Facilitating small businesses: The Ethiopian experience

Cluster development programs have become an important tool for fostering innovation and growth in the private sector in developing countries. Since 2003, the Ethiopian government has pursued an active strategy for micro and small-scale entrepreneurs (MSE), aiming to foster cluster development. The strategy has largely consisted of building working premises for entrepreneurs operating in similar or closely related sectors, at highly subsidized rent. So far, the government has spent over 300 million birr building working premises that reportedly has benefited more than 23 000 MSEs.

Merima Ali, senior researcher at Chr. Michelsen Institute has studied the Ethiopian government’s MSE cluster development strategy and conducted interviews with several Ethiopian businessmen and -women. She questions the significance of the intervention.

-Putting micro- and small scale-entrepreneurs in a single location does not mean that cluster dynamics will occur. It takes time to develop the most important benefits of clustering, such as trust, collaboration and flow of knowledge. Well functioning clusters also depend on an environment that is based on market forces. A top-down approach to cluster development, like the Ethiopian one, needs to be exercised with caution as the risks of failure are high. It is usually beyond government’s capacity to have a perfect understanding of the market situation, says Ali.

The pitfalls of real life
Natural clusters are widespread in developed as well as developing countries. Many of these clusters, like the wine cluster in Chile or the high-tech industry cluster in Bangalore in India, have had immense success, inspiring policymakers and governments to adopt cluster development strategies and policies.

-The Ethiopian experience shows how hard it is to recreate the dynamics and advantages of natural clusters, says Ali.

Ali points to a number of reasons why the government has not been able to realize the envisaged advantages of clustering. The selected production locations did not take into account the overall economic environment and the type of market outlets in the vicinity, and little attention was given to the production organization and working conditions in specific sectors. Also, there was a lack of incentive structures to attract the businesses that had the most to gain from the working premises. In some cases, basic infrastructure like water and electricity was not in place in time.

-As a result, most of the working premises are not being used despite the fact that they are let out almost for free, says Ali.

Need to focus on the overall business environment
Despite the difficulties of creating natural dynamics in government created clusters, cluster development should be an integral part of MSE development strategies.

-In a cluster, the items needed to manufacture products as well as various services are available nearby. This dramatically reduces the cost of production. Clusters are also normally placed close to potential markets. In addition, clusters make the flow of information and knowledge easier, she says.

The Ethiopian experience clearly illustrates the pitfalls of top-down approaches to cluster development. Instead, governments should have focus on improving the overall business environment says Ali.

-The Ethiopian government should prioritize to play an active facilitating role in the formation, growth and scale up of emerging clusters by providing basic infrastructure like roads and electricity, improve the legal framework and give access to credit.