Small Business Opportunities and Constraints - Case Study Example

Small Business Opportunities and Constraints Introduction Small business means any commercial activity or business transaction involving less investment and outlay (Arinaitwe 2002). Small business may also engage less number of employees and can be done with little amount of capital. But the number of small business enterprises can be as large as possible in any developing country for reducing the menace of unemployment (Yusuf and Schindehutte 2000). The actual definition of small business varies in terms of limit of investment and size of the firm among different developing nations (Monk 2000). In several developing nations, small businesses are considered to be vital for sustained growth and a high failure rate may turn out to be a huge negative for their economies (Kiggundu 2002 ; Goedhuys and Sleuwaegen 2000). Ethiopia is one of the important developing nations in Africa which has been facing the problem of unemployment. Hence there is a lot of scope for encouraging small business enterprises so that significant number of people would be engaged in work activities and unemployment problem can be eradicated. The government of Ethiopia also must take up initiatives to establish infrastructure and policies necessary to motivate people to start new small business enterprises. Keeping the above points in consideration, the present report is being made for identification of various factors responsible for poor growth of small business enterprises for chalking out necessary future strategies for boosting the new small business avenues in Ethiopia. Definition of Small Business Small business is in general considered as the driving force of economic growth in developing countries as it helps in higher employment and there by reduces poverty (Harris and Gibson 2006). Similarly, small business also facilitates accelerated economic growth which in turn would boost rapid industrialization (Sauser 2005; Birch 1981). Though small business creates a favorable socio economic atmosphere in developing nations, there have been several challenges faced by the entrepreneurs starting from the initiation of business to long term sustainability (Van Dijk 1995). Several research investigations conducted on small-business development have revealed that the rate of failure in developing countries is higher than in the developed nations (Arinaitwe 2002). Moreover, the nature and extent of problems faced by the developing countries in small business management are significantly different from that of developed nations. Even among the developing nations, the nature of constraints in running small business enterprises vary considerably and hence it demands a case study of each nation. Keeping this in mind, an effort has been made to study the nature of problems faced by small business entrepreneurs in Ethiopia. Need for the study: 1. To identify the nature of constraints faced by small business enterprises in Ethiopia. 2. To provide future management strategies for facilitating sustainable development of small business enterprises in Ethiopia. The Ministry of Trade and Industry Small Enterprises, Government of Ethiopia defined small business enterprises as business enterprises whose paid-up capital is more than $2,500 but not more than $62,500. However, according to this definition, high-tech consultancy firms and other high-tech establishments are excluded from small business enterprises. Small business also covers the micro enterprises which are even smaller in terms of their paid up capital. Microenterprises are defined as the business enterprises whose paid-up capital is less than $2,500 and this also excludes high-tech consultancy firms and other high-tech establishments. The Central Statistical Authority (CSA) of Ethiopia classifies the Small-scale Manufacturing Industries in to different categories like the informal sector, cottage or handicrafts, small-scale manufacturing industries and medium- and large-scale manufacturing industries.  It also clarified that the small business enterprises are establishments that engage less than 10 persons using power driven machinery. It also includes cottage/handicrafts which are basically household type enterprises located in households or workshops which engage own or family labour and mostly manual rather than automated/mechanical machinery. Small Business Context Small business provides ample scope for both developed and developing nations in providing employment to the people at a significantly higher number (Elkan 1988). This is because of the diversity of the small business enterprises and flexibility of these firms which can be operated at a family or household level or at a small workshop level. The necessity of using small business houses as a tool for job creation is highly felt in developing countries where power driven enterprises dominate. However, in case of developing nations like Ethiopia, manual operated enterprises dominate and hence provide ample scope for establishing small business enterprises and micro enterprises which contribute enormously to its growth rate in terms of GDP (Gross Domestic product). The present GDP of Ethiopia in terms of purchasing power parity is $66.3 billion which can be significantly enhanced by promoting small business enterprises (CIA 2009). This would be possible only if the main constraints of small business houses are identified and opportunities are created for the future growth. Small Business Opportunities and Constraints Political Environment Government stability The Federal Democratic Republic of Ethiopia has President as the chief of state. Its present President Girma Woldegiorgis has bee in power since 2001. Similarly, the Prime Minister is its head of government and the present Prime Minister is Meles Zenawi who has been in power since 1995. This indicates that political stability is very much present in Ethiopia. This should be well utilized for taking initiatives for establishing higher number of small business enterprises in Ethiopia. However, some constraints like lack of proper deliberations in the House of People's Representatives and corruption practices become major challenge for growth of small business enterprises. These hurdles have to be eliminated by creating awareness among the citizens of Ethiopia regarding the potential of small business enterprises in creating new jobs and in eradicating the poverty in general. Government and Contribution The present policy of the Federal Democratic Republic of Ethiopia has not been satisfactory in boosting the growth rate of small business enterprises at a speed pace. The government concentrated mainly on efforts of Ministry of Trade and Industry Small Enterprises with out developing a plan for parallel institutions for satisfactory growth of small business enterprises. Its budget allocation must have significant share for the establishment of new small business enterprises. It should provide stable government policy for favorable growth of small business houses in Ethiopia. As Ethiopian economy mainly depends upon the agriculture which contributes for more than 50 % of GDP, the small business enterprises depending upon agriculture have to be promoted by the government for maintaining long term growth rate. General Environment There is a need to recognize the principal constraints for successful establishment of small business enterprises in Ethiopia like lack of capital, corruption, lack of proper financial avenues from government agencies, poor recordkeeping, poor management and weak infrastructure. Future management strategies must be formulated to address these basic constraints so that the growth rate of small business enterprises can be maintained at a significant level (Marks 2006). Some strategies like conducting national and regional level trainings and workshops for the people who are operating small business houses regarding the government policy and subsidy schemes and opportunities for loan facilities from banks and public agencies so that the public awareness would be high. Moreover, one major challenge faced by the entrepreneurs of small business firms is the tough intensive competition from other entrepreneurs in production of same commodity. This requires the careful and systematic study of the competitors for the same product and assess the exact demand for the product in the market. In addition, a critical analysis of existing suppliers of similar product is necessary to accurately assess the demand and supply condition of new product to be launched by small business firm (Carter and Jones-Evans 2000). Most importantly, the customer preferences and needs have to be identified before deciding the size of production so that the marketing problem for small business firms can be minimized. Legal Environment Regulatory framework - overall structure of rules and regulation The citizens of Ethiopia must be trained regarding the regulatory frame work of the government that regulates the nature and principles of operating small business enterprises so that they facilitate clean atmosphere for smooth running of small business enterprises. Business Laws for small business The people of Ethiopia must also be trained regarding the various business laws for operating small business enterprises so that they stick to the laws strictly and cooperate with the government functionaries. This would also reduce the element of corruption in government offices. Several times, it may happen that the establishment of small business enterprises may affect the environmental laws and causing severe occupational health hazards to the people living in the nearby areas. If any body violates the rules of environmental laws, they would be punished strictly and hence people should be made aware about the same so that the faulty operations can be reduced. At the same time, people should also be made aware about the ensuring quality production, other wise, the consumers may complain regarding the end product and it may lead to closure of the unit. Similarly, the export and import rules and policy of the government of Ethiopia must be the part of the training module to be given to the citizens of Ethiopia for successful establishment of small business enterprises. Labor Laws for small business The successful operation of small business houses in Ethiopia also requires the entrepreneurs to follow the labor rules of the Ministry of labor, Ethiopia very strictly. The minimum wage structure and maximum working hours have to be thoroughly monitored and all the entrepreneurs must be well trained regarding the same. The favorable working conditions for the labor in the small business enterprise must be ensured so that the growth rate of small business house would be satisfactory (Storey 1994). Several times, the main challenge for the establishment of small business firms arises in the form of shortage of labor for some specific works. This requires the extensive study of the existing labor markets so that the selection of enterprises would be successful as far as the labor availability is concerned. Socio-cultural Environment In addition to the political and legal aspects, small business enterprises get significantly affected by the socio-cultural environment. Some of the constraints for small business houses are lack of access to common national and international language and traditional customs and beliefs which become hindrance to the initial establishment of small business houses in rural and interior areas of Ethiopia. The people must be trained about the advantages of learning a common language and to practice the small business for reducing the poverty (Alpha 2009). Economic Environment Even after crossing the barriers of the religion and language, the most important challenge faced by the entrepreneurs of small business enterprises is in the form of lack of proper financial support and inadequate capital funds. Severe unemployment affects the economic status of the people and it is a vicious circle making the people unable to invest the required money or capital for establishing new enterprises. The increased rate of interest rates and inflation also affects the small business in Ethiopia negatively (Amha 2009). Hence the government should come up with financial schemes that provide finance at a low interest rates and some form of financial subsidies for both small and micro enterprises in Ethiopia. Technological factors In addition to socio-cultural, political and economical factors, small business enterprises also get influenced significantly by technological factors like basic infrastructure and communication and transport facilities. The lack of sufficient pace in the field of communication relative to the growth rate of world has affected the prospects of small business enterprises in Ethiopia. Hence, the Federal Democratic Republic of Ethiopia must take initiative to establish a strong communication net work and transport facility for successful establishment of small business enterprises. In addition, critical analysis of task environment existed in the Federal Democratic republic of Ethiopia would be of immense help in successful expansion of small business firms. Conclusion The present report defines the small business enterprises, discusses the challenges and formulates the strategies for better prospects of small business in Ethiopia. Small business enterprises in Ethiopia are defined as business enterprises whose paid-up capital is more than $2,500 but not more than $62,500. Several challenges are faced by small business firms in Ethiopia related to political, socio-cultural, economic and technological environment. Some legal and general environment related challenges also pose threat to the prospects of small business in Ethiopia. Lack of flexible policy initiatives, higher levels of corruption, poor infrastructure, complicated labor law structure, inflation and unemployment rate, lack of proper finance facilities, traditional beliefs and customs are some of the important challenges faced by the small business in Ethiopia. Hence, efforts must be taken by the government to provide better infrastructure facilities like transportation and communications, to extend loans with low interest rates, to launch new schemes for establishing new small business firms, to control inflation and to train the entrepreneurs for better establishment of small business in Ethiopia. Recommendations 1. It is recommended that the hurdles like lack of proper deliberations in the House of People's Representatives and corruption practices have to be eliminated by creating awareness among the citizens of Ethiopia regarding the potential of small business enterprises in creating new jobs and in eradicating the poverty in general. 2. The government should concentrate mainly on developing a plan for parallel institutions along with Ministry of Trade and Industry Small Enterprises for satisfactory growth of small business enterprises. Its budget allocation must be large for the establishment of new small business enterprises. 3. It is recommended for conducting national and regional level trainings and workshops for the people who are operating small business houses regarding the government policy and subsidy schemes and opportunities for loan facilities from banks and public agencies. 4. The citizens of Ethiopia must be trained regarding the regulatory frame work of the government that regulates the nature and principles of operating small business enterprises and customer needs and supplier status in the market. 5. It is recommended that the export and import rules and policy of the government of Ethiopia must be the part of the training module of small business enterprises. 6. The favorable working conditions for the labor in the small business enterprise must be ensured and critical analysis of labor markets and task environment is necessary. 7. The government should initiate financial schemes that provide finance at a low interest rates and it should provide financial subsidies for both small and micro enterprises in Ethiopia. 8. The Federal Democratic Republic of Ethiopia must establish a strong communication net work and transport facility for successful establishment of small business enterprises. Reference Lists Alpha, J. 2009. 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