMEs
faceinclude: high cost of credit, high bank charges and fees and lack of proper infrastructure
(Kauffmann,2005). Wanjohi and Mugure (2008) in their study revealed the extententrepreneurs‟ need for
creditamong the common and low earning businesses as numerous money lenders in the name of
pyramidschemes came up, promising hope among the „little investors,‟ which they can make it to the
financialfreedom through soft borrowing. The reason for opting for these schemes among a good number
ofentrepreneurs was majorly to seek finances and soft credit with low interest rates while making
profits.FinancialconstraintremainsamajorchallengefacingSMEsinEthiopia.
Finding the starting capital for most business is one of the major hurdles that many entrepreneurs
gothrough and even after obtaining the starting capital, acquiring sufficient finance to sustain
businessgrowth is yet another challenge (Carter, Greene & Hart, 2003). Study by Kinyanjui (2006) has
establishedhowSMEsareconstrainedbyfinance.OtherstudiesbyKiiruetal(1988)forRuralEnterpriseProgram
med confirmed further that the chief constraint within the small business enterprise sector isfinancing. In
the study carried in Nairobi among small manufacturing enterprises, Nyambura
(2013)establishedthatfinancewasratedamongthebiggestproblem.
Eeden (2004) carried out a study on challengesfacing SMEs in South Africa. The study found thatfinance
was one of the most prominent constrains. The study further revealed that the problem related tofinance
included: lack of information on where to source for finance; restrictive lending offered bycommercial
banks; lack of access to finance; insufficient financing; lack of track record required by thebanks; limited
access to collateral and inappropriate structure of financial institutions when dealing withSMEs. Access to
finance is paramount for the growth of SMEs‟ competitiveness, as SMEs have to investin new
technologies, skills and innovation (Basil, 2005). A wide spectrum such as thismay only betackled by
mainstreaming SME development in national frameworks. It is also noteworthy to add thateffort to
resolve access to financeissues is notsolely the responsibility of governments. SMEs need totake a better
initiative like mobilizing joint advocacy and recommendations based on sound analysesthrough
theirmembershiporganizations.Eeden(2004)suggestsfurtherthatSMEsmustadoptandimplement sensible
business practices and continuously invest in good internal management systems
inaccounting,planning,financial,operationsandhumanresource management.
Ihyembe (2000) reported that SMEs claim that financing, particularly long-term financing is the
greatestobstacletogrowthandinvestment.Thechallengescomeattwolevels.Inleastdevelopedeconomiesand

29
in some transition and developing economies deficiencies in both the macroeconomic and
microeconomicenvironments pose challenges: high budget deficits and unstable exchange rates and legal,
regulatory
andadministrativeenvironmentcausemajorobstaclesforSMEstoaccessfinancing(Chu,CynthiaandMcGee,20
07).
In some economies, there is inadequate capital, property rights may be a hindrance to ownership of
land,underdeveloped markets don‟t favor the transfer of immovable assets, credit and collateral policies
maynot allow SMEs to access certain assets to be used as collateral (e.g. future acquired property),
absence ofregistries increases risks to lenders for mortgages andpledges, weaknesses in legislation andin
thejudiciarymayhampercontractenforcementandassetliquidation(Kinyanjui,2006).
Mostoftheseobstaclesmaybeduetopoororganizationalcapacity.Forinstance,indevelopingeconomies,
underdeveloped marketing, accounting, auditing,financial management and legal counselservices and
other essential services that SMEs may need when they approach banks and other types oflenders
mayresultinSMEsnotbeingabletoaccessoraffordsuchservices(Cassar andHolmes,2003).
Inmoreadvanceddevelopingcountries,wherethereisreasonableprogressinthefundamentalinstitutions, SMEs
may still face challenges in accessing formal finance in the form of bankloans,guarantees, venture capital,
leasing and so on. For example, even though SMEs are the largest group ofcustomers of commercial
banks in any economy, loans extended to SMEs are often limited to very shortperiods, thereby ruling out
financing of any sizable investments. Moreover, due to high-perceived risks
inSMEloans,accesstocompetitiveinterestratesmay alsobelimited(Nyambura,2013).
Majority of the formal financial institutions consider SMEs as highly risky and commercially
unviable,thus hindering them from accessing credit and worse case is in the rural areas where most SMEs
arelocated (Hamisi, 2012). The present legal and policy framework for financial services is less
supportive ofsmaller borrowers and needs to be addressed. Planning was also recognized by several
studies as a keyfactor to small business success such Lussier (1995), Lussier and Pfeifer (2001), Alasadi
and Abdelrahim(2007). A business often begins with an idea that is acted upon. However, to get from the
idea stage to theactual business start-up generally involves considerable Planning. In many cases, the
amount of actualPlanning done is dependent on the wasingness of the entrepreneur to do it. Some
entrepreneurs preparebusiness plans as a means to attain financing for their businesses while others use a
plan to get all theirideasdownonpapertoassesswhethertheirbusinessideaissoundandviable.
Ahmed, Shahbaz and Mubarak (2008) suggested that no one should start a business in today‟s
economywithout a business plan. They argued that success for small businesses is achieved through

30
planning,commitment,andtime,nurturing,financing,andpositioningtoseizeopportunities.Manyofthese

31
activitiesmustbedoneonacontinualbasisastheenvironmentinwhichbusinessesoperateiscontinuouslyevolving
.
Another fact rarely considered is that the majority of new businesses fail within a few years mostly
duesimply to poor planning or no planning at all. Most people who go into business enter a field related
totheir current employment or a favorite hobby. They don't do a market study first to see whether
thedemandfortheirproductorserviceisgrowing,decliningorstagnating.

2.1.10 AccessMarketing Skilland StrategyandPerformanceofMSES

Markeingskills,suchasidentifyingnewprospects,showingeffectivecorporatepositioning,customerhandling,fi
ndingwaystoefficientlyadvertise,andtheabilitytocomeupwithnewideasareveryimportantfactorsthatmicroan
dsmallbusinessenterprisesshouldpossesstobesuccessfullongtermsurvivalinthefuture.TemtimeandPansiri(20
04)alsoreportedintheirstudyofSmallBusinessCriticalSuccess/
FailureFactorsinDevelopingEconomies,inBotswanashowsthat;marketingactivitiessuchasproductmarketing,
marketresearch,anddemandforecastandsoforthhaveagreaterimpactonthesuccessofsmallbusinessesperforma
nce.Inthisstudycustomerrelationshipalsoreportedasoneoftheimportantsuccessfactorsofthesmallbusinessow
ners.Fromthisstudyreportonecanunderstandtheimportance of marketing skills of the business owners to be
successful in their competitive
environment.Pulendran,SpeedandWiding(2002),suggestthatthequalityofmarketingplanningisassociatedwit
hahigherlevelofmarketorientation.Perhapsonecanarguethat,betterqualityplanningassistsmanagersseekingto
implementamarketorientationtoachievetheirgoal,orconversely,marketorientationassistsplanningbyprovidin
gaclearandunambiguousgoalthatservestofocustheplanningeffort.Thisstudyalsoindicatesthatmanagerialfunc
tionsinsmallenterprisesarelimitedtoroutineshorttermfocusedactivities,andverylittleemphasisisgivenlongter
mcompetitivenesswhichinternhasanimpactonthelong-termsuccess andprofitabilityoftheenterprises.

2.2Theoreticalliterature
This study is based on four theories: resource based view theory, signalling theory, the balanced
scorecardandthe peckingordertheory.These theoriesare explainedindetailbelow:

2.2.1ResourceBasedViewTheory(RBV)
Wernefelt (1984) came up with the Resource based view theory to advance the idea that strategy of a
firmas a function of the complement of the resources held. The core of the Resource Based Model is
thatcompetitive advantage is created when resources that are owned exclusively by the firm are applied
todeveloping uniquecompetencies.Theresultingadvantagecanbesustainedduetolackofsubstitution and

32
imitation by the firm‟s competitors. Firms have different collections of resources (tangible and
intangibleassets) and no two firms are similar in terms of the resources they hold, moreover, the resources
a firmholds determine how well that firm would carry out its operations. A company would be posited
tosucceed if it has the best and most appropriate stock of resources relevant for its business and strategy
andtherefore Competitive advantage ultimately can be attributed to ownership of valuable resources
thatenable the firm to perform its activities better than competitors thereby improving its performance.
RBVdescribes a firm in terms of the integrated resources and that resources are limited to those attributes
thatenhance efficiency, effectiveness and performance of the firm (Wernerfelt, 1984). Miller and
Shamsie(1996)referthatresourcesshould have some capabilitytogenerateprofitsortoavoidlosses.

2.2.2 SignallingTheory
Signalling theory is based on the transfer and interpretation of information at hand about a
businessenterprise to the capital market and the requisition of the resulting perceptions into the terms on
whichfinances made available to the enterprise. In other words, flows of funds between an enterprise and
thecapital market are dependent on theflow of information between them (Beck et al, 2008).
Watson,Keasey and Baker (2000) assert that of the ability of small enterprises to signal their value to
potentialinvestors, only the signal of the disclosure of an earnings forecast were found to be positively
andsignificantly related to enterprise value amongst the following: percentage of equity retained by
owners,the net proceeds raised by an equity issue, the choice of financial advisor to an issue (presuming
that amore reputable accountant, banker or auditor may cause greater faith to be placed in the prospectus
for thefloat)andthelevelofunder-pricingofanissue.

2.2.3 TheBalancedScorecard
The balanced scorecard (BSC) suggests that managers should consider the organization‟s
performancefrom four dimensions, financial perspective, customer perspective, innovation & learning
perspective,internal perspective (Kaplan and Norton 1996). BSC integrates financial and non-financial
measures intoone measurement system. The objectives and standards of BSC are obtained from the
organization‟svisionandstrategy.
The Balanced Scorecard provides managers with a comprehensive framework that translates a
company‟svision and strategy into a coherent set of performance measures. Kaplan & Norton (1996)
showed that thebalanced scorecard not only allows the monitoring of present performance, but also tries
to incorporateinformation about how well the organization is positioned to perform in the future. In
addition, theBalancedScorecardhasevolvedtobecomeacoremanagementtool,inthatithelpsthemanagementof

33
firms to clarify, communicate and manage strategy. In practice, companies use the BSC approach
toaccomplish four critical management processes, clarify and translate vision and
strategy,communicateand link strategic objectives and measures, plan, set targets, and align strategic
initiatives and enhancestrategicfeedbackandlearning.

2.2.4 ThePeckingOrderTheory
This is another financial theory, which is to be considered in relation to SMEs financial performance
andmanagement. It is a finance theory which suggests that management prefers to finance first from
retainedearnings, then with debt, followed by hybrid forms of finance such as convertible loans, and last
of all byusing externally issued equity; with bankruptcy costs, agency costs, and information asymmetries
playinglittleroleinaffectingthecapitalstructurepolicy(Norton,1991).AresearchstudybyZoppaandMcMahon
(2002) revealed that 75% of the small enterprises used seemed to make financial structuredecisions within
hierarchical or pecking order framework. According to Cassar and Holmes (2003), thePecking Order
Theory is consistent with small business sectors because they are owner managed and donot want to dilute
their ownership. Owner managed businesses usually prefer retained profits because
theywanttomaintainthe controlofassets andbusiness operations.

2.2.5 EmpiricalLiterature
Conferring to Mead &Liedholm (1998) and Swierczek and Ha (2003), the main factors that affect
theperformance of MSEs in developing countries is not their small size but their isolation, which
hindersaccess to markets, as well as to information, finance and institutional support. The argument that
smallbusinesses in Africa are crucial in the role they play in employment creation and general
contribution toeconomic growth is not new. Although this may be true, many new enterprises tend to be
one personestablishments(Mwega,1991).
This has tended to ensure that the journey of the MSE entrepreneur in many instances is short lived,
withthe statistic of MSE failure rate in Africa being put at 99 percent (Rogerson, 2000). Various reasons
forthese failures have been proposed by scholars including lack of supportive policies for MSE
development(McCormick 1998), intense competition with replication of micro-businesses (Manning
&Mashego,
1993;managercharacteristicsincludinglackofskillsandexperience(Katwalo&Madichie,2008andVerhees,
F.M.,&Meulenberg, M.G.,2004).
A study by Hall (1992:237-250) has identified two primary causes of small business failure appear to be
alack of appropriate management skills and inadequate capital (both at start-up and on a continuing
basis).TheresearchundertakeninTanzaniabysurveying160microenterprisesshowedthathightaxrates,

34
corruption,andregulationintheformoflicensesandpermits,arefoundtobethemostimportantconstraints to 24
business operations of micro enterprises (Fjeldstad et al, 2006 cited in Mulugeta,
2011).AccordingtoJSWiese(2014)whoconductedastudyonthedeterminantfactorsofsustainabilityshowsown
ersormanagerswithmoreexperience(managerial,sectororpreviousSMEexperience)tendtohaveagreaterinclin
ationtowardsgrowthandwasalsoconsideredessentialcriteriaforsustainability.Woldie,etal.,
(2008)andMbugua,etal.,(2014)contendthatSMEsownersormanagerswithmoreexperience(managerial,sector
orprevious small businessesexperience)tendtohavemoregrowth potential
thanthosewithalackofexpectedpotentialandalsothehigherthelevelofeducationattainedbytheowner/
manager,thehigherthelikelihoodofgrowthoftheenterprise.Managerialskillsandexperienceaffectbusinessespe
rformanceatcertainlevel.Sincesmallbusinessesaccountforsizeableproportionsofeconomicactivity,therefore,
andsincetheyareanimportancesourceofdynamismandinnovation,smallbusinessmanagementskillsshouldbea
primaryfocusforeconomicpolicyingeneralandforinnovationstrategies(Keith,2001).
As per Simeon and Lara (2005) MSEs appear to be disproportionately afflicted by the
underdevelopednature of financial institutionsin developingcountries.Forvarious reasonsrangingfrom
alackofcollateral to bias against small firms, MSEs tend to face greater financial constraints than do larger
firms.The study done in Kenya related to financial management of MSEs identified the heavy investment
ininventory ties up capital which in the end reduces firm‟ profitability therefore, there is need for a trade-
offbetween receivables andholdinginventory ifthefirm is toattain the required profits (Charlesetal.,2014).
Marketing activities such as product/service marketing, marketing research and information andpromotion
impact negatively on the performance of SMEs due to lack of marketing skills by SMEsowners. The study
conducted in Nigeria by Ebitu et al., (2015) identified most of problems encounteredMSEs are marketing
related some of which include inability to apply modern marketing techniques andstrategies, difficulty in
managing the firm‟s advertising and other promotional tools, competition fromlargefirms,lackof
adequateresearch,poorandmundaneproductiontechnology,lackof adequatefinancing of marketing
activities, poor quality products and problems of standardization, warehousing,inventory control, and poor
transportation facilities, branding/packaging, financing and credit facilities,and risk bearing among others.
These problems are capable of impeding, disrupting and hindering thegrowth, development and expansion
of the firms in its effort to satisfy its target market and also createvalue for the organizations. According to
Noghor (2015), MSEs are facing challenges brought about bychanges in technological environment;
hence they are failing to keep abreast of these changes.
Largebusinesses,becausetheyhavetheadvantageofbeingtechnologicallyadvanced,enduppoachingthe

35
MSE market niche and resulting in MSEs being kicked out of the game. Failure not to employ the
latesttechnology means producing at higher cost than do competitors in the market thus, eventually
exiting themarket due to tough competition. Though MSEs are considered an important source of job
creation andeconomic growth, their survival is a difficult task for managers for they have typical
characteristics thatendupbecomingbarrierstotheirdevelopment.
According to Olawale, (2014) reason for failure are lack of management experience, lack of
functionalskills, poor staff training and development, poor attitudes towards customers, unavailability of a
logisticschain and ahigh cost of distribution, competition, rising costs of doingbusiness,lack of finance
andcrime. The reason for failure of MSE identified by Mariana, (2014) lack of customer, previous
experiencein the field of business, lack of knowledge or managerial experience, lack of government
policies tosupport small business, the lack of bank credit. A study has been conducted by Abera (2012) on
FactorsAffecting the Performance of Micro and Small Enterprises by using stratified random sampling of
261MSEsfromtwomajorsubcitiesofArada andLidetainAddisAbaba.
According to this study, the main internal factors identified were management factors which include
poorselection of associates in business, lack of strategic business planning, and costly and inaccessible
trainingfacilities. The major entrepreneurial factors include lack of persistence and courage to take
responsibilityforone‟sfailureandabsenceofinitiativetoassessone‟sstrengthsandweakness.Hefurthernotedtha
tthecontextual factors such as financial,workings premises,marketingandinfrastructure hadvery higheffects
on the performance of MSEs compared to other factors in the research area and is prevalent to
thebusinesses.InasurveyconductedonMSEsinselectedcitiesinEthiopiabyMUDC(2013),theyidentifiedanum
beroffactorsincludinginadequatecoverageof thesupportservices,lowlevel ofeducation among the operators,
limited relevance of the trainings and exclusion of the most of the privateMSE operators from the support
services provided by the government. The other study which has similarfinding indicates Drbibe et al.,
(2013) lack of access to finance, lack of knowledge and skills, lack ofworking premises, lack of access to
market, lack of necessary support from relevant institutions,
shortageofrawmaterials,andregulatoryproblemsasmajorchallenges.
The major constraints identified by various studies on MSEs in Ethiopia are associated with market
andfinance problems. According to Gebreyohannes (2015) Market is the major constraint that highly
hindersthe firms‟ performance for all sectors in the manufacturing MSEs. About 43% of the enterprises‟
salesperformance is below their expectation level and in few 18 cases there is no sale at all. This problem
isattributed to lot of factors as the location of theworking premise and the display facilities is away
fromthemainroad,burdenoftasksintheentrepreneurs,lackofcompetitivebusinessskill,lowerpriceof

36
product offered by the informal sector and promotion of the sector is focused more on its role in
povertyreduction than its business role as quality products and thus the customers came with expectation
of lowerprice thantogetqualityproductswithfairpriceinthe market.
As indicated in survey of Assefa et al., (2014) the MSEs were inquired to identify the major
businessconstraints hampering their business. Access to finance tops the constraint list where 37.7% of
the MSEsreported it as a key constraint. The financial constraints facing MSEs is one of the critical
bottlenecks forthe growth of MSE. Some of the more common problems facing MSEs include failing to
get the loan theyapplied for and when they do, itis after a very longloan procedure. Repeated delaysin loan
deliveryaffect their business. The upper loan limit set by the MFIs falls short of the loan requisite of
MSE.Especially matured MSEs usually find it very hard to meet their loan requirements from MFIs. The
MSEsfeel that the interest rate and service charges are very high given the business environment MSEs
operatewith. Literatures on MSEs, particularly those done in Asella, are not conducted on financial
performanceaspects of the sectors. This research is therefore, meant to address the factors determining the
financialperformance of MSEs in a holistic way by targeting and deeply investigating those operators
engaged inconstruction, service,manufacturing and trade activities by capitalizing on operators in Asella
townadministration.
AsclearlystatedinTerfasaetal.,(2016)accesstofinanceappearstobeaverysevereormajorobstacleas reported by
about 55% and 64% of micro and small scale enterprises respectively. The problem ofaccess to finance is
more severe for small enterprises compared with micro enterprise as the latter
oftenhaveaccesstomicrofinanceinstitutions(MFIs) as theirloanrequirementiswithinthecapacityofMFIs.

2.2.6 SynthesisoftheReview
Majority of those who run SMEs are ordinary lot whose educational background is lacking. Hence
theymay not well be equipped to carry out managerial routines for their enterprises (King & McGrath,
2002).Management experience related to the owner/manager and the enterprise. Desouza and Awazu
(2006)argue that management is concerned with the deployment of material, human and finance resources
withthe design of organization structure. Hayton (2003) observes that the growth of many enterprises of
allsizes,suggestthatthescarcityofcompetentmanagersisamoreseriousconstraintoneconomicdevelopment. As
the enterprise becomes larger, the more need for managers to plan, coordinate andcontrol the activities of
the enterprise. Keyser et al. (2000) found that in Zambia lack of starting capitalwas a common problem
for entrepreneurs, as only 24% received a loan to start their business. Anotherstudy by Koop etal (2000)
established thattheamountof startingcapital was positively related tobusinesssuccess.

37
Other negative factors that have been identified include corruption, poor infrastructure, poor
location,failure to conduct market research and the economy (Kiggundu, 2002). The study therefore seeks
toestablish factors that influence the performance of micro and small business enterprises' performance
inAddisAbaba.

2.3. Conceptual framework

According to Mugenda and Mugenda (2003) conceptual framework is a diagrammatic presentation of
therelationshipbetweendependentandindependentvariables.Inthisstudy,thedependentvariableisperformance
of SMEs while independentvariables arefinancial control and Planning, Marketing
Skillandstrategy,Governmentregulationandpolicy,availabilityofbusinessinformationservices,andManagem
ent Experience as presented in figure.

ManagementExperi
ence

Government Financial
policyand control
regulation Mechanism
Performance
of SME

Availability
Marketing
of
skillandstr
Businessinf
ategy
ormationse
rvices
Source: Own sketched derived from the literature review

Figure2-1Frameworkoftheresearchthatshowstherelationbetweentheindependentvariables

withdependentvariable

38
 CHAPTERTHREE

RESEARCHMETHODOLOGY

3. Introduction
This chapter was discusses the research design and methodology use in the study, more specifically,
samplingdesign, researchapproach,methodofdatacollectionandanalysis,andvariablemeasurement.

3.1. ResearchDesign
Researchdesignistheblueprintforfulfillingresearchobjectivesandansweringresearchquestions(John
A.H. et al., 2007). In other words, it is a master plan specifying the methods and procedures for
collectingandanalysingtheneededinformation.Itensuresthatthestudywouldberelevanttotheproblemandthatit
useseconomicalprocedures.Thesameauthorsdiscussesthreetypesof researchdesign,namelyexploratory
(emphasizes discovery of ideas and insights), descriptive (concerned with determining thefrequency with
which an event occurs or relationship between variables) and causal (concerned withdetermining the
cause and effect relationships). The type of research employed under this study wasdescriptive
andinferential research. Themajor purpose of descriptive research is description of thestateof affairs as it
exists at present. Then this study was describes and critically assess the factors affecting
thegrowthofSMEsinAddisAbabaCityAdministration.

3.2. ResearchApproach
According to Mark et al. (2009:101) mixing qualitative and quantitative approaches gives the potential
tocovereachmethod‟sweaknesseswithstrengthsfromtheothermethod.Inthisstudyquantitativeapproaches of
doing research was employ,which hasbeen practiced,as recommendedby Creswell(2009:203-216).

3.3. SourceofData

3.3.1. PrimaryDataCollection
Primary data was collected from MSE operators through questionnaire. In order to collect the data
fromrespondents, the questionnaire with a covering letter which explained the objective of the study
wasdistributed in small and medium enterprises responsible persons. The study was applying a well-
designedFive pointLikertscale questionnaire togatherprimaryinformation.

39
 3.3.2. SecondaryDataSources
Complete information about the MSE operators of the study area, Policies, support rendered, was
collectfromLEIDO(Labour Enterpriseand IndustryDevelopmentoffice)databaseandmagazineand report.

3.4. TargetPopulation
The target population of the study was the entire set of small and medium enterprises in SMEs in
AddisAbaba CityAdministrationKolfeKeraniosubcity.

3.5. SamplingFrame
The sampling frames was the list of 731 target population of enterprises, from which the required
numberof sample size is drawn, which is available in Addis Ababa city Administration KolfeKeranio sub
cityLabour, Enterprise and Industry Development office which is formally registered up to December
30,2015 E.C. Sample size was draw, because it is impossible to consider the total population as
respondentstothis surveydue toimpracticality,timeandcost.
Thesamplingunitforthisstudy
wasfocuson,thetopmanagers,Ownerandmanagers,orotherresponsiblepersonwholeadsthe enterpriselike
salespersonwhorepresenttheowner.
3.5.1.SamplingTechniques
Proportional stratified sampling was used to get information from different sizes of the SMEs.
Thistechnique was preferred because itis used to assistin minimizing partiality when dealing with
thepopulation.With this technique, the sampling frame was organized into relatively homogeneous
groupsbeforeselectingelementsforthesample.AccordingtoJanet(2004:114),thisstepincreasestheprobability
that the final sample was representative in terms of the stratified groups. The stratums were:Wood, metal
and engineering, Leather and textile, Agro-processing and pharmaceutical and Chemical andconstruction
materialsinSEMsin AddisAbabacityadministrationKolfeKeraniosubcity.
3.5.2.SampleSize
AccordingtoCatherineDawson(2002:49),thecorrectsamplesizeinastudyisdependentonthenatureof the
population and the purpose of the study. While there are no general rules, the sample size usuallydepends
on the population to be sampled. In this study to select sample size, a list of the populationformally
registered SMEs in Addis Ababa city Administration KolfeKeranio sub city Labour,
EnterpriseandIndustryDevelopmentofficewhich isformallyregistered uptoDecember 30,2015E.Cwastaken.
Table3-1NumberofpopulationandSampleSize
Number Sectors Population Percentage Sample
1 Wood,metalandengineering 323 44% 114

40
 2 Leatherandtextile 162 22% 57
3 Agro-processingandpharmaceutical 158 22% 56

4 Chemicalandconstructionmaterials 88 12% 31

Total 731 100% 259

A Simplified Formula for Proportions Yamane (1967) provides a simplified formula to calculate
samplesizes. This formula used to calculate the sample sizes in Tables 2 shown above. A 95% confidence
leveland P = 0.05 are assumed. n = N / [1 + N (e) 2] Where n is the sample size, N is the population size,
and eisthelevelofprecision.
3.6.MethodofDataCollection
Thestudywasbasedonprimaryandsecondarysources.Theliteraturereviewtotallydependsonsecondarysources
while theanalysisdependsonprimarysourcesspecificallyquestionnaires.
Primary data collected from MSE operators through questionnaire. This was completed by the
ownermanagers/oroperatorsoftheenterprises.
The questionnaire is dividing into three main sections. The demographic and general data regarding
theowner and the enterprise are discussed on the firstsection.While the second section includes
groupfactors thataffectthe performanceof MSEs, these are: governmentregulation and
policy,businessinformationservice,managementexperience,marketingskillandstrategyandfinancialcontrolm
echanismandplanning.
This section is designed according to a five points in Likert scale form. The scale for each factor
rangedfrom 1= strongly disagree to5= strongly agree. However thelastsections were open ended question
ifanyofthe respondentslike tomentionanycommentsthatcouldbe usefulforthestudy.

3.7.MethodsofDataAnalysisandInterpretation
All hypotheses were testwith thehelp of the Statistical Packagefor Social Science (SPSS-20) software.In
order to analyse the data the two sets of Statistics: Descriptive and Inferential statistics was
used.Descriptivestatisticssummarizesanddescribesquantitativeinformationintheformoffrequencydistributio
n and measures of central tendency (mean and standard deviation), whereas inferential
statistics(correlation and regression) were taken from this tool. During data analysis multiple regression
test wasused to test for significance of differences between the observed and the expected distributions of
data,whilePearson‟scoefficientofcorrelationwasusedtomeasurethedirectionandstrengthoftherelationship
between the research variables and determine whether the independent variables
(governmentregulationandpolicy,businessinformationservice,managementexperience,marketingskillandstr

41
 ategy

andfinancialcontrolmechanismandplanning.)haveaneffectondependentvariable(enterprisesgrowth).
VariableMeasurement

DependentVariableanditsMeasurement
The selection of performance measures that reflect the true situation of small businesses with some
degreeof certainty and reliability is indeed a crucial process (Rami and Ahmed, 2007:6). The lack of
universallyaccepted standard performance measures leftthe door open to business organizations todecide
andchoose its own performance measures that might not truly reflect their performance. Such
performancemeasuresincludebutnotlimitedto:marketshare,salesvolume,companyreputation,return-on-
investment (ROI), profitability, and established corporate identity. While some might argue that most
oftheseperformancemeasuresareappropriateforlargecorporations,theyarenotalwaysperfectlyapplicable
tosmallbusinesses.
In this study, change in profit is used as a dependent variable to measure the performance of MSEs.
Herethe change in profit ratio data is used as the measure of the dependent variable performance of
theenterprises involved in the survey. This is mainly because of the following three reasons. First, as the
pilotstudyclearlyindicates,MSEsaremorefocusesonprofitabilitythanothermodesofperformancemeasures.
Second, as recommended by Rami and Ahmed (2007:6) change in profit has been
widelyadoptedbymostresearchersandpractitionersinbusinessperformancemodels.Alsogrowthinemploymen
t level of the enterprises would not be another appropriate alternative measure of performancebecause this
MSEs are primarily established as a source of self-employment. Employment numbers is alsoa measure
that is easily accessible, since it is an important figure for governments. Sales figures are on theother hand
affected by inflation and exchange rates and it is difficult to compare sales figures betweenindustries.
Thatis why itis important to use multiple growth indicators to study firm growth (Davidssonet al., 2006
cited in Soini&Veseli, 2014).According to CSA (2011) in Ethiopia, there are two forms ofgrowth level of
SMEs. The firstis transition from micro to small and small to medium, the second is
asteptobecompetentwithintheleveltheyhave.

IndependentVariablesanditsMeasurement
According to Fatoki& David (2010), Joseph & Henry (2013), the independent variables measure
was:government regulation and policy, business information service, management experience, marketing
skillandstrategyandfinancialcontrolmechanismandplanning.

42
ModelSpecification
Themodelbuiltaroundtwosetsofvariables,specificallydependentvariable(Growth/
profit)andindependentvariables (governmentregulation and policy,business information
service,managementexperience,marketingskill andstrategy andfinancial control mechanism
andplanning.).The basicobjective of using regression equation on this study was to make the study more
effective at describing,understandingandpredictingthestatedvariables.
The following regression model was formulated with five independent variables and one
dependentvariable. Yi = β0 + β1X1 + β2X2 + β3X3 + β4X4 + β5X5 + Ui Where: Y = Dependent
variable –Growth β0 = Constant term X1 = government regulation and policy, X2 = business information
service,X3 = management experience, X4 = marketing skill and strategy, X5 = financial control
mechanism
andplanning.Independentvariables,Ui=Disturbanceorerrortermβ1,β2,β3,β4,β5,β6andβ5=Coefficient of
independent variablesAccordingly, this statistical techniquewas used to explain thefollowing
relationships.Regress growth (as dependent variable) on the selected linear combination of
theindependent variables using multiple regressions (government regulation and policy, business
informationservice,managementexperience,marketingskill andstrategy andfinancial control
mechanismandplanning.).

ValidityandReliability
Validity is the degree to which a test measures what it purports to measure (Creswell, 2009).
Validitydefined is the accuracy and meaningfulness of the inferences which are based on the research
results. It isthe degree towhich results obtainedfrom the analysis of the data actually represents the
phenomenaunder study. The contents that the validity of the questionnaire data depends on a crucial way
the abilityandwillingness oftherespondentstoprovidetheinformationrequested.
A pilot study was conduct to refine the methodology and test instrument such as a questionnaire
beforeadministering the final phase. Questionnaires was test on potential respondents to make the data
collectinginstruments objective,relevant,suitable to the problem and reliableas recommendedby John
Adams etal. (2007:136). Issues raised by respondents were correct and questionnaires were refined.
Besides, properdetection, by the advisor was taken to ensure validity of the instruments. Finally, the
improved version ofthe questionnaireswas printedanddispatch.
The reliability of instruments measures the consistency of instruments. Creswell (2009:190 92)
considersthereliability of theinstrumentsasthedegreeof consistency
thatk.theinstrumentsorproceduredemonstrates.In this study each statement was rate on a 5 point likert

43
 response scale which includesstronglyagree,agree,undecided,disagree andstronglydisagree.
EthicalConsiderations
All the research participants included in this study was appropriately inform about the purpose of
theresearchandtheirwillingnessandconsentwassecuredbeforethecommencementofdistributingquestionnaire
.Regardingtherighttoprivacyoftherespondents,thestudywasmaintainingtheconfidentiality of the identity of
each participant.In all cases, names are kept confidential thus collectivenameslike „respondents‟wasuse.

44
 CHAPTERFOUR

4.DATAPRESENTATION,ANALYSISANDINTERPRETATION
This section is organized by presenting the general information about MSEs, were presented and
analysedand data collected through questionnaires and interviews were analysed at the same time. On top
of that,the results of Pearson‟s Product Moment Correlation Coefficient and regressions were also
analysed andpresented.

4.1 Descriptive Analysis

4.1.1. GeneralCharacteristicsofTheEnterprises
ResponseRate
A total number of 259 questionnaires were distributed and among them 233 were completed by
therespondents and returned back, this represented a response rate of 90% .Out of the total sample of
259questionnaires administered were 99 from Wood, Metal and Engineering42.3%, 49 Leather and
Textile20.9%,55Agro-ProcessingandPharmaceutical23.5%and30ChemicalandConstructionMaterials
12.8%
Figure4-1Responseratebysubsectors

SubSector
Frequency Percent ValidPercent Cumulative
Percent
Wood, Metal and
99 42.3 42.5 42.5
Engineering
LeatherandTextile 49 20.9 21.0 63.5
Agro-Processing and
55 23.5 23.6 87.1
Valid Pharmaceutical
Chemical and Construction
30 12.8 12.9 100.0
Materials
Total 233 99.6 100.0

Missing
System 1 .4

45
 Total 234 100.0

ReliabilityTest
The reliability of instruments measures the consistency of instruments. Creswell (2009:190-92)
considersthereliabilityoftheinstrumentsasthedegreeofconsistencythattheinstrumentsorproceduredemonstrat
es. The reliability of a standardized test is usually expressed as a correlation coefficient, whichmeasures
the strength of association between variables. Such coefficients vary between -1.00 and
+1.00withtheformershowingthatthereisaperfectpositive reliability.
In this study each statement rated on a 5 point likert response scale which includes strongly agree,
agree,neutral,disagreeandstronglydisagree.Basedonthisaninternalconsistencyreliabilitytestwasconducted in
kolfekeranio sub city operators and the Cronbach's alpha coefficient for the instrument wasfound as 0.918
which is highly reliable. Typically an alpha value of 0.80 or higher is taken as a goodindication of
reliability, although others suggest that it is acceptable if it is 0.67 or above (Cohen et al.,2007:506).
Since, instruments were developed based on research questions and objectives; it is possible
tocollectnecessarydatafromrespondents.Then,instrumentsareconsistentwiththeobjectivesofthestudy.

Table4-1ReliabilityTest

Cronbach'sAlpha Cronbach's Alpha Based N ofItems

onStandardized Items

.918 .922 27

GeneralCharacteristicsofTheEnterprises

MSEsbySectors
AmongthesampledsectorsofEnterprisesthemajorityofthemwereengagedin99fromWood,Metaland
Engineering 42.3%, 49 Leather and Textile 20.9%, 55 Agro-Processing and Pharmaceutical
23.5%and30ChemicalandConstructionMaterials12.8%.ThisdivisionofMSEsbysectortypewasbelievedtobe
helpfultostudyeachsectorcriticalfactorsthataffecttheperformance ofMSEs.

46
 Figure4-2 RespondentsbySubsectors
MSEsOwnersorManagersAge
Table4-2DemographicCharacteristicsofRespondents

Frequency Percent ValidPercent CumulativePercent

Gender
Male 143 61.4 61.4 61.4
Female 90 38.6 38.6 100.0
Total 233 100.0 100.0
Age

18-30 91 39.1 39.1 39.1

31-40 112 48.1 48.1 87.1

41-50 30 12.9 12.9 100.0

Total 233 100.0 100.0

EducationBackground
1-10 74 31.8 31.8 31.8
10+ 50 21.5 21.5 53.2
Valid Diploma 37 15.9 15.9 69.1
Degreeandabove 72 30.9 30.9 100.0
Total 233 100.0 100.0

BusinessAge
1-3 144 61.8 65.5 65.5
4-6 56 24.0 25.5 90.9
7andabove 20 8.6 9.1 100.0
Total 220 94.4 100.0
System 13 5.6
Total 233 100.0
Source: own compilation based on respondent information.2024

From the Table 4.1 above, it is possible to deduce the following facts. The overwhelming majority of
therespondents 143(61.4%) were males and the rest 90 (38.6%) were females. This implies that
enterprisewasdominatedbymaleindividualsmore.
As per the above table, 39.1% of the respondents were below 30 years, 48.1% were between 31-40
yearsand12.9%werebetween41-50years.Theageoftherespondentswasimportantasdifferentagegroups

47
have different challenges in operating their businesses. Young businessmen may not be having
enoughexperience andcapitaltogrowtheirbusinesseswhile agedbusinessmenmaybe.
Related with qualification, 31.8 % of respondents indicated that had 1-10, 21.5 % said they were
10+,15.9%in diploma and 30.9%of therespondents were university graduates while.Thesefindings
showthat the respondents had attained different levels of education. Education levels affect the
managementlevels hence the higher education level attained by the businessman the more it is assumed
that they canmakebetterdecisionstogrowthebusiness.Thishowevermayvaryfromonebusinessmanto another.
From the table majority 61.8% had being in operation for less than 3 years, Majority 24% for between 4-
6years and 8.6 % were above 7 years. These findings show that the respondents had operated in the
marketfor different period ranging from less than 3 years to more than 7 years. These findings show that
therespondents had operated their business within the market for a long period hence is more informed on
thefactorsaffectingSMEs performance.

4.1.2ResultsofMeasuresofCentralTendencyandDispersion
There are a number of challenges that affect performance of MSEs associated with
differentfactors.Thispartexplainsthedescriptivestatisticscalculatedonthebasisofthefactorsthataffecttheperf
ormance of MSEs. The results for measures of central tendency and dispersion were obtained fromthe
sample of respondents of wood, metal and engineering, textile and leather, agro-processing
andpharmaceuticalandchemicalandconstructionmaterialare shown inthefollowingtables.
Table4-3Politico-legalfactorsthataffecttheperformanceofMSEs

Statement The tax Bureaucracy Lackofgov Politicalin Lack of

leviedon incompanyregi ernmentsup tervention accessibleinformat
mybusiness is stration port ion
notreasonable andlicensing ongovernmentregu
lations that
arerelevant
tomybusiness
Valid 233 233 233 233 233
N
Missing 0 0 0 0 0
Mean 4.10 3.86 4.15 4.10 4.21
Std.Deviation 1.224 1.196 .994 1.029 .929
Rank 4 5 2 3 1
Source:Fieldsurvey,2023
As it is indicated in table above, the mean and standard deviation for the politico-legal factors
werecalculated. The table shows the tax levied on business is not reasonable has a mean score of 3.86
with astandarddeviationof1.196.

48
 According to the table 4.3 above Lack ofaccessible information on government regulations
thatarerelevanttobusinessisthemainfactorthataffectstheperformanceofallsectors.Themeanscoreis
4.21witha standarddeviationof0.929.
Bureaucracy in company registration and licensing is justified by the calculated means of 3.86
withstandard deviation of 1.196. As study shows, the operators in MSEs neither agree nor disagree with
theproblemrelatedtoBureaucracyincompanyregistrationandlicensing.
Furthermore, the table indicates that lack of government support is another problem thataffects
theperformance ofenterpriseswithameanof4.15and0.994standarddeviation.
The mean score and standard deviation clearly shows they agree on political intervention. That is
meanof4.1andstandarddeviationof1.029.
Lastly,thetableindicatesthattheownermanagersengagedinallsectorsareneither„agreed‟nor
„disagreed‟withrelatedtoBureaucracyincompanyregistrationandlicensing.Thatisameanscoreof
3.86
withstandarddeviationof1.196foranoperatorengagedinallsectors.Table4-
4Marketingfactorsthataffectthe performance ofMSEs

Marketingfactorsthat affecttheperformanceofMSEs
Statement Inadequatemar Lack of Lack of Absence Lack of Poorcustomerr
ketformyprodu demandfor marketinforma promotion elationshipand
ct ecasting tion ofrelationship handling
with an toattractpotenti
organizationth alusers
at

conductmarket
ing
research
Valid 233 233 233 233 233 233
N
Missing 0 0 0 0 0 0
Mean 4.41 4.23 4.18 4.31 4.41 4.18
Std.Deviation .789 .807 .842 .771 .683 1.069
Rank 2 4 5 3 1 6
Source:Fieldsurvey,2023
Among the marketing factors that affected the performance of enterprises: Inadequate market, Lack
ofdemand forecasting, Lack of market information, Absence of relationship with an organization
thatconduct marketing research,Lack of promotion to attract potential users the respondents were
agreedthat these factors are important in affecting the performance of enterprises , the response of all
sectorsshowed that a grand mean score of above 4.3 point scale implies it is above agreed point and
belowstronglyagreedpoint.
According to the table 4.2 above Inadequate market for my product and Lack of promotion to
attractpotential users is the main factor that affects the performance of all sectors. The mean score is
4.41 withastandarddeviationof0.789andmeanscoreof4.41withstandard deviation0.63respectively.

49
Table4-5FinancialfactorsthataffecttheperformanceofMSEs

Statement Inadequacyof Lackofcashm Shortage Highcollatera Highinterest Loanapplicationp

anagementski ofworki lrequirementf ratecharged rocedures
creditinstituti lls ngcapita rom banks
ons l and other ofbanksandotherl
lendinginst bybanks endinginstitution
itutions s
andotherlen
ding aretoo
institutions complicated
Valid 233 233 233 233 233 233
N
Missing 0 0 0 0 0 0
Mean 4.49 4.17 4.65 4.60 4.47 4.46
Std.Deviation .761 .970 .554 .595 .572 .676
Rank 3 6 1 2 4 5
Source:Fieldsurvey,2023
The table above showed that High collateral requirement fromlending institutions, Shortage of
workingcapital, High interest rate by lending institutions and complicated loan application procedures,
Lack ofcash management skills, Inadequacy of credit institutionsand High interest rate charged by banks
andother lending institutionswas identified as an important factors forthe performance of
enterprises.Shortageofcapitalwasidentifiedasthe primefactormeanscoreof4.65with0.55standarddeviation.
Table4-6ManagementfactorsthataffecttheperformanceofMSEs

Statement Lack of Poororganiz Poorselection Lackofwelltra Lackoflowco Lack

cleardivision ationandinef ined st
of fectivecomm ofassociates ofstrategicbus
dutiesandresp unicati andexperienc andaccessible inessplanning
onsibilityamo on inbusiness edemployees trainingfacilit
ng ies
employees
Valid 233 233 233 233 233 233
N
Missing 0 0 0 0 0 0
Mean 4.20 3.97 4.20 4.27 4.23 4.16
Std.Deviation .870 1.038 .927 .960 .790 .825
Rank 3 6 4 1 2 5
Source:Fieldsurvey,2023
Lack of well trained and experienced employeesandLackoflowcostandaccessibletrainingfacilities are
themain Managementfactors identifiedin affecting the performance of business.Lastly,the table indicates
that the owner managers engaged in all sectors are neither „agreed‟ nor „disagreed‟with related to Poor
organization and ineffective communication. That is a mean score of 3.97
withstandarddeviationof1.038foranoperatorengagedinallsectors.

50
Table4-7Business informationservicefactorsthataffecttheperformanceofMSEs

Statement Businessinfor The The Theinformationnec

mation informationavail essaryforourbusine
isreadily able informationavailab ssgrowth
notavailableto can‟tinformsuso le isnotavailedontime
us fthechanges in
thebusinessenvir can‟tinformusofthe
onment businessregistratio
nrequirements
Valid 233 233 233 233
N
Missing 0 0 0 0
Mean 4.29 4.09 3.81 4.18
Std.Deviation .787 .942 1.012 .750
Rank 1 3 4 2
Source:Fieldsurvey, 2023
The table above showed that Business information is readily not available, The information
availablecan‟t informs us the changes in the business environment and The information necessary for
businessgrowth is not availed on time was identified as an important factors for the performance of
enterprises.Business information is readily not available was identified as the prime factor mean score of
4.29 with0.787standarddeviation.
Lastly,thetableindicatesthattheownermanagersengagedinallsectorsareneither„agreed‟nor
„disagreed‟withrelatedtotheinformationavailablecan‟tinformusofthebusinessregistrationrequirements.Th
atisameanscoreof3.81withstandarddeviationof1.012foranoperatorengagedinallsectors.
ComparisonofFactors
Even though, all the politico-legal, marketing, financial, management and Business information
servicefactors affect the performance of MSEs, this does not necessarily mean that all factors have equal
impact.Thefollowingtable clearlycomparesthe overallimpactofallkeyfactorsdiscussedindetailabove.
Table4-8Comparisonofthemajorfactors

No Factors Mean StandardDeviation Rank

1 Politico-legalfactors 4.08 1.07 5
2 Marketingfactors 4.29 0.83 2
3 Financialfactors 4.47 0.69 1
4 Managementfactors 4.17 0.90 3
Businessinformationservice
5
factors 4.09 0.87 4
Source:Fieldsurvey,2023
It can now be seen that financial and marketing factors has the biggest potential to contribute to
theperformance, followed by management, business information service and politico-legal factors. In
anotherwords,theresultshowsthatfinancialandmarketingfactorsarethetwotopmostfactorsthataffectthe

51
performance of MSE in the selected area. This result is supported by HaftuBerihun et al. (2009:84-
86)who found that lack of finance and working space rank on top being reported as the major constraints
by alarge proportion of the enterprises. It can, therefore, be concluded that finance and marketing factors
dolargelyaffecttheperformanceofMSEs.

4.2. ResultsofInferentialStatistics
In this section, the results of inferential statistics are presented. For the purpose of assessing the
objectivesof the study, Pearson‟s Product Moment Correlation Coefficient and regression analyses were
performed.With the aid of these statistical techniques, conclusions are drawn with regard to the sample
and decisionsare madewithrespecttotheresearchhypothesis.
4.2.1.Pearson'sProductMomentCorrelationCoefficient
In this study Pearson‟s Product Moment Correlation Coefficient was used to determine whether there
issignificantrelationshipbetweenpolitico-legal,marketing,financial,managementandbusinessinformation
service variable with performance. The following section presents the results of Pearson‟sProduct
Moment Correlation on the relationship between independent variables and dependent variable.The table
below indicates that the correlation coefficients for the relationships between performance
anditsindependentvariablesarelinearandpositiverangingfromsubstantialtostrongcorrelationcoefficients.
Table4-9Therelationshipbetweenindependentvariablesandperformance

Growth
Politico-legalfactors PearsonCorrelation .567**
Sig.(2-tailed) .000
N 233
Marketingfactors PearsonCorrelation .609**
Sig.(2-tailed) .000
N 233
Financialfactors PearsonCorrelation .521**
Sig.(2-tailed) .000
N 233
Managerialfactors PearsonCorrelation .538**
Sig.(2-tailed) .000
N 233
BusinessInformation PearsonCorrelation .254**
Sig.(2-tailed) .000
N 233
**. Correlationissignificantatthe0.01level(2-tailed).
Source:Fieldsurvey,2023

52
Asitis clearlyindicatedin the above table 4.9,a strongpositive relationshipwasfoundbetweenmarketing and
performance (r =.609, p < .01), Politico-legal and performance (r = .567, p < .01), andmanagerial and
performance (r = .538, p < 0.01), which are statistically significant at 99% confidencelevel. This implies
that at a 1% level of significance it was discovered that the marketing, politico-
legalandmanagementplaysasignificantroleindeterminingtheperformanceofMSEsintheselectedsub-city.
Moreover,thetablepresentstheassociationbetween
theselectedvariablesandperformanceofMSEsforasampleof233operatorsinKolfeKeraniosub-
city,AddisAbaba.Thereissubstantial,howeverstatistically significant relationship between finance and
performance (r = .521, p <.01). This would implythat, themore working capital thebetter performance of
MSEs wouldbe.The resulton
tableabovefurtherindicatesthat,thereisasubstantialpositivecorrelationbetweenBusinessInformationandperfo
rmance (r = .254), which is statistically significant at 99% confidence level. This implies that
MSEswithavailbusinessinformationperformedconsiderablybetter.
4.2.3. RegressionsAnalysis
Forthepurposesofdeterminingtheextenttowhichtheexplanatoryvariablesexplainthevarianceintheexplainedvariabl
e,regressionanalysiswasemployed.Theresultsofsuchanalysisarenarratedunder.
Table4-10RegressionTest

ModelSummary
Model R RSquare Adjusted Std. Error ChangeStatistics
RSquare oftheEstima R FChange
te Square
Change
51115855770
1 1.000a 1.000 1.000 .000 1.000
655088.000

ModelSummary
Model ChangeStatistics
df1 df2 Sig.FChange
1 5a 227 .000

a. Predictors: (Constant), Business Information, Managerial factors, Politico-legal

factors,Financialfactors,Marketingfactors

ANOVAa
Model SumofSquares df MeanSquare F Sig.

Regression 1025.524 5 205.105 . .b

1 Residual .000 227 .000
Total 1025.524 232

53
a. Dependent Variable:Growth

54
b. Predictors: (Constant), Business Information, Managerial factors, Politico-legal factors,
Financialfactors,Marketingfactors

Coefficientsa
Model Unstandardized Standardized t Sig.
Coefficients Coefficients
B Std.Error Beta
(Constant) 5.236E-014 .000 .000 1.000
312664250.03
Politico-legalfactors 1.000 .000 .615 .000
3
178244793.20
Marketingfactors 1.000 .000 .400 .000
4
1 123111208.06
Financialfactors 1.000 .000 .263 .000
7
222743329.44
Managerialfactors 1.000 .000 .457 .000
6
BusinessInf
.200 .000 .096 43390327.731 .000
ormation

55
Table 4.11 revealed that, the correlation between the observed value of performance andthe optimallinear
combination of the independent variables is 1.000, as indicated by multiple R. Besides, given the RSquare
value of 1.000 and adjusted R square value of 1.000, it may be realized that 100% of the variationin
performance can be explained by the independent variables. The unstandardized coefficients B
column,gives us the coefficients of the independent variables in the regression equation including all the
predictorvariables as indicated below: Predicted performance score = 5.236E-014 +1.000(politico-legal) +
1.000(Marketing factors) + 1.000 (Financial factors) + 1.000(Managerial factors) + .157 (marketing)
+ .200(Business Information factors) .Table 4.11 further shows that, all the explanatory variables
includedinthis study can significantly explain at99% confidencelevel to the variation on the
dependentvariable.The standardized beta coefficient column shows the contribution that an individual
variable makes to themodel. The beta weight is the average amount the dependent variable increases when
the independentvariable increases by one standard deviation (all other independent variables are held
constant). As theseare standardized we can compare them. Thus, the largest influence on the performance
of MSEs is fromthe Politico-legal factor (.615) and the next is Managerial factors (.457). On the other
hand, BusinessInformation with the beta value of .096 and financial with the beta value of .263 are the
poorest predictorofperformance whenitiscomparedwiththe otherexplanatoryvariablesunderstudy.

56
 CHAPTERFIVE
CONCLUSIONSANDRECOMMENDATIONS
5. Introduction
In this chapter the conclusions and recommendations are discussed. For clarity purpose, the
conclusionsare based on the research objectives of the study. Based on the findings of the study
recommendations aremade to government bodies, media institutions, finance institutions and inform to
operators of MSEs andsuggestionforotherresearchers.

5.1. Conclusions
ThisresearchwasconductedinKolfeKeranioof AddisAbabawiththeprimeintentof criticallyassessing the
factors affecting the performance of MSE operators engaged in Leather and textile , agro-
processingandpharmaceuticals,metalandwoodworkandchemicalandconstructioninputmanufacturers
activities. Based on the objectives and findings of the study, the following conclusions areworth drawn.
The most important factors identified are financial factors shortage of working capital andhigh collateral
requirement from banks and other lending institution as main factors of MSEs for allsectors. Marketing
factors include inadequacy of market, lack of demand forecasting, lack of marketinformation and absence
of relationship with an organization/association that conduct marketing research.The main management
factors identified were include lack of well trained and experienced employees,Lack of low cost and
accessible training facilities and lack of clear division of dutiesand responsibilityamong employees. Lack
of government support, Lackofaccessibleinformationongovernmentregulations that are relevant to my
businessandtheunreasonabletaxleviedonbusinessisthemainfactorfrompolitic-regulationfactors.

Lastly, the major business information factors include business information is readily not available,
theinformation necessary for business growth is not availed on time and The information available
can‟tinforms thechanges in thebusiness environmentis themainfactors from availability of
businessinformationperspectives.
In terms of the stated research hypothesis the specific empirical findings emerged from the
investigationthat there exists significant positive relationship between independent variables and
dependent variable.Moreover, the selected independent variables may significantly explain the variations
in the
dependentvariableinstudyarea.Finally,thestudyhasfurtheridentifiedthatthedifferentinfluencesinwhicheacho
fthefactorsunderstudyhaveindifferentcategoriesofthebusiness.Ithasbeennotedthatthefactors

57
prevalent to the businesses such as financial, marketing, and management had very high effects on
theperformance ofMSEs comparedtootherfactors intheresearcharea.

5.2. Recommendations
Based on the overall result and conclusion of the study, the following policy recommendations are
forwarded

 The Addis Ababa city government bodies should provide affordable alternative sources offinance
for MSEs. This can be done by communicating with the banks and other credit institutions
tolessen their requirements. This should be done so that MSEs can get enough access to finance
for theirbusiness activities. The strengthening of government institutions at different levelswould
play a majorrolein positivelyinfluencingthedevelopmentof MSEs,thus
toreducedelaysinprocessinglegalrequirements.

 Thegovernmentthroughvariousrelevantdepartmentsshouldspecializemoreintakingupa facilitative
role, especially by reviewing all the blockings by laws, to address issues of getting a licenseor
getting a premises on which to operate. A number of factors should be considered in designing all-
encompassing policy for the promotion of the sectors. Marketing factors are frequently indicated
as theexplanatory factor for most problems faced by the studied MSEs. Therefore, it is necessary
to solve thisdeep-rooted problem. Some of the ways of doing so can be: - Providing selling,
display places in areasclose to working area and linking with digital marketing institutions.

 The operators of MSEs should formgroups and make use of pooled negotiating power for
borrowing purposes. They can use such negotiatingpower to purchase raw materials and receive
discounts which might lead to a reduction in the cost ofproduction. Through networking, MSEs of
KolfeKeranio can be able to exchange services such asadvertising amongst themselves for free.
This will enhance their competitiveness through a reduction inthe cost of production. The benefit
of sharing such service for the operators of MSEs is that it willstrengthen thefuture
survival,profitability and eventual growth of MSEs.

 Tomake MSEs competitiveand profitable, increasing the capacity and skill of the operators
through continuous trainings,
experiencesharingfromsuccessfulenterprises,andprovisionofadviceandconsultancyarecrucial.Finall
y,investigating different factors based on the right information are vital for the good performance
of anybusiness venture. This can be achieved by conducting more researches in related areas.

58
 The focus for thisstudywasonthemanufacturingsectorsparticularlyinleatherandtextile,agro-
processingandpharmaceutical,woodmetalandengineeringandchemicalandconstructionmaterial.Itist
heresearcher‟sview that future research could therefore investigate the other sectors like
construction, urban agriculture,and retailandcome
upwithspecificfindingswhichwillpotentiallycontribute alotinthedevelopmentof

59
REFERENCES
1. Ababiya, A. (2013). performancee of micro and enterprises and its determinant factors: the case of
Hosana Town, Hadiya Zone. MA Thesis Haramayauniveersity.

2. AdmasuAbera,(2012)FactorsAffectingthePerformanceofMicroandSmallEnterprisesinArada
andLidetaSub-Cities,UnpublishedMBAthesis,AddisAbeba University.
3. AkanjiO,O.
(2006):Microfinanceasstrategyforpovertyreduction,CBNEconomicandFinancialReview,Vol.39
No4.
4. CassarG(2004).TheFinancingofBusinessStart-Ups.J.Bus.Venture19(2):261283.
5. CatherineDawson.
(2002).Introductiontoresearchmethods:Apracticalguideforanyoneundertakingaresearchproject,f
ourthedition,UnitedKingdom,BooksLtd.
6. Creswell,J.W.
(2003).ResearchDesign:Qualitative,Quantitative,andmixedmethodsapproaches(2nded.).London:
SAGEPublications.
7. DalitsoKayanulaandPeterQuartey,(2000),
„thepolicyenvironmentforpromotingsmallandmediumsizedEnterprises
inGhana&malawi,May2000
8. Dobbs, M.,Hamilton,R.T.(2007).SmallBusinessGrowth: Recentevidenceandnewdirections.
9. EveliinaSoini&LabinotVeseli,
(2014),factorsinfluencingSMEsgrowthinkosovo,InternationalBusiness Management,2014
10. FathallahOualalou,(2012).Reportontheroleofsmallandmedium-
sizedenterprisesintheMediterranean.Availableinhttp://community.Org/sites/default/files/asinet-
rabat.pdf.(Accessed26December2014)
11. FatokiOlawale and David Garwe. (2010). Obstacles to the growth of new SMEs in South
Africa:A principal component analysis approach. African Journal of Business Management Vol.
4(5),pp.729-738,May2010.
12. FionaMeehan.(2004).FemaleHeadedHouseholdsin Tigray,Ethiopia,DCGReportNo.35
13. Hittleman, D.R. & Simon, A. J. (1997). Interpreting educational research. An introduction
forconsumersofresearch(2nded.).NewJersy:Prentice-Hall,Inc.

14. James Wumbua, K. W. (2014). Dtrminanta of Growth of Small and Medium Enterprises in

60
 Kakamega Central Sub Country: University of Nairobi, Kenya. Journal of Business
Administration and Management Science Research Vol. 3(3), 022-031.
15. Janet M. Ruane. (2004). Essentials of Research Methods. A Guide to Social Science
Research.USA,BlackwellPublishing
16. John Adams, Hafiz T.A. Khan, Robert Reside and David White. (2007). Research Methods
forGraduate Business&SocialScience Students.California,Sage
17. Maad, D.C. (2008). Micro and Small Businesses tackle poverty and growth (but in
differentproportions). Paper presented at the conference on Enterprises in Africa: between poverty
andgrowth.CentreforAfricanStudies,UniversityofEdinburgh,26-27May.

18. MartinG,StainesH(2010).Managerialcompetenciesinsmallfirm[online].Available:http://
www.emraldinsight.com/insight/viewcontentitem.do? Content type Accessed: 19
December,2014].
19. McCormick, D and Pedersen, P.O. (1996). Small Enterprise Flexibility and Networking inAfrica
Context.Nairobi:LonghornKenyaLtd.
20. MSEDevelopment Strategy(1997,)JohnO.Okpara(2011)RahelWasihun,IssacPaul(2010).
21. Rogerson,C.M.2000.SME infrastructure andpolicy in South Africa.In Khosa,M
(Ed.),Infrastructuremandatesforchange1994-1999.Pretoria:HumanSciencesResearchCouncil,175
-96.
22. Seyoum, A., Aragie, M., &Tadesse, D. (2016). Growth of micro and small enterprises in Addis Ababa
City Administration: a study on selected micro and small enterprise in Bole Sub City. International
Journal of Scientific and Research Publications, 6(1), 581-592.
23. Watson, Jeff. (2001). How to Determine a Sample Size: Tipsheet #60, University Park, PA:
PennState Cooperative Extension. Available
from:http://www.extension.psu.edu/evaluation/pdf/TS60.pdf(Accessed20December2

61
 Appendix

Queens
CollegePostgraduateP
rogram
MastersofBusiness Administration
Questionnaireforthesurveyontheanalysis Factors Affecting the small and medium
scaleenterprisesinKolfeKeranioSubcityofAddisAbaba

DearRespondents

The main purpose of this questionnaire is to gather information about the theanalysis Factors
Affecting the small and medium scaleenterprisesinKolfeKeranioSubcityofAddisAbaba
for the partial fulfillment ofthe requirements for Masters of Business Administration. The
outcome of this study will be usedforacademicpurposeonly.
Therefore,yourgenuineresponsetothequestionsisvitalforthequalityandsuccessfulcompletion of the
study. The accuracy of the information you provide highly determine thereliabilityofthestudy.

EnyewTilahun

Researcher
ContactAddress:
Ifyouhaveanyquestion,pleasedon‟thesitatetocontactme.Iamavailableasperyourconvenienceatenyewtilahun21
@gmail.comor0944015664
Thankyouinadvanceforyourunreservedcooperation!

62
PartI:Demographicprofile ofrespondents
Pleaseindicatethefollowinginformationbyticking[x]onthespaceprovided.
1.Gender:
1-Male 2-Female
2. Age A.18-25 B. 26-33 C. 33-41 D.41andabove
3. Educationalstatus:
A. 1-10 B.10+ C.Diploma C.DegreeandAbove
4. Typeofsub-sectorsyouinvolvedin
A. Wood,metalandengineering
B. Leatherandtextile
C. Agro-processingandpharmaceutical
D. Chemicalandconstructionmaterials
5. Ageofyourbusiness
A. 1-3 B.4-6 C. 6andabove

63
 PARTII:ISSUES RELATEDWITHTHESTUDYAREA
Here aresome statementsasregardstheinfluenceofenterprises

1.Accessibility to business information Services, 2.Managerial experience,

3.Marketing strategy, 4.Government Regulation and 5.Financial control system
onthe performance of small and medium manufacturing enterprise. On a scale of
5-1where 5=strongly agree, 4= agree, 3= neutral, 2= disagree, 1= strongly
disagree,pleaseindicate yourlevelofagreementwitheachstatementbyticking.
S.No. Politico-LegalFactors 5 4 3 2 1
1 Thetaxleviedon mybusinessisnotreasonable
2 Bureaucracyincompanyregistrationandlicensing
3 Lackofgovernmentsupport
4 Politicalintervention
5 Lack of accessible information on government
regulationsthatarerelevant tomybusiness
S.No. MarketingFactors 5 4 3 2 1
1 Inadequatemarketformyproduct
2 Searchingnewmarketissodifficult
3 Lackofdemandforecasting
4 Lackofmarketinformation
5 Absenceofrelationship withanorganization
thatconductmarketingresearch
6 Lackofpromotiontoattract potentialusers
7 Poorcustomerrelationshipandhandling
S.No. FinancialFactors 5 4 3 2 1
1 Inadequacyofcreditinstitutions
2 Lackofcashmanagementskills
3 Shortageofworkingcapital
4 Highcollateralrequirementfrombanksand
otherlendinginstitutions
5 Highinterestratechargedbybanksand
otherlendinginstitutions
6 Loanapplicationproceduresofbanksand
otherlendinginstitutionsaretoocomplicated

64
S.No. ManagementFactors 5 4 3 2 1
1 Lackofcleardivisionofdutiesandresponsibility
amongemployees
2 Poororganizationandineffectivecommunication
3 Poorselectionofassociatesinbusiness
4 Lackofwelltrained andexperienced employees
5 Lackoflowcostandaccessibletrainingfacilities
6 Lackofstrategicbusinessplanning

Availabilityofbusinessinformationsystem
1 Businessinformationisreadilyavailabletous
2 Theinformationavailableisrelevantforourbusiness.
3 Theinformationavailableinformsusofthechangesin
thebusinessenvironment
4 Theinformationavailable informusofthebusiness
registrationrequirements
5 Theinformationnecessaryforourbusinessgrowthis
availedontime
Howdoyouratetheperformanceofyourbusiness
profitability?
1 ThebusinessisProfitable
2 ThereisagoodSalesturnover
3 ThebusinesshasgoodMarketshare
4 Thereisgoodcustomerloyalty

65