1.1 Background of the Study
Micro and Small Enterprises (MSEs) are mostly recognized as the engine of world economic growth. Many highly-industrialized countries like Japan, China, and Taiwan have based their industrial development on MSEs which are now a role model for less developed countries on how to utilize their unemployed labor, domestic resources, and domestic technologies (Tumidado, 2019 & Esubalew & Raghurama, 2020). Private sectors are significant in socio-economic development, increasing productivity, and innovation, and creating employment opportunities mostly for the youth.
According to entrepreneurship reduces poverty and income inequality between rich and poor in any given country. MSEs are one of the means by which people become self-employed or entrepreneurs. Entrepreneurs are often pragmatic, and innovative, have vision and ideas, are risk-takers, able to exploit opportunities, and are capable of transforming their ideas into economic opportunities (Rodrigues et al., 2021).
MSEs have become one of the most significant tools for dealing with economic and social issues and achieving development goals in both developed and developing countries and they play significant roles in the creation of employment opportunities, reduction of poverty, and income generation (Zhang & Ayele, 2022, Ciekanowski & Wyrębek, 2020, & Endris & Kassegn, 2022). Regarding to this the Central Statistical Authority of Ethiopia’s (2015) Report on small scale Manufacturing Industries Survey indicates, the importance of the sector can help transform the economy from agricultural-based to manufacturing-led, increasing agricultural productivity, reducing unemployment, and generating trade and construction (Azanaw, 2022)
(OECD, 2017) statistics showed that MSEs make up more than 60% of the gross domestic product in developing economies and more than 70% of the total employment. This sector generates about 51% of the aggregate employment in Latin America, 65% in Asia, 6.2% in the United States, 22.3% in China, 80% in India, 67% in Japan, and 70% in European, 72% in Sub-Saharan Africa, and 48% in North African countries.
In Ethiopia, about half of the labor force is engaged in this sector and Addis Ababa alone accounts for nearly 40% of the total MSE operators (Endalsasa, 2012 as cited by Menda, 2015; ILO, 2002 as cited by Menda, 2015).
In most fast-developing countries MSEs by virtue of their size, location, capital investment, and capacity to contribute to poverty reduction and generate greater employment have proved their powerful effect on rapid economic growth (Ciekanowski & Wyrębek, 2020). (Rodrigues et al., 2021), also, identified the significance of MSEs as a means of bringing economic transformation using the skill and the talent of people without requiring high-level training, much capital, and sophisticated technology. The sector has a significant role as the national home of entrepreneurship, they are the primary vehicles by which new entrepreneurs provide the economy with a continuous supply of ideas, skills, and innovation (Simale Girma, 2019). Thus, focusing on the growth and transformation of such enterprises will bring paramount change in the economic growth of developing countries.
The government of Ethiopia formulated the national Micro and Small Enterprise Development and Promotion Strategy in 2005 with the primary objective of creating a favorable environment for MSEs. As a result, MSEs could facilitate economic growth, create long-term jobs, strengthen cooperation between them, and provide the basis for medium-scale and large-scale enterprises (MSE Strategy for Ethiopia, 2005 as quoted in Mamo, 2020). Following the 1997 MSEs Development Strategy, the Federal Micro and Small Enterprises Development Agency (FeMSEDA) was established in 2006 to lead and stir Ethiopia’s MSE development. Nowadays, the agency is accountable to the Ministry of Trade and Industry and it was recognized with the primary goal of implementing the formulated strategies. For the purpose of smooth implementation of the MSE policies and strategies, the agency extended its structure into the regions by establishing Regional Micro and Small Enterprise Development Agencies (ReMSEDAs) (Tilahun, 2020a).
Accordingly, the MSE’s Development was integrated into the GTP (growth and transformation Plan) as one of the pillars of the Industrial Development Plan and taken as one of the best tools to implement the country’s Industrial Development Strategy. While ensuring broad-based economic growth and lifting up the country to a middle-income level is the comprehensive goal of the ongoing Growth and Transformation Plan (GTP) of the country. Furthermore, to attain this broad goal, MSE Development Policy and Strategy has been further revised in 2012 with the main objectives of creating extensive employment opportunities to increase income; reduce poverty, and enhance the equitable distribution of income. Moreover, it contributes towards competitive and maintainable economic growth thereby forming basics for industrial development and creating broad-based developmental investors in the country (MSE Development Policy and Strategy, 2012 as referenced in Amed Muktar, 2021).
The strategy was revised with renewed interest and more ambitious targets on employment and a number of entrepreneurs and the transition of MSEs to small and medium scale levels respectively. This made micro and small-scale enterprises development have a strategic place within Ethiopian Industrial Development Strategy by transforming micro enterprises into small-scale enterprises and small-scale enterprises into medium-scale enterprises thereby; transforming the medium-scale enterprises into large-scale industries. The transition of MSE from its present level to the next is one of the main focus areas of the country’s development strategy and receives massive support from the government in the form of access to finance, market, technology, training, and working space (Serawitu, 2020).
The government of Ethiopia, strongly believes that MSEs are the right solution to reduce unemployment and hence reduce poverty and this interest is reflected in the GTP. For instance, it plans to create three million new jobs in the MSE sector in the five years of GTP. Hence, the transition and support of MSE is the vital strategy to achieve this national plan of employment creation in the short run and achieve industrialization in the long run (Deksiso, 2018).
(Esubalew & Raghurama, 2020), stated Ethiopia adopts layered policy support in which MSEs are categorized into startups, growing-middle, and maturity. Start-up stage enterprises refer to those enterprises found at their establishment stage and comprise a group or individual aspiring entrepreneurs that seek various supports to make their enterprise operational. (Feyisa, 2018& Geleta & Talegeta, 2019), revealed the basic constraints at the startup stage include a lack of initial and working capital, poor knowledge of business management and entrepreneurship, and a lack of know-how about the different government policies and directives related to the sector. In order to impede these challenges, FeMSEDA has designed a strategy that focuses on facilitating access to initial capital, supporting MSEs in the formalization and legalization process, and provision of training on business management, entrepreneurship, and production techniques.
The growing stage of enterprises refers to those enterprises that are competent in the market in terms of price and quality and effectively utilize the various government support packages and are profitable in their business. However, enterprises at this stage also suffer from different challenges like financial constraints, lack of appropriate technology and technical skill, absence of sufficient working and sales premises, and rent-seeking behavior (Ghidey & Shete, 2023). However, to ease these specific encounters, FeMSEDA has formed a national strategy that focuses on the facilitation of financial support and skill and technological development program. Whereas, enterprises are considered to have reached the maturity stage or filled the needed criteria when they are completely profitable and engaged in further expansion and investments in the sector. (Hawando, 2018), exposed at this stage, FEMSEDA has a strategy that aims to strengthen enterprises in terms of productivity and product quality. Moreover, at this stage, knowledge of international standards and better production technology is spread to enterprises.
In Ethiopia, because of the comprehensive support extended by the government, the sector had some considerable achievements. For instance, during the first four years of the GTP I (2011-2014) the sector was able to create 6,671,012 jobs, which overdoes exceeding the goal set for the total GTP period (three million Jobs); generate revenue of ETB 25.62 billion through Domestic Market linkage, exceeding the goal set for the total GTP period (ETB 10 billion). Moreover, the sector brought a hard currency of 65,375,026 USD through Foreign Market linkage, exceeding the goal set for the total GTP period (46,166,142 USD) (Tilahun, 2020, Waqjira, 2018, Zhang & Ayele, 2022, & Rodrigues et al., 2021)
However, despite the importance of small businesses, various researches conducted on MSEs showed that a number of factors were hindering the transformation of MSEs and the majority of MSEs remain at their initial level in the country in general and in the region in particular. (Abdissa et al., 2022), revealed these problems are access to financial, marketing, management and technological, environmental, raw material, infrastructure, and entrepreneurial factors. Moreover, the shortage of working capital, the intensity of competition, like lack of business development services, the collateral requirement by financial institutions, conflict with neighbors, and lack of transparency among MSEs office at the time of allocating the working place was hindering the transformation of MSEs in the country as well as in the region (Abdissa et al., 2022, Serawitu, 2020, & Geleta & Talegeta, 2019).
Thus, this research will intend to explore factors that affect the transformation of MSEs in the East Hararghe, Fedis district in order to identify internal and external factors that hinder the successful transformation of MSEs. This research will also be contributed to providing relevant information and evidence regarding factors that affect the transformation of MSE that help to improve MSE transformation in MSE sectors.