EDRI Working Paper 013: State-inducement Versus Self-initiation: A Comparative Study of Micro and Small Enterprises in Ethiopia

Abstract

The promotion of micro and small enterprises has been a centerpiece of the Ethiopian government’s strategy to alleviate urban unemployment among the youth since 2004. Since this time, the government has adopted twin strategies of creating a business environment conducive to start and operate MSEs while at the same time actively triggering the establishment of new MSEs. In this research, using a large dataset collected from 13 major cities in Ethiopia, we explore whether government-induced enterprises (cooperatives) differ from self-initiated enterprises (non-cooperatives) in various aspects of business productivity, business practices and performance,. We employ Control Function and two-stage Least Square methods to overcome selection problems. We also perform Propensity Score Matching as a check for robustness. We identify that cooperatives have greater access to a wide-array of support schemes. Consistent with the government strategy, cooperatives also employ more labor intensive technologies. Using three distinct measures of enterprise productivity, we find that productivity levels are largely comparable by enterprise type but differ widely by gender and levels of education of the entrepreneur. Similarly, after controlling for initial size, value added and gross profits are not statistically different between the two groups of enterprises. Our growth calculation also indicates that while growth rates of self-initiated enterprises are higher, conditional on positive rates of growth, the likelihood of transition into larger size category appears to be larger among cooperatives. We suggest for a more customized government support system that responds to the unique sets of binding constraints faced by such types of dynamic and growth-oriented enterprises that would complement the current all-embracing promotion program of the MSEs.