Factors Affecting The Performance of Micro and Small Enterprises in Wolita Sodo Town

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International Journal of Research in Business Studies and Management

Volume 6, Issue 12, 2019, PP 18-26


ISSN 2394-5923 (Print) & ISSN 2394-5931 (Online)

Factors Affecting the Performance of Micro and Small


Enterprises in Wolita Sodo Town
Addis Alemayehu Tekele*
Department of Management, Wolaita Sodo University, Wolaita Sodo, Ethiopia
*Corresponding Author: Addis Alemayehu Tekele, Department of Management, Wolaita Sodo
University, Wolaita Sodo, Ethiopia, Email: tekeleaddis@gmail.com

ABSTRACT
The fundamental objective of this study is to assess factors affecting the performance of MSEs in Wolita
Sodo Town. The study was employed both quantitative and qualitative research design. Both primary and
secondary data were employed. Questionnaire, interview and observation were the main data collection
instruments. Among the 672 operators in Wolita Sodo Town 251 sample sizes were selected using stratified
and simple random sampling technique. After the data has been collected, it was analyzed using simple
statistical techniques descriptive statistics and inferential statistics were used to assess the relationships and
differences between variables.
Furthermore, the research finding showed that among such factors financial, political-legal, access to
business information service, technological and infrastructure are the major factors that affect the
performance of MSEs in Wolita Sodo Town.
Keywords: MSEs, factors, performance, Sectors.

INTRODUCTION socio-economic development as a means for


generating sustainable employment and incomes
Micro and small enterprises play an important (ILO, 2003).
role in building worlds economy. In different
part of the world they are serving as home of Micro and small enterprises and development
income generation, reduction of unemployment, opportunity have direct relationships. They
and innovation. require less capital and more labor. MSEs have
the capacity to generate a much higher degree of
Small businesses are the backbone of the U.S
employment opportunity with less capital as
economy and the primary source of jobs for
compared to large-scale sectors. Owing to the
Americans. Small- and medium-sized enterprises
mentioned facts they are considered to be of
(SMEs) also account for the largest group of U.S.
greatest value in building up a local production
exporters are a major user of imported goods.
structure (coordinating land, labor, and capital
Small businesses are a continuing source of
in that locality) and in promoting economic
dynamism for the American economy. They
growth.
produced three-fourths of the economy's new
jobs between 1990 and 1995, an even larger In successful developing countries, MSEs by
contribution to employment growth than they virtue of their size, location, capital investment
made in the 1980s. They also represent an entry and their capacity to generate greater employment,
point into the economy for new groups. Women, have demonstrated their powerful propellant
for instance, participate heavily in small effect for rapid economic growth. The MSE
businesses. Small firms also tend to hire a sector has also been instrumental in bringing
greater number of older workers and people who about economic transition by providing goods
prefer to work part-time (http://www.ustr.gov/ and services, that are of adequate quality and are
trade-topics/small-business). This depicts that reasonably priced, to a large number of people
small businesses‟ are the engine of a countries particularly in rural areas, and by effectively
using the skills and talents of a large number of
economy and home of job creation.
people without requiring high-level training,
Throughout the world it is acknowledged that large sums of capital or sophisticated
micro and small enterprises play a vital role in technology (Endalkachew Mulugeta, 2008).

International Journal of Research in Business Studies and Management V6 ● I12 ● 2019 18


Factors Affecting the Performance of Micro and Small Enterprises in Wolita Sodo Town

The Government of the Federal Democratic different economic policies and they are
Republic of Ethiopia has recognized and paid occupying different phases of economic
due attention to the promotion and development development, factors that determine the success
of SMEs for they are important vehicles to of small businesses would vary accordingly. In
address the challenges of unemployment, this study, the attempt is made to investigate
economic growth and equity in the country. To factors that might contribute to the success of
this effect, the government has formulated a micro and small businesses in sodo town.
National MSE Development and Promotion
According to review, of literature numerous
Strategy, which enlightens a systematic approach
factors attribute to the success and failure of
to alleviate the problems and promote the growth
business. The factors include poor business
of SMEs.
plans, lack of entrepreneurial characteristics,
Until2004/2005, the national strategy was poor management of people, lack of finance,
implemented by Federal SMEs Development absence of supporting institutions, poor location,
Agency organized only at national level. absence of BDS, management incompetence,
Because of this, it was very difficult to make the poor financial control, lack of experience,
strategy practical especially in delivering failure to develop a strategic plan, inability to
business development service for SME make an entrepreneurial transition and poor
operators. Thus, by considering the critical role planning.(Beyene, 2007),(Belwal, 2008), (sho
of the sector and the constrained faced by SME nesy & D.Gulbro, 1998). In general there are
operators since 2004/2005 the government of different factors which are still affecting the
Ethiopia decide to establish SMEs coordinating performance of MSEs.
body at regional level. It considers MSEs as one
Therefore, this study is intended to identify and
of the core development strategies through
analyze factors that cause the success/failure of
which it believes to achieve social and economic
the MSEs after categorizing the enterprises as
prosperities for its citizens. Presently it is
successful and failure MSEs based on their
carrying out an intensive registration of the
profitability.
enterprises at national level the same is true at
sodo town. Statement of the Problem
As Endalkachew Mulugeta (2008) the MSE As Tiruneh Abebe (2011), the Micro and Small
(Micro and Small Enterprise) sector is the Enterprises Sectors contribute to economy
second largest employment-generating sector development of nations‟ by creating employment
following agriculture in Ethiopia.In addition, opportunities, production of goods and services
(Beyene, 2007) explained the strategic and other value added activities. The existence
contribution of micro and small enterprises to of a strong small business sector is necessary for
Ethiopian economy. He describes that currently the boosting of the economy. However, the
MSEs approximately account for about one-half transition of this sector to medium and large
of the total indusrial production. This can also business sectors is as crucial to preserve the
support the remarkable contribution of MSEs to flow of new small businesses into the economy.
the countries economic development.ILO, In addition, such transition or growth will
(2003) described the MSE sector is characterized further reduce the unemployment rate and
by highly diversified activities, which can create increase the number of products or services
job opportunities for a substantial segment of the offered to the society. Hence, growth of MSEs
population. This indicates that the sector can be a considered as synonymous with success.
quick remedy for any unemployment problem. Micro & Small Enterprises caught the attention
To curb unemployment and facilitate the of development practitioners and policy makers
environment for new job seekers and self- recently not only because of its importance in
employment, a direct intervention and support by terms of generating employment also because of
the Government is crucial. various other attributes. Some of these are:
While a considerable amount is known about Micro and Small Enterprises are breeding ground
the factors that affect the success of small and for entrepreneurs, the sector has high employment
medium-sized businesses, this knowledge generating capacity, and is less capital intensive
continues to be imperfect and a large number of and it is highly competitive, flexible, and
questions remain unanswered regarding the small innovative (Endalkachew Mulugeta, 2008).
business sector in developing countries. Since Even though, the number of MSE increasing in
developing countries are expected to adopt an increasing rate, the status of their operation is

19 International Journal of Research in Business Studies and Management V6 ● I12 ● 2019


Factors Affecting the Performance of Micro and Small Enterprises in Wolita Sodo Town

the basic question to be asked by the policy MSEs sector in Ethiopian has not been
makers and researchers. Due to change in adequately studied empirically.
business environment and economic situation of
So this study tries to assess selected success or
the world, it is at fast pace to affect or be
failure factors identified from literature with the
affected by the global economic settings. There
performance of Micro and Small Business
are also internal environmental factors such as
Enterprises in Sodo Town.
the entrepreneurial characteristics, finance and
market skills that cause the success/failure of Objectives of the Study
them.
General Objective
It is natural to say that every small business
The general objective of this study is to
owner starts with high hopes of success, but it is
investigate factors affecting the performance of
a usual phenomenon that every year firms go
micro and small enterprises in Sodo Town.
out of businesses. Although failure is not the
sole reason for enterprises to leave the business, LITERATURE REVIEW
many enterprises do fail each year (Tiruneh
Abebe, 2011). Definition of Small and Micro Enterprise
(SMEs)
This study argues that success is a complex
process and that a combination of both internal Worldwide, there is no common definition of
and external factors together would better the SME. Although the Size criteria (number of
explain the success or failure of microenterprises. employees, sales turnover, Asset size total
On this point Belay File (2012) argued that a capital investment and the like), and Economic
multi-dimensional analysis, where a number of criteria (market share, independence and
external and internal factors are taken into personalized management) are the two main
account would yield a clearer understanding of approaches used to define MSEs (Beyene,
success. 2007).
Shonesy and Gulbro (2004) cited in Tiruneh In the case of Ethiopia, until recent times there
Abebe (2011), reported from their review of is lack of uniform definition at the national level
literatures on small business success studies, to have a common Understanding of the MSE
„there have been several studies, which seek to sector. While the definition by Ministry of
identify the critical success factors for small Trade and Industry (MTI) uses capital
businesses. However, there appears a problem to investment, the Central Statistical Agency
develop a common list of the factors which (CSA) uses employment and favors capital-
contribute for success of small business intensive technologies as a yardstick. The
performance operating in various business definition used by MTI, which uses capital
environments and regions‟. It is important to investment as a yardstick, has been developed
define these factors for any new business, as the for formulating micro and small enterprise
owner should be concerned about the chances development strategy in 1997 (Tiruneh, 2011).
for success. According to the new Small & Micro
Understanding of why some firms succeed and Enterprises Development Strategy of Ethiopia
others not is crucial to the stability and health of (published 2011), the working definition of
the economy. Despite this fact, however, which MSEs is based on capital and Labor (Konjit,
factors are the most important to the success of 2012).
Table2.1. Small and Micro enterprises definition
sr.no. Enterprise level Sector Hired labour Capital
1 Micro Industry ≤5 $6000.00 or ≤ Birr 100,000.00
Service ≤5 $3000.00 or ≤ Birr 50,000.00
2 Small Industry 6-30 $90,000.00 or ≤ 1,500,000.00
Service 6-30 ≤ Birr 500,000.00
Source: federal micro and small enterprise development agency
The Roles of Micro and Small Enterprises for and social progress. The small business sector is
Economic Development also seen as an important force to: generate
employment and more equitable income
In all successful economies, MSEs are seen as
distribution; activate competition; exploit niche
an essential springboard for growth, job creation

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Factors Affecting the Performance of Micro and Small Enterprises in Wolita Sodo Town

markets; enhance productivity and technical increase in governmental policies promoting and
change and through the combination of all of these supporting SMEs in order to achieve economic
measures, to stimulate economic development growth and reduce poverty, there is still a lack
(Zewde and Associates, 2002; Trovato and of laws, administrative procedures and access to
Becchetti, 2002; Andy and Paul, 2002; Nuno assistance from governmental agencies (Harvie,
and Santos; 2003). 2005).
Reduction of poverty and unemployment in The finding of Sethuraman, ( 1997) indicated
Ethiopia by supporting and promoting only large- that in most of developing countries, the
scale industries has frequently unsuccessful majority of small enterprises lack access to
instead focusing on small businesses, which formal financial services. Researches in this area
require relatively less capital and absorb a evidenced that the informal firms start their
significant portion of the labor force, will be the business with their own savings supplemented
solution. The labor absorptive capacity of the by borrowing from friends and relatives. Since
small business sector is high, the average capital most of the operators are poor they start their
cost per job created is usually lower than in big business with very little capital. A few meet
business and its role in technical and other their capital requirements through informal
innovation activities is vital for many of the credit mechanisms which exist within their
challenges facing the country (Petersen and community, but rarely from the formal sector
Carpenter,2002; ILO,2004;Freel and Robson, institutions. SMEs have complexity in growing
2004; Ishengoma, 2004; Gebrehiwot and due to lacking of collateral, high transaction
Wolday, 2005). costs and incapability to deal with the
complexity of formal financial institutions
In Ethiopia the contribution of micro and small (Harvie, 2005; APO, 2001; Leopairote, 1997).
enterprise (MSE) have been significant. According
The introduction and use of new technology can
to the Central Statistical Authority (CSA, 2009)
help streamline processes and increase worker
survey the contribution of the small-scale
productivity of small enterprises if managed
establishments to the gross domestic product
properly. The ability of using technology to the
(GDP) or the national economy during the year business advantage requires the skill to identify
2009 E.F. Y, the small-scale manufacturing possible uses for each technological advance.
establishments‟ value added was to the tune of Some technological advances may prove cost
32.5 billion birr. Accordingly, all the small-scale prohibitive for some small business. This
manufacturing establishments, together, created evaluation should shine some light on the
employment opportunity for 2,140,668 people. possible benefits it will provide to both
Furthermore, out of the 2.1 million, 831.5 employees and the company. (Nicole Long.
thousand or 38.85 % were permanent employees. demand media, 2016).
Factors Affecting the Performance of Micro Access to business information services has
and Small Enterprise been identified as one area that needs attention
Acording to Tiruneh,(2011) the factors that from governments and business services
affect the performance of MSEs could vary from providers if the SMEs sector in developing
one country to another due to the economic, countries is to achieve sustainable levels of
geographical and cultural differences. This kind growth and development. Many firms in Africa
of investigation of the success factor is very operate in an information-poor environment due
important for developing countries like Ethiopia to lack of adequate business support services
because the research conclusion could be useful and the poor information technological
for the economic development planners as well infrastructures (Oshikoya & Hussain, 2007).
as to individual entrepreneurs and business Access to information has however not been
owners in the countries concerned. given the challenges regarding ICTs infrastructure
and the cost of IT hardware and software. This in
According to (Harvie and Lee, 2005 ),the itself has created many problems in the area of
significance of SMEs within an economy business information services for the SMEs
emphasize the importance of having governmental
sector. As governments and business
policies that support SMEs; issuing regulations
that help them and their ability to operate service providers try to address the many
efficiently and regulations that imply low challenges facing the SME sector, it is also
administrative costs. Although there has been an important that the present use of ICTs in

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Factors Affecting the Performance of Micro and Small Enterprises in Wolita Sodo Town

accessing business information services be hypothesis drawn and their relationship,


identified in order to provide more development furtherly multiple regression analysis was used
support in this area (Levy, 2000). to test the effect of independent variables on the
performance of MSEs and to rank the identified
Macpherson and Holt (2007) and Barratt-Pugh
factors.
(2005) claim that firm growth is dependent on
managerial knowledge. In comparison with LEs The target population for the study was
managers in SMEs are generally less trained functional small and Micro Enterprises operated
(Tannock et al., 2001), consequently, they chose in wolita sodo town which were 672 in number.
poor production technology, do not use proper The sampling technique used in this study was
accounting systems and underestimate required stratified random sampling to get information
funding and also SMEs spend less on formal from different sizes of the MSEs in sodo town.
training than LE due to financial limitations and With this technique, the sampling frame was
the fact that it can be difficult to take employees organized into relatively homogeneous groups
out of the production (Thassanabanjong et al., (strata) before selecting elements from the
2009; Tannock et al., 2001).
sample. The samples were selected based on
RESEARCH METHODOLOGY population proportion.
According to Mark et al. (2009:101) mixing The researcher used Yamane's (1967) formula to
qualitative and quantitative approaches gives the calculate sample size:-
potential to cover each method‟s weaknesses
Assumptions:
with strengths from the other method. In this
study, a combination of qualitative and A 95% confidence level, and e = ±5%
quantitative approaches of doing research was n= N
employed, which has been practiced, as
recommended by Creswell (2009:203-216). 1 +N (e)2
Primary data was collected using questionnaire Where:-
and key informant interviews. The questions
that were used in the questionnaire were five- n = the sample size
point likert scale type questions. The type of N = the population size
scales used to measure the items on the
instrument is continuous scales (strongly agree e = the level of precision (Sampling error)
to strongly disagree).The secondary data n= N = 672 = 251
collected from report, record brochure and
news paper etc. More over the study used a 1+N(e)2 1+672 (0.05)2
Pearson correlation analysis to test the N = 251
Table3.1. Proportionate Sample Distribution for each MSE
No Sector Number of MSEs Sample
1 Manufacturing 121 121/672*251=45
2 Construction 29 29/672*251=11
3 Urban agriculture 32 32/672*251=12
4 Trade 167 167/672*251=62
5 Service 323 323/672*251=121
Total 672 251
Both qualitative and quantitative data has been infrastructure, finance, entrepreneurial, and access
collected from primary and secondary sources. to business information services factors.
Primary data were collected from operators of Statistical package for social science (SPSS)
SMEs by administrating structured and semi- soft ware version 20 was used to analyze SPSS
structured questionnaires. The secondary data analyze the valid responses.
also collected from the key information such as, Model Development and Specification
SMEs bureaus, literature, journals and SMEs
The equation of regression on this study is
reports and journals.
generally indicates the relationship of the
The regression analysis was used to determine dependent variable performance on the six
the dependence of MSEs performance upon the independent variables (politico-legal, technology,
independent variables i.e. political-legal, technology, infrastructure, finance, entrepreneurial, and access

International Journal of Research in Business Studies and Management V6 ● I12 ● 2019 22


Factors Affecting the Performance of Micro and Small Enterprises in Wolita Sodo Town

to business information service). The fundamental X1= politico-legal, X2= technology, X3=
objective of using regression equation on this infrastructure, X4= finance X5=entrepreneurial,
study was to make the study more effective in X6= access to business information service are
describing, understanding and predicting the the explanatory variables.
stated variables. Therefore, the developed model
β0 is the intercept term- constant which would
and its specification is outlined below;
be equal to the mean if all slope coefficients are
Yi = β0+ β1X1 + β2X2 + β3 X3 + β4X4 + 0.β1, β2, β3, β4, β5 and β6 are the coefficients
β5X5 + β6X6 associated with each independent variable which
measures the change in the mean value of Y, per
Where: unit change in their respective independent
Y is the response or dependent variable- variables
performance of MSEs
DATA ANALYSIS AND DISCUSSION
Table4.1. Model Summary for Multiple Linear Regressions
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .927 .871 .865 .2367
Dependent Variable: performance of MSEs
Predictors: political-legal, technological, infrastructure, finance, entrepreneurial and acces to business
information service
Source: survey result 2019
Based on the above table 4.1, the adjusted R As indicated by multiple R. Besides, given the R
square for this research was 0.93, which Square value of 0.871 and adjusted R square
indicates 93% of the variation for the factor value of 0.865, it may be realized that 87.1% of
affecting performance of MSEs by the optimal the variation in performance can be explained
linear combination of the independent variables by the independent variables. The remaining
tested (political-legal ,technological, infrastructure, 12.9% of the variance is explained by other
finance, entrepreneurial and acces to business variables not included in this study.
information service factors).
Table4.2. Regress performance (as dependent variable) on the selected variables (as independent variables)
using multiple regressions.
Model Unstandardized Standardized T Sig. Hypotheses Results
Coefficients Coefficients
B Std. Error Beta
Constant -150 .104 -.441 .151
Politicl-legal .038 .020 .232 7.544 .000 H1 Fail to reject
Technological .106 .021 .137 4.940 .000 H2 Fail to reject
Infrastructures .189 .028 .125 6.869 .000 H3 Fail to reject
Finance .276 .037 .269 1.871 .000 H4 Fail to reject
Entrepreneurial .093 .032 .048 .2.925 .064 H5 Rejected
Access to business .085 .021 .153 4.095 .000 H6 Fail to reject
information services
Source: SPSS result of own survey 2019
The regression model with all the predictor explain at 99% confidence level to the variation
variables indicate as follow: on the dependent variable. The standardized
Predicted performance score = -.150 + .232 beta coefficient column shows the contribution
political-legal) + .137 (technological) + .125 that an individual variable makes to the model.
(infrastructure) +.269 (finance) + .153 The beta weight is the average amount the
(entrepreneurial and access to business dependent variable increases when the
information). independent variable increases by one standard
The above table shows that, all the explanatory deviation (all other independent variables are
variables included in this study can significantly held constant). As these are standardized we can
compare them.

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Factors Affecting the Performance of Micro and Small Enterprises in Wolita Sodo Town

The smaller the value of sig.(and the larger the MSEs, wolita sodo city government bodies
value of t) the greater the contribution of that should reduce bureaucracy and delays in
predictor. The result of multiple regression registration and licensing in processing legal
analysis in the above table 4.2 clearly requirements by revising all the jamming
demonstrates that five explanatory variables laws, regarding getting a license or premises
have positive and significant influence on SMEs on which to operate.
performance with the value of (β=0.232, 0.137,
 Accessibility of business information service
0.125, 0.269, 0.153) for political-legal,
is vitale for MSEs in order to make accurate
technological, infrastructure, finance and access to
decision. The providing of business
business information service factors respectively
information was limited for entrepreneurs.
with p-value less than 0.05. However
Therefore the study recommends for the
entrepreneurial factor had insignificantly and
government to improve accessibility of
positively related to performance of MSEs with p-
business information service for MSEs.
value of 0.064 which is greater than 0.05 and beta
value of 0.048.  Finally the study recommends the
In this study the highest Beta value is 0.269 for government to advance the technology and
finance factor, second highest is 0.232 for infrastructures such as constant supply of
political-lega factor. This implies the 1 % electric city, water and transportation
increase in finance support would result in a systems and providing working space that
26% increase on SMEs performance other affects the performance of MSEs.
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Citation: Addis Alemayehu Tekele, “Factors Affecting the Performance of Micro and Small Enterprises in
Wolita Sodo Town”, International Journal of Research in Business Studies and Management, 6(12), 2019,
pp.18- 26.
Copyright: © 2019 Addis Alemayehu Tekele. This is an open-access article distributed under the terms of
the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction
in any medium, provided the original author and source are credited.

International Journal of Research in Business Studies and Management V6 ● I12 ● 2019 26

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