determinants of microenterprise success in the urban informal sector of addis ababa

310 Pages·2012·1.41 MB·English

DETERMINANTS OF MICROENTERPRISE SUCCESS IN
THE URBAN INFORMAL SECTOR OF ADDIS ABABA:
A MULTIDIMENSIONAL ANALYSIS

Belay File Garoma
This research and thesis has been sponsored by the World Bank.

© Belay File Garoma 2012

All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, or transmitted, in any form or by any means, electronic,
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of the author.

Printed in The Netherlands.

ISBN 978-94-91478-05-5
DETERMINANTS OF MICROENTERPRISE SUCCESS IN
THE URBAN INFORMAL SECTOR OF ADDIS ABABA:
A MULTIDIMENSIONAL ANALYSIS

DETERMINANTEN VAN SUCCES VAN MICRO-ONDERNEMINGEN
IN DE STEDELIJKE INFORMELE SECTOR VAN ADDIS ABEBA:
EEN MULTIDIMENSIONELE ANALYSE

Thesis

to obtain the degree of Doctor from the
Erasmus University Rotterdam
by command of the
rector magnificus

Professor dr. H.G. Schmidt

and in accordance with the decision of the Doctorate Board

The public defence shall be held on
5 November 2012 at 16:00 hrs

by

Belay File Garoma
born in Wollega, Ethiopia
Erratum

Doctoral Committee
Promotor
Prof.dr. M.P. van Dijk

Other Members
Prof.dr. E. Masurel, VU University Amsterdam
Prof.dr. A.S. Bedi
Prof.dr. P. Knorringa
Dedicated to
Saktu Sarbessa (my grandmother) and Garoma Tesso (my grandfather)
Contents

List of Tables, Figures and Annexes x(cid:2)
Acronyms xiv(cid:2)
Acknowledgements xvi(cid:2)
Abstract xviii(cid:2)
Samenvatting xix(cid:2)
1 INTRODUCTION 1(cid:2)
1.1(cid:2) Background of the Study 1(cid:2)
1.2(cid:2) Statement of the Problem 4(cid:2)
1.3(cid:2) Objectives of the Study 7(cid:2)
1.4(cid:2) Position in the Literature 7(cid:2)
1.4.1(cid:2) Position related to method 9(cid:2)
1.5(cid:2) Research Questions 10(cid:2)
1.6(cid:2) Research Hypotheses 10(cid:2)
1.7(cid:2) Thesis Outline 11(cid:2)
2 THEORETICAL FRAMEWORK AND METHODOLOGY 12(cid:2)
2.1(cid:2) Introduction 12(cid:2)
2.2(cid:2) What is Success for Micro and Small Enterprises? 14(cid:2)
2.2.1(cid:2) Survivalist versus growth oriented microenterprises 20(cid:2)
2.2.2(cid:2) Graduation a success indicator? 24(cid:2)
2.3(cid:2) Characterizing Microenterprises in the Urban Informal Sector 27(cid:2)
2.3.1(cid:2) Rural-urban migration and the informal sector nexus 28(cid:2)
2.3.2(cid:2) Why do people join UIS? 32(cid:2)
2.3.3(cid:2) How do people join UIS? 32(cid:2)
2.4(cid:2) Determinants of Microenterprise Success 34(cid:2)
2.4.1(cid:2) Individual Dimension 34(cid:2)
2.4.2 (cid:2)Organizational Dimension 41(cid:2)
vi
Contents vii
2.4.3(cid:2) External/Environmental dimension 48(cid:2)
2.5(cid:2) The Direct and Indirect Effects 52(cid:2)
2.6(cid:2) Conceptual Framework 54(cid:2)
2.7(cid:2) Methodology 56(cid:2)
2.7.1(cid:2) Primary data sources 57(cid:2)
2.7.2(cid:2) Sampling Design 64(cid:2)
2.7.3(cid:2) Measurement of constructs (Likert-scale questions) 65(cid:2)
2.7.4 (cid:2)Data Analysis 68(cid:2)
2.8(cid:2) Conclusion 69(cid:2)
3 COUNTRY BACKGROUND 70(cid:2)
3.1 (cid:2)Introduction 70(cid:2)
3.2(cid:2) Country Profile 72(cid:2)
3.2.1(cid:2) Private sector development 74(cid:2)
3.3(cid:2) Economic Performance 75(cid:2)
3.4(cid:2) Micro and Small Enterprise Development 79(cid:2)
3.4.1(cid:2) Profile of the MSE sector 80(cid:2)
3.4.2(cid:2) Constraints facing the MSE sector in Ethiopia 83(cid:2)
3.5(cid:2) Conclusion 85(cid:2)
4 STRUCTURE AND GROWTH OF MICROENTERPRISES 86(cid:2)
4.1(cid:2) Introduction 86(cid:2)
4.2(cid:2) The Data 86(cid:2)
4.3(cid:2) Demographic and Socioeconomic Characteristics of Respondents 89(cid:2)
4.3.1(cid:2) Age and sex of respondents 89(cid:2)
4.3.2(cid:2) Education of respondents 91(cid:2)
4.3.3(cid:2) Migration status 93(cid:2)
4.3.4(cid:2) Marital status, ethnicity and religion 95(cid:2)
4.3.5(cid:2) Vocational Training 97(cid:2)
4.3.6(cid:2) Why the present activity? 99(cid:2)
4.3.7(cid:2) Personality traits 102(cid:2)
4.3.8(cid:2) Factor Analysis 108(cid:2)
4.4(cid:2) Enterprise Characteristics 110(cid:2)
4.4.1(cid:2) Sector/activity of the enterprise 110(cid:2)
4.4.2(cid:2) Ownership structure 112(cid:2)
4.4.3(cid:2) Location of the enterprise/activity 114(cid:2)
4.4.4(cid:2) Business income and capital 115(cid:2)
viii DETERMINANTS OF MICROENTERPRISE SUCCESS IN THE URBAN INFORMAL SECTOR OF ADDIS ABABA
4.4.5(cid:2) Start-up capital 117(cid:2)
4.4.6(cid:2) Source of finance for the start-up capital 118(cid:2)
4.4.7(cid:2) Entrepreneurial orientation of a firm (EO) 119(cid:2)
4.4.8(cid:2) Future plans and major challenges 120(cid:2)
4.5(cid:2) Dynamics of Microenterprises 123(cid:2)
4.5.1(cid:2) Value Added per Worker and Firm Productivity Growth 129(cid:2)
4.5.2(cid:2) Cases of some successful formal sector operators 131(cid:2)
4.5.3(cid:2) Success defined by own perception 134(cid:2)
4.5.4(cid:2) Firm growth and exit rates based on employment growth 135(cid:2)
4.6(cid:2) High Growth versus Survivalist MSEs 139(cid:2)
4.6.1(cid:2) Focus group discussion 140(cid:2)
4.6.2(cid:2) Analysis of microenterprise dynamics at various growth
clusters 143(cid:2)
4.7(cid:2) Conclusion 156(cid:2)
5 EXTERNAL ENVIRONMENT AND MSE SUCCESS 157(cid:2)
5.1(cid:2) Introduction 157(cid:2)
5.2(cid:2) Microfinance and Microenterprise Success 157(cid:2)
5.3(cid:2) Enabling Business Environment and MSE Success 160(cid:2)
5.3.1(cid:2) Business development support 160(cid:2)
5.3.2(cid:2) Registration and licensing 168(cid:2)
5.3.3(cid:2) Enabling environment and formality/informality 170(cid:2)
5.3.4(cid:2) Sub-contracting 171(cid:2)
5.3.5(cid:2) Linkages 172(cid:2)
5.4(cid:2) Social Networks and Microenterprise Success 177(cid:2)
5.4.1(cid:2) Social networks 177(cid:2)
5.4.2(cid:2) Dimensions of social networks 181(cid:2)
5.5(cid:2) Conclusion 189(cid:2)
6 EMPIRICAL ANALYSIS OF SUCCESS DETERMINANTS 191(cid:2)
6.1(cid:2) Introduction 191(cid:2)
6.2(cid:2) The Conceptual Framework Revisited 191(cid:2)
6.3(cid:2) Estimation Methods 194(cid:2)
6.3.1(cid:2) Estimation methods in a heterogeneous population:
Quantile regression approach 195(cid:2)
6.3.2(cid:2) Assessing the distribution of response variables 198(cid:2)
6.3.3(cid:2) Variables and their measurement 200(cid:2)
Contents ix
6.4(cid:2) Estimation Results 204(cid:2)
6.4.1(cid:2) Fitness of the model 204(cid:2)
6.5(cid:2) Results and Discussion 207(cid:2)
6.5.1(cid:2) Entrepreneur character and success 208(cid:2)
6.5.2(cid:2) Firm characteristics and success 212(cid:2)
6.5.3(cid:2) Social networks and success 215(cid:2)
6.5.4(cid:2) Enabling environments and success 217(cid:2)
6.5.5(cid:2) Control variables and success 218(cid:2)
6.5.6(cid:2) Indirect determinants of success 220(cid:2)
6.6(cid:2) Value Added per Worker and Firm Productivity Growth 221(cid:2)
6.7(cid:2) Summary of Regression Analysis 222(cid:2)
6.7.1(cid:2) Discussion 227(cid:2)
6.8(cid:2) Conclusion 233(cid:2)
7 CONCLUSIONS AND IMPLICATIONS 235(cid:2)
7.1(cid:2) Introduction 235(cid:2)
7.2(cid:2) Conclusions Related to Success Indicators 239(cid:2)
7.3(cid:2) Conclusions on Characterization 241(cid:2)
7.3.1(cid:2) Demographic and socio-economic characters 242(cid:2)
7.3.2(cid:2) The push versus pull factors and the position of migrants 244(cid:2)
7.3.3(cid:2) The informal sector: A dynamic or a subsistence economy? 245(cid:2)
7.4(cid:2) Conclusions on the Determinants of Success 247(cid:2)
7.4.1(cid:2) Indirect determinants: Entrepreneurial orientation 248(cid:2)
7.4.2(cid:2) Personality traits, competence and personal background 250(cid:2)
7.4.3(cid:2) Firm Characteristics 252(cid:2)
7.4.4(cid:2) Enabling environments and social networks 254(cid:2)
7.5(cid:2) Policy Issues and Some Implications 257

Annexes 262(cid:2)
References 277(cid:2)
List of Tables, Figures and Annexes

Tables
2.1 Survivalist versus growth oriented microenterprises 22(cid:2)
2.2 An overview of the migration models 31(cid:2)
2.3 Determinants of microenterprise success and hypothesized
relationships in the UIS 55(cid:2)
2.4 In-depth interview schedule 60(cid:2)
2.5 Proportion of sample households and enumerator areas by sub-
city in both periods 64(cid:2)
2.6 List of items by constructs and sources 66(cid:2)
3.1 Comparison of business environment in Ethiopia and Sub
Saharan Africa (2006) 74(cid:2)
3.2 Sectoral contributions to GDP growth rates 76(cid:2)
3.3 Percentage contribution to GDP 78(cid:2)
3.4(cid:2) MSE definitions employed in Ethiopia 80(cid:2)
3.5 Urban informal sector employment trend in Ethiopia 81(cid:2)
3.6 Structure of microenterprises in the urban informal sector 82(cid:2)
4.1 Respondent age category by sex 90(cid:2)
4.2 Education level of respondents 92(cid:2)
4.3 Migration status 93(cid:2)
4.4 Marital status, ethnicity and religion 96(cid:2)
4.5 Vocational training 97(cid:2)
4.6 Reason for choosing present activity 99(cid:2)
4.7 Reasons for choosing the present activity by previous activity 100(cid:2)
4.8 Need for achievement (NA) 103(cid:2)
4.9 Internal locus of control (ILC) 105(cid:2)
x