MICRO AND SMALL ENTERPRISES FAILURE CONTRIBUTING

FACTORS: CASE OF METTU TOWN ADMINISTRATION

By: SintayehuTamiru

ID No. WPG/025/09

MBA Thesis Proposal Submitted to Department of Management

Advisor: Dr. Belay K.

Mettu University

Faculty of Business and Economics

April, 2018

Mettu Ethiopia
Contents
CHAPTER 1 .................................................................................................................................................... 1
INTRODUCTION ............................................................................................................................................. 1
1.1. Back ground of the study .............................................................................................................. 1
1.2. Statement of the problem ............................................................................................................ 2
1.2.1. General Objectives ................................................................................................................ 3
1.3.1. Specific objective ........................................................................................................................ 3
1.3. Significance of this study............................................................................................................... 3
CHAPTER 2 .................................................................................................................................................... 4
LITERATURE REVIEW ..................................................................................................................................... 4
2.1. Definition of MSEs.............................................................................................................................. 4
2.2. MSEs History in Ethiopian .................................................................................................................. 5
3.3. Roles of Micro and Small Enterprises (MSEs) .................................................................................... 5
2.4. Major failure cause MSEs................................................................................................................... 6
2.4.1. Common Causes of project failure.............................................................................................. 6
2.4.2. Project failure due to maturity and excellence: ......................................................................... 7
2.4.3. The definition of excellence can be stated as: ............................................................................ 7
2.6. Lack of positive attitude of team work .............................................................................................. 9
2.7. Attitudes of MSEs towards Saving, Borrowing, and Investment ..................................................... 10
2.8. Access to Finance ............................................................................................................................. 10
2.9. Training in Entrepreneurship, Skills and Management ................................................................... 11
2.10. Access to Appropriate Technology ............................................................................................... 12
2.11. The Implementing Bodies of the Strategy .................................................................................... 12
CHAPTER 3 .................................................................................................................................................. 13
3. RESEARCH METHODOLOGY ..................................................................................................................... 13
3.1. Research design .......................................................................................................................... 13
3.2. Sources of Data ........................................................................................................................... 13
i. Primary Sources .......................................................................................................................... 13
ii. Secondary Sources ...................................................................................................................... 13
3.3. Study Population ......................................................................................................................... 13

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 3.4. Sampling technique and sample size .......................................................................................... 13
3.5. Data Analysis ............................................................................................................................... 14
COST AND TIME SCHEDULE (PLAN) ................................................................ Error! Bookmark not defined.
The activities involves through the work will be accomplished according to the following time table.
Activities scheduled (February 2018-June2018) ........................................... Error! Bookmark not defined.
4.2 Financial cost........................................................................................ Error! Bookmark not defined.
Bibliography ................................................................................................... Error! Bookmark not defined.

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 CHAPTER 1
INTRODUCTION

1.1. Back ground of the study

The Micro, Small and Medium Enterprise (MSME) sector has emerged as a highly vibrant and
dynamic sector of the Ethiopian economy over the last decade. MSMEs not only play a crucial
role in providing employment opportunities but also contribute enormously to the socio-
economic development of the country, notably in their role as catalysts for the transition to an
industrial society. MSMEs are viewed as seedbeds for the development of medium and large
enterprises. Small and Medium sized enterprises (SMs) have usually been perceived as the
dynamic force for sustained economic growth and job creation in developing countries. They
play multifaceted role such as boosting competition, innovation, as well as development of
human capital and creation of a financial system.

In most developing countries, small businesses face a wider range of constraints and problems
and they are unable to address the problems they face on their own, even in effectively
functioning market economies. The constraints relate, among others, to the legal and regulatory
environments, access to markets, finance, business information, business premises (at affordable
rent), the acquisition of skills and managerial expertise, access to appropriate technology, access
to quality business infrastructure, and, in some cases discriminatory regulatory practices.
(FDREMTI 1997)

The MSEs sector is believed to be able to fill the gap that exist between the poor and the rich in
developing countries regarding income generation and, unemployment rate. Successful small
businesses are the primary engines for economic development such as income growth and
poverty reduction in many of the developing countries. These businesses can also build
foundation for stable communities and gender equality. However, poor infrastructure, weak
public service, inadequate mechanisms for dispute resolution and lack of markets to their product
and formal financing remain major impediments to small business growth (BereketTadesse cited
MELFED 2004).(The Role of Micro and Small Enterprises in Employment Creation cited
MELFED 2004, june 2010)

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Since the mid-1990s, Ethiopia had been following a long-term strategy (10 year development
strategy) of Agricultural-Development-Led Industrialization (ADLI) which is inherently
poverty reducing and is the basis of the current PRSP process. Under PASDEP, a five year
(2005/06-2009/10) development program, urban development gets the focus and micro and
small enterprises are given great attention for the alleviation of urban poverty and
unemployment(MoFED,2006).According to the 2002 nationwide survey of CSA, there were
974,676 cottage/handicraft manufacturing establishments engaging 1,306,865 people in the
country.

1.2. Statement of the problem

Poverty is deep rooted problem in many developing countries and particularly in Ethiopia.
Rapid increase of the population in relation to the lethargic economic growth aggravated the
intensity of poverty for many years, with a considerable difference in different parts of the
country. Although urban Ethiopians generally enjoy a higher standard of living when
compared to their rural counterparts, poverty remains a problem in urban areas (Tadesse,
1999).The government of Ethiopia has designed different strategies in order to reduce the
mismatch between the large number of population -with high unemployment rate, and level of
the economy to absorb labor. In the poverty reduction strategy micro and small enterprises are a
special focus of the government, in view of the fact that, they creates job opportunities for
jobless people, reduce disparities of income distribution and hence maintain fair economic
growth. Currently in Mettu town failure of MSEs highly grow on the MSEs who start and not
start the business. So failure of MSEs is increasing unemployment, poverty and economic crises.
This study focus on what Micro and small enterprises failure contributing factors: case of mettu
town administration.

Research question.

- what extent the attitude of MSEs member has working together?

-What extent the financial institution contributes the failure of MSEs?

-What extent he service providers are contribute the failure of MSEs?

- what is the compotators contribute the failure MSEs?

- what extent lack of industry contribute the failure of MSEsin mewtu town?

2.

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2.1.1. General Objectives
The general objectives of this study to identify the Micro and small enterprises failure
contributing factors and assess internal and external constraints in case of Metu town
administration

1.3.1. Specific objective

 To Identify the MSEs behavior and to access the attitude of the MSEs members attitude
working together.
 To Identify the financial institution contributing failure of MSEs in Metu town.
 To Identify the service provider contribution of failure of MSEs in Metu town.

2.2. Significance of this study

Findings from this study will assist academicians in broadening of the prospectus with respect to
this study hence providing a deeper understanding of the critical factors that determine the
failure of MSE. The findings of this study will help MSEs in Mettu town administration
and others, within an insight into the benefits of using different factors studied in this research to
predict the factors that determine the failure of MSEs. The government can use the findings
of this study to assist in policy formulation and development for a framework for critical finance,
marketing, customer relationship, change of technology and other factors that affect the
failure of MSEs. Moreover, the findings of this study will help the policy makers and
financial institutions how to encourage establishing or expanding MSE. It also the member of
such enterprises may be able to know the real problems and then to seek solutions for these
problems.

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 CHAPTER 2
LITERATURE REVIEW

2.1. Definition of MSEs

Micro and small enterprises are defined in a different of ways using various factors. Although
many countries around the world seem to use common factors in their definitions, the degree of
emphasis and measures used differ quite considerably. These factors include volume of sales,
number of employees and the capital value of the business. Generally there are two typesof
definitions. The first is operational definition, which are largely used for working purposes and
the other is theoreticaldefinition, which are generally, employed to characterize the sector. In
recent times, there has been some degree of convergencein MSEs definitions particularly in
Europe. The European Commission defines MSEs using a combination of employeenumbers,
annual turnover or balance sheet total and ownership

The Ethiopian government defines MSEs based on the size of the capital and level of
automation (MSEstrategy, 2004). Accordingly micro enterprises are those small business
enterprises with a paid up capital of not exceeding Birr 20,000 andexcluding high-tech
consultancy firms and other high-tech establishments and Small enterprises are those business
enterpriseswith a paid up capital of above Birr 20,000 and not exceeding Birr 50,000. Ministry of
Trade and Industryadopted official definition of Micro and a Small enterprise in Ethiopia is as
follows.

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Table 1: Definition of MSEs according to Ethiopian Trade and Industry Office

Enterprise Sector Employee Capital

Micro-enterprise Industry <=5 <= ETB 100,000.00
Service <=5 <= ETB 50,000.00
Small-enterprise Industry 6-30 <= ETB 1.5milion
Service 6-30 <= ETB 500,000.00

Source: Ethiopian Micro and Small Enterprises Strategy (2010)

2.2. MSEs History in Ethiopian

Micro and small enterprises (MSEs) are a special focus of the government, given that they
comprise the largest share of total enterprises and employment in the non agricultural sectors. In
recognition of the important role MSEs have to play in creating income and employment
opportunities and reducing poverty, the government drafted its first micro and small enterprise
development strategy in 1997. 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 sector employment. The
microenterprises are very small. On average, they employ one and a half workers (this includes
the owner and perhaps one occasional helper), and earn an annual operating surplus of 1,300 birr.
Sole proprietors operated 82 percent of urban enterprises. 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 work force (berekettadesse cite
CSA, 2003).

3.3. Roles of Micro and Small Enterprises (MSEs)

In Ethiopia, like other developing countries, MSEs have great roles in the socio-economic
development endeavors. MSE sector contribute job opportunity, an instrument in bringing about
economic transition through generating income and saving, exploiting niche market, enhancing
productivity and technological change, of which all these stimulate economic development. Also
the sector is the home of entrepreneurship, an essential spring board of growth, job creation and
social progress at large (Andualem, 1997).

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2.4. Major failure cause MSEs
Serious marketing problems, shortage of supply of raw materials, lack of working capital,
lack of technology, lack positive attitude of working team and other reason are the first and
most pressing problems facing small manufacturing industries for not existing their
businesses.

2.4.1. Common Causes of project failure

There are many causes of project failure and every failed project will have its own set of issues.
Sometimes it is a single trigger event that leads to failure, but more often than not, it is a
complex entwined set of problems that combine and cumulatively result in failure. Generally
these issues fall into two categories. Things the team did do (but did poorly) or things the team
failed to do. Failure to understand the why behind the what results in a project delivering
something that fails to meet the real needs of the organization (i.e. failure to ask or answer the
question “what are we really trying to achieve?”)(Failure Prediction of Jobs in Compute Clouds:
A, 2012)

Failure to document the “why” into a succinct and clear vision that can be used to communicate
the project’s goal to the organization and as a focal point for planning. Project objectives are
misaligned with the overall business goals and strategy of the organization as a whole (e.g.
Sponsor has their own private agenda that is not aligned with the organization’s stated goals).
Project defines its vision and goals, but the document is put on a shelf and never used as a guide
for subsequent decision making

Lack of coordination between multiple projects spread throughout the organization results in
different projects being misaligned or potentially in conflict with each other. Failure to establish
a governance structure appropriate to the needs of the project. Appointing a Sponsor who fails to
take ownership of the project seriously or who feels that the Project Manager is the only person
responsible for making the project a success.(defining of small business failure, 2014)

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The success might be a cube rather than a point. If we stay within the cube but miss the point, is
that a failure? Probably not! The true definition of failure is when the final results are not what
were expected, even though the original expectations may or may not have been reasonable.
Sometimes customers and even internal executives set performance targets that are totally
unrealistic in hopes of achieving 80–90 percent. For simplicity’s sake, let us define failure as
unmet expectations. With unmeet able expectations, failure is virtually assured since we have
defined failure as unmet expectations. This is called a planning failure and is the difference
between what was planned and what was, in fact, achieved. The second component of failure is
poor performance or actual failure. This is the difference between what was achievable and what
was actually accomplished. Perceived failure is the net sum of actual failure and planning
failure. andproject management has planned a level of accomplishment lower than what is
achievable givenproject circumstances and resources . (Failure Prediction of Jobs in Compute
Clouds, 2015)This is a classic under planning situation. Actualaccomplishment however, was
less than planned.Here, we have planned toaccomplish more than is achievable. Planning failure
is again assured even if no actual failureoccurs. In both of these situations (over planning and
under planning), the actual failureis the same, but the perceived failure can vary considerably.

2.4.2. Project failure due to maturity and excellence:

Some people contend that maturity and excellence in project management are the same.
Unfortunately, this is not the case. Consider the following definition. Maturity in project
management is the implementation of a standard methodology and accompanying processes such
that there exists a high likelihood of repeated successes. This definition is supported by the life-
cycle phases shown in. Maturity implies that the proper foundation of tools, techniques,
processes, and even culture, exists. When projects come to an end, there is usually a debriefing
with senior management to discuss how well the methodology was used and to recommend
changes. This debriefing looks at “key performance indicators,” which are shared learning
topics, and allows the organization to maximize what it does right and to correct what it did
wrong.

2.4.3. The definition of excellence can be stated as:

Organizations excellent in project management are those that create the environment in which
there exists a continuous stream of successfully managed projects and where success is measured

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by what is in the best interest of both the company and the project (i.e., customer). Excellence
goes well beyond maturity. You must have maturity to achieve excellence.
Excellence, if achievable at all, may take an additional five years or more. During maturity, more
successes than failures occur. During excellence, we obtain a continuous stream of successful
projects. Yet, even after having achieved excellence, there will still be some failures. It is
unrealistic to believe that all projects will be completed successfully. Some people contend that
the only true project failures are the ones from which nothing is learned. Failure can be viewed
as success if the failure is identified early enough so that the resources can be reassigned to other
more opportunistic activities.(The Real Project Failure Factors and the Effect of Culture on
Project, 2012)
2.5. Lack of Market linkage
One of the major challenges that hamper the growth and development of MSEs inEthiopia is
access to sufficient and sustainable market. The government tries tosolve marketing problems in
at least three ways: firstly, the government itself buysgoods directly from MSEs. Federal Public
Procurement Administration Agency has set arule that enforces public institutions to source
certain portion of their annualprocurement from MSEs. That is, MSEs are given priority in
governmentprocurement.Secondly, the government tries to link MSEs with large and medium
enterprises in themarket in the form of subcontracting and input suppliers. The FEMSEDA has
introduceda new directive on franchising, sub-contracting and out-growth linkage with large
andmedium enterprises. For instance, in condominium housing construction projects, 40%of the
construction works mainly involving finishing such as sanitary, electric installationand other
finishing works are given to MSEs. In addition, MSEs are involved in thenational road
construction projects particularly in the construction of feeder roads.Moreover, MSEs are taking
part in power generation program that is undertaken by theEthiopian Power Corporation; and
there are similar efforts to involve MSEs in thecountry’s mining sector.

The main challenge with regards to market linkage is that MSEs depend to a greatextent on the
government to market their products. The government is the largest buyerand market linkage
creator for their products. This has Made MSE operators to developdependency and hence this
kind of market linkage cannot be sustainable. MSEs needto gradually shift to market-driven
market linkages on their own( Identifying key success factors, Oct 2014)

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2.6. Lack of positive attitude of team work
One important choice that new entrepreneurs have to make is whether to start a business alone or
with other entrepreneurs. They need to consider many factors, including each entrepreneur's
personal qualities and skills and the nature of the planned business. In the United States, for
instance, studies show that almost half of all new businesses are created by teams of two or more
people. Often the people know each other well; in fact, it is common for teams to be spouse.
There are many advantages to starting a firm with other entrepreneurs. Team members share
decision-making and management responsibilities. They can also give each other emotional
support, which can help reduce individual stress. Companies formed by teams have somewhat
lower risks. If one of the founders is unavailable to handle his or her duties, another can step in.
Team interactions often generate creativity. Members of a team can bounce ideas off each other
and "brainstorm" solutions to problems. Studies show that investors and banks seem to prefer
financing new businesses started by more than one entrepreneur. This alone may justify forming
a team. Other important benefits of teaming come from combining monetary resources and
expertise. In the best situations, team members have complementary skills. One may be
experienced in engineering, for example, and the other may be an expert in promotion. In
general, strong teams have a better chance at success. In Entrepreneurs in High Technology,
Professor Edward Roberts of the Massachusetts Institute of Technology (MIT) reported that
technology companies formed by entrepreneurial teams have a lower rate of failure than those
started by individuals. This is particularly true when the team includes a marketing expert. But
entrepreneurial teams have potential disadvantages as well. First, teams share ownership. In
general, entrepreneurs should not offer to share ownership unless the potential partner can make
a significant contribution to the venture. Most teams eventually experience serious conflict. This
may involve management plans, operational procedures, or future goals. It may stem from an
unequal commitment of time or a personality clash. Sometimes such conflicts can be resolved; in

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others, a conflict can even lead to selling the company or, worse, to its failure. It is important for
a new entrepreneur to be aware of potential problems while considering.

2.7. Attitudes of MSEs towards Saving, Borrowing, and Investment

MSEs have a favorable attitude toward saving and investment, and a neutral (non-committal)
attitude toward borrowing. The amounts saved and invested by most MSEs are on average small.
Therefore the returns on investment are also small. No wonder then that the capital accumulation
process is long and arduous. Hence the fight against poverty and failure is not effective. Any
form of intervention to reduce poverty through microfinance must seriously consider the
attitudes and intentions of those being targeted. Indeed, attitudes and intentions may well
complement and supplant the use of collateral in extending credit to clients.

2.8. Access to Finance

MSEs cite the lack of finance as the greatest constraint to their growth and development, whether
they are formally registered or not. The financial needs of different types of micro and small
enterprises vary widely, with access problems particularly severe for start-up enterprises. In this
regard, the formal financial institutions are reluctant to avail credit facility to the sectors. Their
standards of operation, the long waiting time they take to sanction loans, unfavorable disposition
towards small loans due to high administrative costs involved in financing them and the stiff and
limited collateral requirements are some of the problems that are found to be discouraging micro
and small enterprises from approaching them. Thus, the portion of informal sector business
operators with access to formal financial institutions is very low. Hence, one of the areas of
intervention to ease the problem of MSEs in this regard is to facilitate accessibility to
capital.(FDREMTI1997)
Access to credit is not a major constraint for microenterprise start-ups because the
majority of interventions directed at credit facilitation are in the area of microfinance.
However, lack of access to medium or long-term credit is a major constraint for those
enterprises that wish to expand their activities. The reasons for this are well known,
particularly the fact that SMEs present a high risk to the lender because many of them
have insufficient assets and suffer from low capitalization. In addition, poor accounting

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records and the lack of other financial records make it difficult for banks to assess the
creditworthiness of potential SME borrowers. Moreover, the relatively high cost of
processing small loans means that lending to SMEs is generally not for banks.
Many expect that financial liberalization will solve SME problems by stimulating
the substitution of more expensive forms of credit for cheaper ones and lowering
transaction costs with respect to credit, resulting thereby in the reallocation of domestic
credit in favour of smaller enterprises. However, these desired effects have often failed to
materialize in the way policy prescriptions envisaged. All four country case studies show
that the traditional problem of access to credit and the reasons for it remain unchanged.
Unfavourable macroeconomic conditions and the risks associated with lending to small
entrepreneurs engender a preference among formal sector banks for short-term lending
and lending to public or corporate entities. Attempts by Governments to address this
problem have met with limited success. Despite the provision of subsidized credit
channelled through development and commercial banks and the creation of various credit
guarantee schemes, these countries have had little success in reaching the intended
beneficiaries, namely growth-oriented small enterprises(Growing Micro And Small Enterprises
In Ldc)

2.9. Training in Entrepreneurship, Skills and Management

The acquisition of relevant vocational, technical and business skills is generally regarded as one
of the critical factors for success in small enterprises. In addition, literacy and entrepreneurial
awareness are seen as particularly important requirements to enable people to advance lower
level activities into larger and better earning enterprises. Responsibility for education, training
and experience transfer rests on a wide range of institutions, including the federal and regional
governments, NGOs and the private sector. This also applies to the sphere of entrepreneurship
sensitizing, training in skills relevant to micro and small enterprises in different sectors and
industries, and the acquisition of management experience by small-business owners and staff.
During the past years, the range of relevant training programs made available to micro and small
businesses have been very minimal. In fact, a general lack of awareness about the spread of
already existing facilities and what they offer to the small enterprises sector or to those interested
in a business career, constitutes one of the shortcomings of the whole training
program.(EFDRMTI1997)
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2.10. Access to Appropriate Technology
Another major constraint and handicap that influenced the success of MSEs is inaccessibility of
appropriate technology. This applies to both ends of the technology spectrum, viz. sophisticated
or appropriate. Identifying and selecting appropriate technology for MSEs operating in the labor
intensive, and low skill spheres deserve more attention and justify some government support. A
structural process of appropriate technology development involves such activities as technology
search, assessment, transfer, absorption, adaptation and replication. In countries where the
manufacturing sector is better developed, the government’s role has been confined to the
dissemination of the results of search, assessment and evaluation of transfer mechanisms.
Entrepreneurs then take over and affect the actual transfer, absorption, adaptation and
replication.

However, in Ethiopia, micro and small businesses have problems in getting information on
appropriate technology and the process of transfer. To execute these crucial stages of technology
transfer, the government will play catalytic role and lay-down the basis for technological
development and transfer. (EFDRMI1997)

2.11. The Implementing Bodies of the Strategy

The institutions that are involved in implementation of the strategy are identified in the
strategicdocument briefly. The implementing bodies of micro and small enterprise development
agencywere established from federal to woreda levels. With national approach implementation,
the federal and regional state executive bodies had undertaken their roles in identified and
integrated ways (Federal Democratic Republic of Ethiopia MSE strategy, 2011:61). The second
five year Growth and Transformation Plan (GTP II) has given particular attention to the
expansion and strengthening of micro and small scale enterprises. As mentioned in GTP II
(2016:148) ) based on the small and micro enterprises development strategy, supporting
frameworks and implementation strategies intensive work will be undertaken to organize Small
and micro enterprises (SMEs) operators and support them to start business.

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 CHAPTER 3
3. RESEARCH METHODOLOGY
3.1. Research design
To conduct this study using research design both qualitative and quantitative. It’s helpful to
obtaining pertinent and precise information as well as to draw valid conclusion about the target
population.

3.2. Sources of Data

The study employed both primary and secondary sources of data collection.

i. Primary Sources
In order to realize the target, the study used well-designed questionnaire as best instrument. This
was completed by the owner managers/or operators of the enterprises.

Besides, face-to-face interviews with the MSEs operators/and the relevant owner managers who
heads the enterprises in the selected sectors. The interview method of data collection is preferred
due to its high response rate. That is it gives the two people concerned an opportunity to interact
and get details on the questions and answers. Through interviews, clarification of issues is easily
achievable leading to accuracy of data from the respondents.

ii. Secondary Sources

Secondary data from files, pamphlets, office manuals, circulars and policy papers were used to
provide additional information where appropriate. Besides, variety of books, published and/or
unpublished government documents, websites, reports and newsletters were reviewed to make
the study fruitful.

3.3. Study Population

The population of the research is the 320 MSEs found in Mettu and the enterprises provide job
opportunities for 207 MSE 921 people and 2709 unemployed people as per the data gathered
from the Mettu Micro and Small Enterprise Development Agency. The MSEs operate in the
manufacturing, service, construction, urban agriculture and trade sectors.

3.4. Sampling technique and sample size

Two samples are taken one for the owner and the other for employee. For the owner the
sampling technique has been used through sytematic random sampling. Based on the owners‟
sample, the employees‟ samples were selecting employees are taken through convenient method
from single or one MSEs owner. Its help to get fulfill information from the respondent.

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 3.5. Data Analysis
The data obtained from primary and secondary sources is processed, classified and tabulated
using computer software. Descriptive method was employed to analyze the data and interpret the
results in quantitative and qualitative ways. Data are analyzed using different forms as tables,
figures, indices and graphs. In dealing with the qualitative analysis based on the evidence
collected from the different sources, an effort was made to carefully understand and interpret the
information to use it together with the quantitative data.

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