Challenges for entrepreneurship development in rural economies: the case of micro and small-scale enterprises in Ethiopia

ABSTRACT

The question of why some small businesses survive and become profitable while others exit the market continues to attract attention. This study analyzes the role of the institutional environment and business formation process in entrepreneurial activity (defined by total early-stage entrepreneurial activity rate) in the context of a high populous and low institutional trust environment. We find that the government's involvement in entrepreneurship through direct support programmes, differential incentives for enterprises engaged in different sectors, and to achieve social goals and political pluralism may reduce entrepreneurial activity. Also, support programmes aimed at promoting the formation of Micro and Small-Scale Enterprises may encourage the entry of entrepreneurs lacking a business strategy that takes into account risk-return tradeoffs. By focusing on the business formation process, this study adds to the debate on the implication of government intervention programmes in entrepreneurship and small business development.

KEYWORDS:

• Institutions
• collective entrepreneurship
• micro and small enterprises
• development planning
• business survival

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 GEM measured growth expectations as the difference between the number of employees at the time of the GEM 2012 survey and the expected number of employees in five years’ time.

2 The GEM 2012 survey applied nine entrepreneurial framework conditions (Figure 1), measured in a 5-point Likert scale. For the interpretation, we labelled a score of 1 or 2 as ‘unfavorable’ and a score of 4 or 5 as ‘favorable’ entrepreneurial conditions.

3 In Ethiopia, a ‘microenterprise’ is defined to have a capital of not exceeding birr 50,000 (services) and birr 100,000 (industries), with the number of workers not exceeding five. A ‘small enterprise’ is defined to have a capital of birr 50,001 to 500,000 (services) and birr 100,001 to 1,500,000 (industries); employee number may range from six to thirty.

4 46 MSEs started operation in 2007, 58 MSEs started operation in 2008 and 95 MSEs started operation in 2009.

5 Despite Ethiopia's robust economic growth in last two decades, urban unemployment still remains very high (16.2% according to the National Planning Commission, 2016) and unemployment rate among fresh college graduates is rising (Reda & Gebre-Eyesus, 2018).