THE ROLE OF SMALL AND MEDIEM ENTERPRIESES ON

POVERTY ALLEVIATION:
A CASE OF FURNITURE PRODUCTION MSEs IN ADAMA

By
Kumbi Abera ……. ID:801/17
Tena Tamiru ………ID 1033/17
Mihiret Hailu………ID1048/17

ROYALCOLLEGE ADAMA CAMPUS

DEPARTMENT OF BUSINESS MANAGEMENT

Mar, 2020
Adama, Ethiopia
THE ROLE OF SMALL AND MEDIEM ENTERPRIESES ON
POVERTY REDUCTION:
A CASE OF FURTURE PRODUCTION MSEs IN ADAMA

A Research Proposal Submitted to Department of Business

Management in Partial Fulfillment of the Requirements for the
Award of Degree in Business Management

By
Kumbi Abera ……. ID:801/17
Tena Tamiru ………ID 1033/17
Mihiret Hailu………ID1048/17

ADVISOR: Fitsum Birehane (MBA)

ROYALCOLLEGE ADAMA CAMPUS

DEPARTMENT OF BUSINESS MANAGEMENT

Mar, 2020
Adama, Ethiopia
Table of Contents
Abstract.......................................................................................................................................................5
1. INTRODUCTION.............................................................................................................................6
1.1. Background of the study..............................................................................................................6
1.2. Statement of the problem.............................................................................................................8
1.3. Research question......................................................................................................................10
1.4. Objectives of the Study..............................................................................................................10
1.4.1. General Objective..................................................................................................................10
1.4.2. Specific Objectives.................................................................................................................10
1.5. Significance of the Study...........................................................................................................10
1.6. Scope of the study......................................................................................................................11
2. LITERATURE REVIEW................................................................................................................12
2.1. Theoretical Review....................................................................................................................12
2.1.1. Concept and Definitions of SMEs..........................................................................................12
2.1.2. Definitions of Poverty............................................................................................................14
2.1.3. The role of SMEs in economic growth and development......................................................15
2.2. Empirical Review......................................................................................................................19
2.2.1. Contribution of MSEs for Poverty Reduction........................................................................19
2.3. Conceptual Framework of the Study..........................................................................................25
3. RESEARCH DESIGN AND METHODOLOGY..............................................................................26
3.1. Research Design........................................................................................................................26
3.2. Population and Sources of Data.................................................................................................26
3.3. Sample size determination.........................................................................................................26
3.4. Sampling Techniques.................................................................................................................27
3.5. Data Gathering Tools.................................................................................................................27
3.6. Data Collection Procedure.........................................................................................................27
3.7. Method of data analysis.............................................................................................................27
3.8. Ethical Consideration.................................................................................................................28
3.9. Organization of the study...........................................................................................................28
4. Time and Budget Schedule................................................................................................................29
4.1. Time Schedule...............................................................................................................................29
4.2. Budget Schedule............................................................................................................................29
Reference...................................................................................................................................................30
 Abstract
The main aim of the proposed study is to assess the Role of MSEs on poverty alleviation of
Adama city. To study the Role of MSEs on poverty alleviation two dimensions of MSE practices
are selected to be used as independent variables and will intend to tests the respondents
understanding perspectives on the Role of MSEs on poverty alleviation. From the total target
population a sample of 89 employees or samples intended to be taken as a sample based on
Yamane’ (1967) sampling formula, using non probability sampling techniques. The data will be
collected through structured questionnaires with closed ended statements questions. The
Collected data will be analyzed through SPSS version 25 by running descriptive statistics to
identify the characteristics of variables under study and to investigate the relationship between
the independent variable of the Role of MSEs with poverty alleviation performance and its
impact on the dependent variables poverty alleviation.

Key word: MSEs, Role of MSEs, Factors Affecting MSE Growth and Poverty Alleviation.
 1. INTRODUCTION
1.1. Background of the study

A strong small and medium enterprises (SMEs) sector contributes highly to the country’s
economy, contributing to the gross domestic product (GDP) by reducing the level of
unemployment, reduction in poverty levels and promotion of entrepreneurship activity. The role
of SMEs in the development of the country is significant (Bayati & Taghavi, 2007). SMEs have
the ability to make a meaningful reduction in the high level of unemployment and contribute to
the GDP of the local economy in SA. Besides assisting in curbing the high level of
unemployment, SMEs can be used as a means of transforming the country, by redistributing the
productive assets, amongst the previously disadvantaged. Beck and Demirguc-Kunt (2006)
reported that micro and small enterprises are major derivers of both employment and economic
growth contributing to more than 50 % to GDP and 60 % to employment in developed
economies, these types of enterprises, however, constitute less than 30% of employment and
17% of GDP in developing countries. The study conducted in Africa by the ILO finds that only
20% of the total populations of working age group in many African countries were reported to
have been working in the micro and small enterprise sector (ILO, 2003).

Nowadays, there are multi dimensional problems like extreme poverty, unemployment, low per
capita income, and unequal income distribution facing in many developing countries. As a result,
different governments are framing different strategies and policies to create job opportunities and
to pull these countries out of their problems. One strategy as to create jobs and accommodate
maximum number of citizens has been emerged, i.e., the establishment of MSEs. (Ermias, 2011).
Like many developing countries, Ethiopia is also suffering from severe poverty, unemployment,
income inequality and lower per capita income. In response to the mentioned problem, and also
by recognizing the significance of this sector, the Ethiopian government issued the National
Micro and Small Enterprises Strategy in 1997 and established the Federal Micro and Small
Enterprises Development Agency in 1998. The country’s industrial policy in 2003 and the
poverty reduction strategy program of 2006 have singled out MSEs as major instruments to
create a productive and vibrant private sector and reduce poverty among urban dwellers
(Ephrem, 2010; MOFED, 2006; MoTI, 1997).
As a result, most developing countries, including Ethiopia, have recognized the contribution of
MSEs in terms of job creation, income generation and to the alleviation of poverty. MSE sector
is the major source of employment and income for the urban dwellers in most developing
countries. For example, this sector generates about 48% of the aggregate employment in North
Africa, about 51% in Latin America, 65% in Asia, and 72% in Sub Saharan Africa (ILO, 2002).
Besides, this sector generates about 6.2% of the aggregate employment in the United States,
22.3% in china, 80% in India, 67% in Japan, and 70% in European countries. In our country,
Ethiopia, about half of the urban labor force is engaged in the Sector and Addis Ababa nearly
accounts for about 40% of the total operators in micro and small enterprise activities (Endalsasa
B, 2012). Since the sector has high capacity in absorbing large labor force and generating of
income, the efficiency of the sector is essential to alleviate poverty in most developing countries
including Ethiopia.

The Growth in MSEs has been found to have a link with economic growth and poverty
alleviation. In order to generate enough income to help minimize the incidence of high level
poverty in most developing economies, international funding bodies and economic growth
analysts have suggested to policymakers in developing economies to make greater efforts at
promoting private sector development with MSEs being at the forefront (Snodgrass & Winkler,
2004). According to Beck et al. (2003), the World Bank approved more than $10 billion in
support for MSEs development programs on grounds that it has the ability to promote economic
growth and alleviate poverty. Studies conducted by Endalkachew (2008) also shows that the
micro and small business sector is an important force to generate employment and more
equitable income distribution, activate competition, exploit niche markets, enhance productivity,
and bring technical change through the combination of all of these measures to alleviate poverty.

Generally MSEs are long recognized as important vehicles of economic diversification, income
generation and distribution, and accelerating the economy of a country (Munira, 2012). They can
also help to achieve a more equitable distribution of the benefits of economic growth and thereby
help alleviate some of the problems associated with uneven income distribution, employment
creation, industrial development, rural development, poverty alleviation, job creation, to identify
and exploit market opportunities, and export growth to provide the basis for medium and large
scale enterprises (Zemenu and Mohamed, 2014). According to Addis Ababa 2016 report, due to
limited growth in employment prospects in the public sector and declining absorptive capacity of
the agricultural sector, the numbers of new job seekers are turning to micro and small enterprises
(MSEs). The Ethiopia government is focusing on the micro and small enterprises basically
because of their contribution in reducing poverty and unemployment becomes better than other
sectors. Even he emphasizes more on micro and small enterprises than medium and large
enterprises. The government have been supporting their MSEs extensively through many
different programs, with subsidized credit schemes, financial support, creating marketing link,
providing free showing area, free production and operation area, promotion and so on (Amare
and Raghurama, 2017).

However, according to Weldegbriel and Admasu ,(2012) this sector faces lot of constraints such
as policy problems, lack or in adequate trainings, lack of credit and loan, lack of working space,
poor production techniques and input access constraints, lack of information, inadequate market
linkage etc. These problems are highly restricting the contribution of MSEs for socio-economic
development. Despite these challenges the MSEs sector contribute much for alleviating the
poverty of the participants in the study area, by creating jobs and in return increase their income
and fulfilled their basic needs. On the basis of this fact the study will attempt to assess the role
that MSEs in improving the living standard of the poorer section of residents and its constraints
by focusing on furniture production sector in Adama city.
1.2. Statement of the problem

Poverty reduction of any country can contribute grossly to the improvement of people’s life and
economic growth of the country (Tefera, 2013). This requires industrialization where micro and
small enterprise comes into the focus as one of the packages and instruments to help accelerate
economic growth, socio-economic progress and then the overall reduction of poverty of the
nation. They make a huge contribution to employment in many developing countries where there
is a challenge of high unemployment and poverty exists (Diriba, 2013). Globally, the small-scale
industries are well-known for their immense contributions to poverty reduction, development
process and as engines of economic growth, critical segment of the manufacturing sub-sector,
effective strategy for tackling unemployment, diversifying output, achieving trade and balance of
payment (Umogbaiet al., 2016).

Generally, The Small and Medium Enterprises (SMEs) has become very popular entity in
Ethiopia due to their important role they play in terms of reducing unemployment rate among
people. Concern with employment creation and with the welfare of the least advantaged can
therefore lead to policies to raise labor standards and employment levels and stability in this
sector on microeconomics and distributional grounds (Anyanwu, 2004). This has been reinforced
in the past by the not always sustainable notion that these firms are in general, efficient users of
labor inputs at a micro economic level.

On the other hand, the reviewed empirical studies reveal that there is a gap with regard to
assessment of enterprises’ roles in terms of employment opportunities, generating income and
profit and alleviating poverty. In addition, some reviewed empirical studies with regard to the
sector focused on major challenges and constraints (Endalkachew, 2008; Weldegbriel, 2012;
Workneh, 2007). There are many studies focus on problems and factors that hinder the growth of
MSEs and the outcome of the program in aggregate forms. Regarding the role of MSEs in the
process of poverty reduction, empirical studies fail to investigate role of MSEs and how the
program intervene in an individual level, though according to MOFED (2006), the program
designed to change the life of those individuals who involved in the program. For instance, the
study conducted by Endalkachew (2008), Weldegbriel (2012) and Workneh (2007) with the
objective of analyzing Causes of MSEs Failures, Problems of Micro and Small Enterprises,
factors that hinder the performance of MSEs, respectively, found that lack of capital, lack of
markets, bureaucratic regulatory requirement, problem of business development services, poor
supply of infrastructure, lack of raw material and inappropriate locations are still major problems
of the sector.

A study conducted by FDRE, (2013), for example, report that micro and small enterprises are
major derivers of both employment and economic growth contributing to more than 50 % to
GDP and 60 % to employment in developed economies, constitute less than 30% of employment
and 17% of GDP in developing countries. MSEs in Ethiopia are the second largest employment
generating sector next to agriculture (Habtamu et al., 2013). Based on the report obtained from
National Bank of Ethiopia from 2008/09-2014/15, it is revealed that the new MSEs
establishments is important for poverty reduction, for employments generated. MSEs
Establishment has grown from 73,775 in 2008/09 to 271,519 in 20014/15.When we see the
employment creation of newly established MSEs on employment creation is increasing from
530,417 people in 2008/09 to 2,800,000 people in 2014/15. According to World Bank report
2013/14 revealed that the poverty level in Ethiopia had declined from 44% in 2000 to 30% in
2011 and have further went down to 26 % in 2013 (Amare and Raghurama, 2017).

Although, there are many researchers which study on challenges which hinder on the expansion
of micro and small scale enterprises for poverty alleviation, employment creation and socio
economic growth of the country. The proposed will intend to assess the roles of SMEs in poverty
alleviation in Adama city including its relationship between the role, contribution and challenges
faced SME‟s in alleviating poverty in Adama.
1.3. Research question

The following research questions will be answered in the proposed study:

1. Can MSEs contribute in alleviating poverty of urban residences who are taking part in
furniture producing in the study area?
2. Do MSEs able to increase the income of the Operators?
3. What are the major constraints and problems of MSEs at start up and during operation of
the business?
1.4. Objectives of the Study
1.4.1. General Objective
The general objective the study is to assess the role of the MSEs on Poverty alleviation in Adama
city.

1.4.2. Specific Objectives

 To assess the major role of MSEs in alleviating poverty of urban residences in the study
area.
 To assess the role and contribution of MSEs in improving the income of operators.
 To Identify major constraints and problems that affect MSEs at start up stage and during
operation in the study area
1.5. Significance of the Study
The proposed study will emphasize to assess the role of MSEs poverty alleviation and the
constraints that hinder their effectiveness and expansion in the study area and help the
government and other actors to focus on furniture production sector as one of the intervention for
the fight against poverty. The proposed study will also gives some suggestions to the policy
makers and strategy designers, implementers and other management bodies for the sake of giving
attention to the problems and to arrive at appropriate solutions for existing problems on MSEs
and thereby to alleviate poverty. Furthermore, the proposed study will provide additional
information about micro and small enterprises for interested researchers in the sector.
1.6. Scope of the study

MSEs are found all over the country and they have played a significant role in providing
employment opportunities. Even if, assessing all the MSEs in country would make the findings
fruitful, the proposed study will be delimited only to the role of MSEs in poverty reduction with
particular reference to furniture production sector in Adama city.
 2. LITERATURE REVIEW

2.1. Theoretical Review

2.1.1. Concept and Definitions of SMEs

There is no standard, universally accepted definition of microenterprises, small enterprises (SE),

medium enterprises (ME) and small and medium enterprises (SMEs). Different countries adopt
varying criteria for defining SMEs and even within the same country different institutions adopt
different interpretations of SMEs (Ayyagari, Beck, & Demirguc-Kunt, 2007; Mukras, 2003).
Storey (1994) has posited that absence of common definitions and lack of data sources have been
a hindrance to international comparisons of small firm statistics. The Bolton Report (1971) in the
UK was one of the first documents to frame the economic and statistical definitions of SMEs and
signified their importance in the economy of the UK. According to the definition provided by the
Bolton Committee, SMEs are independent firms that are managed by their owners and have an
insignificant market share in the economy (Bolton, 1971). According to Abor and Quartey
(2010), SMEs can be categorized according to their size, contribution to GDP and national
economy, employment generation capacities and export potential (see Table 2.1 below).

Table 2.1: The Bolton Report’s quantitative definition of smaller enterprises

Source: (Bolton, 1971)

Various criteria are used to define SMEs in developing and developed economies including the
number of employees, volume of sales return, and the total value of assets and operating capital
of the firm (Ayyagari et al., 2007; Mukras, 2003). Some authors segregate on the basis of capital
assets and others on the basis of sales turnover and employment (Sharafat et al., 2014). Jordan et
al. (1998) applied the term SME to firms with fewer than 100 employees and annual sales
turnover of less than 15 million Euros. The EU adopts the number of employees as the main
criterion for defining SMEs (see Table 2.2). The United Nations Industrial Development
Organization (UNIDO) also defines SMEs based on number of employees, however, the
classification differs in developed and developing countries (Abor & Quartey, 2010). The United
Nations Development Programme defines businesses with 1 to 4 employees as micro enterprises
and those with 5 to 25 employees as small firms (Bowale & Akinlo, 2012). According to The
World Bank’s classification (see Table 2.2), firms with up to 50 employees and annual turnover
of less than 3 million USD are categorized as Micro and Small scale enterprise (World Bank,
2008). Furthermore, there are more divergent alternative classifications of SMEs such as formal
and informal, rural based, knowledge driven and high technology SMEs (Bowale & Akinlo,
2012).

Table 2.2: Definition of SMEs by European Commission (EC) and World Bank (WB)

Source: (Dababneh & Tukan, 2007)

 2.1.2. Definitions of Poverty

The word poverty comes from old French poverté (Modern French: pauvreté), from Latin
paupertās from pauper (poor) (Walter, 2005). There are several definitions of poverty depending
on the context of the situation it is placed in. According to United nation, fundamentally, poverty
is the inability of having choices and opportunities, a violation of human dignity. It means lack
of basic capacity to participate effectively in society. It means not having enough to feed and
clothe a family, not having a school or clinic to go to; not having the land on which to grow one's
food or a job to earn one's living, not having access to credit (Gordon, 2005). According to
World Bank, Poverty is pronounced deprivation in well-being, and comprises many dimensions.
It includes low incomes and the inability to acquire the basic goods and services necessary for
survival with dignity. Poverty also encompasses low levels of health and education, poor access
to clean water and sanitation, inadequate physical security, lack of voice, and insufficient
capacity and opportunity to better one's life (Tesfaye, 20104).

Poverty is usually measured as either absolute or relative:

Absolute poverty: Absolute poverty measures poverty in relation to the amount of money
necessary to meet basic needs such as food, clothing, and shelter. Absolute poverty or extreme
poverty or abject poverty is "a condition characterized by severe deprivation of basic human
needs, including food, safe drinking water, sanitation facilities, health, shelter, education and
information (Gordon, 2005). It is a condition so limited by malnutrition, illiteracy, disease,
squalid surroundings, high infant mortality, and low life expectancy as to be beneath any
reasonable definition of human decency. Is a set condition, which is the same in every country,
and does not change over a period of time (Sachs, 2005).

Relative poverty: it is being actually an index of income inequality. Relative poverty views
poverty as socially defined and dependent on social context, hence relative poverty is a measure
of income inequality. This income inequality is measured by Gini coefficient. The value of Gini
coefficient lies between 0–1.0 would mean there is no inequality. In other words every citizen
would earn the same. 1 would mean there would be severe inequality. Usually, relative poverty is
measured as the percentage of the population with income less than some fixed proportion of
median income (Raphae, 2009). Relative poverty reflects better the cost of social inclusion and
equality of opportunity in a specific time and space. Relative poverty, on the other hand, refers to
conditions which are subjective to the society in which the person lives, and therefore, does vary
between countries, and can change over time (Sachs, 2005).

In general, Poverty is a condition in which people lack satisfactory material resources (food,
shelter, clothing, housing), are unable to access basic services (health, education, water,
sanitation), and are constrained in their ability to exercise rights, share power and lend their
voices to the institutions and processes which affect the social, economic and political
environments in which they live and work (Siyum, 2015). According to Ukwu (2002), suggests
that poverty is a living condition in which an entity or individual is faced with economic, social,
political, cultural and environmental deprivations. These deprivations are captured as lack of
food, poor expectancy rate, poor environmental conditions, low educational opportunity, poor
health services, general lack of economic infrastructure and lack of active participation in
decision making either as it affects the individual or a nation.

2.1.3. The role of SMEs in economic growth and development

The mounting interest in the development of SMEs among developing nations is explained by
their significant potential to generate income and bring about equitable social and economic
development both in rural and urban areas (Small, 2004; Williams, 2006). SMEs play critical
roles in ensuring income stability, employment generation and economic growth (Schmitz,
1995). Policymakers, academics and economists have generally agreed that enhancing SMEs and
promoting entrepreneurship can be a viable strategy for promoting economic development
(Kongolo, 2010). Historically SMEs had a significant impact on the economic development of
many countries around the world and have had a substantial contribution in the industrialization
process of agriculture-led economies (Kongolo, 2010).

The experiences of countries around the world confirm that stable economic development cannot
be attained without a major presence of the SME sector in their economies (Naudé & Krugell,
2002). Many countries around the world have been supporting their SME sector by developing
such policies and regulations which can flourish their businesses as without any doubt it is the
best way to achieve economic development (Yusuf, 2001). SMEs represent a significant segment
of the economies of developed countries and are regarded as the engine of growth in developing
countries (Phaho & Pouris, 2008).

SMEs represent a vast proportion of businesses in developing countries and are considered to be
contributing to the generation of economic growth (Audretsch, 2007; McMillan & Woodruff,
2003; Peci et al., 2012, Ardic, Mylenko, & Saltane, 2011; Cull et al., 2006; Gunasekaran et al.,
2011; Ozgulbas et al., 2006). Gebremariam et al (2004) recognize a positive correlation between
SMEs and economic growth. Abrahams (2003) contends that a well-supported SME sector has
the potential to contribute to economic development in the same capacity as large businesses. A
well-developed SME sector signifies a flourishing and growing economy (Kongolo, 2010).
Several studies have confirmed that SMEs are positively correlated with national economic
growth factors including Gross Domestic Product (GDP) (Newberry, 2006).

Significant variations exist in the size and economic activity of SMEs across countries and their
contributions to economic growth varies accordingly. Since the Global Financial Crisis of 2008-
2009, the interest in the role of SMEs in job creation and economic growth has significantly
increased. The World Bank has estimated that 13 percent of GDP in developed countries and 3
percent of GDP in developing countries are constituted by SME loans whereas in OECD
countries SMEs employ two-thirds of the total work force (Ardic et al., 2011).

Industrialized economies like the United States (US) and the United Kingdom (UK) have been
profoundly reliant on their SME sectors, which account for a sizable amount of their national
GDP and employment (Fredrick, 2005). SMEs are considered as the primary sector of the US
economy, accounting for 99.9 percent of total number of firms and employing 80 percent of the
total labor force (Tamburan, 2005 cited from Piper, 1997). In the Netherlands, SMEs account for
over 95 percent of all business establishments (Bijmolt & Zwart, 1994). In many other
industrialized countries including Australia, Canada, Germany and France, SMEs represent the
engine of economic growth and progress (Audretsch, 2001). The role of SMEs is well recognized
in the economic miracles of Japan, South Korea and newly industrialized countries in terms of
poverty reduction, employment creation and welfare promotion (Pang, 2008). Harvie (2004)
notes that SMEs have played a substantial role in the economic recovery of East Asian
economies, contributing to economic growth, employment generation, trade and investment
promotion and increased competitiveness.
In developing economies, SMEs play a crucial role in employment creation, income distribution,
poverty reduction, rural development and industrial development (Abor & Quartey, 2010).
Accordingly, governments of these countries have been providing extensive support to their
SME sectors through implementation of various programmes including subsidized credit
schemes. The positive role of SMEs in the economic development of Pakistan has been widely
acknowledged by researchers. SMEs represent 90 percent of all businesses in Pakistan, provide
80 percent of all non-agricultural employment opportunities, constitute 25 percent of total
exports and contribute to over 30 percent of the national GDP (Sharafat et al., 2014, p. 69). In
China, the role of the SME sector is growing exponentially as reforms are been introduced to
open up the economy. SMEs are regarded as the key drivers of the rapid economic growth in
China, representing 99% of all enterprises and accounting for 55% of the GDP (Jiantuo et al.,
2007). In the early 2000s there were over 10 million SMEs registered in China, producing 60
percent of the gross industrial input and 60 percent of total exports (Chunyun, 2003, p. 51).
These provide 75 percent of the jobs in the towns and cities, attracting labor from rural areas
(Chunyun, 2003, p.51). Of the 150 million people working in the industrial sector, 70 percent are
employed in SMEs and the rising SME sector has been viewed as a successful remedy to
unemployment problems during the period of reforms (Chunyun, 2003, p.52).

There is a consensus in much of the literature that SMEs bring numerous benefits to the
economies of both industrialized and developing countries (Advani, 1997). They increase
employment, promote private ownership and entrepreneurship, enhance the skills and technical
knowledge of the people, broaden the extent of new resource usage in the economy with more
flexibility, intensify market competitions and enhance the export competitiveness of domestic
economies. Research findings support the notion that small and medium businesses play a major
role in human resource development, contributing to tax and trade revenues, and boosting
entrepreneurship in the society (Agyapong, 2010). SMEs assist in the distribution of goods and
services and serve as sources of innovation (Buame, 2004). Moreover, SMEs are more labor
intensive than large scale businesses and require less capital to create jobs.

Academics argue that SMEs have numerous advantages over large scale businesses as they are
more flexible and adaptable to new market conditions. Aggregate data suggests that SMEs
demonstrate higher levels of growth than larger firms (Nichter & Goldmark, 2005). It has been
suggested that the role of SMEs in economic growth and development can go beyond increasing
per capita output and income as SMEs can bring about change in the structure of business and
society (Audretsch, 2000; Hisrich et al., 2009).

International organizations and donor countries share the view that SME promotion policies
stimulate economic growth and aid in reducing high poverty rates in developing countries
(Thornsten Beck, Demirguc-Kunt, & Maksimovic, 2004). The World Bank and the United
Nations Industry and Development Organization (UNIDO) have been providing technical and
financial assistance to developing countries through their private sector development programs.
The World Bank supports SME development programs in developing countries based on the
argument that SMEs generate incomes for the poor and thus constitute an effective poverty
alleviation tool (Thorsten Beck et al., 2005). Moreover, policies of direct government support of
SMEs have been promoted to help countries reap their development potentials.

It is widely recognized by policy makers and researchers that SMEs have enormous potential to
create employment for the growing labour force (Kongolo, 2010). One of the pioneer SME
proponents, Birch (1979), confirmed the importance of small businesses in job creation,
reporting that the majority of new jobs in the United States created during the 1970s were
provided by firms with fewer than 100 employees. Employment generation is key to reducing the
incidence of poverty and studies have found that private sector development, including the
growth of SMEs, have the potential to create sustainable employment for the poor (Sokoto &
Abdullahi, 2013). Mukras (2003) explains that the attraction of SMEs as an alternative generator
of employment is due to their nature which is characterized by low start-up capital and low skill
requirements. Moreover, these enterprises are highly labor intensive, require low start-up capital
and encourage indigenous technological development (Mlambo, 2001).

The employment generation capacity of SMEs varies greatly in different countries and income
groups (ILO, 2004-2005). “According to OECD statistics, SMEs’ share of GDP contribution and
total employment in 2004 in developed countries was over 55 percent and 65 percent
respectively, while in low income countries the number was higher (60 percent and 70 percent),
while middle income countries enjoyed the highest contribution of the sector (70 percent and 95
percent respectively)” (Agyapong, 2010, p. 201). One of the particular advantages of SMEs is
their ability to survive economic downturns and maintain their competitiveness while larger
firms are more vulnerable to economic stress (McPherson, 1996).
 2.2. Empirical Review

2.2.1. Contribution of MSEs for Poverty Reduction

According to Federal Democratic Republic of Ethiopia (1997-2025), there are three strategies for
the development of MSEs for poverty reduction. The first strategies are Micro and Small
Enterprises Development Strategy of Ethiopia (1997-2010); the fundamental principles of this
strategy are “Agricultural Development Leads to Industrialization” (ADLI) and market economy
principles. These strategies have facing problems: lack of access to finance, say nothing whether
these enterprises are grown to the next higher level or not, cannot define MSEs. The second one
is MSEs Development Strategy, Provision Framework and Methods of Implementation (2011-
2015); the main aim of this strategy is to alleviate the implementation gap of the first MSEs
Development strategy, to shift Agricultural Development Leads Industrialization strategy to
“industry” and to alleviate the financial constraint by means of giving the state government to
give the credit to MSEs. The third one is Industrial Development Strategic Plan (2013-2025); it
emphasis on the economic level of the country should be reaching in the middle level income by
2015 by focusing on manufacturing sector. The main focus of this strategies is for job creation,
promotion of industry and employment creation which gives less emphasis for the economic
contribution because of difficulty of knowing the exact contribution of Micro and Small
Enterprises to the GDP.

Due to the weakness of the first edition of Growth and Transformation plan (GTP I) which do
not consider the Medium and Large enterprises, the second edition of Growth and
Transformation Plan (GTP II) (2015/162019/20) was formulated. From this projection the share
of Micro and Small Enterprises in GDP under base scenario in percent is stated as 1.1 in 2014/15
to 1.8 in 2019/20 and for Medium and Large scale enterprises as 3.7 in 2014/15 to 5.9 in
2019/20. The plan has tried to project the contribution of Micro and Small; and Medium and
Large enterprises to GDP. The entire projection is made only for manufacturing that overlooked
the service sector (Amare and Raghurama, 2017).

(Mohammed, 2016),the role of micro and small-scale industries is important in a developing

country like Ethiopia for eradicating poverty through growth process of economy, create
employment generation, mobilization of resources and entrepreneurial skill, better utilization of
local resource, equitable distribution of income, rural development and creating regional balance
in promotion, growth of various development activities and supports the growth of large
industries by providing components and semi-finished. (Ermias, 2017) viewed that MSEs is very
important for reducing unemployment and poverty among vulnerable groups, has a potential to
support the Ethiopian economy in achieving its development goals, creation for high value-added
industries, to increase income and domestic saving, promotion of large-scale manufacturing
industries, to create employment opportunities, creation of female-oriented businesses and
creation for investments.

(Akugriet al., 2015) conduct a study on the contributions of small and medium scale enterprises
to economic growth in Zebilla, They conclude that 85% of the respondent confirmed that MSEs
is important for infrastructural development, 60% respondents ranked the enterprise is more
profitable, 25% indicated moderate while 15% less profitable, 78% of respondent set MSEs is
important for poverty reduction and 69% respondent set MSEs is vital to empowering citizens. In
addition to this SMEs constitute a vital element for the economic growth, improved living
standards, achieve high levels of productivity and to increase the availability of scarce resource
for use. (Addi, 2014)explained that MSEs is a role for poverty alleviation, accelerate the
achievement of economic independence, potential to utilize idle labor force and generate income
to the incumbents including owners, employees and laborers. As his result, the developments of
micro and small enterprises help to reduce the proportion of foreign capital and skills by
indigenous ones, improve efficiency by using his/her fund and skill, best use of his time,
equipment, materials and labor.

(Tefera, 2013) demonstrated that a dynamic and growing sector of MSEs can contribute to the
realization of a wide range of development objectives such as the attainment of income
distribution and poverty reduction, employment generation, mobilization of savings and
production of goods and services that satisfy the basic needs of the poor. The micro enterprises
sector has been instrumental in bringing about economic transition by providing goods and
services that are of adequate quality and affordable cost to a large number of people in rural
areas, and by effectively using the skills and talents of these people, without requiring high-level
training, large sums of capital or sophisticated technology. The importance of MSEs in general
and new businesses in particular makes a significant contributions in addressing socio economic
problems such as unemployment, poverty, income inequalities, political stability and economic
growth among others (Musara & Gwaindepi, 2014).
(Epherem, 2010) conduct a study on the role of micro and small enterprises in poverty alleviation
in Gulele sub city, the role of MSEs is important for improving the living conditions, saving
habit and income of the members. Their saving becomes 91.84% from the income gained from
their respective enterprises, food intake becomes 69.7%, 62.12% for clothing, 92.4% for
schooling expense, and 72.73% for health care, 78.09% housing facilities due to increment in
income. (Agyapong, 2010) study on the role of micro, small and medium enterprises (MSMEs)
in poverty alleviation in Ghana. The author is of the view that MSMEs help to create jobs and
increase income of the people. This increased income helps the people to obtain better schooling,
health facilities and empowers them to get rid of vicious circle of poverty. Furthermore, growths
in small and medium enterprises (SMEs) also contribute to human capital through on job training
and also contribute to increase tax revenue of the government.

(Kang’ori, 2014) reported that the role of micro and small nonfarm enterprises in poverty
reduction in Morang county, MSEs increases the household income and welfare, skill
development, access to more rewarding economic opportunities, providing employment
opportunities, contribution to self-confidence empowerments of the individuals, ability to acquire
assets creating institutional structure, people’s needs and objectives, providing new opportunities
for the poor and women, ability to acquire loan to expand business, enhanced standard of living,
saving and profit and ability to provide basic needs (food, education, clothing, health, and
shelter). Muturi (2015) also emphasis on the role of micro and small enterprises in achieving
kenya vision 2030, according to his study, MSEs is important for to generate job opportunities,
improve living standards, adoption of appropriate technology, development of a pool of skilled
and unskilled labor, macroeconomic stability, technology and innovation, capital and wealth
creation, increasing revenues and promotion of gender empowerment.

(Diriba, 2013) bearing that socio-economic contributions of micro and small enterprises: the case
of Jimma city, he were tested using Chi techniques; His finding shows that MSEs is important
for employment creation, powerful instrument in economic growth, poverty reduction, quick
production response, saving and income generation, Saving increase, Profit increased, realizing
equitable income distribution, quality of life of the participants improved, developing
entrepreneur’s skills and knowledge, and gender empowering, changing many peoples‟ social
issues and also ways of acquiring businesses, linking different levels of enterprises to facilitate
its development and Transformed into medium and large enterprises.
Major Challenges and Problems that Faces the Expansion of Micro and Small Scale Enterprise
Micro and Small Enterprises face a number of challenges in the process of performing their
activities. A study conducted by (Abdissa, 2016)factors affecting performance of micro and
small enterprises in South West Ethiopia: Using descriptive and Pearson correlation analysis, his
results show that there is a significant relationship for political, social factor, land available,
technological factor, infrastructural factor, marketing factors, financial factor and Management
factor with the performance of MSEs. All the selected independent variables were significantly
explaining the variations in the dependent variable at 5% level of significance. Diriba (2013)
reported that there are many constraints facing micro and small scale enterprises which affect to
operate to the business. These are: Unfavorable legal and regulatory environment discriminatory
regulatory practices; Lack of access to markets, business information; Low ability to acquire
skills and managerial expertise; Low access to appropriate technology; Poor access to quality
business infrastructure; Lack of access to raw materials, lack of working capital and intermediate
inputs and the like.

(Tesfaye, 2014) conduct a study on the role of micro and small enterprises in reducing youth
unemployment, he was analyzed the collected data by using frequency and percentage. From his
study, negative social and cultural attitude towards self-employment, lack of access to start up
finance, lack of business assistance and support, mismatch between jobs available and larger
number of new graduates, low economic capacity of the country to absorb the graduates, lack of
guidance and counseling service, unfavorable conditions from MSE facilitators, weak tie among
TVET, micro finance institutions and MSE development head office were indicated as the major
problems. Cetindamar et al., (2012) also stated that the chance of individuals to start their own
business and get involved in entrepreneurial activities is highly affected by access to vital
resources such as financial, human, social forms of capital. However, resources are not fairly
distributed among societies.

A study conducted by (FEDR, 2013) survey on micro and small enterprises (MSEs) in selected
major cities of Ethiopia, using frequency and percentage identified a number of challenges and
constraints hindering the growth of MSEs. The constraints are shortage of finance (42%),
followed by lack of working premise (28.3%), lack of access to land (18.4%) and lack of access
to market or absence of linkage to market 12% were among the strong factors inhibiting the
growth of these enterprises. Kankuse (2014) conduct a study on the opportunities and challenges
of micro enterprise in empowering women: the case of Adami Tulu JidoKombolcha district,
using percentage factors which hinder on the expansion of MSEs in descending order are lack of
financial resource, increasing cost of raw material, lack of initial capital, skilled manpower, tax
rate, lack of business know how and attitude of society towards MSEs. Weldegbriel (2012) also
conduct on problems of micro and small enterprises in Addis Ababa, by using logistic regression
model; lack business plan, lack of formal and informal association, lack of favorable business
environment, high cost and shortage of raw materials, lack of proper institutional support, lack of
proper marketing practice and inflexible competition are the major problems facing MSEs.

A study conduct by Epherem (2010) on the role of micro and small enterprises in poverty
alleviation in Gulele sub city, he use frequencies and percent and his result shows that out of the
total (105) respondents, Shortage of startup capital (72.38%), high interest rates for borrowing
(71.77%), skilled personnel (69.39%), lack of production place (68.57%), unaffordable tax
(67.05%), inadequate support from Government (66.67%), lack of working capital or lack of
credit facilities (63.81%), lack of access for training (62.77%) and lack of market (59.05%) are
the major constraints which affect the operation of MSEs.

(Kadiri, 2012) conduct a study on the contributions of small and medium scale enterprises
(SMEs) to poverty alleviation in Nigeria. The Binomial Logistic Regression Analysis was
employed as the tool for statistical analysis. The study found that the sector was unable to
achieve this goal due to its inability to obtain adequate business finance and due to corruption.
300 SMEs representing 75 percent of the total respondents were of the opinion that finance is the
greatest challenge and the remaining 25 percent of the total respondents were of the opinion that
corruption is the greatest challenge facing SMEs in the country. According to (Alemayehu and
Agarwal, 2015) study on the performance determinants of micro and small enterprises in
Ethiopia: a study conducted in Sodo and Boditi towns in Wolaita zone, by using multiple linear
regression model, the major factors affecting the performance of MSEs were financial,
marketing, working premise, infrastructural, government support and legal and internal
management factors. This variables spell out 77.7% for affecting MSEs performance and the
remaining 22.3% was not explained by this study variables Among six identified factors except
public infrastructural factor all other factors were statistically significant and among significant
factors financial constraint contribute very high impact (56.1%) on MSEs performance when
other factors held constant and followed by marketing and management problems constraint.

(Belayet al., 2015) conduct a study on factors affecting developments of micro and small
enterprises. Using descriptive statistics researchers found as: lack of market linkage; lack of
awareness of credit; providing institution; lack of professional assistance; lack of knowledge;
poor infrastructures; access to capital; lack of experience, promotion, networking in ascending
order covers 69.78 %. The remaining 30.23% is caused by negative attitude towards MSE, lack
of integration among government sectors and others. Fikadu (2015) study on determinants of
Micro and Small Enterprises Growth in Ethiopia: The Case of Nekemte, by using multiple linear
regression (OLS) analysis the result shows that sources of finance for MSE operators, loan term
(duration of loan period) of MFI, previous business experience, marketing skill of the
entrepreneurs‟, source of raw materials for MSE, and customers of MSE product or services
affects positively the growth of profitability of the MSEs business significantly at 1% level of
significance in regression analysis. Managerial skill of the entrepreneurs and location of the
business positively affect the growth of MSE in terms of the profitability of MSE business
significantly at 5% level of significance but the educational status of MSE operator affects
negatively the growth of MSE significantly at 5% level of significance.
 2.3. Conceptual Framework of the Study
The researcher attempts to develop a conceptual framework for the proposed study by reviewing
the previous works. The variables that the proposed study will focus on are the MSEs role to
generate income and employment opportunities for the poor so as to alleviate their abject
poverty. Start up and Working capital are among the factors that will have an influence for the
sustainable performance of MSEs in different sectors so as to reach to the needed outcomes.
Further more if the outcomes of MSEs achieved positively, the enterprises under study will
expand or transfer to the other productive sectors and may finally transform themselves to
medium and large enterprises. This is shown in the following diagram.
Dependant Variables Independent Variable
Poverty Alleviation
F
Startup Capital Outcome
ac  Participants’ Income Increase
to  MSEs’ Profit increased
rs  Saving increase
 Employment Opportunity
A enhanced
Working Capital
ff  Quality of life of the
ec Participants will be
improved (access to basic
ti needs: getting better like
n Raw Materials food, education, health and
other facilities.) 
g
th
e
Figure 2.1: Conceptual framework of the study
Source: own drawing by summarizing the whole literatures (2020)
Summery on outcome

Income: is a general indicator of enterprise stability or growth, and an important indicator of

household welfare and poverty status.
Saving: variable indicates whether participants have experience on saving increase before or
after they established their business
Quality of life/well-being: is the availability of resources/income/to satisfy basic needs, like
Food security, education, health and other facilities.
Employment /Job opportunity: owners of MSEs were asked what type of work they used to be
engaged in before they commenced the business.
 3. RESEARCH DESIGN AND METHODOLOGY

3.1. Research Design

The proposed study will intend to adopt empirical investigation with descriptive research design,
since the major focus of the proposed research is to assess the role of MSEs on poverty reduction
in Adama city. Descriptive survey designs will be used to allow for the gathering of information,
summarize, present and interpret it for the purpose of clarification. Whereas, the Research uses
qualitative and quantitative research approach, it is a means for testing objective theories by
examining the relationship among variables. These variables, in turn, will be measured, typically
on instruments, so that numbered data will be analyzed using statistical procedures. Therefore, in
order to accurately describe the role & relationships between the independent variables and the
dependent variable descriptive research studies will be employed which helps to use both
qualitative and quantitative data analysis.

3.2. Population and Sources of Data

The target population of the study will be employees of wood furniture making MSEs in Adama.
Primary and secondary data will be collected from both primary and secondary sources through
Questionnaires in order to improve the accuracy and to reduce the bias. The questionnaires will
be distributed to employees of the selected wood furniture making MSEs in Adama. As the
secondary data; books, articles, journals, are reviewed to develop conceptual framework.

3.3. Sample size determination

Since the total numbers of employees of in selected MSEs located at Adama city are 314. The
researcher used Yamane’ (1967) formula to calculate sample size.

N
n=
1+ N (e) ²

Where n is the sample size, N is the population size, and e is the level of precision. By using this
formula at 95% confidence level and 5% level of precision the sample size were obtained as
follows:
114
n= =89
1+114 (0.05)²
From the total target population 89 will be considered as sample size of the study including
secretaries, guards and other supportive staffs whom they are insignificant for the study and
through considering the heterogeneity of sample respondents on the basis of gender.

3.4. Sampling Techniques

For the purpose the of proposed study, the researcher will intend to use non probability sampling
technique since the total population of the study is small and heterogeneous in type purposive
and convenience sampling technique will be preferred. Therefore, the information required for
the proposed study involves selection of respondents who have enough awareness about the the
role of MSEs development; purposive and convenience sampling technique will used to have the
right peoples from every concerned section in those MSEs.

3.5. Data Gathering Tools

The data will be collected through structured questionnaires with closed Likert type statements
questions. The Likert type scale, commonly used in business research will be applied because it
allows participants to provide their perceptions and opinions both in terms of direction (positive
or negative) and intensity (degree of agreement or disagreement). The questionnaire will utilize a
five point likert scale namely Strongly disagree (SD), Disagree (D), Neutral (N), Agree (A) and
Strongly Agree (SA) which will be assigned scores of between 1 and 5. This will allow the
researcher to draw conclusions based on responses made from the respondents. The
questionnaires will be developed based on the literature review satisfying content validity.

3.6. Data Collection Procedure

Before collecting the data, the instruments of the data will be prepared carefully and permission
of the selected firms will be taken. Then the objectives of the study will be explained to subjects.
Based on Their willingness to participate in filling questionnaire the questionnaire will be
distributed. To enhance the response rate, the questionnaires will be delivered by hand and
collect by hand on a scheduled pickup date.

3.7. Method of data analysis

The collected data will be analyzed through Descriptive analysis. Descriptive analytical
technique will be used with the aid of Statistical Package for Social Sciences (SPSS) version 25.
The proposed study will also use tables, frequencies, and percentages to analyze and present the
collected data.

3.8. Ethical Consideration

A formal letter will be written from Royal College Adama campus, Department of Business
Administration to MSEs located at around Adama. The data collection will start after getting
consent from the parties mentioned above. In addition to this, name of the employees (selected
for the sample) will not be included to maintain confidentiality.

3.9. Organization of the study

The paper will be organized into five chapters: 1st Chapter contain the introduction part dealing
with back ground of the study, the research problem, objectives of the study, scope and
significance of the study and operational definition of basic terms. The 2nd chapter focuses on
the literature review about the subject matter. The 3rd chapter presented the research
methodologies of the study. The 4th chapter presents analysis, results and discussion of the study
and finally, the 5th chapter presents the summary of major findings, conclusion and
recommendation.
4. Time and Budget Schedule
4.1. Time Schedule
S.No Activities Duration
1 Proposal development and defense Week one , week two
2 Data collection Week three, four, five
3 Data analysis Week six, seven, and nine
4 Writing thesis submitting to advisor Week ten and eleven
5 Writing final thesis Week twelve and week thirtieth
6 Thesis defense Week fourth
The above table (activities) will be conducted from march/2020 to July 2020.

4.2. Budget Schedule

Miscellaneous Expense

S.No Purpose Cost

1 Photocopy service 3000
2 Thesis binding 1600
3 Internet service and others 2000
4 Restaurant (Cafe) 1500
5 Stationary materials 3600
6 Transport expense 2400
Total 0

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