Individual Assignment of Challenges and Opportunities of Small Business in 2019

Ethiopia.

1) Introduction

Small businesses are privately owned corporations, partnerships, or sole proprietorships that

have fewer employees and/or less annual revenue than a regular-sized business or corporation.
Businesses are defined as "small" in terms of being able to apply for government support and
qualify for preferential tax policy varies depending on the country and industry. Small businesses
in many countries include service or retail operations such as convenience stores, small grocery
stores, bakeries or delicatessens, hairdressers or tradespeople (e.g., carpenters, electricians), resta
urants, guest houses, photographers, very small-scale manufacturing, and internet-related
businesses such as web design and computer programming. Some professionals operate as small
businesses, such as lawyers, accountants, dentists and medical doctors (although these
professionals can also work for large organizations or companies). Small businesses vary a great
deal in terms of size, revenues and regulatory authorization, both within a country and from
country to country.

The small scale industries or businesses have a very important and effective role in the
developed countries generally and in developing countries especially because it is considered the
backbone of their economies. Like in developing countries, small businesses have been
considered as the major strategies to sustain the national economic growth in general and to
solve unemployment problems specifically.

However, small businesses in Ethiopia have struggling with varieties of challenges and
opportunities. That is why my assignment focus on assessment of the challenges and
opportunities of small business in Ethiopia. In this assignment paper the introduction, objective
of the assignment, conceptual definition of the terms, challenges and opportunities and finally
conclusion embodied in this paper.

1 Prepared by Sara Eshetu

 Individual Assignment of Challenges and Opportunities of Small Business in 2019
Ethiopia.

2) Objective of the assignment

2.1. General Objective
 To identify the problems and opportunities of small business in Ethiopia.
2.2. The Specific objective of the assignment
 To be familiar with the basic concepts related to small business
 To identify the major problems of small business in Ethiopia.
 To identify the major opportunities of small business in Ethiopia.
 To forward some possible recommendation to overcame the major challenges of small
businesses in Ethiopia.
3) Conceptual Definition of Small Business

The definition of small scale industry may vary from country to country, year to year, from
period to period and from time to time and according to the level of economic development
reached in a country. Sometimes it is defined in terms of number of workers employed and on
the use of electric power and also in terms of investment made. Despite of this, small Scale
Enterprise when established varies in its mode of formation, its sizes, its organizational setup,
and in its activity. The reason for this is because the type chosen by each individual operator will
depend on the financial capability to manage such enterprise.

For the concept of this assignment the definition given by quality glossary definition was taken.
Accordingly, small business is defined as a privately owned corporation, partnership, or sole
proprietorship that has fewer employees and less annual revenue than a corporation or regular-
sized business. Small businesses are either services or retail operations like grocery stores, medical
stores, trades people, bakeries and small manufacturing units. Small businesses are independently
owned organizations that require less capital and fewer workforces and less or no machinery. These
businesses are ideally suited to operate on a small scale to serve a local community and to provide
profits to the company owners.

2 Prepared by Sara Eshetu

 Individual Assignment of Challenges and Opportunities of Small Business in 2019
Ethiopia.

4) Problem of Small Business in Ethiopia.

4.1. Lack of access to finance and credit

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 highly 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 macro and small enterprises (MSEs) are
unable to secure collateral requirements. As a result of absence in financing, the creation of new
enterprises and the growth and survival of existing ones will be impeded.

Access to finance is a major bottleneck for the rapid growth and development of MSEs mainly
due to targeted mechanism put in place to address the financial needs of small scale enterprises.
Most micro and small enterprises do not have access to micro finance institutions and most
banks are reluctant to avail credit facility to small enterprises unless they have acceptable
collateral. The standard of loan appraisal, the long delay the banks take to sanction loans,
unfavorable disposition towards small loans and the limited collateral requirement, which is over
100% of the loan amount, are the major obstacles that small scale enterprises are facing.

Moreover, the interest rate by most micro finance institutes, which is higher than the lending rate
of formal banks, inhibits effectiveness in addressing the needs of micro enterprises. Some studies
suggested that more than 93% of MSEs replied that they did not apply for bank loans for the
reasons they considered themselves as discouraged potential borrowers, need credit but are
discouraged from applying by the perceived or real high collateral requirement, high cost of
borrowing, difficulty of processes, ineligibility, or concern about their repayment ability and
uninformed.

4.2. Lack of clear and pragmatic national policy and institutional qualities
Despite the strategies and other rules and regulations that are in vigor in theory, most
interventionist policies regarding small scale enterprises are inappropriate and impractical. For
instance, most government policies have a tendency to over regulate and limit the growth of
private sector enterprises and they are over bureaucratized and unfriendly to support small

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 Individual Assignment of Challenges and Opportunities of Small Business in 2019
Ethiopia.

businesses The same study reveals that the complexity of customs system and many forms and
declarations required have had a negative impact on the general business environment diverting
entrepreneurs’ efforts from more productive tasks. The legal and regulatory problems are major
obstacles to efficient operation of micro and small enterprises. The bureaucratic registration
requirements for licensing, high policy control, overregulation, corruption, high tariffs and unfair
tax were found as major policy-related constraints that adversely affect the sector. Free market
policy has also exposed them to international competition, and this had a significant negative
impact on their performance. The government is not actively providing support mechanisms for
business registration to ensure the success of micro-enterprises. There is also poor
communication between the government and small business owners. Lack of proper regulation in
terms of borrowing funds from the banks by small business owners; lack of focus in formulation
and implementation of policies, and tax laws affects the performance of small business.

4.3. Location and working space problems

For small business, 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
start up businesses. Location is critical factor for sales and income of small scale enterprises and
hence entrepreneurs benefit from businesses in formal residential areas. Logically, this finding
stems from the higher per capita income and demand density in developed urban areas. Demand
density also makes taxi ranks and train stations more lucrative. These spaces are limited and thus
a source of competitive advantage that cannot be copied or re-created. The same researcher
found that most of the micro-enterprises are failing owing to a lack of space provided by the
government and the various shortcomings of the small business owners regarding their
businesses.

4 Prepared by Sara Eshetu

 Individual Assignment of Challenges and Opportunities of Small Business in 2019
Ethiopia.

4.4. Lack managerial and other skilled labor, and lack of training
There is lack of knowledge of entrepreneurial and managerial capacity, and marketing
experience. Lack of skill leads to problems in production due to the unfamiliarity of workers
with rapid changing technology, lack of coordination of production process, and inability to 23
troubleshoot failures on machinery and/or equipments is a critical problem that MSEs are facing
since they cannot afford to employ specialists in the fields of planning, finance and
administration, quality control, and those with technical. Moreover, MSEs lack resources
required for research and development and there is inadequate technical and entrepreneurial
skills. There is lack of formal education and training in MSEs operators. The most common form
of acquiring skills in the MSEs sector is through apprenticeships. Though the formal education
system prepares students for paid employment, there are very few vocational institutions that
cater for developing skills. This inevitably leads to low level of innovation in almost all sectors
of the economy and severe shortage of training opportunities for potential entrepreneurs. As a
result, there is lack of technology available to micro and small businesses enterprises. The results
of this research show that the government does not have enough support mechanisms available to
ensure that small business owners and their employees receive the training that would enable
them to run the business successfully. Most owners do not have management experience and
adequate training and skills to operate a business. They also found lack of business skills and
shortage of skill labor which results from absence of proper training are affecting micro and
small enterprises negatively. Management is one of the fundamental bases of business
development. Most of the small business owners do not acquire enough education before
establishing business of their own and they are still blind in seeing the wisdom of formal learning
or acquiring managerial skills in doing business though claim to be successful with their acquired
experience. This has resulted to the low level of attention to the welfares of their workers. It is
therefore important for small business owners to absorb the skills of proper management.

4.4. Lack of sufficient marketing and high competition level

The marketing problem is the main constraint for the growth of enterprises. Micro and small
enterprises in Ethiopia faced various marketing problems. There is lack of product diversity and
as a result similar products are over crowding the market. In addition to this certain micro and
small enterprises lack the skill to modify their products and they have lack of sufficient range of

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 Individual Assignment of Challenges and Opportunities of Small Business in 2019
Ethiopia.

product designs. Ethiopian micro and small enterprises have different pricing problems such as
lack of costing knowledge, did not include over head costs, salary or wage of family members
involved in the production process are not considered, and do not know the exact earning from
sales. Many MSEs plan to promote their products, however, their budget is mostly limited. In
addition to this, such MSEs have lack of awareness haw to compete in the market. MSEs are less
advantageous to compete in the market than large companies since they have smaller economies
of scale.

4.5. Lack of formal or informal linkages / business cooperation amongst enterprises

The other factor that hinders growth and expansion of MSEs is the effectiveness with which they
interact with large or similar firms. In other words, formal and informal linkages or business
cooperation through networking are not common. Large public enterprises and the few foreign
affiliates do not outsource some of their operations to local MSEs. The legal and institutional
mechanisms to enforce contractual obligations and government policy to design appropriate
incentive mechanism to encourage the expansion of business linkages/sub contracting
managements is at its infant stage.

4.6. Lack of good infrastructure facilitates

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.

6 Prepared by Sara Eshetu

 Individual Assignment of Challenges and Opportunities of Small Business in 2019
Ethiopia.

5) Opportunities of Small Business in Ethiopia

The following are the opportunities of small business in Ethiopia.

 Increased Investments in Technology and Innovation: There are strong linkages

between innovation and new firm formation, and policymakers fully understand that risk-
taking entrepreneurs have positive impacts on regional economic development. With
many regional officials seeking the “next big thing” that will drive their local and
regional economies for years to come, there is an appreciation that small businesses are
leading the way toward new inventions, processes, and products. Such innovations are
vital to our economic growth, and they will provide the tools to make our economy more
competitive in an increasingly globalized marketplace.
 Economic Gardening” and Grooming Local Entrepreneurs: Proponents of “economic
gardening,” which has communities plow the dollars that would have been spent on
luring big businesses to their town to promote local small businesses instead, argue that
grooming existing firms can ultimately lead to greater payoffs in terms of job creation.
 Pursuing New Markets Overseas: One of the strengths in our current economic climate
is the export sector, and international trade represents an opportunity for small
businesses.
 Promoting Business Ownership among Selected Demographic Groups: Women and
minorities have been extremely entrepreneurial over the past few years a trend that is
expected to continue. One of the driving factors for minorities has been the influx of
immigrants coming to this country. Recent studies show a strong connection between
immigration and high-technology entrepreneurship, suggesting enormous benefits for
embracing these new citizens.
 Advancing Education and Training: Education and training are important as there are
strong linkages between entrepreneurship and human capital. Moreover, small business
owners devote significant resources to training their workforce. These firms are able to
increase their labor productivity and reduce their labor turnover. In this way, small
business owners should look at education not just as a means of retraining their workers,
but also as methods of building new skills, developing new human talent, and preserving

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 Individual Assignment of Challenges and Opportunities of Small Business in 2019
Ethiopia.

employee morale. Failure to do so might result in a reduced competitive position for the
most talented employees.
6) The Recommendation

In order to solve the problems in small business, the following solutions are recommended:

 Capacity building for the selected sector by initiating and organizing regular training,
work shop and experience sharing from successful enterprises, and provision of advice
and consultancy services for small businesses enterprises.
 Encourage establishment of small business sector, specifically export oriented
marketing companies by providing matching grants to conduct marketing research,
developing marketing strategies, participating and conducting trade fairs and
undertaking promotional and marketing strategies.
 Review of prudential regulations, periodically in line with the small business credit
demand and supply data.
 Establishment of credit guarantees and credit insurance companies; and support
financial institutions in designing and launching small business based program lending
schemes.
 The government should ensure adequate provision of physical infrastructure such as
roads and utilities for the sector.
 The government functionaries should review and design all-encompassing policy to
address issues related to license/ registration and premises/ location on which small
businesses operate.

8 Prepared by Sara Eshetu

 Individual Assignment of Challenges and Opportunities of Small Business in 2019
Ethiopia.

Table of Content
Contents Pages
1) Introduction.......................................................................................................1

2) Objective of the assignment..............................................................................2

2.1. General Objective...........................................................................................2

2.2. The Specific objective of the assignment....................................................2

3) Conceptual Definition of Small Business........................................................2

4) Problem of Small Business in Ethiopia...........................................................3

4.1. Lack of access to finance and credit..............................................................3

4.2. Lack of clear and pragmatic national policy and institutional qualities........3

4.3. Location and working space problems............................................................4

4.4. Lack managerial and other skilled labor, and lack of training......................5

4.4. Lack of sufficient marketing and high competition level.................................5

4.5. Lack of formal or informal linkages / business cooperation amongst

enterprises..............................................................................................................6

4.6. Lack of good infrastructure facilitates............................................................6

5) Opportunities of Small Business in Ethiopia..................................................7

6) The Recommendation.......................................................................................8

9 Prepared by Sara Eshetu