New economist at CMI

Name: Merima Ali

Research interests: Micro- and small-scale enterprises, cluster development and informal networks

Geographical areas: Ethiopia and Sub-Saharan Africa

Micro- and small-scale enterprises: Potentials and Constraints
Micro- and small-scale enterprises (MSEs) constitute 90% of all firms outside of agriculture and 50-60% of the off-farm employment in Africa. The new CMI researcher, Merima Ali, has extensive field-experience from Ethiopia, where she has studied micro- and small-scale enterprises.

What makes these enterprises succeed or fail? Can MSEs lift people out of poverty?

-Despite their large employment contribution, MSEs are often characterized by low productivity and constitute an insignificant share of the commercial output, says Merima. Managerial skills are a critical source of enterprises’ ability to innovate and differentiate products from those of their competitors. For example, entrepreneurs with better managerial skills can identify better marketing or pricing strategies when selling their output. Enterprises with skilled managers can also better forest, plan and invest in obtaining resources such as credit.

Industrial clusters improve profit
-Industrial clusters provide a wide range of advantages that enable MSEs to become competitive and profitable. The availability of inputs, specialized labor and various services in nearby locations help reduce costs of doing business within clusters. The presence of various actors close to each other also facilitates easy flow of knowledge and information exchange. The trust that naturally develops within clusters provides the basis for joint actions (cooperation) to invest in common facilities and facilitate smoother commercial transaction, reducing risk and uncertainty. Industrial clusters can also enable MSEs operate in larger economies.

The concentration of enterprises in one location may create fierce competition among MSEs forcing prices down and reducing the profit margin. Increased concentration may also result in congestion, which can reduce operational efficiency. Innovation, which is manifested through differentiated products, improved product quality and altered marketing channels are important to maintain profitability and foster sustained growth for MSEs in clusters.

What can donors do
Donors and developing country governments create various assistant programs to help reduce some of the MSE constraints and facilitate their growth. Policy changes are designed to improve the business environment: Changing biased policy frameworks, easing overly complex regulatory set-ups, and sometimesdirect assistance to particular enterprises.

-Management training as well as training in bookkeeping and marketing make a difference.  Making credit available to MSEs is crucial, says Merima Ali.