Chapter Two

Review of Literatures

2.1 Theoretical Literature

Micro enterprises are those business enterprises in the formal and informal sector, with a paid up
capital not exceeding Birr 20,000 and excluding high technology firms and other high tech
establishments. Small enterprises are those business enterprises with a paid up capital of above Birr
20,000 and not exceeding Birr 500,000 and excluding high tech consultancy firms and other high
technological establishments (MoTI, 2004). On the other hand, (CSA ,2004) categorizes enterprises into
different scales of operation on the size of employment and the nature of equipment (Weldegbriel M,
2012)

According to the study in Addis Ababa ,the definition of MSEs is depend on its Size of employment,
capital investment or turnover is used as criteria to categorize enterprises along scales of operations and
define micro, small, medium and large enterprises. This categorization is important for functional and
promotional purposes to achieve the desired levels of development (MSEDS, 2011).

In the case of Ethiopia; there is lack of uniform definition at the national level to have a common
understanding of MSEs sector. While the definition by ministry of trade and industry (MoTI) use capital
investment where as the central statistics authority (CSA) uses employment and favored capital
intensive technologies as yardstick. According to the MoTI (2004):

The Ethiopian government issued the National Micro and Small Enterprises (MSE) strategy in 1997 and
established the Federal Micro and Small Enterprises Development Agency (FMSEA) to harness the
benefit of such strategy. Consequently, the government has emphasized the role of MSEs and provided
support to this sector (TarfasaS. et al., 2016).

Micro & Small Enterprise Development Program in Ethiopia meaningfully has been given due attention
by government since 2004/2005. Of course in 1996/97 National Micro and Small Enterprise Strategy was
developed by the government. Until 2004/2005, the national strategy was implemented by Federal
MSEs Development Agency organized only at national level.

Because of this, it was very difficult to make the strategy practical specially in delivering business
development service for MSE operators. Thus, by considering the critical role of the sector and the
constrained faced by MSE operators since 2004/2005 the government of Ethiopia decide to establish
MSEs coordinating body at regional level (Konjit D. 2004 ).

2.2 Growth and profitability of MSEs

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According to.[ A. K. Salman , 2012] investigate that growth rate is significantly effects to profitability.
According to ( A. Vijayakumar 2011], the study have examined that growth of the firm positively
influence the profitability.[ A. K. Salman , 2012] found that firm growth have a positive effect to the
profitability

In most developing countries, MSEs constitute the vast majority of firms, generating a substantial share
of both overall employment and output. Given their significant economic role, one might expect MSE
growth to drive overall increases in output and income levels. In many cases, however, their largest
economic contribution appears to be one of maintaining rather than generating new employment and
income for the poor. At an aggregate level, MSEs demonstrate impressive growth, especially when
compared with larger firms. However, many individual MSEs grow slowly or not at all in some cases, due
to a conscious decision on the part of the business owner. Overall growth rates are often fueled by the
rapid expansion of a narrow group of highly performing MSEs. In developing as well as in developed
countries, there appears to be a small group of “gazelles “firms that outperform their peers and drive
aggregate employment and productivity growth for the small business sector (Nichter S. et al., 2017).

The finding of the study shows that out of the total sample 40% of Micro and Small Enterprises are
growing and 60% of Micro and Small Enterprises are non-growing in terms of employment. In terms of
capital 69% of Micro and Small Enterprises are growing and 31% are non-growing (Alemayehu D. et al.,
2016)

2.3.1 Managerial skill and experience

The study which was studied in Kenya revealed that availability of managerial skills and experience
affects businesses at Limuru Town Market to a great extent while the respondents felt that training on
managerial skills are required in the businesses to a great extent. Further, the respondents reported that
they do not get trainings on business management skills frequently.

Overall, availability of managerial experience affected business performance and profitability only to a
moderate extent. The study of MSEs revealed that access to finance and availability of management
experience are the key socio-economic factors affecting the performance of businesses in LimuruTown
Market.(Stephen M)

A study which was studied in Addis Ababa also revealed that managerial constraints are usually labeled
as critical success/failure factors as they are internal to the organization and within its control. These
problems need immediate managerial actions and include human resources management, business
planning, organizing, and directing.

The future of small firms depends on the development and maintenance of human resources in which
few highly competent people dedicated to the task, driven by it, working full time and very hard are the
successful once. For many firms, the attraction, development and maintenance of successful individuals
are a critical success factor even though recruiting new employee is one of the biggest challenges facing

1
small firms, and a key component of organizational success(Chrisman,1989
Hyvarinen ,1990;Hailey,1991; Donckels and Fröhlich 1991;David andNyong,1992 ;Lussier,
et,al,.,1996 ;Yusuf and Attahir, 1995 (Abiyu J. 2012)

2.3.1.2 Training

A study conducted in Addis Ababa revealed that training is the major source of skill for most
participants‟ demonstrating 30.77 percent of other sources. Society‟s approach to education of young
people in terms of taught values, self employment skills, attitudes and forms of learning is a crucial
factor for entrepreneurial activity. Skill training has precisely to match market needs. Consistent with
this objective, the participants reflected that the training they have attended has positive impact on
their business in term of their profitability. Particularly those who attended the TVET program have also
mentioned the training that they have received was very important for their business. When asked
about the specific subjects that helped them to run the business, entrepreneurship, business
management and book keeping will be mentioned by the majority of the participants in all sessions.
Technical skills, business management and book keeping trainings which are very important for MSEs
entrepreneurs will be given for most of those in the cooperative business as part of MSE promotion
program. But they indicated that it was only an introductory training and focuses on theories that can‟t
be applied to practical jobs (Abiyu J .et.al 2012).

Other study conducted in Addis Ababa revealed that MSE owners who attended training will be 1.32
times more likely gain more profit than those who did not attend training. Moreover, MSE owners who
started their business with higher amount of initial investment are more likely to grow in term of profit
than those who invested lower amount. Regarding product and service rendering nature of MSEs, the
result revealed that MSE owners who render service will be grown 1.25 times than those who
manufacture a product. Further, result of multivariate analysis revealed that MSE owners who work
without forming cooperatives will be 1.58 times more likely grow than those MSE who will be doing
their business in cooperatives (Seyoum A. et al. 2016).

2.3.1.3 Location of the enterprise

The study which was studied in developing countries revealed that all of these countries, the majority of
MSEs operate in rural areas. The share of all enterprises in urban locations - cities and towns with at
least 20,000 inhabitants - reaches as high as 46% in the Dominican Republic and 30% in Zimbabwe, but
was 25% or less in all other countries. Location of the business is the main determinant to grow the
enterprise in its market access and some researchers showed that their own finding in relation to the
road and Location of the enterprise (Michigan L.1998)

The findings of Habtamu is also consistent with this survey finding who found that MSEs operate in main
road side have low probability of growth in term of profitability compared to those operate out of the
town .The result is contrary to the findings of ( Eshetu &Mammo 2009).

2
According to (Rolfe, R. et al.2010). The viability of informal micro enterprise in South Africa.), findings
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. (Mbonyane&Ladzani 2011) found that small businesses select a site
without first thoroughly analyzing the suitability of location. 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. (Olawale&Garwe ,2010) also
found that poor location has a negative impact of the performance of micro and small enterprises.
Political Economy Research-They found that MSEs located at main road side exhibit higher growth
compared to MSEs located out of town.

Accessibility of a location is the ease with which it can be accessed by different modes of transport
(Brown and Lloyd, 2002). Divergent from these aspects, however, most of the studied area is situated far
from the main asphalt road and the condition of the road leading to the cluster from the main road is
extremely poor. This poor state of the road condition of locality has culminated in high transportation
service costs to the MSEs, in addition to making the sector difficult for accessibility by the existing and
potential customers.

2.3.1.4 Initial investment

One of the main elements that determine the development of (MSEs) to set up and expand their
operations, develop new products, and invest in new production facilities is finance. (Nuno Santos, 2003
Nurul and Langenberg, 2005)

The survey indicated that working capital (necessary for the business growth) was the most needed
followed by investment capital (for starting up new business) (Nuno Santos, 2003 Nurul and Langenberg,
2005).

2.3.1.5 Marketing and high computation level

The study which was studied in Addis Ababa revealed that 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 product designs (Assegedech, 2004).

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 (Assegedech, 2004).

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

3
compete in the market than large companies since they have smaller economies of scale (Assegedech,
2004).

In terms of problems related to product diversity, the findings of (Assegedech.2004), (Rahel and
Paul .2010) and (Eshetu and Mammo2009) are similar. According to (Eshetu and Mammo 2009),
majority of MSEs produce or give services of similar products in a limited domestic market.

Most of them do not seek new possibilities and opportunities outside the local markets.

(Rahel and Paul 2010) also reported the presence of competition is the most significant factor. This is
because of the reason that enterprises in the same sector sell identical products without any additional
distinctiveness and innovative activities. This led them to compete for the same demand. Due to this,
the local markets crowded with similar products or services and the level of competition among local
producers of goods and services is intense. As result, the returns are fairly low.

In addition, presence of illegal traders around their market place leads to unbalanced competition and
low demand for merchants who are legal. This results in lack of demands which is another problem for
the enterprises

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 (Assegedech,
2004).

In terms of problems related to product diversity, the findings of (Assegedech 2004),(Rahel and Paul
2010) and (Eshetu and Mammo 2009) are similar. According to Eshetu and Mammo(2009), majority of
MSEs produce or give services of similar products in a limited domestic market.

Most of them do not seek new possibilities and opportunities outside the local markets (Rahel and Paul
2010) also reported the presence of competition is the most significant factor. This is because of the
reason that enterprises in the same sector sell identical products without any additional distinctiveness
and innovative activities. This led them to compete for the same demand.

Due to this, the local markets crowded with similar products or services and the level of competition
among local producers of goods and services is intense. As result, the returns are fairly low. In addition,
presence of illegal traders around their market place leads to unbalanced competition and low demand
for merchants who are legal. This results in lack of demands which is another problem for the
enterprises. The establishment of markets in residential areas also limits the demands. The change in
demand and being unable to modify their products with the demand is the other marketing problem.
Because of such collective factors, most of the MSEs are claimed that they are at a disadvantage. There
are no sufficient institutional facilities that nurture the promotion, growth and development of MSEs.

4
Marketing their products effectively as well as accessing and acquiring information on business
opportunities is the major bottlenecks that small and micro entrepreneur‟s face all over the country. As
a result, the design and quality of products of MSEs are below standard. In addition, lack of marketing
skills and weak infrastructural facilities renders small businesses to be uncompetitive (.Mbonyane
&Ladzani, 2011, Olawale &Garwe, 2010 Bowen et al, 2009) also found that lack of appropriate
marketing practices are among the major constraints that hinder the smooth function of MSEs.

(Bowen ,et ,al 2009) found that there is fierce competition in the small business sector which leads to
price competition and small margin of profit.( Olawale&Garwe .2010)also show that high competition is
among the major factors that hinder the growth of micro and small enterprises. This is due to the reason
that most of MSEs tend to congregate in dense markets and overcrowded cities. Small business owners
do no longer find it easy in competing with their own goods which is mostly perceived by consumers as
low quality ones when compared with those of the multinational companies. Due to the aggressive
competition small business enterprises are facing from companies that operate with greater capital
outlay, companies with better and modern equipments for production, companies with better
manpower and companies with marketing capabilities have resulted to low level of business and at
times outright closure by small business owners (Etumeahu, 2009). (Mezgebe W.2012)

2.3.1.6. Business experience and service year

Business experience of the owner affects growth significantly and positively (Mulu, 2007). The
researcher further found that Smaller and younger firms grow faster than large firms. The
previous29ownership of business has a positive and significant contribution, since they acquire the
knowledge in running business and they expand their social networks (Rahel& Paul,2010). (Eshetu
&Mammo .2009), (Rolfe et al, 2010) and( Olawale &Garwe 2010) also found that lack of experience is
among the factors that adversely affected the growth of MSEs. (Bowen, et al 2009) further found that
majority of businesses that had been in operation for a shorter period reported that their business
performances will be on the decline. It also seems that most micro and small businesses hit their peak at
the fifth year. After the fifth year, most entrepreneurs seem to suffer from what may be described as
entrepreneurial burnout and the excitement declines.

2.3.2. External factors

2.3.2.1. Infrastructure facilitates

To reduce the cost of operation, good infrastructure facilitates have a positive effect in MSEs Owners in
Ethiopia. Efficient, reliable, safe and affordable infrastructure is affecting the profitability of their
business. The physical infrastructure facilities are not adequately developed and expanded in Ethiopia to
meet the growing demand of MSEs activities. Consequently, 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). According to Commission on
Legal Empowerment of the( Poor 2006), though not directly linked, inadequacy of infrastructure (road,

5
banking service, electricity, telecommunication and other services in facilitating smooth operation of
private investment are serious impediments.( Rahel& Paul 2010) also identify that even if access to
infrastructure is not reported as a significant problem, lack of access to water and lack of awareness
about the advantages of telephones and media leads to a negative or insignificant effect on the growth
of enterprises. According to the findings of the same research most MSEs have an easy access to
transportation. But, the number of enterprises that has access to the rest of the infrastructures such as
telephone, television, radio and water are limited.

The key factors that will be found to affect businesses in Limuru Town Market positively are: access to
business information, access to infrastructure and government policy and regulations A unit increase in
Access to Infrastructure would lead to 0.13 improvement in business performance while a unit increase
in Government Policy and Regulations would lead to improved business performance by 0.80.

2.3.2.2. Technology

One of the determining profitability of MSEs is Choice of technology and innovative capacity. According
to (Moyi, E and Njiriani, P,2005) production technology has passed through three paradigms:
technological development, appropriate technology and technological capability paradigm. Technology
development in contextual of MSEs is the process of designing new machineries/ equipments/
Processes/ products. 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 tonarrow 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. Technological capability is defined as technical, managerial and institutional skills
needed to use equipments and machineries properly. This capacity is often categorized in to processes
and stages.According to (Albu 2001: 16) in ( Moyi, E and Njiraini, P 2005),(Moyi, E. and Njiraini, P. 2005),
Towards Technology Models for Micro and Small Enterprises in Kenya: Common Principles and Best
Practices. Discussion Paper No 51, Productive Sector Division, Kenya Institute for Public Policy Research
and Analysis, Nairobi, Kenya). it is divided in to production, investment, and innovative/ adaptive
capability. Production capability is the static knowledge and skill required to use existing machine and
investment capability is the capacity to identify and acquire new technologies or processes while
innovative/ adaptive capabilities are knowledge and skills to imitate, replace and modify existing

6
production processes.(Survey on Micro and Small Enterprises (MSEs) in Selected Major Cities of Ethiopia
2013 )

2.4. Source of Initial Capital

The study which was studied in Addis Ababa revealed that for 66.7% of MSE operators, to start their
own enterprises their initial source of capital is the loan from Borrowing. The rest important sources of
finance for to start businesses are personal saving/Equb, loan from family/friends, assistance from
family, and inheritance accounts, which fall at 19.5%, 5.7%, 4.9%, and 1.6%, respectively. WISE loan is
the main source of finance, especially for over the last 10 years, for women who are poor and have no
opportunity to access credit or to be self-employed. This shows that absence of micro-finance
institutions that enable them to access finance is the major obstacle for women to start a business. In
spite of the presence of many MSE agencies, the criteria, especially collateral, to obtain loan inhibits
women access to credit. According to the FGD participants, the women entrepreneurs are encouraged
to take loan from WISE because WISE provides credit for women with no need of collateral or
guarantee. In addition, unlike the other MSE agencies, WISE does not force women borrowers to acquire
the loan in groups to share the burden of default. This practice encourages poor women to obtain a loan
and participate in economic activities, especially those women who will be previously unemployed and
housewives. Previous studies (Etsegenet, 2000; Tegegne & Mulat, 2005; Mulu, 2007) show that informal
financial sources, especially saving and loan/assistances from relatives or friends, are a major source of
initial capital for about 75% of their sampled MSE operators. But this study found that many women get
their initial finance by borrowing from formal sources. Though for the majority of respondents, the WISE
loan is the main source of initial capital, personal savings, and Equb are still the significant source of
capital to start a business. The informal sources of finance enable 31.5% of women to start their
business.

2.5 Empirical literature

A study conducted in Indonesia among MSEs revealed that, from the socio economic factors experience
of owners in the business has a negative effect for profitability (β = -0.015, P-value < 0.1). ( PRIJADI,
R.AND DESIANA, P. M.2017)

(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 micro,
small and medium enterprises from 5 major cities in Ethiopia. According to this research ,that lasted
from 1996-2001, the factors that affect the long term survival of micro, small and medium enterprises in
Ethiopia are found to be adequacy of finance, level of education, level of managerial skills, level of
technical 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, will be characterized by
inadequate finance (61%), low level of education (55%), poor managerial skills (54%), shortage of
technical skills (49%), and inability to convert part of their profit to investment (46%). The study further

7
indicated that participation in social capital and networking schemes such as Iqub was critically helpful
for long-term survival.

Another Study by (Paul and Rahel 2010) that aimed to investigate the constraints and key determinants
of growth, particularly in employment expansion, among women operated MSEs found out that the
studied enterprises registered 25% increment in the number of total employment they created since
their establishment with an average annual employment rate of 11.72%. With regard to the sources of
initial capital of the studied enterprises, the study indicated that, the main ones will be loan from MFI
(66.7%), personal savings Iqub (17.5%), and loan from family/friends (17.1%). Moreover, the concrete
problems that the targeted MSEs faced at their start up will be lack of capital (52.8%), skills problem
(17.9%) and lack of working space (17.1%).

According to the same research, the subsequent growth of women‟s enterprises is jeopardized by
barriers such as marketing problems, due to the presence of competitors with identical products,
change in demand and absence of market linkages (87%); lack of enough working space (71.5%) and lack
of availability of enough loan access (62.2%). Other constraints identified include raw material
accessibility and shortage of working capital. With having an objective to assess the impact of group-
based MSEs on poverty alleviation, (Daniel 2007) conducted a research in Nekemte city of the Oromia
Regional State of Ethiopia. According to this study, 48% of the surveyed respondents are of a view that
their income has increased while 22.7 % said that their income has decreased as a result of their
engagement in the studied MSEs.

Lastly the study identified that Lack of market, stiff competition, lack of working capital, raw material
shortage and poor managerial skills are among the problems that MSEs are encountering. Drawing on a
data generated from 133 samples working in the construction and garment and textile MSEs,( Getahun
2009) carried out a research in Gullele sub-city of Addis Ababa city to assess the impact of MSE
intervention on urban poverty reduction by examining the level of employment creation, change in
income and living standard of the beneficiaries in terms of education, health, household assets and
clothing.

The other study which was conducted on chosen from four major cities of Ethiopia namely Adama,
Hawassa, Bahirdar, and Mekelle, on 557 operators and 200 MSEs revealed that assessing the
contribution of the MSE strategy to poverty reduction, job creation and business development. The
researchers indicated that the national urban development policy is the root of the MSE program and
strategy; and MSEs are of the five pillars of the urban development package of the urban development
policy.( Tegegne and Meheret 2010). According to them, the government of Ethiopia planned, via its
MSE program, to create employment opportunities for about 1.5 million urban residents by availing
services such as provision of credit and premises, business development services, market linkages and

8
equipping MSEs with appropriate modern machineries and equipment‟s. In relation to the
implementation modalities of the strategy, they outlined that as per the MSE strategy, implementing
offices will be set up from kebele to regional level; and cooperatives, private limited companies and
private ownership will be the organizing forms practiced by the main government executive agency i.e.
the Micro and Small Enterprise Development Office (MSEDO).

They also stated that other government sector offices such as the office of Youth and Women are also
involved in the task of organizing. More importantly, they found that some of the support services
provided to the studied MSEs will be credit provision, provision of working premises, training, and
market linkage especially with government institutions (such as universities, prisons, hospitals) and
projects (like condominium housing construction projects).

On the other side, the same writers concluded that MSEs provided job opportunity, hence increased
income for a remarkable number of unemployed urban dwellers especially the youth. This increased
income, the researchers continued, has brought a change in the operator‟s consumption level of
services such as education, health, and transport. This study also shown that the main problems
challenging the MSEs will be related to access to land, place of work, market shortage and access to
finance and electricity This study uncovered that there was remarkable change in the asset ownership
level of household durables such as TV and radio. But, the observed change on productive asset
possession like housing and vehicles was minor. In addition to declaring that the MSEs will be the major
source of income, 63 % of the operators use their income generated from the MSEs for household
maintenance purposes whereas only 9 % said that they use the income for business expansion,
investment or saving.

And another Study by (Dereje 2008), studied that 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 the following characteristics of MSEs: Studies will be also conducted
specifically with a purpose of identifying the problems that MSEs encounter. For instance, (Workneh‟s
2007) research undertaken in Kolfe Keraneo sub-city of Addis Ababa indicated that lack of capital, lack of
market, unfavourable policy, and inadequate infrastructure, absence of adequate and relevant training,
bureaucratic structure and procedures are among constraints faced by MSEs. The researcher suggested
a sustainable and nonpoliticized support to the studied MSEs.

2.6. Conceptual framework

Conceptual framework means that concepts that how independent and dependent variable relate to
one another and used to explain the research problem. Since profitability is influenced by both internal
and external factors, operators need to understand what influences businesses to reach peak
performance. The external factors include technological, infrastructural and marketing. The internal
factors that influence the profitability can be classified as Training, initial investment, Managerial skill
and experience Business experience and Source of investment as well as some socio-demographic
variables.

9
10
2.6. Operational Definition

Micro and Small Enterprise (MSE): can be defined as a group of people working together for financial
gain subject to the limits on numbers of workers and capital (Michael, 1986:324).

Profitability: in this study the researcher used the term Profitability is monthly net income of each
enterprise

Location in this study the place which MSEs are found and it may indicate on what way their location is
appropriate means It answill bed the question that is it near from the main road? is it appropriate for
various infrastructures?

Training in this study is the process of getting theoretical and practical knowledge formally or informally
by any condition which help for the owner of the enterprise in any circumstances

Raw material raw material in his study is any kind of inputs which help the enterprise to produce their
product in each sector of MSEs

Marketing and high computation level in this study is define how the enterprise are sale their product
and what seems like their market linkage for their customer relatively better than their competitors
within the same town and others

Infrastructure in this study includes road, water supply, light or electricity and telecommunication and
how these factors affect the growth of MSEs in agro town

Business experience in this study means that how the the experience of the business affect the
profitability of the enterprise in Yirgalem town

Technology development in this study is Technology development in contextual of MSEs is the process
of designing new machineries/ equipment/ Processes/ products

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 Chapter Three

Research Design and Methodology

3.1. Study Area

Yirgalem town was founded in 1818 EC. The town is a city administration which is one of the 21
administrative units of SidamaZone. The town is 45 kilometers far away from Zone‟s capital Sidamain
the west direction and 390 kilometers far away from Addis Ababa the capital of Ethiopia in the
southwestern direction. According to the information obtained from the Municipality of the town, its
total population is 89192 (46033 Male and 43159 female). The town‟s astronomical location is 7º 49‟
North Latitude and 36º East Longitude

Figure 2: Map of the Study Area

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3.2. Research Design

The type of research employed under this study was descriptive and explanatory research. The major
purpose of descriptive research is description of the state of affairs as it exists at present. Then this
study describes and critically assesses the factors affecting the profitability of MSEs in Yirgalem town.
The study employs explanatory in that the relationship between variables is correlated with an aim of
estimating the integrated influence of the factors on profitability.

Moreover, the study utilized cross-sectional in the sense that all relevant data was collected at a single
point in time. The reason for preferring a cross-sectional study is due to the vast nature of the study and
the limitation of time. And obtaining information from a cross-section of a population at a single point in
time is a reasonable strategy for pursuing many descriptive researches (Janet M. Ruane, 2006:94).

3.3. Population

3.3.1. Target and size of population

The source populations of this study was registered MSEs in Yirgalem . The study population of
thisinvestigation will be selected registered MSEs that will be operating currently.

3.4 . Sampling design

3.4.1. Sampling size determination

According to (Dawson C., 2009), the correct sample size in a study is dependent on the nature of the
population and the purpose of the study. Although there are no general rules, the sample size usually
depends on the population to be sampled

3.4.2 Sample Size

In this study to select sample size, a list of the population formally registered MSEs until September
2010 E, C by the Yirgalem Micro and Small enterprise. The total population of the study was 690
enterprises which includes manufacturing (125), constriction(57),urban (82) ,service (200), and
trade(226) .The sample size selected here was considered as representative of
manufacturing ,constriction , urban ,service , and trade and it was large enough to allow for precision,
confidence and generalizability of the research findings. (Ymane T., 1967) formula for sample size
calculation was used for the calculation of the sample.

n= N .

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 (1+Ne²)

Where;

E=level of precision, (7.5%)

N=Population size (690)

n= Sample size (142)

The calculated sample size became 142. These samples will be distributed in to each type of enterprise
(strata) proportionally. Then the actual sample was taken by lottery method from each stratum. (Table
1)

Table, 1: Proportional allocation of sample size in to each stratum, Yirgalem , Ethiopia, 2017

Type of enterprise Quantity Proportion Sample size

Manufacturing 125 0.18 26

Construction 57 0.08 12

Urban agriculture 82 0.12 17

Service 200 0.29 41

Trade 226 0.33 47

Total 690 1.00 142

3.4.3 Sampling technique

Stratified random sampling was used to get information from different MSEs. With this technique, the
sampling frame can be organized into relatively homogeneous groups (strata) before selecting elements
for the sample (Janet, 2006).

This step increases the probability that the final sample will be representative in terms of the stratified
groups. The strata will be sectors including: manufacturing, constriction, trade, urban farming and
service

3.5. Source of Data

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This study has used both primary and secondary data. The primary data gathered from MSEs using semi-
structured questionnaire based interview. This provided an opportunity of getting the correct data and a
chance for the interviewer and interviewees to have better interaction and clarification of issues. In
addition, secondary data will be gathered from government documents (office of MSEs). The literatures
which will be reviewed by the researcher has used as a guideline for the development of the
questionnaire.

3.6. Methods of Data Collection

Mainly data will be collected using semi-structured questionnaire. The data collection tool includes MSE
owners‟ related data, age, sex, education level, business experience, location of the enterprise,
operation sector, availability of business plan and the rests and infrastructural factors such as access to
water, access to power access to transportation facilities and also other factors like market linkage,
access to finance, support from NGOs, access to social network.

The questionnaires for this study will be adapted from a study conducted in Addis Ababa (Admasu A. et
al., 2012). But the most questions will be customized to the study area. The tool has included both open-
ended and close ended questions. The questionnaires will be prepared in English language and it will be
translated in to Amharic for data collection. The data will be collected by two oriented data collectors.
They have BA degree holders who are fluent in both Amharic and Afan Oromo.

3.7. Methods of Data Analysis

As data collection completed the collected quantitative data will be checked for completeness and
entered in to SPSS version 20 software for analysis. Descriptive statistics such as percentage,frequency,
mean and sum will be used to present the characteristics of informants and enterprises.

Significantly associated factors with profitability of MSEs will be identified by linear regression model.
Significant association will be determined at p-value less than 0.05 and the result will be interpreted
using beta coefficient.

3.8. Validity and Reliability of Instruments

To check consistency and understandability of the data collection tool pre-test will be conducted in
more than 5% of the calculated sample size (13 MSEs) in Sidamatown. By doing so, the
understandability, consistency of the tool will be checked. Moreover, it will be distributed to advisors
and additional experts in Hawassa University, Business and Economics College, Management
department for face validity. Reliability of the tool was checked using reliability analysis procedures. The
Cronbach's Alpha test for the items will be 0.64. Therefore, we can conclude that the items are internally
consistent.

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