After independence, most African countries have been expecting economic growth and development to arise from investment in the industrial sector. Huge investments were undertaken by the state and foreign investors that were supported by protection from foreign competition. But, investment in large state and foreign owned industrial enterprises resulted in inadequate and unacceptable results. Thus, the focus of attention shifted from larger towards smaller enterprises.
Likewise, African governments, including that of Ethiopia, embarked on policy reforms for liberalizing their economy and sticking on market forces. With this new policy change, market based competition among enterprises through an open market system has been assumed to be the norm. Market forces have become better instruments for allocating resources to more efficient private enterprises operating in the private sector. However, the practical operations of private investors have resulted in disappointing results in most African countries.
Practically, all that is left from former large scale investments has become a waste of resources. Besides, many micro-enterprises and small and medium ones have been struggling for survival. They faced crucial impediments and barriers preventing them from growing into bigger enterprises. In many developing countries, including Ethiopia, inputs and product markets were not well developed. They were characterized by a small number of consumers and market participants with high transaction costs.
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Economists argue that market failures deteriorate the process of competition among enterprises. They insist that competition among firms is an effective means of selecting efficient ones. Assessing the conditions of the operational environment contributes to an enhanced understanding of the process by which resources are allocated. It also selects enterprises that were able to grow in the economic environment of the developing countries.
Economists have found out that enterprises operating in the developing countries operated in a complex process in which institutional and structural factors interact. In some of these countries, the governments had taken up and consolidated a dominating role in the ownership and management of productive assets. Their influence had been more strengthened by stiff rules and regulations of the economy. In time of severe crisis and macro-economic imbalances, these governments embarked on comprehensive adjustment programs. A few of them were considered Africa’s most liberal trade regimes.
Still, in most of the “formal” sectors a very small number of enterprises occupied a dominant position in the local markets. The “informal” sector was widely entrenched, especially in the rural areas of Africa as well as Ethiopia. The informal sector in Ethiopia has been dominant in the production of goods and services in the rural sector.
The past and current structural problems and the characteristics of smaller countries in Africa have been typical of the much larger countries of the region. Despite their size, they are exposed to similar economic challenges which they have to resolve in cooperation with neighboring countries and regional institutions. To meet these challenges, the governments of these countries have to design policies and programs that assist business enterprises. These enterprises produce goods and services for domestic and external markets.
In so doing, they generate employment opportunities and income for the labor force. They also earn foreign exchange by exporting their products to the global markets. These private enterprises may face problems related to productivity due to barriers to their growth and development. The owners and managers of these enterprises should be encouraged by the government through identifying problems that impede the growth of their enterprises.
Economists assert that businesses have cost advantages when they increase their production capacity. This means the average cost decreases as the overall production increases. This assertion is dismissed if there is a negative relationship between growth and age of enterprises. Ethiopians who own enterprises are aware that aging is a barrier to growth of business firms. However, it is also argued that size and growth of enterprises is mostly determined by the distribution of managerial abilities in the various sectors of the economy.
Others may argue that the availability of skilled workers determines the success and profitability of enterprises in Ethiopia. Also, the delivery of appropriate training to workers on the job is vital for the survival of enterprises. Economists also claim that once firms are established, they learn about their efficiency and effectiveness in their businesses. African countries, including Ethiopia, have realized that the process of competition forces the least efficient enterprises to close down. Inefficient and incompetent owners of firms are, therefore, barriers to growth and expansion of business in the country.
The concerned African government authorities are responsible for the removal of barriers to growth and expansion of business enterprises. Some of these barriers may be untimely interference by customs duty or tax officers and inspectors. Irregular interventions by local authorities cause interruption in the smooth flow of business. Once interrupted, owners of businesses may find it difficult to adjust and continue as usual. Of course, there should be periodic control of businesses by concerned agencies in line with existing laws and regulations.
On the other hand, there are owners of firms who engage in tax evasion using illegal means. To maximize their profits they act on both ends. They increase prices on consumer goods and they depress their costs on inputs. Such owners of businesses are hurting both the government and the people whom they are supposed to serve in good faith. In the long-run, they lose to retain their businesses as both consumers and authorities detect their illegal profit seeking activities, which is impeding economic growth and development in their own country.
It is true that the more honest and efficient firms expand their activities when their managers stick to serving their customers openly and sincerely. However, these honest managers face difficulties to continue serving their customers as expected when the firms are ageing. In this situation the manager’s efficiency becomes less accurate and the output will widely differ from one year to another.
Economists have observed that older firms grow more slowly than younger firms and their growth rates are on the decline. Managers of new firms become efficient through learning from the defects of other enterprises. In the process, they are able to increase their efficiency and effectiveness over time through human capital formation. This capital is strengthened through the provision of appropriate skills for workers. Skill development and the availability of finance for that purpose have increasingly attracted managers’ attention. A rise in labor productivity through provision of skills to workers ensures higher quality of production, higher prices, survival and development of enterprises in a competitive market.
The underdevelopment of enterprises occurs when both labor inputs and product markets and tech serve only a low number of consumers. Also, the growth of firms is determined by a process of competition, in which they compete for scarce resources and raw materials. Those firms competing for identical resources are critically affected by those that are more efficient.
Thus, the growth of one firm, therefore, impedes the growth rates of others which are deprived of inputs. This is true for developing countries, including Ethiopia, where the inputs are mainly imported from other countries. In this situation, firms are affected by shortage of foreign exchange for accessing the required inputs. The concerned authorities may assist these firms to have access to resources provided that they are “legitimate” in the industry they operate in. These firms should also be socially accepted and benefiting from respect by clients, suppliers, financial institutions, and law enforcement agencies.
Studies show that the growth of a firm may be associated with its size and age. The size may be a result of efficiency due to competition. It may be squeezed due to barriers both legal and informal actors. The legal ones are competitors of the firm that are capable of diverting the attention of consumers toward them. As mentioned earlier, these firms are also defined as “formal” as long as they are registered, fulfilled their tax obligations and respected labor laws and other relevant regulations. These firms respect fiscal obligations of the country in which they operated. They pay business taxes, transaction taxes on goods and services, property taxes on land and vehicles. They are also required to pay tax on increases in capital and taxes levied on dividends.
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On the other hand, they have full access to all support services offered by the government agencies. They may also benefit from tax exemptions provided by the investment laws of the respective African country, including Ethiopia. However, some business enterprises may face unnecessary barriers to their operations, including exaggerated tax evaluations and failure to respect the law.
As most industrial activities are located in the capital cities of African countries, the majority of customers are also urban residents. However, customers may also come from rural areas looking for consumer goods or inputs for agricultural activities. These inputs may originate from local or external sources. These customers are mainly traders that cater for the needs of the rural people. Of course, they calculate their margin of profit which is a burden on the rural communities.
Studies reveal that selling prices of agricultural outputs are built taking all costs into consideration. The total cost is a burden on the final consumer of agricultural produce such as urban dwellers. These dwellers, in turn, find ways and means of carrying the burden legally or illegally. The concerned authorities may interfere to set the right prices for both suppliers and users of final goods and services. However, they also need to respect the rights of traders and buyers based on correct information on the costs of production, transportation and marketing. Ethiopian consumers should be protected from unfair practices of traders whose goal is maximization of profit at any cost.
