Determinants of Growth and Diversification of Micro and Small Enterprises: The Case of Dire Dawa, Ethiopia

Abstract

This research was aimed at identifying factors affecting growth and diversification of micro and small enterprises with a special emphasis on construction, manufacturing, and service sectors in Dire Dawa Administration. The study used a stratified random sampling method to select 190 micro and small enterprises. To achieve the objectives of this study, data were collected using questionnaire through face-to-face interview and observation, and analyzed using descriptive and inferential analyses as well as econometric models. The descriptive result showed that the source of finance at the start-up were mainly personal saving and the major constraints of the enterprise engaged in construction, manufacturing, and service at this time were lack of sufficient capital, marketing and working place. The next major problems which affected the growth and diversifications of the three sectors in the study areas were right advices, opportunities, technology, and legalization. Majority of the respondents of construction and manufacturing agree with opportunities and technological problems. But, respondents of the three sectors agreed with the right advice and legalization problems. The average start-up capital of enterprise engaged in construction, manufacturing, and service was Birr 6909.47 with an average of 6.48 employees and at the time of the study, the average employment was 7.23 employees. About 85.8% of survey respondents sold their products/services in the local market and 14.2% of them sold their products/services external market inside the country. However, no firms were participating in export markets. The econometrics result indicated that age of owners/managers and enterprises engaged in construction were negatively related to growth of enterprises. Previous work experience, enterprise engaged in manufacturing, access to market, access to working and selling premises, amount of initial capital, access to finance, social networks, and vertical linkage were important factors which affected the growth of MSEs positively. Similarly, diversification of MSEs was positively influenced by opportunities, information and communication technology, strengthening the household asset basis, and availability of key assets. Genders and age of owners/managers were also found to be significant factor which affect diversification of MSEs negatively. The findings of the study verified the importance of micro and small enterprises in employment creation. The Dire Dawa Administrative city has to promote the growth and diversification of micro and small enterprises by facilitating necessary credit services, working premises, market, and experience sharing to update their knowledge. In this regard, creation of awareness of the owners/managers to follow a related diversification strategy through using opportunities, ICT and key assets that are underutilized within the enterprises. And also it is advisable to give special attention and support for enterprises that are owned/managed by female.

Key words: Micro and small enterprises, Employment growth, Related diversification