Debre Markos University College of Agriculture and Natural Resource

Management Department of Agricultural Economics

TITLE. THE ROLE OF MICRO AND SMALL-SCALE ENTERPRISES IN

REDUCING POVERTY: IN THE CASE OF DEJEN WOREDA; EGZ

A Senior Research Proposal Submitted to Agricultural Economics: In

Partial Fulfillment Of The Requirement For The B.Sc Degree In
Agricultural Economics

Prepared BY ID
1.Degwale Dagne ……..…...AGR3882/11
2.Amtew Ayelign ……….…AGR3872/11
3.Habtamu Kurnelo…….….AGR3900/11
4.Bertukan Mihiret………...AGR3879/11
5.Gubay Animaw .....……...AGR3896/11
6.Haymanot Ayanaw……...AGR3900/11

Advisor: Esubalew Tadele (M.sc)

Debre Markos, Ethiopia

April, 2013 E.C
Table of Contents page
Table of Contents..................................................................................................................................................ii
ACKNOWLEDGMENTS...................................................................................................................................iv
Synopsis................................................................................................................................................................v
1.1. Background of the study............................................................................................................................1
1.2 statement of problem..................................................................................................................................2
1.3 Objective.....................................................................................................................................................4
1.3.1 General objective.................................................................................................................................4
1.3.2 specific objective.................................................................................................................................4
1.4 Research Question......................................................................................................................................4
1.5 significance of the Study............................................................................................................................ 4
1.6 Scope and Limitation of the study area.......................................................................................................6
2. LITERATURE REVIEW.................................................................................................................................7
2.1. Theoretical review.....................................................................................................................................7
2.1.1. Definition of Poverty..........................................................................................................................7
2.1.2. Definition of Micro and Small Enterprises.........................................................................................7
2.1.3. Characteristics of MSEs......................................................................................................................9
2.1.4. Theories towards Micro and Small Enterprises..................................................................................9
2.1.5. The Role of Micro and Small Enterprises in Poverty reducing........................................................10
2.2. Empirical review......................................................................................................................................12
2.2.1. Studies on the Ethiopian MSEs Sector.............................................................................................12
3. METHODOLOGY.........................................................................................................................................15
3.1 Description of the Study Area......................................................................................................................15
3.2. Target Population.....................................................................................................................................15
3.3. Sampling Technique and Sample Size.....................................................................................................16
3.4. Source of Data and Method of Data Collection.......................................................................................16
3.5. Methods of data analysis..........................................................................................................................17
3.6. Definition of Variables and Working Hypothesis....................................................................................18
3.6.1. Dependent variable...........................................................................................................................18
3.6.2. Independent variables.......................................................................................................................18
4. Budget and work plan.................................................................................................................................22
4.1 Work Plan..............................................................................................................................................22
4.2 Budget Plan............................................................................................................................................22
References.......................................................................................................................................................... 23
APPENDIXES....................................................................................................................................................25

ii
ABBREVIATIONS AND ACRONYMS

CSA Central Statistical Authority

FMSEDA Federal Micro and Small-Scale Enterprises Development Agency
FMSES Federal Micro and Small-Scale Enterprises Strategy
GDP Growth Domestic Product
GNP Gross National Product
GTP Growth and Transformation Plan
ILO International Labor Organization
MSE Micro and Small Enterprise
MIT Ministry of Trade and Industry
MUDCO ministry of urban development and construction
MOFED Ministry of Finance and Economic Development
MOI Ministry Of Information

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ACKNOWLEDGMENTS

Above all, we would like to thank my God for his invaluable helps in our entire life. Next we

would like to give a grateful thanks to our advisor Esubalewu T(M.SC) for her eagerness and

excellent guidance, priceless advice, comments and assistance from the beginning research until

the end. Her encouragement, patience and prompt reaction in the course of undertaking this study

are greatly appreciated. Finally, we are also give grateful thanks to the informants who Dejen

Town residents, administers to for us reliable data for research

iv
Synopsis
MSEs are basically set up with the goal of poverty alleviation. These enterprises have a very
important and effective role in both developed and in developing countries; because it is
considered the backbone of their economies. Even if MSEs play a vital role in the livelihood of
rural household by generating income, peoples become little attention is given to them because
of lack of necessary conditions in order to run these enterprises. The main objective of this study
will examine the role of MSEs in poverty reduction in Dejen town. This study tries to answer
three important questions: can MSEs contribute in alleviating poverty of urban residences, what
are the major constraints and problems of MSEs? And in what status currently small and micro
enterprises exist in the study area? Both descriptive and inferential statistics will be used to
examine the role of MSEs in poverty reduction and its overall existences. Hence, binary logit
regression model will be employed to the participants and nonparticipants of the program. With
the above objectives in mind, these studies will carry out by gathering primary data through
questionnaires and interviews with key informants. In addition, secondary sources of data will
have also used. Eventually, using a mix of qualitative and quantitative tools, Poverty is a
complex multifaceted and multi-dimensional concept.

Keywords: MSEs, Poverty, Role of MSEs, Challenges and Problems, Poverty Deduction

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1. INTRODUCTION

1.1. Background of the study

Micro and Small enterprises (MSEs) play significant roles in the creations of
employment opportunities and generations of income for quite a large proportion
of the population all over the globe. The study conducted in Africa by the ILO finds that
only 20% of the total populations of working age group in many African countries were
reported to have been working in the micro and small enterprise sector (ILO, 2003).

Nowadays, there are multi-dimensional problems like extreme poverty, unemployment,

low per capital income, and unequal income distribution facing in many developing
countries. As a result, different governments are framing different strategies and policies
to create job opportunities and to pull these countries out of their problems. One strategy
as to create jobs and accommodate maximum number of citizens has been emerged, i.e.,
the establishment of MSEs. (Ermias, 2011).

Like many developing countries, Ethiopia is also suffering from severe poverty,
unemployment, income inequality and lower per capital income. In response to the
mentioned problem, and also by recognizing the significance of this sector, The
scountry’s industrial policy in 2003 and the poverty reduction strategy program of
2006 have singled out MSEs as major instruments to create a productive and
vibrant private sector and reduce poverty among urban dwellers (Ephrem, 2010;
MOFED, 2006).

Micro and small scale enterprises are seen as the most important alternative sector in
fostering socioeconomic developments in both developed and developing countries.
Particularly, they make undoubtedly a huge contribution to employment in many
developing countries where there is a challenge of high unemployment and poverty
exists. Several studies reveal that MSEs in these countries are considered as crucial
in employment creation and generally contribute to economic growth as an engine
of development and vehicle towards fulfilling the Millennium Development Goals.
Chief among these goals is the reduction of poverty through creating employment,

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wealth and improvement of living standards, because poverty and unemployment
rate are considerably higher in these countries than developed countries
(Abiyu ,2011).

The growth in MSEs has been found to have a link with economic growth and
poverty alleviation. In order to generate enough income to help minimize the
incidence of high level poverty in most developing economies, international
funding bodies and economic growth analysts have suggested to policymakers in
developing economies to make greater efforts at promoting private sector
development with MSEs being at the forefront (Snodgrass & Winkler, 2004).

The role of MSEs in employment creation and income generation for the poor, the
Ethiopian government is advocating for the importance of these enterprises for
enhancing development and growth by identifying youth and women as a target group for
relevant support measures (MOTI, 2011). Institutionalizing the MSEs is one of the ways
to facilitate development and growth condition. Due to this the government take the
MSEs as a core development partners and paved the way for the formation of MSEs
Development Agency that will facilitate their function and give technical
assistance, training at different level (federal and regional . However, according to
Weldegbriel and Admasu(2012) this sector faces lot of constraints such as policy
problems, lack or in adequate training, lack of credit and loan, lack of working
space, poor production techniques and input access constraints, lack of information,
inadequate market linkage etc. these problems are highly restricting the
contribution of MSEs for socioeconomic development. Despite these challenges the
MSEs sector contribute much for alleviating the poverty of the participants in the
study area, by creating jobs and in return increase their income and fulfilled their basic
needs. On the basis of this fact the study was attempt to assess the role that MSEs Play in
improving the living standard of the poorer people live in study area.

1.2 statement of problem

Micro & Small Enterprise Development Program in Ethiopia meaningfully has been
given due attention by government since 2004/2005. However, the degree of recognition
to the sector with regards to job creation and the alleviation of abject poverty among
impoverished youth &women were not sufficient. Because of this; it was very difficult to
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make the strategy practical specially in delivering business development service for
SMEs operators .

There are many small and micro enterprises registered in different office in Dejen town.
But most of small and micro scale enterprises are not working as they are planned to
establish. As many researches declared that small and micro enterprises are not working
as they are planned to establish. In same way in Dejen town different small and micro
scale enterprises are not working as they are panned to establish.

The government‟s efforts to improve the living conditions of the rural population have
relatively begun to bear fruit,whereas the incidence and severity of poverty have
intensified in the urban areas in the recent past (MOFED, 2006).

Dejen has become the most populous in East Gojjam zone . However, Dejen is one of
the less developed town in East Gojjam facing a major challenge of urban poverty . Like
any other major towns of East Gojjam , Dejen is presently suffering from a host of social
and economic problems including widening income disparity, deepening poverty, rising
unemployment, severe housing shortage, poorly developed physical and social
infrastructure and the proliferation of slums and squatters elements (UN-HABITAT,
2008).

Rapid urbanization has been accompanied by growing number of poor people and a
parallel increase in the social and economic needs of local communities. Unemployment
remains high whilst nearly half of the population earns less than what is needed to buy
enough food for basic subsistence. also the enterprise faces a lot of constraints such as
policy problems, lack or in adequate training,lack of credit and loan, lack of working
space, poor production techniques and input access constraints, lack of information,
inadequate market linkage etc.. These problems are highly restricting the contribution of
MSEs in reducing poverty of study area. Therefore,this study will be try to analyze the
role of MSEs in poverty alleviation in Dejen town by taking MSEs‟ and their
Managers/Operators as well as the other members of the enterprises who are take part in
the town ‟s as a unit of analysis. Also this study will be helps the Dejen`s small and
micro scale enterprise office will be to identify major factors that affect small and micro

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 enterprise to do not work by their full capacity as they are expected to establish. This
study also help the office to plan and eliminate the factors based on the identified major
and priority factors to enhance the development of small and micro enterprises. As result
poverty reduction has remained the declared core objective in the governments poverty
reduction programs.

1.3 Objective
1.3.1 General objective
The general objective of this study is to analyze the role of MSEs in poverty
reduction in Dejen town.

1.3.2 specific objective

1. To assess the current status of small and micro enterprise in Dejen town.
2. To assess the major role of MSEs in alleviating poverty of urban residences in the
study area.
3. Identify major constraints and problems that affect MSEs at start up stage and during
operation in the study area.

1.4 Research Question

1. Can MSEs contribute in alleviating poverty of urban residences?
2. What are the major constraints and problems of MSEs at start up and during
operation in study area?
3. In what status currently small and micro enterprise exist in study area?

1.5 significance of the Study

There are many MSEs in Dejen; Like demes hotel , ,cobble stone paving ,iron work,wood
enterprise. Their potential to create employment and to generate income makes them
crucial economic instrument.

For the future, the result of the study will provide relevant information to policy makers
and local development planners working on the development of conducive environment
for MSEs.

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Furthermore, the study will provide additional information about the role of MSEs in
poverty reduction in Dejen town for interested researchers,prospective entrepreneurs, and
business consulting firms. Recently,there is good recognition that micro and small scale
enterprise have tremendous role in terms of employment creation and poverty
reduction in many developing countries .For example in Ethiopia, large number of
the youth in urban areas of the country including Dejen town employed and less
dependent on their families (Demis, 2011; Ephrem, 2010).

Hence, to give due attention to MSEs sectors for reducing unemployment and
poverty is indisputable. Thus, the development of MSEs can assist in reducing
unemployment and increase the income of individuals who participated in the sector and
solve the problem of income inequalities. Due to this poverty reduce and income
growth.

The study can helps in identifying the existing challenges and posed on the success
fullness by identifying the major constraints which affect the activities of MSE. The
main findings of the study will expecte to indicate the strategic intervention areas that
may be improve.

Furthermore,this study will also uses, as academic experience for the researcher and
reference for others researchers and academicians in related area. In addition the findings
from this study will assist academicians in broadening of the prospect us with respect to
this study hence providing a deeper understanding of the critical factors that affect the
performance of MSEs. The findings of this study will help MSEs in Dejen town and
others, within an insight into the benefits of using different factors will study in this
research to predict the asses the challenge that affect the performance 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, work premises and other
common challenge that affect the performance of MSE. Moreover, the findings of this
study will help the policy makers and financial institution show to encourage
establishing or expanding MSEs. It also enables them to know what kind(s) of policies
should be framed.

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Therefore, this study is emphasize to identify the role of MSEs in reduce poverty
and the constraints that hinder their effectiveness and expansion in the study area and
help the government and other actors to focus on the intervention for the fight against
poverty.

This study will also give some suggestions to the policy makers and strategy designers,
implementer and other management bodies for the sake of giving attention to the
problems and to arrive at appropriate solutions for existing problems on MSEs and
thereby to reducing poverty.

Also this study describe the role of MSEs in reducing poverty and their focus on the
issues of doing the target of reducing poverty in Dejen town.

In addition to this, the study will be use as a reading to support with other papers, for
interest beginner researchers and as a guide line for further description and analyze MSEs
role in reducing poverty in Dejen town.

1.6 Scope and Limitation of the study area

The study will concern role of MSEs in reducing poverty in Dejen district particularly in
Dejen town Administration. Although, there are different issues that can be proposed in
relation to MSEs, this study is delimited to the political, legal, working premises,
technological, infrastructural, marketing, financial, management and entrepreneurial
factors. Besides, the study will cover all MSEs that are registered legally & functioning in
the area.

The study describe the role of micro and small enterprise in poverty reduction in Dejen
town only, it state that the poverty reduction in the different regions of Ethiopia in the
case of social welfare, education and health. It was difficult to obtain the reliable data
because of there is no documented data or sources of information, lack of reference
materials, shortage of finance, time constraints, whether condition and the availability of
the respondents ,in cause of corona,peace defficulties .Even though large sample size is
essential for in-depth understanding of the MSEs in reducing poverty, the study is
limited to a sample size of 88 respondents, due to time and financial limitation. However;
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the study tried to enhance the quality of the project by conducting in-depth interview with
relevant stockholders and determining the result of the survey with secondary data
sources. In addition, limited empirical information on the Micro and Small enterprises in
the country has pause restriction in examining trend in the sector. However some
supporting and complementary information are lacking, this did not affect the result of
the research.

2. LITERATURE REVIEW
2.1. Theoretical review
2.1.1. Definition of Poverty
The conceptualization of poverty and its alleviation has been remained an area of
concern for various scholars and development agencies for a number of decades.
Numerous author define poverty in different ways by considering different criteria
and indicators of poverty. Some researchers have defined the poor as that portion of
the population, that is, unable to meet the basic nutritional needs. Others viewed poverty
as a function of education and/or health using the measurement of life expectancy, child
mortality, etc. level of expenditure and consumption are other criteria used to identify the
poor. According to Ephraim Setegn, (2010) Urban people in poverty are those
without sufficient education, secured employment, stable incomes, savings, proper
housing and important networks. They are the people that are vulnerable to changes in
demand in the labor market, in prices of basic goods and services, and who
cannot afford adequate housing.

2.1.2. Definition of Micro and Small Enterprises

The definition and types of micro and small enterprises differ from country to country
and there is no universally stated definition for micro and small enterprises. (Lepi,
2005, Storey, 1995; cited in Demis and Mulugeta(2011).This is so because the
criteria and ways of categorizing enterprises as small, micro and medium varies from
country to country and from organization to organization. The absence of such uniform
definition of MSEs has created a difficulty. In line with this, for instance, Tegegne and
Meheret (2010) argued that the absence of a single or globally applicable definition
has made the task of counting the number of MSEs and assessing their impact extremely
difficult across countries, though the rational for most governments to make such

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definition and categorization is mainly for functional and promotional purposes to
achieve the desired levels of development of the sector. Different countries use
different points of criteria to distinguish micro and small enterprises from other
economic entities within their national boundary. The major criteria use in the definitions
according to Carpenter (2003) could include various combinations of the following:
Number of employees, financial strength, sales value, relative size, initial capital
outlay and types of industry. For instance, European Commission utilizes three
criteria to determine whether an enterprise is a micro or small sized. These are
staff headcount, annual turnover, and annual balance sheet .In European Commission
Micro enterprises are defined as enterprises which employ fewer than 10 persons and
whose annual turnover or annual balance sheet total does not exceed 2 million euro.
Small enterprises are define as enterprises which employ fewer than 50 persons and
whose annual turnover or annual balance sheet total does not exceed 10 million euro
(Kushniret al, 2010).

From Ethiopian context; two different definitions of MSE are used so far. These are: The
1997 definition of MSE development strategy/Ministry of Trade and Industry (MTI), and
Definition given by CSA(FMSEDA, 2011).The definition used by Ministry of Trade and
Industry (MTI), which uses paid capital or capital investment as a yardstick, has been
developed for formulating micro and small enterprise development strategy in 1997
by considering other countries ‘experience, especially the South Africa experience.
According to the MTI, Micro enterprises are those businesses enterprises, in the
formal and informal sector, with a paid up capital not exceeding Birr 20,000(1200
USD) and excluding high tech consultancy firms and other high tech establishments.
Small enterprises are those business enterprises with a paid up capital of above Birr
20,000(1200 USD) and not exceeding Birr 500,000(30000 USD) and excluding high
tech consultancy firms and other high tech establishments. On the other hand,
CSA categorizes enterprises into different scales of operation on the size of
employment and the nature of equipment. To CSA, establishments employing less than
ten persons and using motor operated equipment are considered as small scale
manufacturing enterprises. Enterprises in the micro enterprise category are subdivided
into informal sector operations and cottage industries: Cottage and handicraft industries
are those establishments performing their activities by hand and using non-power driven

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machines whereas the informal sector is defined as household type establishments or
activities, which are non-registered companies and cooperatives operating with less than
10 persons.

2.1.3. Characteristics of MSEs

Where in Ethiopia, are engaged in different activities. The document prepared by the
entitled ‘Inception Report on Micro and Small Enterprise Development in Addis Ababa’
(2014) reveals that, due to their high employment creation capability, existence of
market, short period of return on investment, local raw material utilization, seven sectors
are selected for intervention. These are Cement Manufacturer, Metal and Wood Work,
Gypesem Preparation, Construction, cobblestone, Municipal Services, and Urban
Agriculture.

Zewde and Associates (2002) identified that the MSE sector is characterized by a
number of highly diversified activities, which can create job opportunity for a
large segment of the population. The characteristics of the informal sector (small
and micro enterprises) have also been described as it is easy to enter, it is financed
mainly from personal and family resources, it requires low starting capital, it uses
labor-intensive techniques, and it relies on the non-formal school system such as
apprenticeship and on-the-job training (cited in demis,2011). Donald (1999) also
identified the following distinguishing features, namely more labor intensive, more
efficient, more equitable in distributing the income they generated, geographically
more widely diversified, and more nurturing of entrepreneurs.

2.1.4. Theories towards Micro and Small Enterprises

Different theorists followed different perspectives on the development of Micro and

small scale enterprises. According to Tambunan (2006), two theories were developed.
These are the classical and the modern theories. The Classical theory - states that poverty
and the importance of MSEs Development correlate positively. In the course of rapid
economic development, the economic share of MSEs declined; while those of large and
medium enterprises dominate the economy. In other words, the higher the proportion of
people living in poverty, the more will be the contribution of MSEs in reducing poverty.

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This theory however, is criticized for neglecting the economic growth of MSEs through
networking and clustering, agglomeration. It only focused on the relationship between
levels of income and the growth of MSEs. Because of these short co ming of the theory,
the modern view was developed in 1980s.

The Modern theory- postulates that the major reason for the emergence of the
notion of flexible specialization was the long debate of how to interpret the new
global pattern of production caused by globalization forces and industrial
restructuring. Global production had transformed from mass to individual production
system and flexible specialization is the result of this debate. Hence, Tambunan (2006),
shows that the modern theory have three characteristics; Flexible and Specialization -
firms in the community form part of a bounded community which outsiders are largely
excluded. High level of competitive innovation - there is a continuous pressure on
firms in the community to promote innovation in order to keep an edge of their
competitors and; High level of cooperation - there is a limited competition among firms
in the community over wages and working conditions encouraging greater cooperation
among them.

In general, according to Tambunan (2006), the flexible specialization on MSEs

states those MSEs grow faster than large enterprises with the process and are important
source of invention, efficiency and innovation. They are also capable of standing the
competition with large enterprises. Hence, in the courses of development, the economic
share of MSEs increases or in other words, MSEs contribute a lot for poverty
alleviation; while, it declines in the classical theories. The other theory, the
dependency or dominance theory, views that micro and small enterprises can
survive either in direct dependency on large enterprises, as subcontractors to them,
or as petty producers and traders operating in extremely competitive markets with
little possibility for growth and accumulation of capital to invest (Demis2011).

2.1.5. The Role of Micro and Small Enterprises in Poverty reducing

By now it is clear and agreeable that poverty, both in urban or rural areas, is all about
lack of basic needs, health care, clean water, sanitation, education and low or inadequate
level of income and consumption, and poor common over resources. Before reaching in

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to such multifaceted understanding of the concept of poverty, poverty was viewed in
terms of level of income in the late 1950’s and 60’s.Then onwards, however, the trend of
defining it begun to incorporate other non-economic aspects. Likewise, on the other
hand, according to Green et al (2006), one important innovation, since the late
1980’s and early 1990’s, in development research and policy has been the refocusing
of the goals of development strategy from an exclusive concern with economic
growth to ‘growth with poverty reduction’ through MSE development. Again during
these decades, the role played by MSEs, through the various socio -economic benefits
emanating from the sector, was found to be eminent in the overall development
effort and process of nations. In other words, by generating larger volumes of
employment as well as higher levels of income, the SMEs will not only have contributed
towards poverty reduction, but they will also have enhanced the welfare and standard of
living of the many in the society (Mulugeta, 2011).

As shown above, central to the problem of poverty is the availability of work.

Work, secured either as owner or employee in MSEs, allows people to produce for
themselves (i.e.food) and earn the money needed to buy goods and services. In this
point poverty reduction can be correlated with job creation. According to Vandenberg
(2006), it is also from work that wealth is created which, through taxation, allows
governments to fund pro -poor services such as health care, clean water and
education (Arem M. A, 2011).

Currently international thinking is also with a view that acknowledges SMEs as a tool to
fight poverty in the long run. The ILO’s approach to poverty reduction through
small enterprise envelopment is based on the promotion of the four elements of decent
work, namely, productive, remunerative employment; rights at work; social dialogue;
and social security. This strategy focuses on the needs of poor people who are part of
the micro and small enterprise economy, as owner/operators and workers, as their
dependants, as the unemployed who may benefit from job creation, and as customers.
While further consolidating the above-shown approach, Vandenberg (2006) suggested
that the ILO’s existing strategy for poverty reduction through small enterprises must
emphasize the fact that Small enterprises make a positive contribution to poverty
reduction when they provide employment, adequate levels of job quality, and low-cost

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goods and services used by the poor; entrepreneurship, combined with productivity
increase, is a key ingredient for poverty reduction through small enterprise
development; and vibrant enterprises, competitive markets and a fair globalization
can make a significant impact on poverty reduction.

The micro and small enterprises sectors have also unquestionable importance for
women. According to World Bank (2007), most women are not found engaged in outdoor
employment opportunities in Ethiopia. They are deprived from higher decision-making
positions, equality of inheritances, decent works and other economic activities in
developing countries in general and in Ethiopia in particular. As a result, since MSEs are
started with low financial capital and credit

and have the capacity to absorb huge low-level income populations, they can help
women to have easy access to employment and be the owner of the enterprises. Their
income earning capacity can increase gradually and contribute a lot for their families.
They can also emerge out of their traditional roles, get ample experiences from their work
places, and further educate themselves.

As a result, different study shows that MSEs are important means in poverty alleviation
through employment creation and income generation for low-income groups with limited
opportunities. They do have the capacity to increase the level of income of
individuals and to improve the living standards of the larger poor because they need
low startup capital and their potential to absorb the huge proportion of the
uneducated or the low educated work force, which is the reality in the poor
countries like Ethiopia.

2.2. Empirical review

2.2.1. Studies on the Ethiopian MSEs Sector
In Ethiopia, the MSE sector has high capacity in absorbing high labor force; this is
because the sector is characterized by diversified activities. Due to its contribution for
alleviating the poverty of the low income people and of course with a number of
constraints micro and small enterprises get the attention of many researchers.
Accordingly, Daniel (2007) with having an objective to assess the impact of group-based

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MSEs on poverty alleviation conducted a research in Nekemte city of the Oromia
Regional State of Ethiopia.

The role of micro and small-scale industries is important in a developing country like
Ethiopia for eradicating poverty through growth process of economy, create employment
generation, mobilization of resources and entrepreneurial skill, better utilization of local
resource,equitable distribution of income, rural development and creating regional
balance in promotion, growth of various development activities and supports the growth
of large industries by providing components and semi-finished (Mohammed, 2016).

Getahun (2009) carried out a research impact of MSE intervention on urban poverty
reduction by examining the level of employment creation, change in income and living
standard of the beneficiaries in terms of education, health, household assets and clothing.
The study found out that the studied MSEs have created a permanent and
temporary employment opportunity. The income and expenditure of the
beneficiaries of the MSE program has shown an increment, according to the
study. The respondents believed that their engagement in the MSEs has resulted in an
improved health and clothing, and increased ownership of basic household assets such as
table, chair, bed, radio and tape recorder. And also identifying lack of finance,
inadequacy of production space and lack of training as bottlenecks that hinder the
poverty alleviation role of MSEs. Studies were also conducted specifically with a
purpose of identifying the problems that MSEs encounter.

According to Mulugeta (2011), in his study of the livelihoods reality of micro and
small enterprise operators identified and categorized the critical problems of the
MSEs in to market -related problems, which are caused by poor market linkage
and poor promotional efforts; institution related problems including bureaucratic
bottlenecks, weak institutional capacity, lack of awareness, failure to abide policies,
regulations, rules, directives, absence of training to executives, and poor monitoring
and follow-up ; operator-related shortcomings like developing a dependency tradition,
extravagant and wasting behavior, and lack of vision and commitment from the
side of the operators; MSE-related challenges including lack of selling place, weak
accounting and record keeping, lack of experience sharing, and lack of cooperation

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within and among the MSEs; and finally society-related problems such as its
distorted attitude about the operators themselves and their products.

By Primarily relying on 200 MSEs chosen from four major cities of Ethiopia
namely Adama, Hawassa, Bahirdar, and Mekelle, and taking a sample survey of
557 operators ,Tegegne and Meheret (2010) were conducted research with the intention
of assessing the contribution of the MSE strategy to poverty reduction, job creation
and business development. The researchers indicated that the national urban
development policy is the root of the MSE program and strategy; and MSEs are
of the five pillars of the urban development package of the urban development
policy. According to them, the government of Ethiopia planned, via its MSE
program, to create employment opportunities for about 1.5 million urban residents by
availing services such as provision of credit and premises, business development
services, market linkages and equipping MSEs with appropriate modern machineries
and equipments. On the other side, the same writers concluded that MSEs
provided job opportunity, hence increased income for a remarkable number of
unemployed urban dwellers especially the youth.

In general, the reviews from different studies informed that MSEs face many problems
but they have economic, social and political significances that they need special
attentions to make them efficient and so that they may contribute a lot for development
endeavors of developing countries in general and in Ethiopia in particular. So, MSEs
have great potential to achieve the desired development and to alleviate poverty and
unemployment.

14 | P a g e
3. METHODOLOGY

3.1 Description of the Study Area

The study wii be conduct in Dejen Woreda at Dejen town 01 kebele East Gojjam Zone
of Amhara region. The town is located in 272 km far from Addis Ababa, 385 Km from
Bahir Dar and 70 km from Debre markos town. According to the information of Dejen
Chief Administration Office of Transformation Plan (DCAOTP, 2011), it lies at an
altitude of 2421m up to 2490m above sea level and it receives an annual rainfall of
1325mm with an average temperature of 21.89 0C. The climatic condition of the study
area is weynadega73% and kola27%.

Based on the 2007 national census conducted by the Central Statistical Agency of
Ethiopia (CSA), this woreda has a total population of 102,359, an increase of 17.02%
over the 1994 census, of whom 49,487 are men and 52,872 women; 8,700 or 8.50% are
urban inhabitants. With an area of 620.97 square kilometers, Dejen has a population
density of 164.84, which is greater than the Zone average of 153.8 persons per square
kilometer. A total of 25,511 households were counted in this woreda, resulting in an
average of 4.01 persons to a household, and 24,917 housing units. The majority of the
inhabitants practiced Ethiopian Orthodox Christianity, with 97.01% reporting that as their
religion, while 2.85% of the population said they are Muslim.

The Woreda is bordered with four woreda’s in four directions, namely on the west by
Awabel, on the north west Debay Telatgen on the north by Enemay and on the east by
Shebel Berenta. The main production system in the Woreda is agriculture on the
production of cereals, fruit and vegetable from this the major one is TEFF 71% WHEAT
11% SORGHUM 18% . In addition to farming, they are engaged in small scale
commercialization to receive additional income, manufacturing, service and animal
productions .

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3.2. Target Population

There are 8120 total populations in 01Kebele. From the total population the number of
female’s are 3025 and 5095 are males. They were get benefits from the contribution
micro and small scale enterprise. The numbers of household in the 01kebele are 315;
from this household 95 are females head household 220 are males.

3.3. Sampling Technique and Sample Size

The sampling technique of household was selected by using multistage sampling

technique. Dejen town is selected purposely based on its chronic poverty problem in East
Gojjam zone. In the second stage, 01kebele is select randomly from four Kebele where
MSEs are operating. In this study, at final stage, households both from participants and
non-participants of MSEs are selected by using random sampling technique proportional
to the number of households from the sample kebele. Appropriate sample size is
determined from both participants and non-participants (Yamane, 1967)
N
n 
1  N ( e) 2
Where,

n=Sample size
N=Total size of target population
e= level of precision (error level) at 91% confidence level (0.09)
On average there are 315 household heads in 01 kebele and 91% desired significance
level; the appropriate sample sizes will 88 households.
315
n
1  315(0.09) 2
= 88

3.4. Source of Data and Method of Data Collection

For this study we will use both primary and secondary data to find relevant information
concerning about the topic. The primary data will be conducted through qualitative and
quantitative data gathering techniques to get the available source of data. The qualitative
data will be collected through personal observation and interviewing while the
quantitative data will be collected through semi-structured, interview and questionnaires.

16 | P a g e
The secondary source of data is published or unpublished material, website and other
relate documents. The interview schedule and the questioner will be used questions
related to socioeconomic, demographic and institutional characteristics of household’s
information.

3.5. Methods of data analysis

Both descriptive and Logit model used to analyzed the data

Logit model
The advantage of this model is that the probabilities are bounded between 0 and 1. The
dependent variable is dichotomous, taking two values, 1 if an individual get advantage
participate in MSEs and 0 otherwise(not get advantage)
The mathematical formulation of logit model Gujarat (2004) is as follows:
P e
Zi
i= Z
1+e i

Where: Pithe probability of participation for the i t h household and it ranges from 0-1
z iIs a function of n-explanatory variables which is also expressed as
❑
Zi = β 0+∑ β i X i +Ui❑
❑

i=1 , 2 ,3 , ⋯ , n
β 0=intercept β i=regressioncoefficientsbeestimated ∨ logitparameter
U i=adisturbanceterm ,∧
'
X i =Participating h ouse h old s c h aracteristics
Zi =clientsparticipation

The probability that a household belongs to non-participant is:

1
1−Pi = ❑
1+ e
Therefore, the odds ratio can be written as:
Pi 1+ e
Z
Z
i

= −Z
=e i

1+ P i 1+e i

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 Pi
Now is simply the odds ratio in favor of participating in the program service. It is
1+ P i
the ratio of the probability that an individual would participate in the program to the
probability that he/she would not participate in the program service.

Finally, taking the natural log of equation (4) we obtain:

Li=l i [ ]
Pi
1−P
=Zi =β 0+ β 1 X 1 + β 2 X 2+ ⋯ + β n X n

Where: Pi= is a probability of being participated in the program

Zi = is a function of n explanatory variables( X|i ) which is also expressed as:
Zi =β 0+ β1 X 1 + β 2 X 2+ ⋯ + β n X n
Where: β 0 , is an intercept, β 1 , β 2 ,… , β nare slopes of the equation in the model
Li= is log of odds ratio, which is not only linear in but also linear in the parameters,
X i = Pre-intervention characteristics of the an individual in the study area,

If the disturbance term (U i ) is introduced the logit model becomes:

Zi =β 0+ β1 X 1 + β 2 X 2+ ⋯ + β n X n +U i

3.6. Definition of Variables and Working Hypothesis

3.6.1. Dependent variable
The studying of the dependent of one variable on more than one explanatory variable is
refers to as dependent variable. The role of MSEs (participation) depends on the
independent variables. The dependent variable is of dichotomous nature representing the
observed status of the MSEs Participation on poverty reducing. It is represents in the
model by a value of 1 if a given household participate in MSEs and 0 otherwise.

3.6.2. Independent variables

The explanatory variables, which are expected to have associations with the participation
of the households in MSEs in the study area. The major explanatory variables that are
influencing and affecting poverty status of the households to be participant get advantage
and not get advantage participant. The explanatory variable list below.

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Age of household (AGHH): Age is continues variable measured in year. It is the factors
that determine decision of a person. Age also shows a significance relation with an
income but the relationship is negative indicating that the increase in the age of operators
affects income of them. Younger people are more energetic, motivated and interested
than older people and hence they might become successful in their business (demise,
2011).In study will be hypothesized age is affect the role of micro and small scale
enterprise in reducing poverty positively.
Education of household (EDUHH): It is a Dummy variable, 1 literate, 0 otherwise .The
higher the education level, the better would be the knowledge of the person about poverty
reduction .Education and skills are needed to run micro and small enterprises. King and
McGrath, (2002) in their study suggest that those with more education and training are
more likely to be successful in the SME sector. Then study will be hypothesize education
affect the role of micro and small scale enterprise in reducing poverty reducing
positively.

Family size of household (FSHH): It is a continuous variable that refers to the number of
family members of a given household. When family size increases, their income also
increases. This could be due to the number workers increased in the business enterprises
so that it adds value in to their income increment (demise, 2011). So we expect family
sizes with role of MSEs reducing poverty have positive relationship.

Amount saving household (SAHH): Saving is continuous variable measured by birr.

Saving is a basic instrument in the improvement of income growth of life and in the
poverty alleviation effort as it helps to smooth consumption. It is also usually the entry
point for a potential user in interacting with financial service providers. When individuals
have saved some amount of money, the income growth of MSEs becomes improved,
More saving money would mean more capital that enhances the operation of the sector
(Demise, 2011). The study will be expected saving with role of MSE reducing poverty
have positive relationship.

Acces of credit received (AMCRDTR): It is a Dummy variable, 1 is credit user 0 is

otherwise Credit is an important source of income. Those people who received the credit

19 | P a g e
they wanted have better possibility to spend on activities they want. Either they purchase
agricultural input (improved seed, fertilizer, etc.,) or they purchase livestock for resale
after they fattened them and other activities. All these activities increase income of the
household. In the study will hypothesize that credit will have a positive relation with the
role micro and small scale enterprise in reducing poverty.

Access to extension service (ACXSER): It is a dummy independent variable if it exist

one and zero if it does not exist. It delivers information rearguing production technology,
health care or working habit and resorce utilization to the farmers King and McGrath,
(2002). The study was expected Access to extension service have a positive relation with
the role micro and small scale enterprise in reducing poverty.

Access to technology (ACCTEC): It is a dummy variable that takes a value of 1 for those
people who use the technology and 0 otherwise. It is expected that having experience of
using different technologies that could enhance or increase profit of person in MSEs can
have positive effect on their profit then reducing poverty. We will be expected that access
to technology have positive relation with role micro and small scale enterprise in
reducing poverty.
The amount of on-farm income (ONFHH): It represents the amount of farm household
annual income generated from on-farming activities. It is a continuous variable. The
higher the amount of annual income might reflect households’ strategy of improving its
agricultural production and productivity to secure the household basic needs and
gradually to change the household members’ life style sector (Demise, 2011). We
expected that the amount of on-farm income have positive relation with role micro and
small scale enterprise in reducing poverty.

Distance from the market (DIMKT): It is the continuous independent variable measured
in kilometer. Due to the far distance of transportation the MSEs center constructs a road
facility. Rural communities in remote area suffer from lack of transportation facilities.
The closer to the market the lesser would be the transportation cost and time spent King
and McGrath, (2002). In the study will be hypothesized that Distance from the market
have negative relation with role micro and small scale enterprise in reducing poverty.

20 | P a g e
 Participation in off- /non-farm employment (NONFHH): This is a continuous variable
which representing the participation in off/non-farm employment. The presence of off
farm employment and ability to generate additional income from off farm employment
had a positive association with household hood security status. Therefore, income earned
from off/non-farm activities is an important variable which determines household food
security status in the study area. In the study will be hypothesized that Participation in
off- /non-farm employment income have positive relation with role micro and small scale
enterprise in reducing poverty.
Table 1 Type, Definition, Measurement, and Hypothesis of variable

Dependent variable is Role MESs: 1=participate get advantage,0=participant not get

advantage
Independent Definition Type Measurement Hypothesi
Variable s
AGHH Age of house Continuous Year +
hold
EDUHH Education of Dummy 1=literate,0=otherwise +
household
FSHH Family size of Continuous Number +
household
SAHH Saving of Continuous Birr +
household
AMCRDTR acces of credit Dummy 1=credit user,0=otherwise +
received
ACXSER Access to Dummy 1=training,0=otherwise +
extension
service
ACCTEC Access of Dummy 1=user +
technology technology,0=otherwise
ONFHH The amount of Continuous Birr +
on-farm
income
DIMKT Distance from Continuous Kilo meter -
the market
NONFHH The amount of +
non-farm Birr
income Continuous

21 | P a g e
 4. Budget and work plan

4.1 Work Plan

No Activity Mar Apr May Jun Jul

1 Proposal writing &presentation 

2 Visiting of the studding area  √

3 Visiting of agricultural bureau  √

4 Selecting of respondent √ 

5 Data collection(interview) √ 

6 Data analysis √

7 Thesis report writing √

8 Thesis Submission √

9 Thesis presentation √

4.2 Budget Plan

N Item Cost(birr)
o
1 Note book 30
2 Cost of transport 400
3 Cost of mobile card 80
4 Paper and pen 100
5 Others 300
6 Total 910

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References
Adeyemi, S.L. & Arem M. A (2011). Small and Medium Scale Enterprises as A Survival

Adil Yassin. (2007). Challenges and Constraints of Micro and Small Scale Enterprises in
Addis Adjustment Financial Policy and Assistance Programs in Africa. In
William F.Steel. Applying

Admasu Abera. (2012). Factors Affecting the Performance of Micro and Small
Enterprises in Administration, Culture and Information Bureau: Addis Ababa.
alleviating Urban Poverty in Nekemte City, Oromiya Regional State. MA thesis
in Regional and Arada and Lideta Sub-Cities, Addis Ababa.MA thesis in
Business Administration, Addis Ababa

Berhanu N. & Befkadu D. (2005).Transformation of the Ethiopian Agriculture:

Potentials,

Botswana: the Role of Adult Education. University of Botswana: Gaboroni. Bulletin

Number 282, Addis Ababa, Ethiopia. Bureau (Amharic) .

Carpenter, C. (2003). “SME Finance in Nigeria”. Paper presented to the Roundtable on

“Making Constraints and Suggested Interventives Measures. Report on the
Ethiopian Economy, pp.103-139 (Volume IV) Ethiopian Economic Association.

CSA, (2007). The 2007 Population and Housing Census of Ethiopia: Statistical Report
for Addis

CSA. (2003). Report on Urban Informal Sector sample Survey. AA: Ethiopia

CSA. (2004). Report on Urban Informal Sector Sample Survey, October 2004, Statistical

CSA. (2010/11). Urban Employment -Unemployment Survey study, Addis Ababa,

Ethiopia

Elfeta, D. W. (2007). Micro and Small Scale Enterprises and their influences in alleviating Urban
Poverty in Nekemte City, Oromiya Regional State (Doctoral dissertation, MA thesis in
Regional and Local Development Studies. RLDS, Addis Ababa University).

Demis Alamirew. (2011). Role and Performance of Micro and Small Enterprises in
Improving Development Studies. RLDS, Addis Ababa University.

Endalsasa Belay (2012). The Contribution of Group-Based Micro and Small Enterprises
to the
Ephrem Setegn (2010). The Role of Micro and Small Enterprises in Poverty Alleviation

23 | P a g e
Ermias Werkilul (2011). A Study on Financial Sources of Micro and Small Enterprises in
Addis Ethiopia: Association of Ethiopian Micro-Finance Institutions Occasional
Paper No. 24. Addis Ethiopia: Emprical Evidence. Eastern Africa Social Science
Research Review. Volume 22.

Forcheh, Nkemazem. (2003). Community Empowerment as a Strategy for Poverty

Reduction

Gebrehiwot A.and Wolday Amha. (2006). Micro and Small Enterprises (MSEs) Finance
in Geneva, Switzerland.

Getahun Reta. (2009). The Impact of Micro and Small Scale Enterprises Development
Program

Green, C. J., Murinde, V. & Kirkpatrick, C.H. (2006). Finance for Small Enterprise
Growth and Gulele Sub City, Addis Ababa Ethiopia.MA Thesis in public
Admistration, Addis Ababa

Haftu, B., Tseahye, T., Teklu, K., & Tassew, W. H. (2009). Financial needs of micro and small
enterprise (MSE) Operators in Ethiopia. Occasional paper, (24)

ILO. (2000): Resolution concerning statistics of employment in the informal sector,

adopted by international labor organization

ILO. (2002). Decent work and the informal economy: abstracts of working papers.
Geneva,

ILO. (2003): Guidelines concerning a statistical definition of informal employment,

endorsed by international labor organization

ILO. (2003a). Ethiopian Women Entrepreneurs: Going for Growth. ILO Sub-regional
Office,

ILO. (2004). World Employment Report 2004-2005: Employment, Productivity and

Poverty enterprises and changing Policies Structural

24 | P a g e
APPENDIXES

Questionnaire
Dear respondent: The main aim this questionnaire is to collect data as input for the study
entitled Analysis of micro and small scale enterprise in reducing poverty in the case of
Dejen town at Dejen Woreda East Gojjam zone Amahara regional state of Ethiopia,
whose sole purpose is to contribute some efforts in conducting research on the subject
matter so that policy makers can use the information to improvement of the livelihood of
the society and economic growth of the country .Therefore ,extending thanking in
advance for your co-operation ,each pieces of information collected going to be use.

Demographic, Economic and Social Characteristic of the Household

1. Name of household head ___________________________
2. Age of household head _____________years old.
Household information
01 02 03 04 05 06 07 08
Name of the Marita Relationship Sex Age Education Main
Serial

household l status to the (Years level occupation

M=1
members household ) (activity)
No.

head F=2
01
02
03
04
05
06
07

Note

25 | P a g e
 For codes 03= 1) unmarried 2) Married 3) Divorced 4) Widowed 5) below marriage
age

For codes 04= 1) Husband 2) Wife 3) Daughter 4) Son 5) Relatives 6) Others

For codes 07= 0) Illiterate W&R) Read & write 3) If attending School, write the
grade 4) Leave blank for children below 8 years

For codes 08= 1) Farming 2) Merchant 3) House hold work 4) wood workers 5) Other
specify
Saving household
3. Do you save?
a) Yes
b) No
4. If questions three yes how much do you save________________________________?
5. What is the source of money for saving?
a) Income from MSEs
b) Borrowing from lenders
c) Income from off-farm activity
d) Income from relatives
6. Where do you save?
a) In iqub c) in MFIs
b) At home (e.g.in safe box) d) in formal bank
7. For what purpose you have been saving?
a) Loan repayment c) To earn interest
b) For safety purpose d) To buy basic household items

Amount of credit received

8. Did you have credit access in 2012/?
a) Yes
b) No

26 | P a g e
Access to extension service
9. Did you have extension contact in relation the role micro and small-scale enterprise in
reducing poverty in the 2012/13?
a) Yes
b) No
10. If yes, how often the extension agent contacted you?
a) Weekly
b) Monthly
c) Once in a year

Distance from market

15. How much you travel to get to the nearest district market to sell the product
in_________ kilometer?
16. How do you transport agricultural produce to the market place?
a) On back c) Vehicle
b) Horse carts d) Back animal
17. Where did you sell your product?
a) At village market
b) At nearest district market
c) At regional market

Access to technology
11. Do you have use technology?
a) Yes
b) No
Off- Farm income
12. Do you have engage non-farm activities?
a) Yes
b) No
13. If question 12 yes, in which of the off-farm activities your household is engaging at
present?

27 | P a g e
off-farm activities a. Yes Estimated
b. No annual
income in
birr

1. Trading grains and pulses

2. Trading livestock
3. Drinks production and sales

The amount of on-farm income. 14. What is your income from on farm activities per year?

Total owned Estimated price Income Income Total income

in birr from from rent
sale
Cows
Sheep goat
Animal product
Butter
Eggs
15. How much you travel to get to the nearest district market to sell the product
in_________ kilometer?
16. How do you transport agricultural produce to the market place?
a) On back c) Vehicle
b) Horse carts d) Back animal
17. Where did you sell your product?
a) At village market
b) At nearest district market
c) At regional market

28 | P a g e
 18. After you become involve in micro and small scale enterprise,your income is?

a) Highly increase c) no change

b) Increase d) decrease
19. What motivated you to engage in this enterprise?
a) Unemployment b) To get better income c) Family poverty
d) other reason

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