ALKAN HEALTH SCIENCE BUSINESS AND TECHNOLOGY

COLLEGE
COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

The Role of Micro and Small Enterprises in Reducing Unemployment in

Bahirdar City Administration: The Case of Tewodros Sub-City

PREPARED BY:
1. Alemnesh Alebachew--------------07
2. Awoke Tsegaw----------------------15
3. Ayitenew Yenework---------------16
4. Elsabeth Fisha-----------------------35
5. Lakachew Adisu--------------------65
6. Mintamir Morka--------------------78
7. Netsanet Mola-----------------------82
8. Selam Agidew------------------------89

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 ACKNOWLEGEMENT

First of all I would like to express my grateful thanks to my God for his surprising and unbelievable
support to my real life to complete the course and the success of this research paper.
I am deeply indebted to my advisor Ato Tilahun Bayou (MA) for his unreserved consultation and
timely follow up and checking of the manuscript up to the end of this paper.
I would also like to extend my appreciation to all Bahirdar city administration, Tewodros sub-city
MSE office staff members, and MSE workers for their material, data and moral supports.
My deep gratitude also goes to my families who have taken the most important role in assisting
me with moral and financial supports during my study and the preparation of this paper.
Last but not the least I gratefully thank my friend Senait who assisted me in typing my manuscripts.

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 Table of contents
Contents Page
Acknowledgement………………………………………………..................I
Table of contents…………………………………………………………….II
List of tables…………………………………………………………………V
List of figures………………………………………………………………..V
Acronyms…………………………………………………………………..VI
Abstract……………………………………………………………………VII

1. Introduction……………………………………………………………...1
1.1. Background of the study……………………………………………1
1.2. Statement of the problem……………………………………...…...2
1.3. Objective of the study………………………………………………3
1.3.1. General objective……………………………………………3
1.3.2. Specific objectives…………………………………………..3
1.4. Research questions………………………………………………….3
1.5. Research methodology……………………………………………...4
1.5.1. Nature and data sources……………………………………..4
1.5.2. Sample size and sampling technique………………………..4
1.5.3. Tools and methods of data collection…………………….....5
1.5.4. Methods of data analysis………………………………….....5
1.6. Organization of the study……………………………………….......6
1.7. Significance of the study…………………………………………...6
1.8. Limitation of the study……………………………………………..6
1.9. Scope of the study…………………………………………………..6

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 Chapter two
2. Review of related literature……………………………………………..7
2.1. The concept of micro and small enterprise………………………...7
2.2. The role of micro and small enterprises……………………………9
2.2.1. Supporting large and giant enterprise……………………….9
2.2.1.1. Distribution function………………………………...9
2.2.1.2. Supply function……………………………………...9
2.2.2. Source of innovation…………………………………….......9
2.2.3. Stimulating economic competition………………………...10
2.2.4. Creating employment opportunity……………………...….10
2.3. Problems of micro and small enterprise……………..………...….10
2.3.1. Lack of managerial skill……………….…………….......…10
2.3.2. Financing…………………………………………………....11
2.3.3. Tax……………………….………………………………….11
2.3.4. Problems of selecting qualified personnel…………………11
2.3.5. Marketing………………………………………………...…11
2.4. Micro and small enterprise as vehicles for poverty reduction,
employment creation and business development………….………11
2.5. Micro and small enterprise policy and strategy in Ethiopian……..15
Chapter three
3. Description of the study area…………………………………………...18
3.1. Physical features of the study area………………………………...18
3.1.1. Foundation of Bahirdar city…………………………………18
3.1.2. Geographical location of Bahirdar city……………………..19
3.1.3. Climate……………………………………………………...19
3.2. Socio-economic features…………………………………………..20
3.2.1. Demographic characteristics……………………………….20
Chapter four
4. Data analysis and interpretation………………………………………..22
4.1. The demographic and socio-economic background of
MSEs operators……………………………………………………22

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 4.1.1. Age and sex distribution……………………………………22
4.1.2. Educational status…………………………………………..23
4.1.3. Marital status and family size……………………………...24
4.1.4. Previous occupational status of MSEs workers……………25
4.2. The nature of enterprises…………………………………………..26
4.3. The trend of MSEs development in the town……………………..26
4.4. The role of MSEs in creating job opportunities…………………..27
4.5. Financial and income status of MSEs workers……………………28
4.5.1. Initial capital……………………………………………….28
4.5.2. Source of capital……………………………………………29
4.5.3. Current capital and monthly income……………………….29
4.5.4. Sources of income from other sectors……………………...31
4.6. Job creating potential of the sector………………………………..31
4.7. Types of business operated by MSEs……………………………...32
4.8. Institutional support for MSEs…………………………………….32
4.9. The improvements of MSEs workers……………………………...33
4.10. Strengths of MSEs in the town……………………………..33
4.11. Major constraints of MSEs in the town……………………34
4.12. The objective of MSEs establishment……………………..35
Chapter five
5. Conclusions and recommendations……………………………………36
5.1. Conclusions………………………………………………………..36
5.2. Recommendations…………………………………………………37
Reference…………………………………………………………………...39
Appendices…………………………………………………………………40
Appendix I………………………………………………………………….40
Appendix II………………………………………………………………....46

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ACRONYMS

MSEs – Micro and small enterprises

SBA _ Small business administration
EEA – Ethiopia economic association
AUC – Alpha University College
FSS – Forum for social studies
Ibid – The same source
HICES – House hold income consumption and expenditure survey

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 Abstract

our research will conduct in Bahirdar city administration, Tewodros sub-city on the micro and
small enterprise to know its role in reducing unemployment with the objective of to investigate the
role of micro and small enterprise in creation of employment opportunities, to show the general
trends of micro and small enterprises development and to identify the major constraints of micro
and small enterprise development in the town. For the trainability of the intend objective both
primary and secondary data will collect from different sources. The stratified random sampling
techniques will use to select respondents as sample. Both qualitative and quantitative methods are
use as data analysis method. These are lack of finance and in accessibility for credit, lack of work
premises and market places, lack of institutional support, lack of infrastructural development and
high taxation system are major challenges and hindrance of micro and small enterprise
development in the town. Finally, this research recommended that the city administration, the
micro and small enterprise Office, and individual as well as non-governmental organizations
should encourage and provide access to work premises and market places, finance, institutional
support, create conducive marketing environment, develop infrastructure and reduce high tax.

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 Chapter one
1. Introduction
1.1 Background of the Study
Across the world as well as in Ethiopia there is small and large business organization operating for
profit. The definition of micro and small enterprises varies from country to country. All over the
world, number of employees or employment and capital investment or both has been used as the
basis for defining micro and small enterprises.

Specifying any size standard to define small business is necessarily arbitrary because people adopt
different standards for different purpose. Legislators may exclude small firms from certain
regulations and specify ten (10) employees as the cut-off point. Move over businesses may be
described as “small” when compared to larger business size and economic criterion. The criterion
used to measure the size of business is vary. Size refers to the scale of operations. Some criteria
applicable to all industrial areas, while others are relevant only to certain types of business (IBID).

The small business Administration (SBA) establishes size standards that determine eligibility for
SBA loans and for special consideration in bidding on government contracts. In 1984, the SBA
issued a revise set of standards, some of which are stated in terms of number of employees and
others of which are stated in terms of small volumes (IBID).

Size standards for most non-manufacturing industries are now expressed in terms of receipts. US
$ 3.5 million is a common upper limit in the service and retail areas in which small business is
strong. In mining and manufacturing, however, SBA classifies firms fewer than 500 employees as
small. To provide a clear image of small business the general criteria for defining a small business
are suggested.
 Financing of business is supplied by one individual or a small group.
 Only a rare case would the business has more than 15 or 20 owners.
 Except its marketing function the firm operations are geographically localized.
 Compared to the biggest firms in the industry, the business is small.

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  The number of employees in business is usually fewer than 100. Obviously,
some small business enterprises fail to meet all the above standards.

MSEs, the world over comprise a widely divergent spectrum of establishment, ranging from micro
and rural enterprise to modern industrial units using sophisticated technology. Because of their
contribution in each and every national economy, the importance and emphasis on MSEs has been
accentuated in the mind of policy makers, planners and the industry. This is the consequence of
the recognition that the shift from agrarian to industrial and to post industrial knowledge base
societies is not through the large scale industrial houses but through individual and small initiatives
by visionaries from the micro and small enterprises.

1.2 Statement of the Problem

The importance of micro and small enterprises sector in Ethiopian, particularly for the low-income,
poor and women groups, is evident from their relatively large presence share in employment and
small capital requirement. These are the sufficient reasons for governments and other stake holders
in development to be interested in micro and small enterprises. However, in the context of many
developing countries, countries in transition in particular including Ethiopia, MSEs are also seen
as an emerging private sector, forming the basis for private-sector-led growth. In Ethiopia, at the
level of strategy and policy, these roles of MSEs have received recognition and are seen as means
of providing employment, alleviating poverty, ensuring food security, and private sector
development, yet the sector has not been studied adequately, except the large manufacturing
industries. So, detailed micro and small enterprises related studies are very scarce to say the least
in Ethiopia and in the study area.

Besides the benefits of micro and small enterprises in Ethiopia, to secure food insecurity, to
improve the low-level of income, to create employment opportunity and to alleviate poverty. All
these are the major problems in the study area which can be alleviated or minimized by making
the people to participate in micro and small enterprise which has a great-role on those problems.

2
Therefore, the study is partially fill these problems and information gap that the researcher want
to investigate the role of micro and small enterprises in the alleviating of unemployment in
Bahirdar city administration, the case of Tewodros sub-city.

1.3 Research questions

In order to achieve both general and specific objectives of the study, the researcher attempt to
answer the following basic research questions;

 What is the general trend of MSE development in the town?

 What is the role of MSE in the creation of employment in the town?
 What are the major constraints of MES that hinder to develop in the town?
 What are the possible solutions for the problems?

1.4 Objective of the study

1.4.1 General objective
The general objective of the study is to assess the role of micro and small enterprise in alleviating
of unemployment in Bahirdar city administration, particularly in Tewodros sub-city.
1.4.2 Specific objectives
The study has the following specific objectives;
 To investigate the role of micro and small enterprises in the creation of employment
opportunities.
 To show the general trends of micro and small enterprise development in the town
 To point out the major constraints of micro and small enterprises in the town.
 To suggest possible solution to the problems based on the findings.

1.5 Significance of the study

The researcher expects that study will have much significance;
 It will partially fill the information gap that the researcher intended to achieve.

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  Micro and small enterprises sectors may get high emphasis after the study has been
completed because the study will give some insight to the town administration in
the study area.
 Other may share experience from the result of the study
 The MSE bureau can use the findings of the study as an input to their future
development.

1.6 Scope of the study

Even though the information gap or poverty and the role of micro and small enterprises are
nationwide, for simplicity the study is confined to only Bahirdar city administration, Tewodros
sub-city. Moreover, the study is also investigated the trends of MSE, employment opportunity of
MSE, the major problems and possible solutions in the town.

1.6 Organization of the study

The paper will organize by five chapters. The first chapter deals about the introduction part; which
incorporate statement of the problem, objective of the study, basic research questions, significance
of the study, limitation of the study, scope of the study and research methodology. Chapter two
incorporates related review of literature as a whole. Chapter three deal about the description of the
study area. Chapter four is include presentation, analysis and interpretation of the data. Lastly, the
5th chapter constitutes conclusion and recommendation of the study.

CHAPTER TWO
2. REVIEW OF RELATED LITERATURE
2.1 THE CONCEPT OF MICRO AND SMALL ENTERPRISE

The term enterprise is used to mean all industrial, commercial, agricultural, services rending and
financial intermediaries. Enterprises are commonly classified in to four, namely; micro, small,
medium and large scale. There is no universally accepted definition of Micro and small enterprise

4
(MSE). Due to this, countries adopt their own working definition. The definition of MSES has
usually been based such an either quantitative or qualitative; never the less, many developing
countries apply the first one qualitative definition are based on the specific parameters such as
number of employment, assets and sale turn over, type and ownership (world Bank; 1998, cited in
Addisu, 2010).

The micro and small enterprise sector is highly diversified sector and play predominant role in the
economy of most developing countries. It comprises relatively modern and traditional or
independent products and services to domestic markets. Micro enterprise usually exhibits its own
characteristics such as it is an informal sector activity located in rural area or an urban center. The
sector is run by the owner or manger assisted by family members and it also use minimal fixed
tools and startup capital, usually the sector uses indigenous, local raw materials. It requires
rudimentary skills and technologies. Mostly, it produces goods and services for low income
consumers and sells the product through personal contact with consumers. Some MSES produce
capital goods more often such enterprises produce a wide range of intermediate in puts and
consumer good and also supply a large variety of services. They produce poultry, involved in food
processing, beverage, garments, construction, cattle rising, wood and metal product, furniture,
jewellery, and other miscellanies products. They work in areas such as trade, transport,
communication, laundry, restaurant and hotels (little: 1985, cited in Adisu, 2010).

“Some of those enterprise may be linked with medium and large enterprise under sub contracting
arrangements for either supply input or using their by product and istes. Women account for
relatively high preparation of owners or workers in the small scale enterprise sector, personal
saving … MSES is major sources of human resource development and save as training ground
which gives un skilled workers” (Andualem; 1996, cited in Adisu, 2010).

MSES also play an important role in the process of a country industrial development particularly
in developing countries. A small labor incentives industry has been favored basically to create
employment opportunities in an economy with abundant unskilled labor. They require low capital,
indigenous resource and technology which help utilization of national resources (Ibid).

5
Small scale industry means any manufacturing formulation, alteration, prefabrication and
preparation activity organized with capital ceiling and carried using many motive power driven
machinery and equipment with a view to selling products in clouding engineering services (Hailay,
2007).
In light of the above definition and taking in to consideration the Ethiopian situation may be
defined in the following ways:

Micro Enterprise are business activities that are independently and owned operated have a small
share of market, are managed by the owner and employing five (5) or less people (Hailay, 2007).

Small enterprises are those businesses that employed up to 49 people. They share the small
characteristics with micro enterprise in other aspects (IbId).
Medium scale enterprise are those which have relatively high share in the market, independently
or jointly owned and managed by the owner or by the appointed executive and employee 50 to 99
workers. Those enterprises that employee move than 100 people would be considered as large
enterprise (IbId).

Currently the government of Ethiopia in its Federal Micro and Small Enterprises strategy of 2006
(FMSES) defines MSE based on the size of capital and level of automations as follows. Micro
enterprises are those businesses with paid up of capital not exceeding birr 20,000 excluding high
technology constancy firms and other high technology establishment. Small enterprises are those
business with paid up of capital above birr 20,000 and not exceeding birr 500,000 excluding high
technology consultancy and other high technology establishment. Lack of standard definition is
basic challenges facing all those who are want to understand what those enterprise mean when
does the micro become small and the small become medium (Hailay, 2007).

2.2 THE ROLE OF MICR AND SMALL ENTERPRISE

2.2.1 Supporting Large and Giant enterprise
The interdependence of micro, small, medium and large enterprises in Ethiopia and across the
world is one of the basic realities in the economy. The facts that, some functions are more expertly
performed by small business enable the small enterprise to contribute to the success of the large

6
ones. If small businesses suddenly go out of operation, the fate of the big enterprises will be in
danger. The major contributions of micro and small enterprise in supporting large and giant
enterprises can be classified in to distribution and supply function (Hailay, 2007).

2.2.1.1 Distribution Function

To distribute and sell their products large enterprises should have whole sale and retail out lets.
The vital role of small business in distributing the product of both large and small manufactures is
evidenced by its dominance of retailing scene (IbId).

2.2.1.2 Supply Function

Small businesses also act as suppliers and subcontractors for large firms. Specially, in developed
world, the final products of small enterprises serve as raw materials of the big enterprises. The
relationship between cotton producers small enterprises and garment factories of Ethiopian, for
instance, cotton which is the final output of small enterprise is the raw material of Akaki Garment
factory, Bahir Dar Textile factory or Kombolocha Textile factory. On the other hand, MSE
industries also purchases raw materials, equipment, and supplies from large firms (IbId).

2.2.2 Source of Innovation

Some studies of patent records shows that, the majority of the 20 th century innovations are the
result of individuals or small scale enterprises. The current sophisticated Air Engine is innovated
by the unreserved efforts of the two brothers, white and Albright. Big enterprises research centers
of the time are not successful in devising equipment that flies on the sky from continent to
continent… the presence of millions of small business tends to stimulate progress by providing
many centers of initiative and source of innovation (IbId).

2.2.3 Stimulating Economic competition

In economy where there is no competition, the quality of products and services provided to the
customer highly depends on the self-interest of the business person. This is because the customers
do not have different alternatives to compare and select the best organization that gives prompt
services and quality product at a reasonable price. Thus, the establishment and existence of small

7
and micro enterprises, has a great contribution in stimulating economic growth of the country by
making individuals to be driven by self-interest to act in socially desirable manner (IbId).

2.2.4 Creating Employment Opportunity

The establishment and existence of micro and small scale enterprises all over the world has given
rise to the opening of new jobs. In Ethiopia, after the proclamation of free market economy, many,
private small business organization have been established. These small enterprises have widened
the chance employment for many persons (AUC, 2006).

2.3 Problems of Micro and Small enterprise

It is clear that, the small business enterprises found all over the world are not operating smoothly
without any problem. They are experiencing peculiar problems like:

2.3.1 Lack of Managerial skill

It is evident the most micro and small enterprises management teams do not possess managerial
skills that the work deserves. This is because; the owner of the business is at the same time the
manager. He/she is responsible to pass major decisions alone and to accomplish daily routine
activities that require a diversity of talents. It is true that the MSE managers also fail to exercise
the highest quality of management as they are bound by tradition (IbId).

2.3.2 Financing
The major problems of many MSEs are lack of capital and credit. Long term capital is a particular
need of many small firms. Borrowing money from banks is sources of long term capital. However,
fulfilling the requirements of banks to get loan and the corresponding high interest rates are heard
breaking to MSE (IbId).

2.3.3 Tax

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Like any business organization, MSEs are also supposed to pay different taxes by law. Reduction
of tax from their annual profit is critical for them as they naturally have capital source problem
(IbId).

2.3.4 Problems of Selecting Qualified Personnel

Small business enterprises managers have a problem of selecting the right applicant for the right
position. This is because the managers themselves lack the skill or have little knowledge to select
competent employees (AUC, 2006).

2.3.5 Marketing
Micro and small enterprises do not have clearly defined policy when to advertise, which media to
use… channel of distribution, product differentiation, marketing strategy and other issues like wise
constitute significant problem for micro and small scale enterprises (AUC 2006).

2.4 Micro and small Enterprise as Vehicles for Poverty Reduction, Employment Creation
and Business Development
In many countries, there is now a wide recognition of the contribution of MSEs to economic
growth: In across-section of both developed and developing economics, the contribution of MSE
sector to total employment, entrepreneurship and innovation cannot be underestimated for
example, this sector generates about 6.2% in Japan and about 70% European union (EU) countries
(Creater and Jones, 2004; cited in Forum for social studies (FSS); 2011).

The potential advantages of a dynamic MSE sector have generated high expectations in many
developing countries about the contribution of this sector to job creation and poverty reduction.
Add to this the optimism that the full development of MSE sector can foster competitiveness in
the economy and achieve a more equitable distribution of benefits of economic growth in both
developed and developing economies. Such considerations have motivated many governments to
put in place national policies to stimulate the growth of this sector in services, distribution and
manufacturing-related economic activities (FSS, 2011).

9
Throughout the 1950s and 1960s, the currently vibrant Asian economies greatly benefited from
the growth of MSE sector. Government of these nations pursued a strategic focus on export-
oriented medium-sized enterprise that fuelled the overall industrialization process and helped
penetrate the international market place. The success of the sector lay in the fact that these firms
are adopt at applying technology and training to address the needs of growing markets. Additional
success factors include, mutually cooperation that led to exchange of information and know-how
and thus rendered individual firms less prone to risks, not to mention government support in
technological extension services, including research support and information on sources of
technology and encouraging linkages and net working among enterprises (UNCTAD 2005; Kual,
et al. Cited in FSS, 2011).

Given the enormous differences between the socio-economic background of Asian countries and
other developing nations, a direct replica of Asia experiences may not be a realistic option. With
this proviso, however, it is extremely important that developing countries take useful cues from
the Asian experience in their attempt to develop the MSE sector and make it a robust engine of
economic growth and employment creation. In this regard, recommended steps include appropriate
macroeconomic policies, an out ward orientation with focus on export promotion, measures to
attract foreign direct investment; and effective selective interventions… are suggested as essential
options (Hawkins, 1998; cited in Fss, 2011).

From the perspective of developing countries, MSEs have a number of advantages that make them
attractive in accelerating economic growth.

First, because MSEs fairly labor intensive employment opportunities are generated with relatively
low capital cost. Secondly, they utilize raw materials and labor-intensive technology that are
domestically available. Thirdly, policies and programs can be put in place to encourage the
development of these industries indifferent parts of the country there by reducing concentration of
enterprise in certain areas and promoting balanced economic growth. Four they, manageable
production capacity and their flexibility make them suitable to respond to current national demand
and the limited size of the market in many developing nations (Fasika and Daniel 1997; Andualem
2004, cited in FSS 2011).

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MSEs can contribute tremendously to the growth of national economies. However, many
developing countries have not been lucky to benefit from the growth of this sector mainly due to
institutional and policy constraints, ill-conceived development strategies; a complex legal and
regulatory environment that hinders the development the sector; shortages of adequate business
development services, including lack of access to finance, markets and business skills and
appropriate technology are to be blamed for lack of success (FSS, 2011).

Within Ethiopian context, despite the potential contribution of the MSE to poverty reduction and
employment creation, the government had not until very recently extended adequate support to the
development of sector. Shortly, there have not been meaningful government support in-terms of
recognition and access to finance and skilled required for operating small business and enterprise
profitably and efficiently (Eshetu and Zeleke 2008, cited in FSS 2011). This has meant that this
sector is at its infancy and there for needs a major institutional and resource boost to contribute to
the country’s program of sustainable development and poverty reduction (IbId).

On the other hand according to the house hold income consumption and expenditure survey
(HICES, 2004/05 cited in Fss 2011); urban poverty incidence has increased from about 33% in
1995/96 to about 35% in 2004/05. At present the urban unemployment rate stands at a staggering
25% of the employable population.

These two hard realities have forced the government of Ethiopia to turn to the MSE sector as a
strategy that can have a lasting effect on reducing urban poverty, creating employment and
bringing about overall growth in the business sector. As government plan is to reduce urban
unemployment through support for small and micro enterprises and acceleration of the creation of
urban-based employment, including vocational and technical training program, a community
based and labor intensive urban works program; expanding micro finance institution and providing
market support and services, premises for micro and small enterprise (FSS, 2011).
This is also reflected in the national urban development policy which as two main packages:
i. The urban development packages; and
ii. The urban good governance packages

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The objective of urban development package are to reduce unemployment and poverty, to improve
the capacity of construction industry, to alleviate the existing housing problems, to promote urban
areas as engine of economic growth and to improve urban, social and economic infrastructure
particularly for youth (IbId).
Among the pillar packages micro and small enterprises development program is the major one.
The micro and small enterprise development program under urban development packages (2006)
has the following objectives:
 To reduce urban poverty and unemployment by supporting MSES;
 To achieve fast growth through the creation of linkages between MSE with
medium and large enterprises;
 To promote the economic linkages between urban and rural areas (IbId).
The development of MSE therefore, has been footed as a vehicle to reduce poverty and create jobs
for the creasing number of graduates out of the nation’s technical and vocational education training
institutes. Accordingly the government has ear marked significant resources for the expansion the
MSE sector in the different regions (Ibid).

This program has set ambitious goals to attack urban poverty and reduce unemployment in the
urban areas of the country. Among other things, it planned to create employment opportunities for
1.5 million residents in 825 towns over the period 2005/07 to 2009/10. According to the program
50% of these beneficiaries will be women; and the government plans to invest birr 6.2 billion and
provide 4900 hectares of land for MSE development (FSS, 2011).

2.5 Micro and Small Enterprise Policy and strategy in Ethiopian

Designing and implementing appropriate economic policy, strategy, and legal and regulatory
framework are prerequisites for creating and enabling environment to promote MSE. In Ethiopia
it could be argued that deliberate effort to promote MSEs is relatively recent. In line with its
ideology, policies and regulations of the Dergue`11 regime aimed at eliminating the private sector.
Restrictive policies such as fixing a ceiling on industrial capital, introducing one man-one license

12
rule, favoring state organizations in availing foreign exchange and bank loans, limits on single
borrower loans, restrictions on license and investments, absolute priority given to the public sector
in access to trained qualified manpower, etc are in place. In general, the legal requirements to
obtain licenses during the Dergue are bureaucratic which discouraged the participation of micro
and small enterprise operators. The tight for high exchange control and heavy import restrictions
had created scarcity of imported commodities and corrupt and rent seeking business community
(Gebre Hiwot and Wolday 2001).

Following the regime change in 1997, drastic measures, intended to transform the command
economy to market led-one, many of which are bound to affect MSES, are taken. The main macro
economic reforms and restructuring that, directly or indirectly, affect the development of MSES,
include; adoption of market economic policy; deregulation of domestic prices; devaluation of the
local currency; privatization of public enterprises; decentralization and devaluation of power and
the formation of regional states; formation of a new labor law; financial sector reforms including,
the opening of private banks, insurance companies and microfinance institutions. The reform also
included the monetary management and liberalization of interest rate and foreign exchange market;
fiscal policy reform including tax reform, budgetary restructuring and reduction of government
deficits; introduction of investment laws to encourage private investment; liberalization and
promotion of foreign trade; and promotion of favorable economic environment and bilateral,
regional and multilateral international relations. There are also MSE focused measures including
the issuance of the National Micro and small enterprise strategy (1997) and establishment of the
federal Micro and small Enterprise Development agency (Gebrehiwote and Wolday, 2001).

The strategy stresses “various policies, structural and institutional related problems and bottle
necks” have constrained the role of the MSE sector in and contribution to the national economy.
It has primarily aims at creating enabling legal, institutional and other supportive environments for
the development of MSES. The specific objectives of the strategy include: facilitating economic
growth and bring about equitable development; creating long-term jobs, strengthening cooperation
between MSEs; providing the basis for medium and large sale enterprises, promoting exports; and
balancing preferential treatment between MSE and bigger enterprises. The intended MSE support
includes erecting legal framework; improving access to appropriate technology, information,

13
advice and markets, and developing infrastructure. The strategy also states its intention to the
strengthen private sector associations and chambers of institutions are expected to be involved in
providing support to the MSES (Gebrehiwot and wolday 2001).

The strategy is based on the new approach to MSE development. As stated in the strategy, the
fundamental principles guiding interventions by stake holders(government, private sector, NGOs,
Associations chambers and others) include that support to the MSE operators will be on private
sector development; that all supports to the MSE operators/sectors should be designed to be all-
round; that support services should, as much as possible, be based on fees; that addressing
marketing problems of MSE operators will be given due consideration; that emphasis will be given
to the advancement of women; that supporting institutions should provide solid services to the
MSE operators using adequately skilled and trained staff; that the private sector will be involved
in the supply of commercial BDS to MSE operators; and that cooperative ventures should be
facilitated (Gebrehiwot and Woldey; 2001).

Take at face value; it would appear that these measures would go a long way in promoting MSE,
in the country. However, a study by the ECA (2001) concluded that countries such as Cameron
Ethiopia, Gabon, Nigeria, Senegal and Uganda have shown that the policy environment in which
MSE operate proves to be a major handicap for their expansion and growth. The same study repeals
that the complexity of the customs system and the many forms and declarations required have had
a negative impact on the general business climate, diverting entrepreneurs’ efforts from more
productive tasks. The tax levied on imported raw materials is often higher than that on imported
finished products that uses the same raw materials. The result is a substantial increase in the
production cost of MSE operators that require high taxed imported inputs, thereby limiting their
competitiveness. In Ethiopia, the infrastructure is also evaluated as particularly disabling (IBID).

As argued in Asmelash, (2007) cited in Gebrehiwot and Woday; (2001,) among the measures
needed to support Micro and Small enterprise development are:
1. Undertake a though review of the policy and regulatory environment with the aim of
determining their weakness and learning from best practices… and produces in
manner that will stimulate the growth of MSES;

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 2. Regular review policies to determine their effectiveness; and
3. Continued effort to harmonize laws, regulations and procedures at national and
regional level;

CHAPTER THREE
Research methodology
3.1 Research design

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This part of study deals with analysis and presentation of data gather from sampled population
(MSE workers, and MSE office boss and workers) and documents of the town MSE bureau,
through questionnaire and interview. From the total copies of questionnaire distribute properly
filled and returned. Data will also obtain from the interviews conducted with MSE officials.
Therefore, the analysis will make based on the information obtained from the respondents
supplemented by the data obtained from MSE office documents. The gathered data will analyzed
by using tables, graphs followed by discussions.

3.2 Target population of the study

Even though, MSE has a great contribution for the improvement of living standard of the house
hold, it has a lot of problems that hindered their growth and development in the town. According
to the survey, gathered from the respondents, among the major problems and constraints of MSE
development in the town are: lack of finance and accessibility to credit services, lack of work
premises, problem in marketing and demand for their product, lack of institutional support,
taxation and infrastructure problems.

In the town the MSEs have a problem of finance. When establishing small business enterprises,
most individual sources of finance come from personal saving and loan acquired from relatives,
friends and money lenders with high amount of interests.

According to the survey the problem of finance is getting worsened because government as well
as private banks don’t show an interest to grant loan. This is due to the fact that the MSEs don’t
meet banks collateral requirement and project study proposals.

3.3 Sample size

The target population is decided to be the active labor forces who are engaged in micro and small
enterprise sector and those bosses from MSE bureau. There are 720 workers in the town who are

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performing their individual activities in different fields such as town agriculture, industry,
construction, services and agro-processing. In order to cope up with financial, time and cost of the
paper, the sample size is designed to 58, i.e. by taking 8% of sample size from total population of
720. Of these the researcher used 56 respondents from MSE workers and the other two are selected
from MSE bureau workers as samples.

3.4 sampling technique

In this study both probable and non-probable sampling techniques are employed. From probable
sampling techniques, the researcher used stratified random sampling and simple random sampling
to obtain a truly representative sample. In the study area the target population consists of several
sub-groups that have different characteristics. To apply stratified sampling the researcher has
followed some steps. First, forming strata on the basis of common characteristics. The stratification
factor is based on occupation of the target population in which they are engaged. Second, the size
of sample respondents in each stratum is decided by adopting proportional allocation in accordance
with the size of target population in each stratum. Finally, simple random sampling employed to
select the sample respondents by using coin flipping method, in order to avoid biasness and to give
equal chance for each population being selected in relation to their population which in the total
population. The researcher is also used purposive or judgmental sampling to select MSE bureau
workers as to get and to produce the most valuable data through interview.

3.5 Nature and Data sources

To get more reliable and accurate data for effective achievement of both general and specific
objectives, the researcher used both primary and secondary data sources.
Primary data will obtain from respondents select as sample in order to acquire the required
information, and secondary data will gather from secondary sources like annual reports, published
and unpublished materials.
3.6 Tools and methods of data collection
For the purpose of data collection, we will apply both questionnaire and interview. Primary data
is collect by using open ended and close ended questionnaires from MSE workers, while structured
interview is used to obtain information from MSE bureau workers or bosses. On the other hand

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secondary data is collected by referring the available published and unpublished books, documents
and annual report materials.

3.7 Methods of data analysis

The data will collect from primary and secondary sources are arrange, organize and present
systematically. To analyze the organized data, we use both quantitative and qualitative methods.
The data that is gathered from respondents in the form of close ended questionnaires is analyze
through quantitative technique by using tables, percentage and graphs, whereas the data which will
collect from respondents in the form of open ended questionnaire and interviews, are analyze
through qualitative or simple descriptive method.

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