Change in employment level and financial constraint: evidence from Ethiopian manufacturing SMEs

Abstract

This paper examines the effect of access to external sources of finance on employment growth in small and micro-manufacturing enterprises in Ethiopia. Based on a sample of 1321 respondents covering the 11 zonal capital towns of Amhara region, the key findings include: (1) A large fraction (60.5%) of small and micro-manufacturing enterprises are financially constrained. (2) Access to external finance has positive and significant effect on employment growth-specifically in the metal-wood work subsector, in family-/groupoperated enterprises, and in those enterprises that started operation with a mix of own capital and borrowed money. (3) Even though a significant fraction of the enterprises in the sample reported having exposure to some type of industrial extension service, this exposure has no significant effect on employment growth. (4) Women participation in the management/ownership of small and micro-manufacturing enterprises is relatively low (about 29%), and male-operated enterprises are significantly more likely to report expansion in employment than their female-operated counterparts.

Micro- and small-scale enterprises’ financing preference in line with POH and access to credit: empirical evidence from entrepreneurs in Ethiopia

“…In most developing countries where access to formal finance by MSEs is woefully limited, it is difficult to tell whether a particular financing pattern is just an issue of preference or desperation borne out from limited access or constraints to formal finance (Osei-Assibey et al, 2012 ). In Ethiopia, as a developing country with limited financial market, micro-finance institutions(MFIs, hereafter) are suggested to be the providers of credit services to MSEs as indicated in MSSEs’ policy and strategy (MoUDH, 2016 ) which is confirmed by empirical evidences (Engida et al, 2017 ; Melesse, 2019 ). However, many of the institutions may not meet the capital requirements of SMEs especially when the latter grows in size and operation as the long as the institutions themselves are in limited finance (Nega & Hussein, 2016 ).…”

“…The literature review, however, provides inconclusive evidence with regard to the determinants. Moreover, the issue of financial inclusion remains as relevant as ever before (Melesse, 2019 ) which needs detailed investigation. Therefore, due to the mixed evidence from previous studies and relevance of the issue, the twofold purpose of this study was to examine factors that determine micro- and small-scale enterprises’ financing preference to establish whether these enterprises had followed the pecking order hypothesis in the first place and to investigate access to credit determinants in in Benishangul-Gumuz Regional State of Ethiopia using binary logistic regression.…”

“…Therefore, the argument that probability of accessing external finance depends on willfully participation of firms in the credit market and differentiating truly credit constrained firms from non-constrained firms is important while studying access to external credit constraining factors. In this regard, a study on manufacturing enterprises in Amhara Regional State of Ethiopia revealed that most of the enterprises did not seek to obtain external financing in the first place due to many reason (Melesse, 2019 ) though the main concern of the study was not to test POH in the first place. In most developing countries where access to formal finance by MSEs is woefully limited, it is difficult to tell whether a particular financing pattern is just an issue of preference or desperation borne out from limited access or constraints to formal finance (Osei-Assibey et al, 2012 ).…”

“…First, unlike the studies in the existing literature focused on access to credit of enterprises ignoring their preference of financing, this research sought to explore whether small businesses had followed the POH while making financing decision in the first place and investigate access to external credit determinants focusing only on entrepreneurs with demand of credit market participation to look at the true constraints. Second, the study is based on cross-sectional data collected from small business owners from Benishangul Gumuz Regional State of Ethiopia to minimize the problem of pooling observations from structurally different economies (Melesse, 2019 ) as long as differences in institutional arrangements between economies actually merit the need to look at the issue from different perspectives (Abor & Biekpe, 2009 ). Third, nothing is said about access to credit determinants of small enterprises in the region where there is serious difficulty of enterprises’ access to credit (Abara & Banti, 2017 ) and the region’s small business sector take the lowest percentage share of credit from the total amount of loan provided by micro-finance sector of the country (NBE, 2019 ).…”

Profitability of Agricultural Micro and Small-Scale Enterprise in North Wollo Zone, Amhara Regional State, Ethiopia

“…Micro and small manufacturing enterprises accounting for 60.5% are nancially constrained in Amhara region (Melesse, 2019), and half of them dropout from the business in 2014/15 (Zegeye et al, 2016). The absence of access to credit, poor market linkage, lack of working premises, and information communication technology problems are critical challenges for SMEs in Amhara Region (Youtang & Yesuf, 2021).…”