Effect of resources and entrepreneurial orientation on growth of small enterprises in Tigray Regional State, Ethiopia

Abstract

The primary objective of this study was to examine how and to what extent entrepreneurial orientation, firm internal resources and capital structure decisions affect growth of small enterprises, following the resource- based view on determinants of growth and static trade-off theory of capital structure as theoretical frameworks. Regardless of the number of earlier study, there is no consensus among scholars on determinants of growth due to the existence of different theories and metrics of growth. Moreover, as the earlier studies were undertaken in developed countries, their research findings could not permit generalization on the effect of the explanatory variables on growth in less developed countries like Ethiopia. Therefore, this research tried to fill the gap in the existing body of knowledge on determinants of growth by contextualizing the association of growth with firm specific factors and EO from the Ethiopian context, more specifically from the context of Tigray Regional State. Besides, extra variables that were either not considered or might have been tested separately in earlier studies in Ethiopia were integrated into the regression model. In this mixed explanatory cross-sectional research, systematic random sampling techniques and structure questionnaire were applied to collect primary data from 333 small enterprises operating in five urban towns of Tigray region. Dependent variable of the study was growth of small enterprises, defined as logarithm of change in number of employees at the time of establishment and time of survey. The explanatory variables comprise of entrepreneurial orientation with three dimensions, tangible and intangible resources under the control of a given enterprises, capital structure decisions, external factors such as marketing related problems cost and accessibility of infrastructure, government policies and bureaucracy, business development services were also included in the regression model. Descriptive statistics, statistical difference tests, multiple regression analysis and Propensity Score Matching were applied for the purpose of data analysis with the help of Stata version 12 software. Majority of the small enterprises demonstrated moderate degree of entrepreneurial orientation and location nearer to major customers, entrepreneurial orientation, strong financial position, access to credit and leverage have statistically significant positive effect on growth of small enterprises which support the resource based view and static trade-off theory of capital structure as well as the perceived hypothesis. On the other hand, consistent to the hypothesis, age and size of small enterprises showed negative significant effect on growth, that supports Jovanovich’s learning model but against the Girbat’s law of proportionate effect. Moreover, the relationship between education and growth was found to be non-linear or volatile-growth of SEs tend to declined until certain level, reached a minimum level after which SEs with more educated owners tend to grow faster. This implies that unless owners’ years of education reach a very high level of schooling, a given increase in years of schooling could not necessarily result into higher growth rate. Based on the findings, the researcher suggests (i) in order to solve financial constraints of SEs, stakeholder need introduction of National Credit Guarantee Fund, Promotion of non-bank financial services, introduce Mandatory Minimum Bank Loan to small enterprises, establish specialized banking system that specifically support the small enterprise sector, (ii) provide working premises such as shades at concessional cost, (iii) facilitate establishment of small enterprise commercial centers, (iv) strengthen the clustering practices,(v) facilitate provision of adequate infrastructure at reasonable price, (vi) as TVET completed individuals outperform in growth rate, educational institutions in Ethiopia need to incorporate competence based training system and entrepreneurship into their syllabus by strengthening the industry university linkages