The viability and entrepreneurial orientation of micro and small enterprises in Ethiopia: an institutional perspective
Creators: name: Biru, Ashenafi
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350704
subject: Entrepreneurship
classificationCode: 350705
subject: Innovation management
classificationCode: 350709
subject: Organisation and management theory
classificationCode: 350716
subject: Small business organisation and management

description: This study examines the effects of the institutional environment on the entrepreneurial orientation (EO) and viability of micro and small enterprises (MSEs) in Ethiopia. Creating an institutional environment which encourages entrepreneurship and fosters ongoing viability of small business is of critical concern to many developing economies. This study is guided primarily by institutional theory and adopts a pragmatic research strategy that places emphasis on the importance of the research problem. Exploratory sequential mixed methods research design was adopted to conduct the study, in which the researcher analyzed qualitative data collected in the first phase, to inform a quantitative study in the second phase. During the first phase of the study, a qualitative data collection was conducted based on a set of semi-structured interviews. The interviews were conducted through two waves involving 32 face-to-face interviews, each ranging from 90 minutes to two hours. The participants were selected primarily due to longevity of business operation and were drawn from four major Ethiopian regional states. An interpretive approach modeled on (Gioia et al., 2013) was adopted, whereby simultaneous collection and analysis of data occurred through constant assessing of emerging and formative themes then going back into the field to collect further data on these important findings. Building from the qualitative findings, a self-administered questionnaire was developed and a survey was conducted to gather the data required to generate answers to the emerging research questions. The study established a robust conceptual framework and developed testable hypotheses based on the extant literature and findings from the qualitative study. The conceptual framework and hypotheses were tested using structural equation modelling (SEM) on a sample of 552 firms located in four regional states in Ethiopia. Tested and validated measures were used for the key constructs. Both exploratory factor analysis (EFA) and confirmatory factor analysis (CFA) were performed to uncover the underlying factor structure and to confirm the measurement model. The study also tested the construct validity and reliability of instruments to ensure the credibility and appropriateness of measurement items. Drawing on in-depth interviews with Ethiopian MSEs, the qualitative study identified sixteen major elements that form the institutional environment, constituting the regulatory, normative, cognitive and conducive pillars. Within each pillar, the constituent elements have conflicting nature. This creates complexity and uncertainty in the institutional fabric in which firms operate. Consequently, the institutional complexity puts MSEs in a difficult position. It is both difficult and costly to abide by the formal and informal rules of the institutional environment when the elements exert such conflicting pressures. Likewise, it is difficult, if not impossible, for MSEs to change the existing institutional environment by lobbying powerful stakeholders. Generally, firms that cannot abide by or alter the governing institutions are expected to exit the market. However, in Ethiopia MSEs navigate an alternate path to viability by bypassing institutional requirements. Some firms systematically and innovatively circumvent the institutions in ways that add value to the firms and society at large (circumventive entrepreneurship), others engage in evasive activities that only benefit the firm at the expense of the society and other actors in the market (evasive entrepreneurship). Hence, the findings show that Ethiopia’s formal and informal institutional environment factors are yet to reach a stage of maturity that is capable of supporting and facilitating the business environment required to enhance the viability of MSEs. Institution bypassing activities reveal a contradictory aspect of entrepreneurial activity in Ethiopian MSEs. Despite acting in ways that would not traditionally be considered entrepreneurial, the MSEs value entrepreneurial activity highly. When MSEs work around the system to survive and be profitable, it is not because they do not aspire to being entrepreneurial, but because they are not yet operating on a level, opportunity-based playing field and thus are forced toward a default “lowest common denominator” position. The quantitative study which was conducted in the second phase reveals a more nuanced picture of the relationships between institutions, EO and the viability of MSEs in Ethiopia. The multivariate analysis shows that firms perceive the Ethiopian institutional environment positively and that this has a predominantly positive and significant effect on their viability, both directly and indirectly. However, the impact of these positive perceptions is not uniform. The regulatory environment has the strongest impact on viability, though this impact is largely exerted indirectly, via EO. The conducive and normative environments impact directly more strongly than indirectly. The cognitive environment still impacts viability directly though shows no significant effect on EO, possibly explained by the fact that most firms act on the basis of how other actors in the market are behaving rather than on the basis of their cognitive attributes. This underscores that the institutional environment (more specifically a firms’ perception of it) significantly shapes entrepreneurial behavior. The findings also detail the interplay between institutions and the viability of MSEs in Ethiopia, providing contrast to the current understanding that the influence of institutions within any given environment is uniform. The study results, in general, show that the ability of MSEs to achieve and sustain viability in Ethiopia to a large extent depends on the nature of the institutional environment in which they operate. The level of entrepreneurial activity undertaken by MSEs is impacted by their perceptions of Ethiopia’s complex and uncertain institutional environment. The contradictory regard of EO in the Ethiopian environment (aspirational and in practice) is reflected in the outcomes of Ethiopian MSE support policy. Programs such as “MSE graduation program” have subsidized the creation of a large number of MSEs but have failed to “graduate” them to self-sufficient viability in the long term. MSEs view the program positively based on their aspirations but criticize it based on its inability to break the mindset of staying small and protected and to prioritize entrepreneurialism in practice. In the absence of outcome-based resource distribution MSEs revert to the same survival-focused “lowest common denominator” setting. The challenge for the country in its endeavor to transform the economy is to reset this baseline. Thus, until a more sophisticated, transparent and conducive institutional environment is developed, we may not be able to see a flourishing entrepreneurial ecosystem across the nation.