Oromia State University

School Of Leadership and Governance

Department of Governance and Development

Management (DM)
Title: The Role of Micro and Small Enterprises for Local Economic Development: The Case of
Sululta Town, Oromia, Ethiopia
By: Belay Daba
Advisor: Daniel Ebba (Ph.D.)
May,2022
 Contents
Chapter One
 Introduction
 Background
 Statement of Problem
 Objectives and Research Question
 Scope of Study
 Limitation
Chapter 2
Literature Review
Chapter 3
Methodology
Chapter 4
Finding
Chapter 5
Conclusion and recommendation
 INTRODUCTION

Local economies development often get developed

with the participation of government, non-
government organizations, and the community at
large.
Poverty and unemployment are viewed as the
most alarming issues affecting development in the
majority of the developing countries in the world
(Ndabeni, 2006).
Micro and Small Enterprises (MSEs) are
inextricably linked to economic growth, job
creation, and income generation within poor and
disadvantaged communities in developing
 ...Int.
MSEs have become a focal point of considerable
attention to many international and government
institutions in emerging economies.
Academicians, Politicians, and development
economists also support the promotion of micro
and small business enterprise towards job
creation, poverty reduction, and innovation
In general under the prevalence of extreme
poverty where unemployment coupled with the
growing urban population, the modern and formal
sub-sector of the economy alone could not absorb
the multitudes of unemployed people.
 …int

• As a result, the MSEs sub-sector is believed to be able

to fill the gap that exists between the poor and the rich
in developing countries regarding income generation
and, the unemployment rate
• Among many, one of the contributions of MSEs is the
development of the local economy by providing jobs
and entrepreneurship for the local people
• To reduce the existing level of urban unemployment
and urban poverty through development, presently in
our country MSEs has designed as development
program under its urban-industrial development
package in 2005
 …. Int.
In 2009 the program had a target to reduce
80% of urban unemployment by creating
permanent employment opportunities and
to reduce 20% of urban unemployment by
creating temporary employment
opportunities, thereby reducing urban
poverty.
Accordingly this research describes the role
of Micro and Small Enterprises on local
economic development in enhancing local
economic development in Sululta town.
 Statement of the Problem

In the current situation many developing

countries, like Ethiopia, are highly attached to
different problems like poverty, unemployment,
traditional culture, famine, illiteracy, and high
population growth rate.
According to FeMSEDA (2016), the key
objectives of micro and small enterprise
development program are to create a broad-based
springboard for the development of competitive
domestic industries and private sub-sector,
create employment opportunities and thereby
reduce poverty.
 Statement Problem
For this reason, issues like extensive unemployment,
deficiency of the formal sub-sector to absorb a fairly
sufficient level of labor, increasingly heavy capital shortages,
the need for local resource mobilization and stimulation of
the local economy, and other points of concern made MSEs
quite peculiar and relevant entities that deserve sufficient
attention as well as policy focus in the local economic
development initiatives of urban localities.
Therefore critical attention shall be given for MSE so that
they can effectively play their role. In sipite of this reality in
Sululta town even if the available MSE are trying to playing
their role no study is conducted on this area in a
consolidated form to identify the role of MSE and their
contribution for local economic development. This study is
the first to be conducted in this area.
 Research Gap

Previous study have conducted various issues on MSE. This study

fill the gaps which are not covered by those scholar. Factors that
hinder the growth of MSEs and the outcome of the program in
aggregate forms. Regarding the role of Micro and Small Enterprises
in local economic development, the studies give no or little focus
on the issue of the role of MSEs for local economic
development.

Admasu (2012) analyzes the major problems of the sub-sector but

the researcher did not see how MSEs contribute to local
economic development
 Research Gap
Brhane's (2014) study focused more on access to finance for
MSEs and found that to attain the desired goal of MSEs,
access to finance is very important. However, the researcher
overlooked the role of MSEs in community development.

Zemenu and Mohammed (2014) also tried to analyze growth

determinants of MSEs .However, the study failed to
investigate how MSEs can contribute to local economic
development in terms of employment creation, income
generation, improving livelihood, and poverty reduction
 Objective of the Study
The main objective of this research is to
investigate the role of Micro and Small
Enterprises in local economic development in
Sululta town
The specific objectives
To analyze the performance of the MSEs (in
terms of capital, employment, and profit)
operating in Sululta town.
To examine the role of MSEs in enhancing
the well-being of households.
 Specific of the Objective
To identify the major challenges and
opportunities MSEs are facing in
promoting local economic development.
To examine the contribution of MSEs to
local economic development.
To identify job creation for unemployed
duelers
Significance of the Study:
can have value to the development efforts in
poverty reduction, employment creation, local
economic development, and generally in LED, in
general, and in particular in Sululta
It may also serve as reference other researchers
who might be interested to conduct further
studies on similar subjects.
May serve as a source of information for a person
who needs to know about MSE
The results obtained from this study may serve to
formulate reasonably sound policies and decisions
in matters related to MSE development
 Scope of the study

Spatially it is limited to Sululta town administration.

Thematically the research covered the main products such
as:-Manufacturing, industry, Service, Construction,
Agriculture, Trade, and Minerals sub-sectors of MSEs in
Sululta Town that registered capital of less than ETB 500,000.
Limitation of the study:
shortage of time, budget constraints, and resistance to
respond to research questions from employees, other officials,
and lack of sufficient documents existed in some sectors
 REVIEW LITERATURE

Theoretical framework:
policy strategies for achieving national development goals such as
poverty alleviation, economic growth increasing people’s
participation in economic activities, employment creation, and
income generation (Raymond, 2009)
Rudjito (2003), the importance of MSEs, including medium
enterprises that they are contributing to job creation and output
growth, and sustainable development is now widely recognized
among developing and developed countries in the post-1970s.
The governments of developing countries have also been
supporting MSEs through various programs, like credit schemes
and the provision of training (Tambunan, 2006).
 …Cont.
From any angle, there is no doubt that MSEs have
already become major features of the economic
landscapes in most developing countries (Thorbeche,
2000)
The importance of the Micro and Small Enterprises
sub-sector in Ethiopia, particularly for the low-
income, poor, and women groups, is evident from
their relatively large presence, share in employment
and small capital requirement (Tekle Hiluf, 2014).
Depending on capital invested and the number of
people employed Micro enterprises are as small or
medium .
 …Cont.
Hence a micro-enterprise in the industrial sub-sector
(Manufacturing, Construction, and mining) operates
with up to five people including the owner, and/or has
total assets not exceeding ETB 100,000.
For activities in the Service sub-sector (retailer,
transport, hotel, tourism, ICT, and maintenance), a
micro-enterprise operates with up to five people
including the owner, and/or has total assets not
exceeding ETB 50,000 .
A small enterprise in the industrial sub-sector
operates with between 6 to 30 persons and/or has
paid-up capital or total assets not exceeding ETB 1.5
million.
 …Cont.

Similarly, a small Service sub-sector enterprise

has between 6 and 30 persons and/or has total
assets or paid-up capital of ETB 500,000
(FeMSEDA, 2015).
Volume of capital, size of employment, market
share, growth performance, and annual and
monthly turnover are some of the common
criteria used widely. report that, in addition to
these criteria, enterprises can be categorized
based on past growth performance as new starts,
no growth firms, small growth firms, and
graduates (Tegegne and Meheret ,2010).
 ...Cont.
Ministry of Trade and Industry (MoTI) uses capital
investment, while Central Statistical Agency (CSA)
uses employment and favors capital-intensive
technologies as a yardstick.
As to CSA, establishments employing less than
ten persons and using motor-operated equipment
are considered small-scale Manufacturing
enterprises.
 Socio-economic Importance of MSEs
Employment Creation :
Developing countries in general and African countries, in particular,
have been experiencing high unemployment rates paralleled by
increasing urban poverty (Haggblade et al 1990).
When we look at the share of employment in MSEs and large
industries for lower and higher-income countries, 62%, and 38% of
employment opportunities in lower-income.
However, the share of employment in MSEs in higher-income
countries is still considerable and it accounts for 41% of the total
employment, Workneh (2007).
According to FMSEDA the total number of jobs in 2010/11,
2011/12, 2012/13, and the first 9 months of 2013/14 were 289
thousand, 806.3 thousand, 1223.7 thousand, and 963.8 thousand,
respectively. Manufacturing with 14.7 percent and urban agriculture
taking 13.1 percent over the four GTP implementation years (EEA,
2015)
 Poverty Reduction:
Munira (2012), stated that according to the 2003
International Labor Conference on Working out
of Poverty the ILO Director-General’s report
outlined eight ILO activities that contribute to
poverty reduction concerning MSEs
The floor of the economic status, the chance to
operate their own business at a very low startup
capital, and expand from that point will help to
support the MSEs and their families. This
intern will operate to reduce nationwide poverty
(Benyam Aragaw, 2008).
 Challenges faced by Micro and Small Enterprises
According to the Ethiopian Economic Association (2015),
the major challenges facing MSEs include problems
related to:
finance,
access to market and low competitiveness,
business information,
working premises,
poor acquisition of technical skills and managerial
expertise,
appropriate technology, and
access to quality infrastructure
Local Economic Development Approaches
LED is a conscious process in which communities
are assisted by well-advanced organizations to
work in the direction of improving the standards of
social and economic well-being (Cunningham and
Meyer-Stamer, 2005)
The market-driven approach:
focuses on the pursuit of economic growth, investment
attraction, and courting high-profile businesses. This
approach has some benefits; it addresses the goals of
individual self-reliance, entrepreneurship, expansion of
the market, competitiveness, reduction of
unemployment, and sustainable growth (Rogerson, 2000)
Pro-poor LED approach:

can be measured based on community-based

economic having the aims of , stimulate a sense of
community; promote self-help and empowerment;
contribute to the generation of (self-employment);
improve living and working conditions in
settlements; and create public and community
services
Due to its benefits in socio-economic development
MSEs get the attention of the government for
enhancing the local economy. And local resources
are crucial ingredients in the course of local
economic development
 Theories on micro and small enterprises
The labor surplus theory:
Lewis (1955), argues that the driving force behind MSE
development is excess labor supply, which cannot be absorbed
in the public sector or large private enterprises and is forced into
MSEs despite poor pay and low productivity. According to this
theory, MSEs are expected to grow in periods of economic crisis,
when the formal sector contracts or grows too slowly to absorb
the labor force.
Cont.

The output-demand theory :

This theory assumes that a precondition for the development
of MSEs is that there is a market for their products and
services. Therefore, the MSE sector will tend to develop a
cyclical relationship with the economy as a whole.
The firm growth theory:
The firm growth theory known asserts that MSEs are more
likely to disappear and be replaced by modern large-scale
industries. This theory has, however, been shown to be
inaccurate in the sense that MSEs do not normally compete
directly with large enterprises; rather, they often tend to
remain micro and small, co-existing with large multi-national
companies.
 Empirical review
• The majority of economic activities in many countries,
whether developed or developing, are constituted by
SMMEs (Zevallos, 2003).
• Throughout the period 2001 to 2003, small businesses
with less than 20 employees improved employment by
853, 074. These enterprises account for 99.7% of the
firms, generating more than half of the private sub-
sectors' gross domestic product, including 60% to 80%
of the employment in the economy
• In 2004 there were about 5 million SMMEs in the US
that employed more than 6 million people.
• It is estimated that this sub-sector accounts for about
50% of the economic activities In the Nigerian economy
 Cont.
• In Ethiopia the it is identified and analyzed that key MSE
development constraints are financial, training/consultancy,
market, infrastructure, technology transfer, institutional and
cross-cutting issues
• According to the Central Statistical Authority (CSA) survey,
there are almost 570,000 MSEs in Ethiopia, 99.4 percent of
which are micro-enterprises with fewer than ten employees,
accounting for 88.2 percent of private sub-sector employment
• Of the total employment in these urban micro-enterprises,
family members accounted for 60 percent. Beyond family
members, apprentices constituted a large proportion of the
remaining MSE workforce (CSA, 2003).
 Conceptual Framework of the study

Source:-based on the concept of MSEs and LED

RESEARCH METHODOLOGY

Primary and secondary

 primary through questionnaires and interviews
Secondary from different body of literature,
such as journal articles, working papers, relevant
works on the stipulated research problem, and
other publications were consulted primarily via
internet sources
 RESEARCH METHODOLOGY
Sampling Techniques
Purposive and random sampling techniques
four kebeles were purposely selected from
the Sululta town administration considering
some enterprises and the number of
individuals who were engaged in MSEs
Respondents were randomly selected from
construction,manufacturing,Agriculture,Tra
de,Minerals and service sub-sectors.
 Sampling Frame
• The target population for this study was MSEs managers
operating in construction, manufacturing, and services
sub-sectors in the Sululta Town
n= ====163
Data Collection Instrument
Questionnaire:
• both an open-ended and closed end type in English
language and translated to Afaan Oromo to generate
both qualitative and quantitative data.
 Cont.
• Key informant Interview (KII): Interviews have involved a series of
open ended questions related to problems researcher wants to
study.
• Focus group Discussions(FGD
• Group of 6-8 employers of various sector and experience with
careful supervision to keep them on track of what is needed to be
studied.
• Method of Data Analysis
• Quantitative data were coded in numerical representation using
Statistical Package for Social Sciences (SPSS)
• Qualitative data are analyzed in narrative context
Socio- economics of respondents Result and Discussion
Types Types of demographic Frequency Percent
Male 127 77.9
Female 36 22.1
Total 163 100.0
Sex

16-29 97 59.5
30-39 49 30.1
40-59 17 10.4
Age

Total 163 100.0

Married 136 83.4
Marital status

Divorce 2 1.2
Single 25 15.3
Total 163 100.0

Yes 132 81.0

No 31 19.0
Leaders

Total
163 100.0
Primary 20 12.3
Level of Education

Secondary 47 28.8
Diploma 46 28.2
Degree 50 30.7
Total 163 100.0

Less than 2 65 39.9

of

From 2-5 85 52.1

greater than 5 13 8.0
milies

Total
ze
 Performance of the MSEs
Ownership of Enterprise
Out of the total respondents 125(76.7%) of them are owned cooperatively. The second high category of ownership is
sole proprietorship. That is 29(17.8%). The rest 9(5.5%) of them are partnership.
Owner Frequency Percent
Sole proprietorship 29 17.8
Partnership 9 5.5
Cooperatives 125 76.7
Total 163 100.0

Technical Training
Training type Frequency Percent
Woodwork 17 10.4
Electricity 64 39.3

Metal work 15 9.2

Auto mechanical work 3 1.8
Food processing 24 14.7
Masonry 23 14.1
Marketing 16 9.8
Knowledge Improvement after Training
….

101(62.0%) of respondents were no further knowledge regarding of their training, while, 62(38.0%)
respondents has improved their training accordingly.
Owners Frequency Percent
Yes 62 38.0
No 101 62.0
Total 163 100.0
Employees of enterprise
Job Creation
Before they engage in the current job Owner Frequency Percent
Permanent Male 80 49.1
Types of jobs Frequency Percent Female 51 31.3
Unemployed 36 22.1 Total 131 80.4
Temporary Male 18 11.04
Student 90 55.2
Female 6 3.68
Private employee 36 22.1 Total 24 14.7
Government 1 .6 Family Male 5 3.06
member Female 3 1.84
employee
Total 8 4.9
Total 163 100.0 Total 163 100.0
 Role of MSEs in enhancing the well-being of households
Income expense saving from earn per day/week/month
Expense Frequency Percent
Household consumption 38 23.3
Owner’s
saving Frequency Percent
Health and education 28 17.2
Ceremonies 1 .6
Yes 126 77.3
Business expansion 96 58.9
Total 163 100.0 No 37 22.7

Total 163 100.0

income condition after start the business saving conditions

Frequency Percent
Increased 114 69.9 Frequency Percent
Yes 116 71.2
Decreased 3 1.8
No 47 28.8
No change 46 28.2

Total 163 100.0 Total 163 100.0

 The contribution of MSEs to local economic development

household saving Initial and Current capital of the Enterprises

Types of saving position Frequency Percent
MFI only 16 9.8 Owners
Frequen
Iqub only 68 41.7 cy Percent
Formal bank only 61 37.4 501-15000 74 45.4
MFI and formal bank 18 11.0
Total 163 100.0
15001-20000 16 9.8

Additional source of income

20001-35000 20 12.3
Most respondents 124(76.1%) of have no additional sources
of income.
While 39(23.9%) of respondents had some source of 35001-100000 30 18.4
incomes.
Owner’s 100001-200000 11 6.7
Frequency Percent
Yes 39 23.9
greater than 200000 12 7.4
No 124 76.1

Total 163 100.0 Total 163 100.0

Current Capital Impacts on asset holding of the household

160

Frequency Percent 140

134
Less than 5000 10 6.1
120 117
112
5000-15000 20 12.3 102 103
108

99
100
90
15001-30000 31 19.0 85 84 84 83
78 79 79 80
80
73

Frequency
After
300001-100000 56 34.4 64 Before
61 60
60 55
51
100001-300000 21 12.9 46

40
29

300001-2000000 20 12.3 20

greater than 5 3.1 0

d fa e rs f or on er o ry e s
Be bl ai el di el us ol
2000001 So Ta Ch Sh e rat
ev
is i cord Ra ew Ho
g
to
f rig Te
l Re J
kin
Re ap
e or
Total 163 100.0 T W

Assets of household
 Challenges Faced by MSEs in the Study Area
The faced challenges Lack of Sufficient Capital
Owner’s
Frequency Owner’s Frequency Percent
Percent
Yes 104 63.8 Low 46 28.2

No 59 36.2 High 117 71.8

Total 163 100.0 Total 163 100.0

Lack of Working Spaces Limited Access to Market

Owner’s
Owner’s Frequency Percent
Frequency Percent
Low 100 61.3 Low 42 25.8

High 63 38.7 High 121 74.2

Total 163 100.0 Total 163 100.0

 Challenge….

Limited Access to Credit Facilities High price of raw material

Owner’s Owner’s
Frequency Percent Frequency Percent
Low 45 27.6 Low 52 31.9

High 118 72.4 High 111 68.1

Total 163 100.0 Total 163 100.0

Lack of raw materials

Heavy government tax
Owner’s
Owner’s
Frequency Percent
Frequency Percent
Low 63 38.7
Low 74 45.4

High 100 61.3 High 89 54.6

Total 163 100.0 Total 163 100.0

 …challenge
Pressure from Government Rules and Regulations Lack of Information
Owner’s Owner’s
Frequency Percent Frequency Percent
Low 97 59.5 Low 44 27.0

High 66 40.5 High 119 73.0

Total 163 100.0 Total 163 100.0

Lack of Technical Skill Unfair Competition from Other Enterprises

Owner’s
Frequency Percent Frequency Percent
Low 50 30.7 Low 51 31.3

High 113 69.3 High 112 68.7

Total 163 100.0 Total 163 100.0

 CONCLUSIONS AND RECOMMENDATIONS

Conclusions
• Although the emergence of Micro and Small Enterprises
(MSEs) is viewed differently, the sub-sector has been
playing a significant role in promoting local economic
development through creation of employment
opportunities and utilization of local resources
• Quite recently, the economies of most industrialized
countries have shown various signs of stagnation and
structural decline, MSEs are being recognized as
generators of new growth, primary sources of
technological changes, job creation, and one of the
major factors in maintaining socioeconomic stability
 …cont.
• In Ethiopia, too, considering the extent of poverty and
unemployment as well as realizing the potentials that micro and
small enterprises have in local economic development, the
government and other policy implementers have given due
attention to the sub-sector very recently.
• In line with this the present study revealed that access to
working place, access to bank loan, technical training to the
operator, assistance with marketing, access to raw materials
and appropriate customer and were found to be the major
components which contributed for the improvement of MSEs
performance
• The study also disclosed that MSEs form a vital element of the
local economic development process, and their contributions in
terms of employment, income and poverty alleviation is
commonly acknowledged
 Cont.

• MSEs in Sululta Town Administration also witnessed

potential development for the local economy
• A critical component to achieve these enterprises
mission, which is also a broader development objective
of the society, is their ability to reach the poorest and
most disadvantaged section of society, so that the local
economy is most likely to happen through such
enterprises
• The proportion of respondents who were poor by the
time of program entry was substantial, but higher level
of involvement of the poor and poorest section of the
society in the program makes their life encouraging
 Cont.
Micro and small enterprises have increased the
income of households of the managers
The employment opportunities created following
micro and small enterprise utilization of managers is
encouraging and it practiced through enterprise forms
 Limited productivity resulted from lack of technical
and entrepreneurial skills; lack of affordable access to
raw materials and inputs; lack of sufficient capital;
lack of market and appropriate assistance for micro
and small enterprise makes the enterprises not
performing in their full capacity
Even if many job opportunity is created the number
of female employees is still lagging behind.
 Recommendation

 big emphasis should be given factors like, lack of

technical and entrepreneurial skills, lack of affordable
access to raw materials and inputs, lack of sufficient
capital, lack of market and appropriate assistance that
challenges MSE in LED.
 government or non-government and other concerned
bodies should give the right training at the right time
and place as per the need of the enterprises for the
development of the enterprise in particular and local
economic development in general.
 Governmental and non- governmental organizations
should facilitate sustainable market linkage between the
producer and potential customers.
 Cont.
 Responsible bodies should act to tackle lack of transportation
or necessary allowance or any motivational
mechanism for officers so that they can reach
and provide necessary advices for MSE.
 given to increase their participation. Though
enough is stated at the policy level to encourage
women to participate in the MSEs, aggressive
awareness raising mechanism, provision of
special credit window and women focused
special training is mandatory to increase their
number
Thank you