DEBRE BIRHAN UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

ECONOMICS PROGRAM

FACTORS AFFECTING THE PERFORMANCE OF MICRO AND SMALL

ENTERPRISES IN DEBRE BIRHAN TOWN

PREPARED BY:- ID No
ANDEBET AYALEW-------------------------------2337/08

ANDEBET EJIGU-------------------------------------2336/08

BERIHUN TADESSE----------------------------------2383/08

SAMUEL EBABU----------------------------------------2294/08

SAMRAWIT KUMLACHEW--------------------------2629/08

TADELE YALEW----------------------------------------2629/08

ADIVISOR; HAILEMICHAEL.S (MSc)

A SENIOR ESSAY SUBMITTED TO THE DEPARTMENT OF ECONOMICS,
BUSINESS AND ECONOMICS COLLAGE OF DEBRE BIRHAN UNIVERSITY IN THE
PARTIAL FULL FILLMENT OF THE REQURIMENT FOR DEGREE OF BACHELOR
OF ARTS (B.A) IN ECONOMICS

May, 2018
Debre Birhan, Ethiopia

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 Acknowledgment

First and for most, we would like to extend our heartfelt gratitude to God for his forgiveness,
willingness kindness support throught our life.

We would like to express our deepest to our advisor Hailemichael Siyum for his great effort of
evaluating, correcting, and giving constructive idea and suggestions throught our work

We express our deepest thanks to our families for their love and continuous effort and
encouragement during our work

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 List of Acronyms

AACMSEDA Addis Ababa City Administration Micro and Small Enterprise Development

Agency

CSA Central Statistical Authority

DBMSEO Debre Birhan Micro and Small Scale Enterprise office

FeMSEDA Federal Micro and Small Enterprises Development Agency

GDP Gross domestic product

GEM Global Entrepreneurship Monitor

MoTI Ministry of Trade and Industry

MSE Micro and Small Scale Enterprises

MSEDS Micro and Small scale Enterprise Development Strategies

OECD Organization for Economic Cooperation and Development

OLS Ordinary Least Square

UNIDO United Nations Industrial Development Organizations

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 Table of Content
Content Page

Acknowledgment---------------------------------------------------------------------------i

Acronyms---------------------------------------------------------------------------ii

Table of Content-------------------------------------------------------------------iii

List of Table and Figure-------------------------------------------------------------vii

Abstract --------------------------------------------------------------------------viii

CHAPTER ONE--------------------------------------------------------------------------
1. INTRODUCTION--------------------------------------------------------------1

1.1 Background of the Study-----------------------------------------------------------1

1.2 Statement of the Problem----------------------------------------------------------3

1.3 Objective of the Study-------------------------------------------------------------4

1.3.1 General Objective-------------------------------------------------------------4

1.3.2Specific Objective------------------------------------------------------------------4

1.4 Research questions---------------------------------------------------------------------4

1.5 Scope of the study-----------------------------------------------------------------4

1.6 Significance of the study-----------------------------------------------------------5

1.7 Limitation of the study-------------------------------------------------------------5

1.8 Organization of the study-----------------------------------------------------------5

CHAPTER TWO----------------------------------------------------------------------------6
2. LITERATURE REVIEW--------------------------------------------------------------6
2.1. Theoretical Literature Review-----------------------------------------------------6

2.1.1 Definition of MSEs---------------------------------------------------------------6

2.1.2 Definition of MSEs in Ethiopia----------------------------------------------------6

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 2.1.3 The concept of business performance----------------------------------------------7

2.2 The Role of Micro and Small Enterprise in Poverty Reduction----------------------------------8

2.2.1 Special contribution of micro and small scale enterprise----------------------------------------9
2.3 Factors Affecting the Performance of Micro and Small Scale Enterprise---------------------9
2.3.1Marketing factors-------------------------------------------------------------------------------------9

2.3.2 Management Factors-----------------------------------------------------------10

2.3.3 Technological Factors----------------------------------------------------------10

2.3.4 Infrastructural Factors----------------------------------------------------------10

2.3.5 Financial Factors---------------------------------------------------------------11

2.3.6 Working Place Factors----------------------------------------------------------11

2.3.7 Politico-legal factors-----------------------------------------------------------11

2.4 Empirical Literature Review-------------------------------------------------12

CHAPTER THREE---------------------------------------------------------------------
RESEARCH METHODOLOGY-------------------------------------------------------17
3.1 Descriptions of study area-------------------------------------------------------17

3.2. Source and method of data collection---------------------------------------------18

3.2.1. Source of data--------------------------------------------------------------18

3.2.2 Types of data----------------------------------------------------------------18

3.2.3 Method of Sampling Techniques---------------------------------------------18

3.3 Data Analysis-------------------------------------------------------------------19

3.3.1. Descriptive Analysis-----------------------------------------------------------20

3.3.2. Econometric Analysis----------------------------------------------------------20

3.3.3. Model specification------------------------------------------------------------20

3.4. Description of the variables------------------------------------------------------21

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 3.4.1. Dependent variable------------------------------------------------------------21

3.4.2 Explanatory variable-----------------------------------------------------------21

3.5 Diagnostic Tests-----------------------------------------------------------------22

3.5.1Multicollinarity Tests-----------------------------------------------------------22

3.5.2 Hetroskedasticity Tests---------------------------------------------------------23

CHAPTER FOUR--------------------------------------------------------------------------

RESULTS AND DISCUSSIONS-------------------------------------------------------24

4.1. Theoretical Results and Discussions-----------------------------------------------24

4.1.1 General characteristics of the enterprises-----------------------------------------24

4.2 Empirical Results and Discussions--------------------------------------------------27

4.2.1 Descriptive analysis of the survey------------------------------------------------------27

4.3 Econometric Results and Discussion------------------------------------------------28

4.3.1 Ordinary Least Square Estimation Results and Discussion------------------------------------29

4.3.2 Statistical tests-----------------------------------------------------------------31

CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
5.1 Conclusions---------------------------------------------------------------------33

5.2 Recommendation----------------------------------------------------------------34

References---------------------------------------------------------------------------36

Appendix----------------------------------------------------------------------------39

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 List of Table and Figures

Figure No. Figure Title Page No.

2.2 Conceptual framework…………………….…………………….………17
4.1 Sectors respondents engaged in…………………….…………………...27
4.2 Sources of finance …...…..………………………………………….….27
4.3 Important aspects for business venture…………………….……………28

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 Abstract

Micro and Small Enterprises (MSEs) play a crucial role in the development of the Ethiopian
economy. The sector is not only a major source of employment, but also plays a significant role
in promoting competition, innovation and enhancing enterprise culture which are necessary for
private sector development and industrialization. However most MSEs in Ethiopia are not able to
generate permanent and highly remunerative jobs and only a few graduates to medium and large-
scale enterprises. The main objective of this study was to assess factors affecting the
performance of Micro and Small Enterprises with a special emphasizes on textile and garment,
food processing and wood and metal work sectors in using a sample of 77 enterprises in Debre
Birhan town. The study employed an econometric analysis using Ordinary Least Square (OLS)
linear regression analysis where profitability is used as a Measurement for good performance.
The study found that access to finance, access to market, access to infrastructure, initial capital
and entrepreneurial ability of the entrepreneur have a positive and significant effect on
profitability. Managerial skill of the entrepreneur and working place though insignificant were
found to be negatively and positively related to profitability respectively. Given the important
role the sector plays in the development of the country, the study recommends provision of a
conducive policy environment that enhances the growth and performance of MSEs. Specifically,
this study proposes the following policy measures to promote the sector and they include:
provision of affordable credit, promotion of start- up capital, promotion of marketing, provision
of infrastructure, diversifying research and development and improving the legal and regulatory
framework.

Key words: MSEs, performance, factors

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 Chapter One

1. INTRODUCTION

1.1 Background of the Study

In overall economic development, micro and small scale enterprise plays a key role in the
developing world. The vast majority of countries rely on the dynamism, resource fullness and
risk talking of private enterprise to which most micro and small scale enterprise belongs to
sustain the process and from the use for private sector increases agricultural productivities
through providing agricultural inputs and creating demand for agricultural output. Thus micro
and small enterprise play a key role in sustain other sector of the economy, such as trade,
construction, service and agriculture as well as in reducing unemployment (ILO, 2006).

In the world, on average there are 31 MSEs per 1000 people across 132 economies covered. The
five countries which the highest formal MSEs density in the word are as follow, Brunei
Darussalam(122), Indonesia (100),Paraguay (99), check republic (85) and Ecuador (84).
Economies with higher income per capital tend to have more MSEs per 100 peoples. In the high
income countries, MSMEs are not only denser in the business structures, but also employ higher
percentages of work force in half of the high income economies covered, formal MSEs
employed at least 45% the work force compared to only 27% in low income economies. The
MSEs growth rate is three times higher in higher economies than in low income economies
(World Bank, 2010).

In sub Saharan African countries MSEs play a vital role for growth and development essentially
the World Bank contains three related subjects first, MSES provides a mapping of growth
patterns in sub Saharan Africa over the last 20 years during the last decade we have observed a
strong shift towards high and persistent growth in money of the countries in the region.
Furthermore India and China have gradually become important investor and trading patterns for
these countries adding to already increased exospores demand from OECD countries. Second
MSMEs play a pivotal role in industrial development and restructuring, satisfying and rising
local demand for services. Therefore, MSEs become engineer that sustain growth for an African
countries have a large numbers of SMEs relative to the size of the economy, but this are often

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not part the formal economy. Third the most important obstacles to SMEs growth in sub Saharan
Africa is that red tape, corruption, complete entry regulations etc. (world bank, 2010).

Similarly in Ethiopia, MSES plays a crucial role for socio economic development and serve as
instrument of change and vehicles of growth and diversification, occupy a strategic position and
play a vital role in fulfilling the socio economic objective of the people (Ethiopian negarit
gazeta, 2015).

In Ethiopia a study under taken by Central Statistical Agency (CSA) disclosed that there were
about 974,679 micro enterprises, generating a means of livelihood for about 1.3 million
people(CSA,2002).Another study conducted in 2003 by CSA also revealed that 1,863 SMEs had
created employment opportunities for about 97,782 citizens(CSA,2003).

Micro and small enterprise include many fields and sub fields such as: food processing, clothing
and textile, urban farming, wood and metal work, washing car, construction, internet café, fish
reproduction, electronics service, hen reproduction, pool service, leather and transport
(DBMSEO,2010).

There is no universally accepted definition of micro and small enterprise. Different countries
have defined enterprises based on different condition, in Ethiopian context MSEs defined as:
Micro enterprise is having a maximum of less than ten employees with paid up capital of not
greater than20,000, and small enterprise is having a maximum of 10 employees with paid up
capital of not exceeding 50,000 birr (MoTI,1997).

Growth of MSEs has been in the recent past of great concern to many government policy makers
and researchers globally because of realization of their economic contribution to gross domestic
product (GDP) and economic growth. Despite having this large contribution in creating job
opportunities and building the economy of developing countries, MSEs operation and growth
have been persistently challenged by numerous internal and external factors, therefore MSES are
considered to be critical in kick starting broad based growth and enhance employment and
removing there constraints is crucial. Based on this fact the study would attempt to assess factors
affecting the performance of micro and small scale enterprise in DebreBirhan town.

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1.2 Statement of the Problem

The Ethiopia economy, although still highly dominated by the agricultural sector in terms of
employment (80%), its contribution the GDP (44%) and its share in the export market (80%), is
witnessing one of the fastest growing economies in Africa as well as in the world. In its
contribution to the socio economic development of the country, the government of Ethiopia has
given greater focus for the development of MSEs sector .According to micro and small scale
enterprise development strategy of Ethiopia, designed to insure the sustainability of the
development achieved in all economic sector of the Country, the main focus of the government
is creating job opportunities through MSEs development, reduce unemployment, alleviate
poverty and enhancing MSEs to be base for industrial development in the country
(AACMSEDA,2011).

The sector is crucially important to the economic and social development of the country in the
sense that and facilitate urban and rural economic linkage, promote entrepreneur ship culture
and enhance self -employment and serves as fertile ground for the emerging of medium and
large industries, etc. Despite the importance of micro and small scale enterprise in sustainable
economic growth, the sector is affected by several factors in Ethiopia in general in Debre
Birhan Town in particular (ibid,2011)

According to Alebachew (2017), entails that most of these problems are derived essentially from
inadequate access to finance, lack of employment creation, lack of credit availability, lack of
managerial skill, lack of raw material and technology and this research is conducted using
descriptive analysis. According to Gathoge (2011), lower level of education, lack of work
experience, unavailability of own premise, lack of infrastructural facilities, gender of the
entrepreneur and lack of finance are the main problem that hinder MSEs and his research is
conducted using descriptive analysis

Research by professor Mauric,(2015) suggests that; lack of marketing availability, lack of

managerial skill, difficult in securing loan needed for business, high cost of labor, low level of
formal education and inadequacy of infrastructure are the major problem hinder the growth of
small business and his research is conducted using logit and propit model.

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Based on this empirical evidence our main gap is model estimation method (multiple linear
regressions), time, scope, place and other content differences. By taking these gaps we would try
to fill based on our knowledge: we have tried to cover other factors that expected to affect MSEs
performance like initial capital and entrepreneurship to show their indispensable effects on MSEs
performance, by using cross sectional estimation in DebreBerhan town.

.1.3 Objective of the Study

1.3.1 General Objective

The main objective of the study is to assess factors affecting the performance of micro and small scale
enterprise in Debre Birhan town

1.3.2 Specific Objective

 To determine the factors that affect the performance or success of the enterprise
 Estimate the relationship between enterprise performance and various factors affecting it
 Recommend possible solution to alleviate the problems of MSEs

1.4 Research questions

 Which factors significantly affected the performance of MSEs?

 What challenges do entrepreneurs operating SMEs in Debre Birhan town face?
 What is the source of finance or funds available to MSEs?

1.5 Scope of the study

As indicated in the objective the aim of this study is to identify important variable that affect the
performance of micro enterprise in the study area. In order to identify the important variable, the
survey was conducted at Debre Berhan town by using questionnaire. The research was conducted
through using cross-sectional one year (2018). It is also spatially limited that it only considers
MSEs in Debre Berhan town. This is because of time and financial constraints that prevent the
possibility of wider coverage.

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1.6 Significance of the study

Findings from this study would assist academicians in broadening of the prospectus 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 would help MSEs in Debre Birhan and others,
within an insight into the benefits of using different factors studied in this research to predict the
factors that affect the performance of MSEs and also 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 factors that affect the performance of MSE. Moreover, the
findings of this study will help the policy makers and financial institutions how to encourage
establishing or expanding MSEs.

1.7 Limitation of the study

Every human activity is trained with some limitations be in material or others which reduce the
quality of work and limit its achievement of the objective. There are certain constraints that faced
while we are conducting the study. Among those are constraints of time, lack of finance, lack of
organized information, rigidity of the entrepreneur to give information what we want, and their
scattered locations of the entrepreneurs is the major problems in this research paper. Having this
limitation the study used the possible capacities to make the findings more real and acceptable as
much as possible.

1.8 Organization of the study

The paper has been organized in to five chapters. The first chapter focuses mainly on the
background, statement of the problem, objectives of the study, research questions, significance of
the study, scope of study, limitation of the study and organization of the study. Relevant
literature reviews related to the study were reviewed in chapter two. Research methodologies,
types and sources of data, techniques of data collection, sampling technique and methods of data
analysis and description of variables were included in chapter three. Chapter four provides
descriptive analysis and econometric analysis, results and discussions. Finally in chapter five, the
study provides conclusions and recommendations.

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 Chapter Two

2. LITERATURE REVIEW

2.1. Theoretical Literature Review

2.1.1 Definition of MSEs

There is no universally accepted definition of micro enterprise. Different countries have defined
enterprises based on different condition. According organization for economic cooperation and
development (OECD) the characteristic of small scale enterprise not only reflects the economic
pattern of a country but also the social and cultural dimension. There unique patterns are
noticeably reflected with various definition and criteria of MSEs adopted by different countries
where as some refers to the numbers of employers as their distinctive criteria for SMEs, other
use invested capital and some use a combination of the number of employees, invested capital,
sales and industry type (OECD,2004).

2.1.2Definition of MSEs in Ethiopia

Micro and Small scale enterprises are categorized into industrial sector and service sector. Under
industry sector (manufacturing, construction and mining) micro enterprises are defined as an
enterprise that operates with 5 people including the owner and/or their total asset is not
exceeding Birr 100,000.Underservice sector (retailer, transport, hotel and Tourism, ICT and
maintenance) service sector. Under Service sector Micro enterprises are defined as an enterprise
that operates with 5 persons including the owner of the enterprise and/or the values of total asset
is not exceeding Birr 50,000.Under the industry sector (manufacturing, construction and mining)
small enterprises are defined as operates with 6-30 persons and/or with a paid up capital of total
asset Birr 100,000 and not exceeding Birr 1.5million.Under the Service sector (retailer, transport,
hotel and Tourism and maintenance service) Small enterprises are defined as operates with 6-30
persons or/and total asset, or a paid up capital is with Birr 50,001 and not exceeding
Birr500,000.When ambiguity is encountered between manpower and total assets as explained
above total asset is taken as primary yardstick (MSEDS strategy, 2011).

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Table 2.1The improved definition of MSEs in Ethiopia

Level of enterprise Sector Human power Total asset

Micro enterprise Industries ≤5 ≤ Birr 100,00
Service ≤5 ≤ Birr 50,000
Small enterprise Industries 6-30 ≤ Birr 15 Million
Service 6-30 ≤ Birr 50,000
Source Ethiopian micro and small enterprise development strategy (2011).

2.1.3The concept of business performance

Performance is defined simply in terms of output terms such as quantified objectives or

profitability. Performance has been the subject of extensive and increasing empirical and
conceptual investigation in the small business literature (Bidzakin K.J., 2009). The issues that
remain unresolved are the goals against which performance should be assessed and from whose
perspective the goals should be established (Etzioni, 2003).Rami Alasadi and Ahmed
Abdelrahim (2007) on their study defined performance as follows:

The most commonly adopted definition of success (good performance) is financial growth with
adequate profits. Other definitions of success (good performance) are equally applicable. For
example, some entrepreneurs regard success (good performance) as the job satisfaction they
derive from achieving desired goals. However, financial growth due to increasing profits has
been widely adopted by most researchers and practitioners in business performance models.

Global Entrepreneurship Monitor (GEM) defined Performance as the act of performing; of doing
something successfully; using knowledge as distinguished from merely possessing it (GEM,
2004). However, performance seems to be conceptualized, operationalized and measured in
different ways thus; making cross-comparison is difficult (Sivasan et al., 1994). Among the most
frequently used operationalization’s are survival, growth in employees and profitability.

2.2The Role of Micro and Small Enterprise in Poverty Reduction

Poverty in Ethiopia is widespread and remains a major challenge of sustainable development

and stability (Lutheran World Federation of Ethiopia, 2006 cited in Eshetu&Mammo, 2009). By
now, it is clear and agreeable that poverty, both in urban and/or rural areas, is all about lack of

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 basic needs, low or inadequate level of income and consumption, poor command over
resources, and high level of social exclusion, inequality and vulnerability. 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 MSEs 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 (Mukras,2003).

UNIDO approach to poverty reduction describe here: Poverty reduction is simply not going to
happen by government fiat but only through private sector dynamism. The evidence directly
linking MSEs and poverty reduction is considerably less robust than that linking them to
economic vitality, even in the most developed economies. There are suggestions of greater
employment opportunities for poor, low Skilled workers, increased skills development and
broader social impacts. The movement to support MSE development internationally reflects a
return to promoting poverty reduction by investing in private sector-driven strategies by all of the
major multilateral agencies. Poverty Reduction Strategies (PRSs) currently being formulated in
many developing countries places a more pronounced emphasis on the contribution that the
private sector will have to make – compared to the over-relianceon the social agenda that
characterized earlier PRSs (Perumal K. & Prasad, 2005).

2.2.1Special contribution of micro and small scale enterprise

Micro and small scale enterprise poses some qualities that make them more miniature
version of Big Business Corporation. They make exceptional contribution like providing
new jobs, introduce innovations, and land aid big business.

Providing new job; as the population and the economy grow, small business provide new
job opportunities. It seems that the small business provide the “lion share’s ”of the new jobs,
sometimes adding jobs while large corporations are “down-sizing “and laying off employees
(hailay,2006).

Introducing innovation: studies of innovations have shown the greater effectiveness of

small firms in research and development. Innovation contribution to productivity by
providing better products and better method of production .The large number of small firms

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 that provide the center of initiative and source of innovation are thus in opposition to help
improve account’s productivity(ibid,2006).

Aid Big Business: the fact that some functions are more expertly performed by small
business enables them to contribute for the success of large firms (ibid, 2006).

2.3 Factors Affecting the Performance of Micro and Small Scale Enterprise

2.3.1 Marketing factors

Micro and small scale enterprises in Ethiopia mostly organized in proprietary partnership
and are of very small size. This feature of MSES makes them to be weak in case of access to
capital. As a result MSEs Face’s different problems of marketing their product, such as,
problem of incompetency of their product inability of paying transportation cost and
advertisement cost, lacks marketing research about the product type and the customers
availability to such product. Thus, marketing problem and other problem have created a
great obstacle for the growth and expansion of micro small and small scale enterprises in
Ethiopia ( Hailay,2007).

2.3.2 Management Factors

Zeleke (2009) conducted a study on the efficiency of management as a determinant of long-

term survival in micro, small and medium enterprises in Ethiopia, and his research ascertains
that high level of managerial skills significantly promotes long-term survival and
profitability in small businesses and enterprises. Successful businesses are significantly
associated with the ability to generate profit on a sustainable basis. The main reason for
failure is inexperienced management. Managers of bankrupt firms do not have the
experience, knowledge, or vision to run their businesses (Zeleke2009).Managerial
effectiveness influences every aspect of a business and is often believed to be the most
important factor contributing to small business failure. The management skills and
management concepts of business founders are deemed much more important than their
technical skills and their concern about production which has resulted in an overall positive
organizational performance (Lin and Yeh-Yun 1998).

2.3.3 Technological Factors

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Choice of technology and innovative capacity is another important factor determining growth of
MSEs. The appropriate technology paradigm assumes MSEs as beneficiaries and not as active
participant of development and improvements of technology; technology as a resource that can
only be adapted by MSEs for improving factor productivity and reducing unit costs. It also
focuses on incremental choice and suitability of available technologies to the production and
market environment of MSEs operating in environment of unskilled and large labor market, low
income consumer market, and low quality inputs. But appropriate technology paradigm is
challenged for its limited impact and its failure to narrow gaps between MSEs and larger
enterprises. The technical capability paradigm has emerged as a result of unsatisfactory result
with appropriate technology paradigm and with an objective to raise capacities of MSEs in
making use of innovated technologies as most innovated technologies is adopted from separate
workshops. It needs institutional, technical and engineering skills to adapt these technologies to
different climate, raw materials and market demand (Albu,2001).

2.3.4 Infrastructural Factors

Good infrastructure facilitates have a positive effect in reducing the cost of operation. MSEs
Owners in Ethiopia indicated that lack of efficient, reliable, safe and affordable infrastructure is
affecting the performance of their business. The physical infrastructure facilities are not
adequately developed and expanded in Ethiopia to meet the growing demand of Mses. Activities.
As a result, most MSEs have problems related to business premises such as an increase in house
rent, lack of basic services such as telephone lines, electricity supply, sewerage and water
services (Eshetu& Mammon, 2009).

2.3.5 Financial Factors

Lack of adequate capital, sufficient loan, and inefficient financial market in terms of facilitating
financial resources to entrepreneurs are the major obstacles in doing business particularly in the
informal sector. Most micro and small enterprises are risky ventures involving excessive
administrative costs and lack the experience in dealing with financial institutions and do not have
a track record of credit worthiness with banks. Since most banking institutions are reluctant to
provide small enterprises with loan and credits, most MSEs are unable to secure collateral
requirements. As a result of absence in financing, the creation of new enterprises and the growth

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and survival of existing ones will be impeded (Commission on Legal Empowerment of the Poor,
2006).

2.3.6 Working Place Factors

For MSEs, lack of premise is unquestionably a serious problem. Most informal operators do not
get access to suitable locations where they can get easy access to markets. The issue of
acquisition and transaction cost has become very prohibitive to the emergence of new enterprises
and to the growth and survival of existing ones. The issue of land provision and the land lease
system has greatly constrained the chances of micro, small and medium enterprises who aspire to
startup businesses (Eshetu&Mammo, 2009).

2.3.7Politico-legal factors

A legal and regulatory system that calls for complex registration and licensing requirements and
demands tedious and costly reporting practices imposes heavy costs on SMEs. As firms grow
and become more “visible”, their options for regulatory avoidance decrease, suggesting that there
exists a theoretical break point in the cost of compliance. This point logically lies somewhere
between very small businesses, which can avoid the rigors of regulation, and those companies
that have reached a size that enables them to spread the administrative expenditure between a
greater resource base, and to offset the costs with certain benefits of legitimacy (such as the
possibility to secure public contracts, access to credit, renewal of licenses and opportunities for
subcontracting work, from which informal sector enterprises are barred). The challenge for
policy makers is not to impose dramatic break points (in the form of regulatory and, in particular,
tax requirements) that are a disincentive to increasing the size of business operations. The
evidence indicates that all the countries studied have some registration requirements in relation
to tax, labor or other laws.(Ouedrago and Nepal,2001).

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2.4 Empirical Literature Review

The study conducted by (Abraham, 2013) on factor affecting the performance of SMEs in
Hosanna Town in hadya Zone as a finding of his study showed more study area had performance
when their performance were measured based on benefit cost ratio value of the enterprises as
average benefit cost ratio value of sector had lower benefit cost ratio from all five sector that the
enterprise was enjoyed the growth of expansions of business under consideration has been their
important subjective but there are a number of constraint identified by his study which hinder the
performance of small scale enterprise. These include lack of entrepreneurial skill of the
operator’s low amount of initial capital to enter in to the business, law education level of the
operators, and low age of enterprise stay in the business.

Another study conducted by siyummenda (2015) on the role of micro and small scale business
enterprise in urban poverty alleviation.A case study on cobble stone paving sector in Addis
Ababa city in his study 95% confidence levels, MSE (cobble stone paving can play a role in
improving the socio economic conditions of the participants since they create employment
opportunity that can be them to generate their income which intern leads to access for better
income distribution and increase their capacity.To expand food, clothing, housing facility,
medication, schooling and ceremony on the basis of his finding Availability of credit for MSEs
both at the start up level and during operation is very important for achieving the objective of
enterprise in poverty alleviations.

Hence government and nongovernmental bodies should support MSE both at the start up level
and during their operation for east accessing of credit facility. In this study area, enabling
environment like facilitating cooperation between enterprise with different development
organizations and NGOS, promoting entrepreneurial development problem, expanding training
instructions promoting war kept associations should be developed in order to increases the
contribution of MSEs this will help the enterprise to solve problems share among one another in
providing service and consequently could join and be elevates to medium and large enterprise.

Eshetu and Zeleke (2008) conducted a longitudinal study to assess the impact of influential
factors that affect the long-term survival and viability of small enterprises by using a random
sample of 500 MSMEs from 5 major cities in Ethiopia. According to the research, that lasted
from 1996-2001, the factors that affect the long term survival of MSMEs in Ethiopia are found to

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be adequacy of finance, level of education, level of managerial skills, and ability to convert part
of their profit to investment. This is so because the findings of the study revealed that businesses
that failed, during the study period were characterized by inadequate finance (61%), low level of
education (55%), poor managerial skills (54%), and inability to convert part of their profit to
investment (46%). The study further indicated that participation in social capital and networking
schemes are critically helpful for long-term survival of the enterprises In their study, based on
the survey covering 123 businesses units in four Kebeles of Nifas Silk- Lafto and Kirkos sub-
cities of Addis Ababa, and aimed to investigate the constraints and key determinants of growth,
particularly in employment expansion,

In his research, Dereje (2008) studied the nature, characteristics, economic performance,
opportunities and challenges of MSEs in the construction sector based on 125 sample enterprises.
The results of the study revealed that the main constraints of the MSEs were shortage of capital,
lack of raw materials, absence of government support, lack of market, lack of credit facilities and
high interest rate. Studies were also conducted specifically with a purpose of identifying the
problems that MSEs Encounter. For instance, Workneh’s (2007) research undertaken in Kolfe
Keraneosub-city of Addis Ababa indicated that lack of capital, lack of market, unfavorable
policy, and inadequate infrastructure, absence of adequate and relevant training, bureaucratic
structure and procedures are among constraints faced by MSEs. Similarly, Adil’s (2007) research
carried out in Addis Ababa shows that inappropriate government intervention, shortage of
capital, location disadvantage, lack of market and lack of display room are the major challenges
that obstruct MSEs.

Mulugeta, (2011) has identified and categorized the critical problems of 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, and record
keeping, lack of experience sharing, and lack of cooperation within and among the MSEs and

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

Table 2.2.Summary of empirical literature

Title Authors, year Research Parameters Findings
and area Methods
Factors that affect the Maurice Ndege Mixed (qualitative Entrepreneurs micro and small
growth and development of (2007) South and quantitative ) skill ,market enterprises are
small, micro and medium- Africa approaches condition, age of significantly
sized business enterprises business, ,manageme influenced by
nt and finance entrepreneurs skill and
market condition

Socio-economic Diriba Shiferaw Qualitative employment, saving, Due to MSEs 79.27%

contributions of Micro and (2013), Jimma method income generation, of the enterprises
Small enterprises city entrepreneurs skill responded that the
and knowledge, overall socio-
gender empowering economic
improvement of the
peoples was good.
The role of micro and small Siyum Menda Mixed (qualitative Income, creation of MSEs have played
enterprises in urban poverty (2015) Addis and quantitative) employment and positive role in
alleviation by taking cobble Ababa approaches. improving the quality improving income,
stone paving sector of of life creation of
MSEs. employment and
improving the quality
of life of the
participants of the
cobble stone paving.
The contribution of micro Alebachew Qualitative Employment MSEs have played a
and small enterprises for (2009),Debre approaches. creation, income greater role in
economic development Tabour town generation, improving income,

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 entrepreneurs skill creation of
and knowledge, employment,
technology adoption, entrepreneurs skill and
education of family knowledge,
of entrepreneurs, technology adoption,
saving and tax education of family of
revenues. entrepreneurs, saving
and tax revenues.

In reality, literature on MSEs in Ethiopia is scanty and most of the available studies were not
conducted in line with performance aspects of micro enterprises. However, this research tried to
assess factors affecting the performance of MSEs in a holistic way by targeting and deeply
investigating those operators engaged in textile and garment, food processing and metal and
wood work activities in Debre Birhan town.

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Conceptual frame work

To align the conceptual framework with the research objectives, business performance is the
dependent variable whereas initial capital, working premises, , infrastructural, marketing,
financial, management and entrepreneurial factors are all independent variables. The relationship
can be expressed and shown in figure 2.3

Initial capital

Working premises

Entrepreneurial
factors

Performance of MSEs
Management factors (Profitability)

Infrastructural factors

Marketing factors

Financial factors

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 Chapter Three

3. RESEARCH METHODOLOGY

This chapter presents the research methodology adopting in conducting the study in order to
achieve the study objective which to find the factor that affect the performance of micro and
small enterprise in Debre Birhan town and the chapter discusses procedures and activities under
taken, focusing on namely the study’s research design, questionnaire design, data collection,
method of sampling techniques sampling strategy.
3.1. Descriptions of study area

Debre Birhan is the capital town of North Showa zone in Amara region. The town is located
130kms to the northeast direction along Addis-Mekele high way. Debre Berhan town started a
total area of 18081.95 hectare land with absolute location 9 040' north latitude and 39030'
longitudes. The altitude above sea level around 2750 meter and the topography of the town is
10% ups and downs, 4% cliff, and 86% plain. Debre Birhan is established during the reign of
emperor ZereYakob(1434-1468), and at that time the town was named as “Debre-Eba” means
the land of Eba .It has Dega weather condition and the town is known by worch. Though the
town was established before 600 years, the majority of the people live under low social,
economic situations to provide services for increasing population. However, currently the town
is growing to the place of considerable social, economic and political activities with
establishment of colleges, banks, university, factories, modern shops, investment projects and
other significant financial institution (DBU2008, as cited by mesele).
3.2. Source and method of data collection
3.2.1. Source of data

The study used both primary and secondary data sources. Primary data was gathered through
questionnaire and we also used secondary data as supplementary tools that collected from
various sources such as books, magazines, Newspapers and other published and unpublished
materials and also from Debre Birhan micro and small enterprise office and other internet
sources.

3.2.2 Types of data

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The type of data we have been employed for this study is cross sectional data, since it is
important for the value of one or more than one variable are collected for several sample units at
the same point in time (one time shoot),just the researcher will collects the data from the
respondents directly in particular time

3.2.3 Method of Sampling Techniques

Although there are different sectors in which the MSE operators have been engaged in
Debre Birhan town, the sectors we have been select for conducting the research are textile and
garment, food processing and metal and wood work sector because of the following rationales.
First, the sectors are selected because of largest concentration in number compared to other
sectors in the town. This made the sectors more and easily accessible for the data collection.
Second, it is difficult to reach the operators/or owners managers of some sectors like urban
farming, hen reproduction and others.

The target population of the study is 326 enterprises which include food processing (120), textile
and garment (101), and wood and metal work (105) from the year 1998 up to 2009. To figure out
our sample size we will use the slovin ̍s formula which is used in determining a sample size of
the enterprise. In order to get adequate and representative sample of respondents, the sample size
is determined by using the following formula for finite population. The reason for using this
sampling method is that the sizes of enterprise in the town are known.

Among the several method of sample size determination to determine the required sample size is
at 90% confidence level is selected, 90 out of 100samples have the true population value within
the range of +10%,precision (sampling error). Slovn ̍s formula is expressed as

N 326
n¿ 2
n= =¿ 77
1+ Ne 1+326(0.01)

Where, n =sample size; N = population size (targeted enterprise);

e = 0.1 % error margin / margin of error

Using 10 % level of error or 90 % level of confidence 77 samples will take from the total target
enterprise.

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Based on the nature of enterprise that they participate in different sectors, with different
peculiarities, we have used stratified sampling techniques, which is a type of probability
sampling. The reason why we choose stratified, because it is use full in increasing a sample
statistical efficiency and in providing adequate data for analyzing the various sub population who
participates in different sectors, then we stratified based on sectoral group. After stratification we
have used simple random sampling to select individual enterprise from the three sectors

Proportion of selecting the sample from the three enterprises including; food processing, metal
and woodwork and garment and textile to collect the required data from the enterprise is given
101
by ∗77=24 from garment and textile
326

120
∗77=28 From food processing
326

105
∗77=25 From wood and metal work
326

3.3. Data Analysis

According to the nature of data which we have been collected, both descriptive and econometric
analysis was employed to study the different variables.

3.3.1. Descriptive Analysis

Descriptive analysis is used to describe the data in to summary format by tabulation, measure of
central tendencies .Moreover; pie charts and bar graph have been used to describe the general
characteristics of enterprise.

3.3.2. Econometric Analysis

An appropriate model we apply in the analysis of factors affecting the performance of firms in
this study is Ordinary Least Squares (OLS) as the dependent variable taken as turnover (profit in
a year) in this case is continuous variable. And also OLS provides an estimate of the best way
linearly to combine the explanatory variables to predict the dependent variable and the estimator
is the most basic estimation procedure in econometrics.

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3.3.3. Model specification

The dependent variable will be taken as turnover, which has to be explained by various
characteristics of MSEs Constraint such as: initial capital, working place factors, infrastructural
factors, marketing factors, financial factors, management and entrepreneurial skill. Therefore the
basic regression model that applied in this study as follow

Log (Profit) = βo + β 1 log ⁡¿ cap) + β 2 Ent+ β 3Man+ β 4Place+ β 5Infra+ β 6Mark+ β 7Fina+¿ ei

Where

Y=is the response or dependent variable –profit in log

X1=initial capital in log

X2=Ententrepreneurial skill.
X3=Management
X4=Place
X5=infrastructure,
X6=marketing, and
X7=finance are the explanatory variables.
β0= is the intercept term-constant which would be equal to the mean if all slope coefficients are
0.
ei =error term
βi are the coefficients associated with each independent variable which measures the change in
the mean value of Y, per unit change in their respective independent variables.

3.4. Description of the variables

3.4.1. Dependent variable

Log(Profit)It is single variable which its value depends on explanatory variable. In this model the
dependent variable is performance of MSEs which is measured by profit (turn over) of the firm.

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Measuring MSEs Performance in terms of turnover (profit) is preferable to other measures such
as customer loyalty, market share, employment growth because it is less influenced to
measurement error and also in this model the dependent variable coded as continuous. To
minimize the value of coefficient of the variables we have taken profit in logarithm form

3.4.2 Explanatory variable

Log(Incap):-initial capitals have an impact on the performance of MSEs. It is expected to have

positive sign because with more initial capital of the firm they can expand their business easily
and can produce more and coded as continuous. To minimize the value of coefficient of the
variables we have taken initial capital in logarithm form

Work place:-working place factors is the other variables that affect the performance of MSEs.
Whether or not the performance of MSEs located in business “hotspot ” areas differ from those
operating in an area with less concentration of business. It expected to have positive sign because
MSEs located in high business concentration area have good performance compared with those
located in area with less business concentration. It is dummy variable talking the value 1if the
work place is largely favorable and 0 otherwise

Infra:-Access to infrastructure affects the performance of MSEs. The infrastructural problem

include:-lack of electricity, water, transport, road etc. It is expected to have positive sign because
good infrastructural facility leads better performance of MSEs. It is dummy variable talking 1 if
there is adequate infrastructure and 0 otherwise

Mark:-Market situation of the firm can affect the performance of MSEs. The problem related
with market situation include: lack of demand forecasting, lack of promotion to attract potential
users, poor customer relationship and handling. It is expected to have positive sign because good
market situation initiates firms’ performance. It is a dummy variable talking 1 if the market
situation is good and 0 otherwise.

Fina:-Access to finance has an impact on the performance of MSEs. Financial problem include:-
high interest rate charged by banks and other lending institutions, high collateral requirement
from bank and other lending institutions. It is expected to have positive sign because the higher

29 | P a g e
access to finance leads the higher firm’s business performance. It is dummy variable talking the
value 1if there is access to finance and 0 otherwise

Man:-Management factor affect the performance of MSEs. Problem related with management
include:-lack of well trained and experienced employee, poor organization and ineffective
communication and lack of strategic business planning. It is expected to have positive sign
because good management is necessary for proper planning, control organizing skills and proper
staffing with qualified and competent employee and this leads to good performance of MSEs. It
is a dummy variable talking the value 1 if there is good management skill and 0 otherwise.

Ent:-entrepreneurial factor affects the performance of MSEs. Problem related with

entrepreneurial factor include:-lack of tolerance to work hard, lack of motivation and lack of
information to exploit business opportunity. It is expected to have positive sign because good
entrepreneurial training results better performance of MSEs. It is a dummy variable taking the
value 1 if there is good entrepreneurial ability and 0 otherwise

3.5 Diagnostic Tests

Diagnosing the model will very important to establish whether the estimate of the coefficient are
tenable and the extent to regression coefficient in the model makes the model linear unbiased
estimator of SMEs performance. For the purpose of this study, the model will tested to verify the
existence or otherwise of multicollinarity and hetroskedasticity.

3.5.1Multicollinarity Tests

This is a violation of one of the classical assumption of OLS that suggests that the explanatory
variables are not perfectly correlated. When this happens OLS is no longer BLUE and affect the
estimate of the coefficient so that they are no longer stable in the degree of their statistical
significance, magnitude and sign (Gujarati, 2003). Detection can be undertaken through an
examination of the R2: if this is high the researcher has few significant t-values then the
researcher may have this problem in this model, so the researcher should conduct a correlation
matrix or use variance inflation factor (VIF).To detect multicollinarity, the researcher will
conduct variance inflation factor (VIF). The decision rule as follows:

 When VIF >10 there is a multicollinarity problem between independent variables.

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  When VIF <10 there is no problem of multicollinarity between independent variables.

3.5.2 Hetroskedasticity Tests

Application of ordinary least square model is consequent on full filling its assumption. The
violation of equality of variance of the errors has to do with the problem of hetroskedasticity.
The presence of hetroskedasticity leads to inefficient estimate of the coefficient although they
remain unbiased. Hetroskedasticity is more prevalent with cross sectional data and could
undermine the result of the study. To test the presence of hetroskedasticity, the Brush pagan
/cook-Weisberg tests will be employed. This test involves testing the null hypothesis that the
error variances are all equal versus the alternative that the error variances are a multiplicative
function of the one or more variables. In other words the alternative hypothesis states that, the
error variances increase or decrease as the predicted values of Y increase. A large chi-square
would indicate that hetroskedasticity was present, thus it indicates that the error term is
multiplicative function of the predicted value

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 Chapter Four

4. Results and Discussions

To facilitate ease in conducting the empirical analysis, the results of descriptive analyses are
presented first, followed by the econometric analysis. The purpose of this study is to critically
assess the factors affecting the performance of MSEs in Debre Birhan town. How far, the owner
managers are aware on the challenges of MSE’s performance and Data were collected from
operators or owner managers of MSEs found in Debre Birhan town. Seventy seven
questionnaires were distributed across the three sectors in the town. These questionnaires were
distributed to textile and garment (24), food processing (28) and wood and metal work (25)
respectively. Generally, this section is organized in the following manner: First, the general
information about MSEs were presented and analyzed. Second, data collected through
questionnaires were analyzed.

4.1. General characteristics of the enterprises

4.1.1 Category of Business Venture

Table 4.1 Sectors respondents engaged in

Year Sector No of No of enterprise in

enterprise percentage
2005/6- Textile and garment 24 31.16%
2017/18
Food processing 28 36.36%
Wood and metal work 25 32.46%

Source Debre Birhan MSEs office,2017/2018

As shown in figure above, the sample firms were operating in three sectors of the economy. Most
of them are engaged in food processing (36.36%) followed by wood and metal work (32.46%)
and textile and garment (31.16%).
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4.1.1.2The Main Source of Start-up and Expansion Finance

Starting own business requires a starting capital rather than mere existence of ideas. To capture
information regarding the relative importance of the various sources of finance, enterprises were
asked whether they ever received credit from each of a given list of sources of finance. The
following figure shows the main sources funds.

Figure 4.1 Sources of finance

Source own survey in Debre Birhan 2017/2018

As can be seen from the figure personal saving (31.5%) are the most frequently used sources,
followed by family (27.5%), bank (25.5%)and micro finance institutions (15.5%) in that order.
This shows that the main source of finance for MSEs in Debre Birhan town is personal saving. In
the town , informal sources play the greatest role in establishment of MSEs than the formal
sources like microfinance and banks.

4.1.1.3 The Important Aspects for Business Venture Success

Figure 4.2 Business venture success

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 Object 20

Source own survey in Debre Birhan 2017/2018

As it can be seen from the figure above, 32.5% of the respondents indicated that a business plan
is important for the success of their business ventures, 25.5% of the respondents felt that the
availability of business opportunities is important for the success of their business ventures,
21.5.1% of respondents alluded to the fact that an entrepreneurial team is essential for the
success of their business ventures and 22.4% of the respondents concluded that training in
business skills is important for the success of their business ventures. The closer analysis of the
result leads to the conclusion that a business plan is the most important aspects for the success of
any business venture.

A special set of questions were asked to MSEs to identify the challenges they face while
participating in the sector. They were provided with close ended questions related with the
constraints they encounter. Identifying the challenges is half the way of solving the problem. So
the challenges should be clearly looked to find the solution. Look the following charts

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Figure 4.3 Top Business constraint of enterprise

Object 22

Source own survey in Debre Birhan2017/2018

As it can be seen from the figure 23.5% of the respondents indicated that a Financial factors is
the main constraint followed by infrastructure (19%), marketing (16.5%) and legal factors
(13%). On the other hand technological factors and working place factors have little impact on
the performance of business. In conclusion all the major constraints identified by the enterprise
require a quick solution from the concerned bodies so that the business environment could
improve..

4.2 Empirical Results and Discussions

4.2.1 Descriptive analysis of the survey

This section of the paper consists of the descriptive analysis of the survey done by the researcher.
This section is depending on the questionnaire distributed to different enterprises. As we
mentioned on chapter three of this paper 77 questionnaires of the samples were used to assess
factors faceting the performance of micro and small scale enterprise in Debre Birhan town.
Enterprises were asked a different set of questions with regard to their participating sectors. They

35 | P a g e
are classified in into three i.e. MSEs in textile and garment, wood and metal work and food
processing. In this section we have started our analysis by the following STATA 12.0® results
by the command of “sum” presented as follow

Table 4.2

Variable Obs Mean Std. Dev. Min Max

Profit 77 83891.2 174117.1 3645.5 1500000
Incap 77 28328.23 31650.99 1000 200000
Ent 77 .7402597 .4413674 0 1
Man 77 .6753247 .471324 0 1
Wplace 77 .8441558 .365086 0 1
Infra 77 .4935065 .5032363 0 1
Mark 77 .7142857 .4547163 0 1
Fina 77 .5974026 .4936369 0 1
Source: own computed from surveyed data, 2017/18

A summary of surveyed micro and small scale enterprise data given in the above table 4.2 would
be interpreted as follows;

Note that the mean estimates of dummy variables should be interpreted as percentage.

. A summary of surveyed’ data is given in Table 4.2. From the total of 77 sampled enterprises 24
(31.15%) were enterprise of textile and garment sectors, food processing 28(36.36), while 25
(32.46%) were enterprises in wood and metal.

The profit of the firm is about 3645.5 birr with a minimum of 1firm to a maximum of 1.5 million
birr and the average profit of the entrepreneur is 83891.2. The amount of initial capital of the
firm is 1000 birr with a minimum of 1 firm to a maximum of 200000 birr and the average initial
capital of the firm is 28328.23birr. The survey result shows that the entrepreneurial ability of57
(74.0%) of the enterprise said that good but 20(26%) of the enterprise the entrepreneurial ability
not good due to Lack of motivation and drive, Lack of tolerance to work hard, Lack of
persistence and courage to take responsibility for one’s failure, Lack of entrepreneurship training
and Lack of information to exploit business opportunities. The survey result shows that
management skill of52 (67.5%) of the enterprises is said that inadequate but 25(30.5%) of the
enterprise management skill is adequate. The survey result also shows that working place
36 | P a g e
condition of 65 (84.4%) the enterprise is favorable due to current working place is convenient
and the rent of house is not too high but 12 (16.6%) of the enterprise working place is not
favorable. The survey result shows that the infrastructure condition of 49 (49.3%) of the enterprise were
said that it is inadequate but 50.7%) of the enterprise infrastructure is adequate.

The market access condition of 55 (75.4%) of the entrepreneurs were said that it is good but 22
(24.6%) of the enterprise market access condition is not good. Finance access condition of the
enterprise 46(59.7%) 0f the enterprise said that there is financial problem but 31(40. 3%) of the enterprise
there is no financial problem. This shows that there are firms which have no credit facility at the results of
the problems of credit access on enterprise.

4.3 Econometric Results and Discussion

In this section results obtained from regression analysis of factors affecting the performance of
micro and small scale enterprises are discussed and different tests are included. As we have
described earlier the multiple leaner regression model is employed to analyses factors affecting
the performance of micro and small scale enterprise which include initial capital of the
enterprise, finance access of the enterprise, market, management, entrepreneurial ability,
infrastructure, and working place.

4.3.1 Ordinary Least Square Estimation Results and Discussion

The ordinary least square estimation results obtained using STATA version 12.0 is given in table
below.

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Table 4.3 Ordinary Least Square estimate of multiple linear regression model

Obs = 77
F(7, 69) = 37.82
Prob > F= 0.000
R-squared= 0.7933

Variables Coefficients. Std. Err. T P>|t| [95% Conf. Interval]

logIncap .2200412 .0577072 3.81 0.000*** .1049184 .3351639

Ent .6949179 .1837462 3.78 0.000*** .3283543 1.061481
Man -.0803451 .131722 0.61 0.544 -.3431233 .1824331
Wplace .2025827 .1737153 1.17 0.248 -.1439698 .5491353
Infra .5821257 .1596441 3.65 0.001*** .2636444 .9006069
Mark .3824297 .1788328 2.14 0.036** .025668 .7391914
Fina .3773629 .195181 1.93 0.057* -.0120126 .7667384
_cons 7.182295 .5261549 1 13.65 0.000 6.132645 8.231945
Source: own computed from surveyed data, 2017/18

*** - Significant at 1% level of significance

**- Significant at 5% level of significance

*- Significant at 10% level of significance

4.2.4. Regression Diagnostic Tests and Discussion of the Estimation Result

I. The Model Estimation
From the OLS estimation result, by approximating the estimated coefficients of the following
model can be found.
logProfit=7.18+0.22 logincap+0.69Ent-0.08Man+0.20Wplace+0.58Infra+0.38Mark+0.377Fina

38 | P a g e
II. Regression Diagnostic Tests
Before making the analysis of the result it is important to judge the efficiency of the model using
some diagnostic tests. In particular, inferences based on OLS results can be valid depending on
whether the CLRM assumptions hold. Hence, after estimating the parameters, the next task is to
test whether the assumptions of CLRM are satisfied or not. The following are the most frequent
used tests for cross-sectional data type regression model.
A. Multicollinearity test
We used VIF to test the existence of multicollinearity. Therefore the level of our STATA result
is mean VIF =1.77 which is lower than 10. As the rule of thumb if VIF<10 shows that there is no
multicolinearity problem in the model. Therefore the value of 1.77<10 indicates that there is no
multicolinearty problem among the explanatory variable of the model with the dependent
variable (see appendix part).

B. Hetroskedasticity test
To test for the presence of hetroskedasticity, the Breach –pagan /cook-Weisberg tests would be
employed. If the p-value is very small, we would have to reject the null hypothesis (i.e.) there is
a problem of hetroskedasticity. Since in our model the p-value is (0.6088) which is greater than
0.05 we accept the null hypothesis. So, our model has no problem of hetroskedasticity. (see
appendix part).

III. Discussion of the Estimated Result

The result of OLS multiple regression models show that, from the total of seven independent
variables, the estimated coefficients of five variables found to be significant. The effects of those
significant variables would be discussed below.
Initial capital: initial capital of the enterprise is statistically significant at 1% significant level
with p-value of 0.000 and has a positive sign as we expect, indicating a strong positive
relationship between firm profit and initial capital. The increment of startup capital of the firm by
one percent, increase the profit of enterprise by 0.22%, citrus paribus.

Entrepreneurship:- The variable entrepreneurship is statistically significant at 1% significant

level with p-value of 0.000 and has a positive sign as we expect, indicating a strong positive
relationship between firm profit and entrepreneurial ability, a unit increase entrepreneurial ability
would lead to 0.69% increase profit of firms other things being equal.

39 | P a g e
Infrastructure:- The variable infrastructure is statistically significant at 1% significant level
with p-value of 0.001and has a positive sign as we expect, Interpreted as a unit increase in access
to infrastructure would lead to 0.38% increases the profit of firms other thing being equal .The
access of infrastructure like water, road, electricity and transport leads increase the performance
of firms.

Market: The variable market is statistically significant at 5% significant level with p-value of
0.036 and has appositive sign as we expect. A unit increase access to market would lead 0.38%
increases the profit of the firm other thing being equal. Access of the market include: good
customer relation and handling, adequate market of product leads to increasing the profit of the
firm.

Finance: The variable finance is statistically significant at 10% significant level with p-value of
0,057 and has appositive sign as we expect. A unit increase access to market would lead 0.377%
increases the profit of the firm other thing being equal. With regard to access to finance, we find
that adequate access to finance positively correlates to with performance of firms in the study
area. The variable management and Working place factors found to be statistically
insignificant.

In our analysis there are seven independent variable and a dependent variable, R-squared which
equal to 0.7933 this value tells us that the independent variable (initial capital, entrepreneurship,
finance, working place, market, infrastructure, and management) accounts for approximately
79% of the variation of dependent variable (profit).

Chapter Five

Conclusion and Recommendation

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5.1 Conclusions
This research was conducted in Debre Birhan town with the prime intent of critically assessing
the factors affecting the performance of MSE operators engaged in textile and garment, food
processing and wood and metal work. Specifically, the study attempted to examine the factors
that affect the performance of MSEs, to describe the characteristics of small enterprises operating
in the study area and to recommend possible solution to alleviate the problem of MSEs. Based on
the objectives and findings of the study, the following conclusions were drawn.

This study analyzed the possible factors that affect the performance of micro and small scale
enterprise in Debre Berhan town in Amhara region. The study used a total of 77 enterprises to
assess determining factors of micro and small scale enterprises. To assess the factors we used
multiple regression model which was more appropriate. We used a theoretical data to investigate
the source of finance and the important aspects for business Venture Success for micro enterprise
from Debre Berhan town micro enterprises office and cross sectional data to assess the factors at
a point of time of 2017/18 in the town.

It can be concluded that 79.3% of the variation in performance can be explained by the
independent variables (initial capital, Marketing, Finance, Working Premises, Management,
Entrepreneurial, and Infrastructural) factors. The remaining 20.7 % of the variance is explained
by other variables not included under this study.
It can be concluded that there exist a big gap of financial sources for the startup and expansion of
MSEs that can be easily and equally accessible to all entrepreneurs in Debre Birhan town. The
formal financial institutions was not easily accessible because of the difficult application
procedures, collateral requirement and high rate of interest, and these situations led MSE
operators to use more of the informal institutions. So lack of sources of finance is the major
factors affecting startup and expansion of business by many entrepreneurs in the area. The
factors which are identified as the major factors affecting the performance of MSEs are: the
initial capital, Financial, entrepreneurial, infrastructure, working place, management and
Marketing factors.

The multiple liner regression model result indicate that while initial capital, entrepreneurship,
market condition, infrastructure and finance have a positive significant effect on performance of

41 | P a g e
micro and small scale enterprise. This means with higher entrepreneurial ability and with more
initial capital of enterprises is increase the performance of entrepreneurs. However, if the supply
of electricity is unreliable, finance access is low, and the charging of high interest rate will
offset/reduce the firm business performance. The most conducive part of the result was the
positive coefficient in the variable working place. Though insignificant, working place had a
positive effect on the performance of micro and small scale enterprise. On the other hand, though
it is insignificant, management have a negative sign which reduce the profit of the firm.

Among the variables entrepreneurship, initial capital and infrastructure are the main factors
affecting the performance of business in Debre Birhan town, it has shown substantial positive
correlation with performance (p < 0.01).
5.2 Recommendation

The findings of this study have important implications designed to enhance the startup, growth,
performance and expansion of SMEs in Debre Birhan and in similar cities with in Ethiopia.
Since the creation of new jobs depends on good performance of enterprises, a concerned
attention should be given to those factors that influence start up and performance of enterprises.
Based on the findings and conclusions of the study, the following recommendations are
forwarded.
 The town administration should provide affordable alternative sources of finance for
MSEs. This can be done by communicating with the banks and other credit institutions
to lessen their requirements. This should be done so that MSEs can get enough access to
finance for their business activities. The strengthening of government institutions at
different levels would play a major role in positively influencing the development of
MSEs, thus to reduce delays in processing legal requirements.

 Improvement and expansion of infrastructural facility i.e. power supply, communication

and others should have to be done. Though it needs a nationwide effort to alleviate this
problem the local government according to its capabilities can search for other energy
sources (especially for electricity facility).

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  The Microfinance institutions should review and simplify loan application procedures,
the level of collateral and interest rates that can be easily accessed and affordably
utilized by MSEs.
 Since capital is a very important factor that affects the performance of MSEs it is
recommended the government and other financial providers provide training for the way
of raising initial capital.
 Government should provide be a systematic and well organized Entrepreneurial training
center with in the town that provides a continuous training, for MSE officers, extension
workers and business operators.
 Government should expand local market within and outside the country can lessen the
problems associated with small market size.

REFERENCES

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  Abraham. A,(2013) factor affecting the performance of MSEs in Hosanna Town ,
hadya Zone, Ethiopia, Addis Ababa: The case of Gullele, Kirkos and Yeka sub-
cities. MA thesis in Regional and Local Development Studies.
 Addis Ababa City Administration Micro and Small Enterprise Development
Agency (AACMSEDA). (2011). ‘Inception Report on Micro and Small
Enterprise Development in Addis Ababa’, Unpublished Report.
 Alebachew. T,(2017) The Contribution of Micro and Small Enterprises for
Economic Development in Debre Tabor, Debre Tabor, Ethiopia.
 Bidzakin Kanburi John. (2009). “Assessing Performance of Micro and Small
Scale businesses in Northern Ghana”: Kwame Nkrumah University of Science
and Technology, Kenya.
 Commission on Legal Empowerment of the Poor. (2006), “Background issue
paper on Legal Empowerment of the Poor”, Addis Ababa, Ethiopia.
 CSA - Central Statistics Authority, (2002and2003),“Report on Small-scale
Manufacturing Industries, “Addis Ababa.
 Dereje Lemma. (2008). Micro and Small Scale Enterprises in the Construction
Sector in AddisAbaba; The case of Gullele, Kirkos and Yeka sub-cities.
 Eshetu Bekele & Mammo Muchie. (2009), “Promoting micro, small and medium
Enterprises (MSEs) for sustainable rural Livelihood,” Development, Innovation
and International Political Economy Research,
 Eshetu,(2008) assess the impact of influential factors that affect the long-term
survival and viability of small enterprises, Addis Ababa, Ethiopia.
 Federal Democratic Republic of Ethiopia (FDRE), Ministry of Trade and Industry
(MoTI). (1997). Micro and Small Enterprise Development Strategy. Debre
Birhan, Ethiopia.
 Federal Micro and Small enterprises Development Agency Establishment council
of Ministers (2011). Federal Negarit Gazeta of the federal democratic Republic of
Ethiopia.
 Gathogo. G ,(2011) An Analysis Of Factors Affecting The Performance Of Small
And Medium Enterprises In The Manufacturing Sector In Kenya. Thika
Municipality, Kenya

44 | P a g e
  Global Entreprenuership Monitor (GEM). (2004). Women and Entrepreneurship.
Center, Addis Ababa, Ethiopia
 Hailey G/Tensay, (2007), entrepreneurship and small business management, 2 nd
edition ,Ethio general, Mekelle,Ethiopia
 High Level Commission on Legal Empowerment of the Poor (HLCLEP). (2006).
Background Issue Paper on Legal Empowerment of the Poor: Entrepreneurship.
Draft Document. Addis Ababa, Ethiopia.
 ILO– International Labor Organization (2006), “Key Indicators of the labor
market,” Report V, Geneva
 Lin and Yeh-Yun, C. (1998), “Success factors of small- and medium-size
enterprises in Taiwan: Journal of Small Business Management.
 Micro and Small Enterprises Development Strategy (2011 ) Addis Ababa,
Ethiopia Federal Democratic Republic of Ethiopia (FDRE),).
 Mukras, M.S. (2003). Poverty Reduction through Strengthening Small and
Medium Enterprises. Botswana Journal of African Studies,
 Mulugeta Yohanes. (2011). The Livelihoods Reality of Micro and Small
Enterprise Operators:, Graduate School of Development Studies, Addis Ababa
University, Ethiopia. Unpublished Master’s Thesis.
 Organization for Economic Cooperation and Development (OECD).(2004).
Promoting micro and small scall enterprises to accelerate economic growth and
reduce unemployment in Asia.” Asian economic conference
 Perumal K. & Prasad V. N. . Small and Micro Enterprises: A tool in the fight
against poverty. Available from http://www.un.org/ecosoc/docs/stats/UNIDO.pdf.
 Professor Maurice ,(2015) factors that affect the growth and development of
small, micro and medium-sized business enterprises in The Vaal triangle region
of gauteng province in south Africa, European Journal of Business, Economics
and Accountancy, Vol. 3, No. 3, 2015 ISSN 2056-6018
 Rami Alasadi and Ahmed Abdelrahim. (2007), “Critical Analysis and Modeling
of Small Business Performance,” Journal of Asian Entrepreneurship and
Sustainability
 Siyum .M (2015) the role of micro and small scale business enterprise in urban
poverty alleviation, Addis Ababa, Ethiopia

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  World Bank. (2010). Small and Micro Enterprises”. World Bank Group Review of
small Business Activities. Washington, DC: World Bank
 Zeleke W. (2006). Efficiency in Management as a Determinant of Long-term
Survival in Micro, Small and Medium enterprises in Ethiopia. Problems and
Perspectives in Management, 7(3):1-9.

Appendix one

Questionnaire

DebreBerhan University

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 College of Business and Economics

Department of Economics

Dear respondent,
We are a graduate student in the department of Economics, Debre Birhan University. Currently,
we undertaking a research entitled ‘Factors Affecting the Performance of Micro and Small
Enterprises in Debre Birhan town’. You are one of the respondents selected to participate on
this study. Please assist in giving correct and complete information to present a representative
finding on the current status of the factors affecting the performance of Micro and Small
enterprises in Debre Birhan town. Your participation is entirely voluntary and the questionnaire
is completely anonymous.
. All information will be used for academic purposes only.
Instructions
No need of writing your name

for multiple choice questions indicate your answers with a check mark (√) in the appropriate
block.
SECTION ONE GENERAL INFORMATION
1 Sex A. Male B. Female

2 Age A. under 20 years C. 30-40Years

B. 21-30 Years D. over 40 years

3 Education level
A. Illiteracy (the ability not to read )
B. Grade 1-4
C. Grade 5-8
D. grade 10 completed
E. Above grade 10

4 Marital status
A. Married C. Divorce

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B. Unmarried

SECTION 2 : GENERAL INFORMATION ON BUSINESS ENTERPRISES

5. What is the main activity of the enterprise?

A. Textile and garment .B Food processing C. Wood and metal work

6. How did you raise funds to start-up your business?

A. Personal saving B Micro finance institutions

C, Family . D, Banks E Others (specify)-----------

7. Which one of the following aspect is the most important for the success of your business
venture?

A. A business plan C. An entrepreneurial team

B. Business opportunities D. Training in business skills

8 How much profit did you get in the year 2009 E.c---------------

9 Initial capital .
10 What are the sources of your initial capital?
Own money Loan from bank
Loan from other person other sources
11 Inadequate of Infrastructural facilities (e.g. electricity and water).

(i) Yes (ii) No

12. How do you evaluate the market situation of the sector?
Good Not Good

13 Poor Management skills/Inadequate competent personnel?

(i) Yes; (ii) No

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14 In the case of loans from financial Institution do you find it easy to access?
A. Yes B. No
15 To what extent do you think working place factors affects the performance of your
Business? Great extent little extent

16 How do you evaluate the entrepreneurial ability of the sector?

Good Not Good

17 What are the major problems affecting the performance of your Company?
(a) Lack of startup capital.
(b) Difficulty in obtaining finance.
(c) Inadequate of Infrastructural facilities (e.g. electricity and water).
(d) Problem of market and marketing services.
(e) Poor Management skills/Inadequate competent personnel.
18. What problems did you face while running MSEs in relation to:

_ Politico-legal factors [government policy, bureaucracies (in relation to company

Registration and licensing), taxation and the like
_ Premises factors
_ Technology factors
_ Infrastructure (power, transportation, water supply and like)
_ Marketing factors (relationship with suppliers, customers and others)
_ Financial factors (interest rates, collateral requi

Thanks in advance for your cooperation

Appendix two: STATA related

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 ___ ____ ____ ____ ____ (R)
/__ / ____/ / ____/
___/ / /___/ / /___/ 13.0 Copyright 1985-2013 StataCorp LP
Statistics/Data Analysis StataCorp
4905 Lakeway Drive
Special Edition College Station, Texas 77845 USA
800-STATA-PC http://www.stata.com
979-696-4600 [email protected]
979-696-4601 (fax)

3-user Stata network perpetual license:

Serial number: 501306208483
Licensed to: dorba
diredawa

Notes:
1. (/v# option or -set maxvar-) 5000 maximum variables

Checking for updates...

(contacting http://www.stata.com)

Table: A1 the Descriptive Statistics of the Variables

Variable Obs Mean Std. Dev. Min Max

logProfit 77 10.73181 1.053293 8.201249 14.22098

logIncap 77 9.691165 1.161678 6.907755 12.20607
Ent 77 .7402597 .4413674 0 1
Man 77 .6753247 .471324 0 1
Wplace 77 .8441558 .365086 0 1

Infra 77 .4935065 .5032363 0 1

Mark 77 .7142857 .4547163 0 1
Fina 77 .5974026 .4936369 0 1

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 Table:A2OLSRegressionResults

Source SS df MS Number of obs = 77

F( 7, 69) = 37.82
Model 66.8854334 7 9.55506191 Prob > F = 0.0000
Residual 17.4308846 69 .252621515 R-squared = 0.7933
Adj R-squared = 0.7723
Total 84.3163179 76 1.10942524 Root MSE = .50261

logProfit Coef. Std. Err. t P>|t| [95% Conf. Interval]

logIncap .2200412 .0577072 3.81 0.000 .1049184 .3351639

Ent .6949179 .1837462 3.78 0.000 .3283543 1.061481
Man -.0803451 .131722 -0.61 0.544 -.3431233 .1824331
Wplace .2025827 .1737153 1.17 0.248 -.1439698 .5491353
Infra .5821257 .1596441 3.65 0.001 .2636444 .9006069
Mark .3824297 .1788328 2.14 0.036 .025668 .7391914
Fina .3773629 .195181 1.93 0.057 -.0120126 .7667384
_cons 7.182295 .5261549 13.65 0.000 6.132645 8.231945

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 A3 Hetroscedasticity test for our data

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of logProfit

chi2(1) = 0.26
Prob > chi2 = 0.6088

Table A4: Multicollenearity test

Variable VIF 1/VIF

Fina 2.79 0.358069

Mark 1.99 0.502668
Ent 1.98 0.505382
Infra 1.94 0.515000
logIncap 1.35 0.739648
Wplace 1.21 0.826400
Man 1.16 0.862385

Mean VIF 1.77

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