29 Apr 2016 Working Papers
Determinants of growth of micro and small enterprises (MSEs): Empirical evidence from Ethiopia
r4d Working Paper 2016/3 by Solomon Tarfasa, Tadele Ferede, Shiferaw Kebede and Daniel Behailu
ABSTRACT: Broad-based growth and transformation through the promotion of micro and small enterprises (MSEs) has been robustly underscored in various development plans in Ethiopia, but both the level of unemployment and quality of jobs remain a concern. In order to make the MSE sector the engine of economic growth and reduce the problem of unemployment, it is important to understand what factors determine growth and investment in innovation in MSEs in the context of Ethiopia. In this paper, we provide a microeconomic evidence on the determinants of firm performance in Ethiopia, with a focus on MSEs. The main objective of this study was to identify the determinants of growth and of investment in innovation in MSEs using a survey of 300 firm level data from Addis Ababa, Ethiopia. Both descriptive statistics and econometric methods have been used to analyse both internal and external factors, and the relative impacts of these factors on the performance of MSEs. The findings of the study reveal that MSEs suffer from a host of internal problems (e.g. weak human resources and other assets) and of external factors including lack of access to credit, limited market facilities, policy and regulatory bottlenecks. For small enterprises, access to credit appears to be a binding constraint for their growth as they are ‘too big’ for microfinance institutions, but they are ‘too small’ for formal banks in terms of the size of loan, reflecting the ‘missing middle financial intermediaries’ that serve small enterprises. Hence without renewed focus on promoting firm growth, especially MSEs through improving access to warehouses, relaxing credit constraints, and improving the macroeconomic and regulatory environment, the potential for MSEs for creating more jobs will be severely compromised.