Action Programme on Productivity Improvement, Competitiveness and Quality Jobs in Developing Countries - Working Paper PMD-4

This working paper is circulated solely to stimulate discussion and critical comment

CONTENTS

Foreword

1. The research effort

2. Introduction

3. Conceptual issues

• 3.1. What is meant by "enterprise"
• 3.2. What does it mean to be "growth-oriented"?
• 3.3. Definitions of scale

4. Implications for the study of growth-oriented enterprises

• 4.1. Identifying GOEs
• 4.2. Needs of GOEs

5. Methodological implications

• 5.1. Location of research
• 5.2. Selection of GOEs
• 5.3. Undertaking the research
• 5.4. Research personnel
• 5.5. Representativity

6. The enterprises - An introduction

• 6.1. Basic characteristics of the GOEs
• 6.2. The activities

7. The business environment

• 7.1. The United Republic of Tanzania
• 7.2. Uganda
• 7.3. Zimbabwe
• 7.4. Entrepreneurs’ perspectives on the business environment
• 7.4.1. Positive and negative aspects of the business environment
• 7.4.2. Institutional support
• 7.5. Conclusion - The enabling environment

8.Enterprise-specific factors explaining growth

• 8.1. Legal form and ownership
• 8.2. Character of activity
• 8.2.1. Sector orientation
• 8.2.2. Market orientation
• 8.3. Responsiveness to changing market conditions
• 8.4. Entrepreneurs’ perspectives on growth
• 8.5. Use of human resources in the enterprise
• 8.5.1. Family and enterprise
• 8.6. Investments undertaken during growth
• 8.7. Cash flow and depreciation
• 8.7.1. Cash flow
• 8.7.2. Depreciation
• 8.8. Conclusion: Enterprise-specific factors contributing to growth

9. Characteristics of the entrepreneurs

• 9.1. Personal characteristics
• 9.1.1. Sex
• 9.1.2. Ethnicity
• 9.1.3. Family-related issues
• 9.1.4. Education
• 9.1.5. Work experience and prior enterprising activity
• 9.1.6. International exposure
• 9.1.7. Conclusion on entrepreneurial characteristics
• 9.2. Variables related to the mentality of entrepreneurs
• 9.2.1. Psychological characteristics
• 9.2.2. Triangulation of data
• 9.2.3. Reactive or proactive entrepreneurs
• 9.2.4.Reasons for starting a business
• 9.3. Conclusion: Personal and psychological characteristics of the entrepreneurs that contribute to growth

10. The growth process

• 10.1. Growth in number of employees and quality of jobs
• 10.2. Growth in terms of turnover and profits
• 10.3. Character of growth
• 10.3.1. Growth at enterprise level
• 10.3.2. Growth at entrepreneurial level
• 10.4. Preparations before start-up
• 10.5. Support sought and obtained
• 10.5.1. Non-financial support
• 10.5.2. Financial support
• 10.5.3. Conclusions: Non-financial and financial support

11. Summary

• 11.1. The most important factors behind the growth of GOEs
• 11.1.1. The business climate
• 11.1.2. Enterprise activity and its organization
• 11.1.3. Personal and psychological characteristics
• 11.1.4. The growth process
• 11.2. How can these factors be used to identify potential GOEs?
• 11.2.1. Identifying the enterprises which will grow
• 11.3. Addressing the training needs of GOEs
• 11.3.1. Training the entrepreneurs
• 11.3.2. Training the management of GOEs
• 11.3.3. Recommendation

Bibliography

Appendix 1

• Terms of reference
• Terms of reference for study of growth-oriented enterprises
• 1. Introduction
• 2. Research objective
• 3. Defining "growth-oriented enterprises"
• 4. The study

Appendix 2

• The questionnaire

Foreword

One of the factors that determine an enterprise’s productivity and competitiveness is the structure and development of its supplier and distribution industries. An individual enterprise does not develop its competitive advantage in isolation. As equally significant as internal strengths are the strengths the enterprise draws from other firms in the form of quality inputs and services, information, knowledge, skills and business linkages. Thus, increasingly, one source of competitive advantage is in how an enterprise manages its value chain. In a very dynamic and sometimes turbulent market, enterprises attain flexibility and speed in meeting the rapidly changing customers' needs and expectations through good management of its supply and distribution chain. In this respect, strong inter-linkages among large, medium, small and micro-enterprises within and across sectors are very important. In some economies, such inter-linkages are constrained by the "missing middle" phenomenon in the industry structure.

Another reason for this interest in growth of SMEs is due to findings in various studies that it is the dynamic and growth-oriented enterprises that contribute significantly to net job creation. In addition, studies also show that incomes and conditions improve with the size of the enterprise, although significant exceptions and variations among enterprise within the same size groups exist.

This study on growth-oriented small enterprises was undertaken to complement another study that looked at the supply-side constraints that hinder African enterprises from taking advantage of the new market opportunities emerging from the liberalization of international markets.

This working paper is produced under the Action Programme on Productivity Improvement, Competitiveness and Quality Jobs in Developing Countries. With increasing globalization, it is more and more appreciated that productivity improvement is crucial to a country’s integration into the global economy. With the opportunities for growth of output and trade and the increased competition offered by globalization, it is important for countries to develop the capacity to pursue strategies for productivity and competitiveness improvement of industries supplying local and international markets. Particularly for developing countries, productivity improvement is essential to create more jobs through growth from new investments and to sustain jobs in the face of increased competition.

The Action Programme promotes the "high road" to productivity improvement and competitiveness, i.e. approaches that aim at achieving both economic and social objectives at the same time. It is developing various guides and manuals on improving productivity and competitiveness through customer orientation, quality, innovation, participation, human resource development, labour-management cooperation, better working conditions, and sharing of productivity gains, among others.

It is documenting national, sectoral and enterprises level "best practices" in productivity and competitiveness improvement. The manuals and guides and the best practice cases will be disseminated through publications, national workshops and seminars as well as through undertaking of policy and programmes development advisory services.

Ms. L. Badia contributed greatly in putting the manuscript into publication.

Arturo L. Tolentino
Manager
Action Programme on Productivity Improvement,
Competitiveness and Quality Jobs in Developing Countries

1. The research effort

The main research objective of this study was to identify which factors are most important for the growth of small and medium-sized enterprises (SMEs). This objective can be subdivided into three broad areas of interest:

nHow can growth-oriented enterprises (GOEs) be identified before they begin to expand?

nWhat are the needs of GOEs?

nHow can GOEs be supported?

In order to address these issues we have made a study of enterprises that have already demonstrated their ability to grow. The study was undertaken in the United Republic of Tanzania, Uganda and Zimbabwe. The ILO Start and Improve your Business project (SIYB) is operating in these three countries.

2. Introduction

There has been a growing awareness since the early 1970s that SMEs are important for economic growth, not least for their contribution to employment. The 1980s saw an intensification of this interest and an expansion into the sector of microenterprises. Although there is still great interest in SME promotion there is a growing realization, especially among those concerned with employment creation, that the support given is often not as cost-efficient as might be desired.

Research findings from the United Kingdom and the European Commission indicate that 50 per cent of total net job creation is created by a mere 4 per cent of SMEs (Manu, 1998). Research in Africa indicates that the number of enterprises that significantly contribute to employment growth is in fact even smaller - 1 per cent (Mead, 1994). By implication, the great majority of SMEs are not very growth prone. It would thus appear that SMEs fall into two categories. There is a very large group of entrepreneurs who, for various reasons, will not develop their business beyond a certain (small) scale, and there is a very small group of entrepreneurs who are capable of expanding their business. There is now increasing interest in identifying and promoting growth-oriented SMEs.

This is the research report from an ILO study on GOEs. The terms of reference for the study focus on the factors involved in the growth of small enterprises. The purpose of the research was to provide background information for the possible development of programmes and products to meet the needs of this particular group of entrepreneurs. The first part of the report defines the central concepts involved and discusses the question of scale. The next section describes the methodology of the study, the selection of enterprises and the research tools used. Then we move on to the actual research findings; a profile of the sample is provided and salient issues from the empirical work are presented.

3. Conceptual issues

3.1. What is meant by "enterprise"

The term "enterprise" is often used interchangeably with "business", "company" or "firm": it implies no specific legal status. For the purposes of this study we included enterprises of any legal form, such as private limited companies, sole proprietorships, cooperatives and unregistered enterprises in the informal sector.

It should be noted that in the case of SMEs "there is a very close and intimate identification between the entrepreneur-manager and his or her small business" (Tolentino, 1997, page 1). There has consequently been a tendency in small enterprise development efforts to define the enterprise by the entrepreneur. In this study we acknowledge the importance of the entrepreneur for the success of the business. However, in trying to identify the factors that are conducive to enterprise growth, we have expanded our view beyond the entrepreneur and also paid attention to the enterprise itself.

3.2. What does it mean to be "growth-oriented"

To be growth-oriented indicates a desire to expand from a point of departure. The subject may be a person or thing, i.e. in our case an entrepreneur or an enterprise. If we are referring to an individual as growth-oriented we would imply a certain state of mind. If we are describing an enterprise, we might be referring to an individual entrepreneur, but we might also be referring to the collective mindset of a group of people such as the board of directors or the managers.

When we speak of enterprises as growth-oriented we are thus referring to the key individuals and their ideas on developing the enterprise. However, intention is one thing and capacity is another. The one cannot go without the other - growth will not be achieved, no matter how much the key individuals desire it, if they do not have the capacity to expand. And conversely, if the key individuals do not desire it, no matter how capable they may be, they will not expand. Growth potential is a function of inner capacities and environmental factors. When speaking about growth orientation in this study, both willingness and capacity are taken into account.

3.3. Definitions of scale

The aim of this study is to find ways of identifying and assisting growth-oriented enterprises, whether they are micro, small or medium-sized. There is an emphasis though on supporting the graduation of companies into the medium range, to make "the missing middle" a thing of the past. There is therefore a need to define the different scales.

Scale can be defined in many ways: annual turnover, labour force, etc. One of the ILO’s main interests in the field of small enterprise development is job creation. An integral part of that is the promotion of decent jobs. However, since the quality of jobs is difficult to operationalize in the selection of enterprises, we have only been concerned with defining scale, using the number of employees as the defining factor. The scale of an enterprise is relative, determined by the context. Mead and Liedholm (1998) report that less than 2 per cent of enterprises in Africa employ ten to 50 people. Even fewer employ more. We have therefore considered micro, small and medium-sized enterprises to be those that employ one to four, five to 20, and 21 to 49 persons.

4. Implications for the study of growth-oriented enterprises

In this section, we look at how the research objectives were interpreted and addressed.

4.1. Identifying GOEs

The terms of reference (see Appendix 1) state that one important interest guiding the study is to find out ways in which GOEs can be identified in advance, i.e. before they have actually grown. Since the study is concerned with the whole range of GOEs, it is necessary to bear in mind that there are two distinct groups of GOEs. One group has already proved their ability to innovate and expand. The other group are growth-oriented but have not yet proved their ability and willingness to actually grow.

For the purposes of this study, we wanted to find out what kind of enterprises grow. Therefore, we have only included GOEs of the first kind, i.e. those that have already carried out at least one entrepreneurial act.

For the purposes of analysis, both groups of GOEs are concerned. We point out the ways in which GOEs seem to differ from other enterprises and this might indicate what factors we should be looking for among the enterprises and entrepreneurs that have not yet demonstrated their ability and willingness to grow.

4.2. Needs of GOEs

The second and third main interests behind the study (see terms of reference) are to identify the needs of GOEs and suggest how these needs can be met. As pointed out in the 1997 ILO Report to the Donor Committee on Small Enterprise Development, needs assessment should consider at least two different perspectives. The first is often referred to as "felt" or "perceived" needs. This is the perspective of the entrepreneurs/enterprises. It describes how they perceive the opportunities and obstacles they face and their ideas about what they need in order to expand their business. The other perspective is often referred to as "objective", "real" or "logical" needs. The "objective needs" are usually a research-based understanding of what it takes to create well-functioning enterprises. It should not be assumed that one perspective is more valid than the other.

This study focuses on the entrepreneurs/enterprises, the "perceived needs". It is for users of the report to assess the relevance of these needs compared with the "objective needs". It should be noted that prior research shows that entrepreneurs tend to overemphasize the lack of finance in assessing their needs and underestimate the benefits of training.

5. Methodological implications

In order to generate the kind of data required to address the research issues at hand a qualitative approach has been used. The main tool for data collection was a questionnaire used to interview the people behind 43 growth-oriented enterprises. The section below presents the selection criteria and their operationalization for countries, enterprises and research personnel.

5.1. Location of research

The research effort took place in three of the six countries covered by the Regional Project Office (RPO), namely the United Republic of Tanzania, Uganda and Zimbabwe. These countries were chosen partly because they represent different geographical regions of the RPO area, but more importantly because the business environment (infrastructure, local resource endowment, institutional development, etc.) differs quite significantly. Zimbabwe is the most advanced country in the RPO area, while the United Republic of Tanzania is among the least advanced. Uganda is in-between, but shows remarkable progress at the moment. In addition, the three countries have a different history and they began market liberalization at different times. These contextual differences were expected to provide insights on the importance of the environment for enterprising activity.

The research took place only in urban areas, or more specifically in the major economic centres of each country, i.e. Dar es Salaam, Harare and Kampala. Fifteen interviews were undertaken in each country.

5.2. Selection of GOEs

The focus of interest in this study is on enterprises that have already shown their ability and willingness to grow. We are looking at companies that are moving towards the missing middle.

We have focused on achieved growth as an indicator, growth being assessed in terms of employment. Although business growth may also be assessed in financial terms, such as turnover, that option was not chosen ⁽¹⁾, primarily because such figures are not easily obtained. Two selection criteria were used:

- the company has ten to 50 employees;

- the number of employees has increased by at least 50 per cent over a five-year period.

The number of employees was limited to between ten and 50. The period of five years was used to assess growth because of the high incidence of business failure within the first three years. Five years would seem to indicate that the enterprise is sustainable. In order to have a comparative and recent sample, growth had to be achieved during the 1990s.

The sample consisted of an equal number of manufacturers, wholesalers/retailers and service providers. Identification in respective countries was pursued through different channels, such as the local chamber of commerce and the local association for manufacturers.

5.3. Undertaking the research

In applying the selection criteria some modifications had to be made. If we only look at permanent employees, enterprises in the service sector are generally rather small. However, they often employ a larger number of casual workers. We have taken this into consideration when selecting the enterprises, which explains why some are recorded as employing less than ten people. At the other end of the spectrum, some enterprises in the study actually employ more than 50 people. This was not intentional. Although initial contacts with these enterprises seemed to confirm that they fully satisfied our selection criteria, other figures on the number of employees were provided at the actual interview. Despite this it was decided to include the enterprises in the final sample because they have grown significantly in recent years and can be expected to provide important insights on the issues at hand.

One more modification was made in that the number of years of operation was cut from five to three as most research indicates three years to be sufficient.⁽²⁾

The process for identifying the enterprises varied a little from country to country, but the general procedure was the same. Before arriving in each country we asked local organizations to help identify enterprises that appeared to fit the selection criteria. We then met the people behind those enterprises to ascertain that they actually corresponded with our criteria. In Zimbabwe there were few problems in this process. In the United Republic of Tanzania and Uganda, however, there were some complications because the official registers are rarely up to date with the number of employees. And quite often the correct numbers are not given because the enterprises want to avoid taxation or pay a lower membership fee in an organization.⁽³⁾

To tackle this problem we had to make contact with the enterprises directed to us. In many cases they did not meet our criteria and we had to find new ones. This had to be done while interviews were already being undertaken. Additional enterprises were often found by taking a walk in the city centres or industrial areas to spot businesses that appeared to fit our criteria. We also took the opportunity to identify some enterprises exhibiting at the Saba Saba International Trade Fair in Dar es Salaam. Approximately half of the enterprises in the United Republic of Tanzania and Uganda were identified this way.

Eventually 48 enterprises were studied. Closer scrutiny of the data obtained revealed that five of them did not fit our selection criteria satisfactorily. In two cases this was because the number of employees actually turned out to exceed 100 and in three cases because no growth in employment was reported in the interview.

5.4. Research personnel

The interviews were conducted by local interviewers, who talked to about five entrepreneurs each. The conversations were guided by a questionnaire (Appendix 2). The research project coordinator was present during the interviewing stage in all three countries and undertook some interviews himself.

In addition to fluency in English as well as the local language, and having a suitable personality, the interviewers were required to:

nhave done previous research for or on business development;

nhave a thorough understanding of business management, preferably through their own business experience;

nbe independent of the ILO Start and Improve Your Business programme.

These criteria were met in all instances. The interviewers prepared for their task by reading papers about the research and attending a one-day workshop, where they practised using the questionnaire. At the end of each session the interviewers and the research coordinator went through the interviews carried out during the day. In this process the skills of the interviewers were further improved.

5.5. Representativity

We tried to get an unbiased sample by relying on several sources of information. However, the sample is limited and we do not know the total number of enterprises in the whole population. Thus, the representativity of our sample is uncertain. Judging from the time-consuming task of identifying GOEs according to our selection criteria, though, we might infer that our sample does make up a fair share of the total. For the United Republic of Tanzania and Uganda we estimate that the total is no more than three times the number of GOEs identified. For Zimbabwe it is probably closer to five times the number identified.

Our focus has been on enterprises that grow. Had the emphasis been on entrepreneurs who expand, their business our sample may have looked different, as we know that a significant number of entrepreneurs prefer to expand their operations by creating new enterprises, usually very small ones. Taking all the operations of such entrepreneurs into consideration, their employment contributions might add up to fit our selection criteria. However, there are very few entrepreneurs of this kind in our sample.

6. The enterprises - An introduction

Out of the 48 enterprises studied, 43 were finally selected, 15 in Zimbabwe and 14 each in the United Republic of Tanzania and Uganda.

6.1. Basic characteristics of the GOEs

Only a summary of the enterprise characteristics is provided at this initial stage. More details are given in the following chapters.

Table 6.1. GOE characteristics

The average age of the GOEs differs significantly between Zimbabwe and Uganda. This may be related to structural adjustment programmes (SAPs). SAPs picked up momentum in Uganda in 1987 and in the United Republic of Tanzania in 1988, but in Zimbabwe they did not even begin until 1991. With SAPs came a stronger emphasis on small enterprise development, rather than on state-led development through large parastatal companies. Before these programmes there was relatively little official SME activity and it was even considered shameful to be involved in it.⁽⁴⁾

The number of employees in this sample ranges from five to 76. This figure deviates from the range established by the selection criteria because in addition to the number of permanent employees, we have also included casual and seasonal labour. For example, in the GOE employing only five people, we are actually talking about a company that is growing by employing workers on short-term contracts. At the time of the interview 40 additional people were employed for a period of six to seven months for promotional purposes and at least ten of them were expected to remain as permanent employees. Taking account of casual labour, only one enterprise employed less than ten people at the time of the interview. Until very recently it had employed ten workers but owing to a misappropriation of funds, the firm had to downsize temporarily.

The size of the enterprise varies between the three countries. Those in the United Republic of Tanzania and Zimbabwe are almost the same size, but those in Uganda are generally smaller in terms of employees. In a few cases this affects the interpretation of the findings, but in most cases not.

6.2. The activities

We have included enterprises from three sectors of the economy, manufacturing, services and wholesaling/retailing.

Table 6.2. Lines of activity

The table above reflects only major activities although several enterprises are engaged in other activities as well. For example, we do not mention that the supermarket in Zimbabwe also has an in-house deli and bakes its own bread. This kind of information is given later.

7. The business environment

There has been a protracted debate among World Bank policy makers on whether enterprise creation is best promoted by focusing on creating an "enabling environment", or whether direct interventions to support various groups of enterprises are necessary as well (Webster, Riopelle and Chidzero, 1996). Our conviction is that enterprise growth is a function of the enterprise itself, the people behind it and the environment for enterprising activity. The next three chapters therefore discuss each of these areas.

Chapter 7 provides a snapshot of the business environment in the three countries concerned, pointing out differences between the economies that may affect enterprise growth. Since the enterprises in our study have already grown, we concentrate on the economic situation and policy reforms during the 1990s. We also provide a glimpse of the present state of the economy. We start with a general overview.

Table 7.1. General national statistics on economic structure (base year 1997)

7.1. The United Republic of Tanzania

Donor-supported market liberalization began in 1985 in the United Republic of Tanzania with the launching of the Economic Recovery Programme (ERP) which was to last until 1988. Initially progress was quite slow. The ERP was followed by another three-year programme, the Economic and Social Action Programme (ESAP). Whereas the first programme focused more on government expenditure, the latter focused on creating an environment conducive to enterprising activity. More tangible results were achieved in the early 1990s. In February 1993 the adjustment of the official foreign exchange rate was officially declared complete and the parallel market for foreign exchange virtually disappeared (Trulsson, 1997, page 81). A three-year programme for the retrenchment of 50,000 civil servants began the same year. Also in 1993 the Parastatal Sector Reform Commission (PSRC) began operating, closing down ailing parastatals and preparing others for divestment (ibid., page 83). Cooperatives began losing their monopoly rights in handling certain cash crops and price controls on a number of commodities were lifted.

Since 1993 the United Republic of Tanzania’s annual GDP growth has ranged between 3 and 5 per cent; forecasts by the Economist Intelligence Unit place GDP growth for 1999 and 2000 at 5 per cent and 5.5 per cent respectively (Hawkins, 1999, page 117). In the early 1990s inflation was around 30 per cent but the rate has gradually declined and is now down to almost half that figure. The currency has lost value relative to the United States dollar. The decline was quite moderate between 1993 and 1997, but the exchange rate dropped more sharply at the end of the 1990s. This can be attributed to a change in policy by the Bank of Tanzania, which decided not to prop up the exchange rate. In spite of this, macroeconomic indicators show that the economy is doing fairly well.

The export sector is small, but according to Hawkins it is relatively well balanced. The major traditional export crops, coffee and cotton, accounted for 18 per cent of export revenues in 1996, which is basically the same share as that of manufactured products (Hawkins, 1999). Still, agriculture is the backbone of the economy and accounts for almost half of recorded GDP, whereas manufacturing only accounts for 7 per cent (World Bank, 1999). Mining has become an important new income earner for the country, and so have some non-traditional export crops. The most important new foreign exchange generator is, however, tourism. Two of the enterprises in our sample provide services to this sector.

The banking sector in the United Republic of Tanzania has undergone significant change during the 1990s. In the beginning there were very few banks operating in the country, each with a specific clientele and each owned by the State. In line with parastatal restructuring the major banks have been restructured as from 1994. As a consequence the major commercial bank, NBC, offered little or no financial support to SMEs from 1995 to 1997. Before then the bank had a special department catering solely for SMEs. The financial sector was opened to foreign banks in 1994, but virtually none of the new banks are interested in lending to SMEs. The availability of commercial loans was low during this period. And even where loans were available the interest rate was close to 40 per cent. The real interest rate was almost 12 per cent in 1996, and the following year it was about 8 per cent (IMF, 1998).

The United Republic of Tanzania has recently been affected by developments that are beyond government control. Heavy rains have crippled parts of the infrastructure, and the price of gold has slumped on the international market. However, there are also internal problems, rampant corruption being perhaps the gravest. In a survey by the watchdog organization Transparency International, the United Republic of Tanzania was rated the fourth most corrupt country in the world, followed by Nigeria which is much better known for corruption (Bray, 1999, page 17).

Bureaucracy is another problem in the United Republic of Tanzania’s state apparatus. According to a study by the international consultancy firm Coopers and Lybrand (for USAID) the average waiting time for foreign investors to set up operations in the United Republic of Tanzania is 18-36 months (in Uganda it is 12-24 months) and the use of bribes is substantial (Hawkins, 1999, page 118).

Although there are prospects for growth in the United Republic of Tanzania, half of the entrepreneurs we interviewed were negative about the business climate. Corruption was one of the reasons cited, and of course ⁽⁶⁾ taxation. Another factor was the exchange rate. During the week of our interviews the exchange rate fell from Tsh.730 to 780 per US dollar; a week later it was almost Tsh.800 to the dollar.

7.2. Uganda

Market liberalization in Uganda began in the early 1980s. After failure in 1986 a renewed effort was made in 1987 with the Economic Recovery Programme (ERP). As usual in structural adjustment, the primary effort was directed at bringing the exchange rate into parity with market conditions. This was basically achieved by the end of 1993 (Brett, 1996, page 318).

Uganda has been singled out as a success story in sub-Saharan Africa during the 1990s. Over a ten-year period annual GDP growth has averaged almost 7 per cent and in 1995 it peaked at over 10 per cent. Since the peak year, growth has slowed and in 1997 the rate was just above 5 per cent. The 1998 estimate is slightly higher (World Bank, 1999, page 191). It should be noted that this growth has been achieved despite decreasing revenues from the major export crop and costly involvement in armed conflict, both inside and outside national borders. Inflation has been kept at bay and since 1992, when it rose above 50 per cent, it has remained at or below 10 per cent per annum. Since 1992 the exchange rate has been fairly steady, although it rose at the end of the 1990s.

Uganda relies heavily on a single commodity for its foreign exchange inflows. Coffee accounts for almost two-thirds of the country’s export revenues and approximately 25 per cent of annual GDP. Second most important is gold which accounts for 8 per cent of total exports (Hawkins, 1999, page 120). The manufacturing base is small and contributed only 8 per cent of GDP value added in 1997 (World Bank, 1999). Our sample includes one GOE involved in coffee processing.

The policy of indigenization of the economy, i.e. promoting black African ownership of enterprises, has a long history in Uganda. Most notable is the expulsion of the Asian population in August 1972, by President Idi Amin (Wabwire, 1996, page 277). People of Asian origin were given 90 days to leave the country. Before then they controlled approximately 77 per cent of Uganda’s industry (ibid.). When they left the manufacturing sector slumped and has yet to recover its former strength.

Uganda has a relatively violent past and there are many weapons in circulation, so that security is a major concern. From local sources we were informed that in a period of three months in 1999, Kampala experienced two major bomb blasts and five armed bank robberies with several casualties. In addition to these problems people are disenchanted with the banking system. The Government has already saved two banks from defaulting and the Greenland Bank has defaulted. This, of course, undermines public confidence in the recently deregulated banking sector. The banks have been rather poor at catering for the needs of SMEs, and none of the financial institutions has a special department to assist small firms. And although interest rates have come down significantly since 1992 (lending rates have been slightly above 20 per cent), real interest rates were still around 14 per cent in 1996 and 1997 (IMF, 1998).

The entrepreneurs we interviewed expressed different views on the business environment. Statements ranged from "it stinks" to "it is very conducive". The negative remarks primarily concerned corruption and actors in the hidden economy who escape taxation and who smuggle goods across the borders, thus avoiding customs duties. Positive remarks mostly concerned the general atmosphere which was perceived to encourage business growth. Other positive aspects mentioned were improved infrastructure (primarily roads) and better security.

7.3. Zimbabwe

Zimbabwe is a latecomer to structural adjustment. Market liberalization began in 1991 with the Economic Structural Adjustment Programme (ESAP). In 1995 this programme was replaced by the Zimbabwe Programme for Economic and Social Transformation (ZIMPREST), for 1997-2001. While certain regulations and price controls are still in force, significant deregulation has taken place. This has not been achieved without sacrifices. The exchange rate has been under heavy pressure and in two years the Zimbabwe dollar has lost much of its value. While it took Z$11 to purchase US$1 in February 1997, the same transaction cost almost Z$40 in February 1999. Further depreciation is kept at bay mostly due to an agreement between bankers and the Government to peg the Zimbabwe dollar to the US dollar at a specific rate. This would appear to be untenable in the long run.

At the same time inflation is soaring. The inflation rate stayed around 20 per cent during the early 1990s, except in 1992 when it soared to over 40 per cent. Since 1997 it has soared again. In July 1999 annual inflation reached approximately 55 per cent and it is still rising.

Despite the present economic challenges, Zimbabwe is the most developed country of the three in this study. It is less reliant on agricultural production and has a relatively diversified manufacturing sector. Furthermore, the infrastructure is far better than that of either the United Republic of Tanzania or Uganda; GNP per capita is more than twice that in Uganda and three times that in the United Republic of Tanzania.

Zimbabwe’s major export is tobacco. Although the economy suffers when tobacco sales are not good (as in 1999), the economy is sufficiently diversified to generate hard currency from other sources. Except for tobacco, manufacturing and exports are based on resources such as cotton, livestock, gold, platinum, asbestos and horticulture. Tourism is also an important source of income. One of the GOEs in our sample is involved in tourism.

The banking sector is relatively well developed in Zimbabwe and loans are generally available to all groups of enterprises. Barclay’s Bank has a special Small Enterprise Department. Interest rates have been well over 30 per cent, though, and the real interest rate was almost 10 per cent in 1996 and 1997.

Another factor in Zimbabwe is its relatively recent independence and the racial tensions that remain. White Zimbabweans are generally far better situated than the rest of the population. To rectify this imbalance there is an indigenization programme in place. While this may have the desired results, the drawback is that many white Zimbabweans feel insecure about their future and are not investing as much as they might otherwise do. In fact, quite a few potential Zimbabwean investors are moving abroad.

Although observers consider the future for Zimbabwe to be relatively good, its population has experienced hardship in recent years. Zimbabwe is just starting structural adjustment while the United Republic of Tanzania and Uganda have lived with it for quite some time. At present, then, people in Zimbabwe might be expected to have a gloomy outlook on the business climate. And indeed they do - none of the entrepreneurs reported favourably on the present business environment. The most positive remarks were "quite tough" and "hard" and the most negative ones were "awful" or "very, very poor". Devaluation and its impact in terms of more expensive imports were the most commonly mentioned problem. High interest rates were singled out as another major problem.

7.4. Entrepreneurs’ perspectives on the business environment

We asked the entrepreneurs about their own perspectives on the business environment - what has been good and bad for their enterprise. We also asked about their views on trade regulations, and the extent to which they utilize various kinds of institutional support. The sections below report our findings.

7.4.1. Positive and negative aspects of the business environment

A number of policy changes have taken place in the three countries during the period of our study. In this section we highlight those that the entrepreneurs think have had the largest impact on their activity. We start with the positive aspects and continue with the negative ones.

Table 7.2. Positive aspects of the business environment

It is interesting to note that approximately 40 per cent of respondents have no positive remarks to make about the business environment. In the United Republic of Tanzania the figure reaches 50 per cent. General financial deregulation is mentioned positively more often than the other points. Access to credit or to foreign exchange is mentioned most often. In addition to the 14 entrepreneurs who mention general financial deregulation, six more specifically mention foreign exchange liberalization. This brings the number of entrepreneurs who appreciate financial deregulation to almost half of those interviewed.

Let us now look at the negative aspects of the business environment.

Table 7.3. Negative aspects of the business environment

Nine entrepreneurs, or almost 20 per cent, do not consider there are any negative aspects of the present business environment. In Zimbabwe this is so despite rather harsh economic conditions. The most commonly mentioned problem is taxation, particularly in Uganda and the United Republic of Tanzania. To complain about taxes is very common in most parts of the world. The lower frequency of such complaints in Zimbabwe should not be attributed to a favourable taxation system, but rather to the fact that entrepreneurs have more serious things to complain about at present (e.g. price controls, high interest rates and government policies in general, which are all under "other").

To grow means that the enterprise becomes visible. To become visible means that it becomes more difficult to avoid paying tax. A problem voiced by several entrepreneurs in East Africa, especially Uganda, is that the tax authorities are much tougher on larger companies than on smaller. In this respect, larger companies face a competitive disadvantage, because they are likely to be more heavily taxed. This might be a disincentive to grow in the formal sector, or at least to expand an enterprise rather than dividing it into separate small businesses.

The same argument applies to smuggling. This problem is mostly raised in Uganda, where two out of four respondents who complain about customs specify smuggling as a problem. One entrepreneur in the United Republic of Tanzania also mentions it. Otherwise, the problem with customs duties is that they are too high. This problem applies mainly to wholesalers/retailers and manufacturers.

In the positive and negative aspects of the business environment little was said about foreign trade. This is because we asked the entrepreneurs separately about how they see the present trade regulations. These are the answers they gave.

Table 7.4. Perception of how foreign competition affects domestic production

Almost 40 per cent think that foreign competition is a challenge to be met. Although several do not take the challenge lightly, they claim that it must be faced and that they can handle it - "it pushes us to improve" as one of them said. A third of the respondents think foreign competition is hard to cope with. More than half have given up the thought of ever being able to compete with foreign goods: "foreigners are too advanced and we are too far behind" appears to be the prevailing sentiment in this group. Not surprisingly, those who are most negative are in the two least developed countries of the study. Finally, seven entrepreneurs, i.e. 15 per cent, do not think that the issue concerns them. Their operations are purely local and they consider that their enterprise is not affected by the price of imported goods.

7.4.2. Institutional support

There are many organizations, donors as well as NGOs, that support SMEs in the three countries studied. However, in our interviews there was little mention of such organizations. One entrepreneur in the United Republic of Tanzania mentioned MEIDA, one in Uganda mentioned UMA and three in Zimbabwe mentioned ZimTrade. Only here can we say that institutional support is important for GOEs.

Three enterprises in the United Republic of Tanzania have received some direct assistance from donors, one in Uganda and none in Zimbabwe.

Government support is generally perceived as very low or even non-existent. Financial institutions seem to be catering relatively well to the needs of GOEs in the growth phase, but not in the start-up phase. This is a slightly different issue, though, which we will discuss in Chapter 10.

7.5. Conclusion - The enabling environment

Zimbabwe is clearly the most developed country of the three in this sample. It has a much higher GNP per capita, the infrastructure is more developed and the economy is much more diversified. However, Zimbabwe is currently experiencing the most hardship in trying to adapt to structural adjustment. The United Republic of Tanzania and Uganda have been implementing structural adjustment programmes for quite a long period. Although these countries are still relatively poor, they are in a different position as their macroeconomic indicators are pointing in essentially the right direction. Only a few years ago, though, the situation was different in Zimbabwe, and it was during that time that the GOEs embarked on their growth paths - making investments, etc. Thus when interpreting the results we should bear in mind that most decisions concerning the GOEs were taken at a time when growth prospects looked good and the macroeconomic indicators were pointing in the right direction.

Another important aspect of the economic structure in the three countries is that indigenization policies have been enacted in all three - most forcefully in Uganda. The other two countries have been more moderate in trying to even out the positions of the different ethnic groups. Certain policies have been enacted to help the black population engage in enterprising activity, and various financial schemes have more or less explicitly been reserved for black entrepreneurs.

When asked about the business environment in their respective countries the entrepreneurs mention primarily one positive aspect and two negative ones. The positive one is deregulation of the financial sector, particularly foreign exchange liberalization. The two negative ones relate to taxation and customs duties. It should be noted, though, that these factors are also perceived as positive for some - it is hard for policy makers to please everyone!

Finally, when interpreting data about the extent to which GOEs use assistance from external sources (Chapter 10), we should remember that the institutional support available may not have been significant or efficient to begin with.

8. Enterprise-specific factors explaining growth

Certain enterprise-specific factors seem to have an impact on the success of the business. We will examine the following: form of ownership, character of activity, market orientation, quality and characteristics of employees, operational characteristics, investment propensity and financial management.

8.1. Legal form and ownership

Research from Western countries indicates that the legal form of an enterprise has implications for its growth orientation. It might of course be the other way around, i.e. that growth orientation has implications for the legal form of the enterprise (Storey, 1994). Research in Western countries also indicates that a larger number of founders has a positive impact on the success of an enterprise (Storey, 1994; Feeney, 1993). However, research from five countries in southern and eastern Africa indicates the opposite (Mead, 1994, page 1886). We will look at these two issues here.

It should be noted that all the GOEs in our sample are registered in one way or another. Of the 43 enterprises one is a cooperative society, one is a partnership (husband and wife producing garments), two are sole proprietorships (bakery/catering and events management) and the rest are (private) limited liability firms. Registration was made directly on start-up in more than half the cases (23). In seven cases the enterprise was registered before the entrepreneur began work. At the other end of the spectrum, nine enterprises were registered within three years of start-up and only four waited more than three years to register.

The reasons for registration mostly relate to legality and credibility in the eyes of banks, buyers and suppliers. Besides being a legal requirement, registration is seen as a symbolic act showing that the entrepreneur is serious about business.

Our first question was whether the entrepreneurs started alone or with others.

Table 8.1. Who started the GOE

The ownership of an enterprise becomes a legal issue when it is registered. Registered ownership to a large extent corresponds to the initial ownership stakes, with the possible exception of family enterprises, especially those where husband and wife start together. In the latter case, the husband usually has all or most of the shares. In five cases the initial owner of the GOE changed during the course of operations. The changes were minor, though, and do not affect the overall picture significantly.

Apart from the husband and wife division of ownership, there are no significant deviations in ownership when the sample is analysed by sex. However, if we look at ethnicity, there is a decided overrepresentation of entrepreneurs of Arab or Asian descent among the enterprises where other family members are involved. This applies to four of the five enterprises in this category in the United Republic of Tanzania, and to four of the seven enterprises in total. Conversely, one might say black African entrepreneurs are much more likely to start and run their enterprise alone, or possibly with their spouse. This might be explained by the complex web of relations and obligations that this group face when working closely with family members. It may often be better for the business if the entrepreneur is free from such relations.

In sum, growth-oriented enterprises tend to register quite soon after start-up. This seems to show that they are sincere in their intentions and are striving to be in business on a long-term basis. Most of the enterprises register as limited liability companies. Although for some entrepreneurs this is merely because they do not look into other possibilities, it is often preferred precisely because liability is restricted.

There are few indications that a larger number of founders might correlate positively with growth. In fact, if we disregard enterprises where family members have joined forces, there are only ten enterprises with more than one owner, and the prevalence of sole owners is almost 50 per cent. However, if we look at enterprises started by black African entrepreneurs it would seem that those which are most likely to grow are the ones that are started and run by one person.

8.2. Character of activity

There are always some sectors with more potential for growth than others. This is usually because they are new and there is a large untapped demand, or because there have been significant changes prompting sectoral restructuring. For example, computer services, prompted by the development of information technology, can be seen almost worldwide today. What can we say about the implications of the sector for the growth of enterprises in this sample? We will first consider the general area of activity and then look more closely at the market orientation as such.

8.2.1. Sector orientation

Generally the GOEs seem to be in fields that are long established. Manufacturers are engaged in wood processing, clothes making, electrical engineering, etc. Service providers offer training, cleaning, food and transportation. Retailers and wholesalers sell groceries, building materials, pharmaceuticals and machinery. However, if we look more closely at what they are doing we find that quite a few are engaged in relatively new segments within those areas. One of the clothes manufacturers, for example, has constantly changed his product line as other firms have moved into that field, and is presently making safari suits only. The manufacturer of electrical goods has concentrated on producing voltage stabilizers. The provider of training services is engaged primarily in business management and two of the building material retailers are focusing on imported tiles. This is not to downplay the fact that some GOEs also provide very common services/products. But they are different in that they provide higher quality products than most competitors and, as we will see below, they look for a slightly different market niche.

8.2.2. Market orientation

At least two factors would seem to promote export orientation in the three countries of our study. First, it is often claimed that domestic purchasing power is too low. Furthermore, the governments try to promote exports as a way of increasing national wealth and earning foreign exchange. Nevertheless, as shown in table 8.2. below, most of the enterprises presently focus on the domestic, or even local, market.

Table 8.2. Market orientation at present

Very few GOEs base their growth on activities outside the home country. All but two are primarily operating in the domestic market. Of those operating in the domestic market only a little over half are operating outside the capital city (where our study was undertaken). Despite many complaints about the low purchasing power of the local population, there is apparently enough domestic demand to spur enterprise growth. It is primarily a matter of finding a market niche and exploiting it.

Only two GOEs produce primarily for an export market while another 12 also operate in foreign markets, mainly in neighbouring countries. Interestingly, though, none of these enterprises has tried to penetrate the more developed neighbouring markets. None of the GOEs in Uganda or the United Republic of Tanzania has sought to establish itself in Kenya, and none of the Zimbabwean GOEs has tried to establish itself in South Africa. This would seem to indicate a lack of readiness to penetrate Western markets. The enterprises probably need an extra push and considerable assistance to make this move. In two cases the GOEs have started to operate in Japan, in response to approaches by the Japanese.

An overview of the initial market orientation shows that the GOEs focused on the local market, but then expanded their geographical outreach. At the initial stage, only five enterprises had any sales activity outside their country of operation. Now as many as 14 do. Although the majority of enterprises grew by expanding their markets locally, in almost one-third of the cases studied growth involved targeting markets outside the country of origin. Most often this step was not taken until they had established themselves in the local and domestic market. Enterprises would thus seem to be rather cautious about expanding their market and avoid rushing into something they cannot handle.

If we look beyond the geographical aspect of market orientation, two issues stand out. One is whether marketing per se is an important aspect of activities and the other is the kind of markets that GOEs target.

To answer the first question we need only refer to table 8.5 which shows that marketing is carried out in all but two enterprises. Although marketing is sometimes delegated, the entrepreneurs themselves are involved in almost 75 per cent of the cases. This would indicate that marketing is considered important.

Which groups of clients do the GOEs target, i.e. where do they think they have a competitive advantage? This question can most adequately be answered in terms of a market niche. In Uganda and Zimbabwe virtually all enterprises (13 in each country) think they have a market niche. In the United Republic of Tanzania only half of them do. In the United Republic of Tanzania, there seems to be a lack of clear customer focus and marketing strategy among half the enterprises studied. As they are growing despite this, it seems that they are not operating in a very competitive environment.

As for those that do have a market niche, what is the nature of this market? There are three large categories: a specific income group, a few regular customers, and the quality of their product/service compared to that of others. All of them point to a similar market orientation. In the first category it is primarily high-income earners. Part of the second group would seem to have a very similar market orientation, focusing on organizations such as NGOs and embassies rather than individuals. However, just as many enterprises in this group claim to have a market niche in that they are the dominant suppliers to a few local enterprises or government institutions. Inherent in the orientation towards high-income earners as well as embassies and NGOs is an emphasis on quality. Quality per se is also emphasized as a means of creating a market niche.

8.3. Responsiveness to changing market conditions

Customer preferences change and so may the profitability of a market niche. It is thus important to deal successfully with changing demand. If there is no market, the enterprise does not have a raison d’être, and will crumble under excessive costs. In this section we examine how the entrepreneurs/enterprises deal with changes in market conditions.

There are three strategies for coping with shifting market demand. One way is to stick to your product and try to identify new customers when the old ones want something else. A second way is to stick to old customers when their demand shifts and adapt to their new demands. And thirdly one may do both. In other words, the choice of activity can be supply driven, demand driven or both. Is there a prevalence of the one or the other in this sample?

In just under half of the cases, a change in operations can be attributed to demand and supply factors. Operations change because of competition. New entrants mean more supply and a fall in profit margins. The enterprises therefore want to change to a more profitable line. Also, in just under half the cases, enterprises have grown because of demand factors. They pick up feedback from consumers and use it to realize new market opportunities. The remaining few are enterprises that cling to the competence of their core people, or that change with the recruitment of a core person with a new quality. Few have grown this way and it may be inferred that enterprises that are supply driven will soon lose their market niche and cease to operate. Obviously it is very important for enterprises to be aware of market demand and adjust to it.

8.4. Entrepreneurs’ perspectives on growth

We are trying to ascertain why some enterprises grow and others do not. Our perspective is that of an outsider. How do the insiders, i.e. the entrepreneurs behind the firm, think about their success? Why do they think they have been successful? We asked the entrepreneurs both about the GOE per se and about expanding an enterprise in general. The following factors were considered particularly important.

Table 8.3. Entrepreneurs’ perspectives on reasons for growth⁽⁸⁾

From the perspective of the entrepreneurs, the two most important reasons for growth are the mentality of the entrepreneur and the staff of the enterprise. Among the mental traits mentioned we find somewhat more frequently than others: hard work, commitment/dedication, focus, ability to cope with change and willingness to learn. Among the staff-related issues we find predominantly the competence and commitment of personnel.

There are 35 incidences of growth-related factors directly tied to the entrepreneur, and 42 that concern enterprise operations per se. In addition to staff competence and dedication, enterprise-related factors such as efficiency in operations and customer orientation were mentioned. Under efficiency in operations a wide variety of factors were mentioned, the most common being self-reliance.

Nearly all the respondents who spoke about the character of the product/service mentioned high quality. Two entrepreneurs mentioned that it was unique. External factors include a variety of answers. Only one was mentioned twice, "timing". An interesting final note is that only in Uganda was reference made to political stability and national security.

The factors above relate to how entrepreneurs think about the growth of the GOE they started. What do these experienced people think it takes to expand an enterprise in general?

Table 8.4. Entrepreneurs’ perspectives on what it takes to grow in general⁽⁹⁾

Several factors considered important for enterprise growth relate to the workforce. Know-how and commitment are personal traits that are mentioned for staff as well as for entrepreneurs. Customer orientation is mentioned too, as is general management and in some instances financial management. It is surprising that only ten of the entrepreneurs mention capital and only two mention know-who. This is even more surprising when we learn that of the ten who mention capital only three are manufacturers (five are service providers, one a retailer and one a wholesaler). Perhaps this indicates that these entrepreneurs have enough experience to see that finance is not the panacea for all the ills of an enterprise.

It should be noted, though, that the number of enterprises mentioning finance as an important factor is smallest in Zimbabwe. This might reflect the low rate of interest in Zimbabwe before the macroeconomic problems began in 1997. A survey made a few years from now reflecting the lending terms of today may show different results.

In sum, many entrepreneurs believe that their own mental strength contributes significantly to the success of their enterprise. However, there are almost as many instances where entrepreneurs credit their staff. In fact, we find that more enterprise- than person-specific factors are mentioned. When we look at what the entrepreneurs believe it takes to expand an enterprise this impression is strengthened and the emphasis on staff qualities, such as know-how, commitment, customer orientation and management skills becomes even more pronounced. And although access to finance is also important it does not stand out from the other factors. This is perhaps related to high interest rates and a general reluctance to borrow from banks.

8.5. Use of human resources in the enterprise

We saw above that the quality and commitment of staff is perceived to be important for growth. Similar observations have been made in other parts of the world as well ⁽¹⁰⁾. This leads us to examine in more detail the role of the employees. How do entrepreneurs organize the activities that are performed and decide who performs them? To investigate this issue we will examine the growth record in relation to firm size and degree of delegation.

Previous research indicates that entrepreneurs find it difficult to relinquish control as the enterprise grows ⁽¹¹⁾. They are reluctant to delegate authority and try to be everywhere at once. This supposedly has a negative impact on sustainability. As operations grow, the more one person tries to control everything the greater is the risk of failure. It is a bit like juggling. The more balls you juggle, the more difficult it gets and the more likely you are to drop them all. As the enterprise grows, the founder has to give up control.

Since the enterprises studied here have succeeded in growing we might expect a positive correlation between number of employees and propensity to delegate authority, i.e. employ more managers. The following observations can be made.

Table 8.5.Tasks and responsibilities

In nearly all of our sample GOEs, the entrepreneurs have delegated at least some activities. Only one has no delegation of tasks. In another only bookkeeping is outside the control of the entrepreneur. In two GOEs only one task has been delegated (bookkeeping and personnel management respectively), but the entrepreneurs supervise the tasks closely. The rest of the entrepreneurs delegate two or more tasks.

The job most commonly delegated is bookkeeping. This is the task which is most often carried out by people outside the enterprise. Periodic financial overviews are also often delegated, but the entrepreneurs prefer to keep some control over this activity. The same pattern applies to marketing. The areas that entrepreneurs are least willing to delegate are buying and costing, personnel management and product development. Product development is the area where the entrepreneurs’ involvement is greatest. It is, however, also the task which is least often performed.

Another question is whether there is any correlation between number of employees and propensity to delegate authority. Although the enterprise (a hotel) that employs the highest number of employees is the one where everything is delegated, there is no evidence of such a correlation in our sample. There is a relatively high degree of delegation in the GOEs studied, and the entrepreneurs do relinquish control over some areas, but it is not clear at what point that becomes necessary. Perhaps delegation is absolutely necessary when the number of employees exceeds 50!?

8.5.1. Family and enterprise

Research in Africa indicates that family relations may have a negative effect on enterprise growth (Buame, 1998, Morris and Somerset, 1977, Trulsson, 1997). Family members, including extended family, are often more of a burden than an asset. The reasons for this are partly under the control of the entrepreneur. For example, family members are often employed even though they are not qualified to do the job, and they tend to be lax about working for a relative. In all fairness, though, as Wayne Nafziger has pointed out in his research from Nigeria, black African entrepreneurs may have little to gain by employing their relations, but family members are often very important when establishing a firm (Nafziger, 1969). Another observation is made by Frese (forthcoming), who believes that family members are probably an asset as employees up to a certain point in the growth process, as they are more loyal and willing to work for nothing if necessary, e.g. for cash-flow purposes. However, at a later stage (undefined) when the enterprise has grown and appears to be "successful", family members may become a burden because they make demands on the entrepreneur and the enterprise that are not compatible with sound business practice.

The issue of family involvement has two aspects. One concerns family as co-owners, the other concerns family as employees. We have already seen that GOEs owned by black African entrepreneurs tend to be started by one person only, while GOEs run by entrepreneurs of Arab or Asian descent more often start with family members. What can we say about the involvement of family members as employees, though? Let us begin with an overview of extended family involvement in the enterprises.

Table 8.6. Family members working in the GOEs

Family members are employed in 75 per cent of the GOEs as a whole but there are national differences. Whereas the figure for Zimbabwe is around 60 per cent, the figures for the United Republic of Tanzania and Uganda are well above 75 per cent. The concentration of close family members is highest in Uganda.

Although as many as 75 per cent of the GOEs employ people from the family of any of the founders, these entrepreneurs claim there is a strict division between family and enterprise ⁽¹²⁾. Only two entrepreneurs do not try to separate family from business. To them the business is a way of life for the family. As for the rest, as one Ugandan entrepreneur said: "Family affairs are family affairs. Business affairs are business affairs. And they should not be mixed." Or as a Tanzanian entrepreneur said: "An enterprise and a family operate along different lines of logic and they are not compatible." There are sometimes problems in keeping them apart, but in most cases the separation seems to work well. Only five entrepreneurs indicate that they have problems separating the two.

Why is it that this group of entrepreneurs seems to have relatively few problems with family employees? Do they hire them on the basis of special criteria? We asked if they have a special strategy on employing family members. These are the responses given.

Table 8.7. Strategies on employing members of the extended family

Almost half the GOEs had no strategy on employing extended family members. Of the other half, the most common strategy was to hire extended family members only according to certain criteria, usually to select them on the same basis as any other worker i.e. to employ them on merit only. In a few cases "commitment" and "dedication" were mentioned, and in one more "loyalty" was emphasized. Employing family members was often perceived to be beneficial because they could help with surveillance and were generally more trustworthy. The most commonly mentioned drawback of employing family members was that they tend to be lax and they are difficult to discipline or even fire if they misbehave. The problem of theft was not often mentioned.

Judging by the experience of these GOEs we can confirm that it seems to be important to separate family and business. However, this does not mean that family members must be kept out. Only five of the sample GOEs have employed that strategy. Nevertheless, it seems that if family members are to work in the enterprise it should be mainly because they have the required competence.

8.6. Investments undertaken during growth

Expanding a business generally means expanding output, which in turn means buying new machinery or equipment and/or employing more people. The employment of new workers has already been discussed. What investments in machinery and equipment have these enterprises made?

Table 8.8. Investments made since start-up⁽¹³⁾

The most important point demonstrated by table 8.8 is that hardly any enterprises have grown without investing further since start-up. All the manufacturers have invested in machinery, some in new machinery others in second-hand. Most of the new machinery has been imported, but there are a few instances of local purchase. This is particularly true in the United Republic of Tanzania.

There are concerns that the introduction of new technology leads to a reduction in employment. The data from this research are not detailed enough to comment on this subject. What we can say is that, although 22 enterprises have bought new technology, the number of employees has still grown. Only one enterprise installed new technology with the explicit purpose of reducing the number of employees. A more detailed study is required to analyse the employment effects of newly acquired technology.

Regardless of whether they use accumulated profits or external finance, GOEs do re-invest. For manufacturers this appears to be a necessity.

8.7. Cash flow and depreciation

Two crucial aspects of the financial viability of a firm are cash flow and depreciation. In order to maintain operations without unnecessary interruptions (e.g. inability to buy raw materials to process an order), it is crucial to manage cash flow properly. If depreciation is not handled well the ability to reinvest will be severely hampered and the sustainability of the venture will be endangered. The questionnaire was not designed to probe these two aspects very deeply. However, we would like to make a few observations.

8.7.1. Cash flow

Since we did not try to obtain precise figures from the enterprises, the issue of cash flow had to be addressed in another manner. We therefore asked the entrepreneurs if they experienced seasonal fluctuations in their operations and, if so, how they dealt with them. The following replies were given.

Table 8.9. Extent of seasonal variations and their causes

Almost 75 per cent of the GOEs experience seasonal fluctuations and there appears to be little prospect of escaping them. In most cases the variations are due to weather conditions or holidays, usually Christmas. Due to the variety of sectors studied here the ways in which weather and holidays affect enterprising activity vary quite a lot. For a wholesaler the rainy season may be a slow period because a large portion of sales reach the customers through street vendors (who of course are less active during the rainy season). For a paint manufacturer the rainy season means that few people will paint outside and demand goes down. The holiday season affects retailers and wholesalers alike. Demand goes up before the holidays and down after. But holiday seasons also affect service providers and manufacturers who supply industry. During the main holidays and vacation periods many companies close down for a while.

We also studied how the GOEs deal with seasonal variations in demand. Although some stated that this caused specific problems, few had really taken seasonality into account. They simply ran their operations at a slower pace when demand was low and adjusted when demand rose again. In the meanwhile they lived off their profits. It appears that few were very proactive in this respect. People are rather reactive, notably a provider of educational services who only decided to offer new courses, partly to a new group of clients, when revenues slumped during long school break.

8.7.2. Depreciation

The questionnaire did not address the issue of depreciation. However, despite the fact that surprisingly few GOEs completed business plans before venturing into business, we have seen that a substantial number of the enterprises have reinvested their profits. This indicates that they have taken into consideration the depreciating value of equipment and machinery and saved money to reinvest later. It seems, though, that in periods of high inflation the GOEs tend to place reinvestment on hold. In 1992, when inflation peaked in Uganda, none of the existing GOEs made any investments. However, in 1994, after inflation had dropped to less than 10 per cent in two consecutive years, four GOEs invested in various goods. The effect of the present very high rate of inflation in Zimbabwe remains to be seen.

If there is a negative correlation between high inflation rates and willingness to reinvest, protracted high inflation would seem to affect the economy negatively. If high inflation is accompanied by a depreciation of the local currency - as in Zimbabwe at present - the problem would seem to be compounded. A positive side effect may be that enterprises shift their preference from imported machinery and equipment to local purchase. However, unless the quality and efficiency of the local substitute is high enough to meet international standards, future growth and perhaps even sustainability may be hampered.

8.8. Conclusion: Enterprise-specific factors contributing to growth

In this chapter we have looked at enterprise-specific factors that contribute to growth. The following observations have been made. GOEs tend to register quite soon after starting operations. The number of founders does not appear to correlate with expanding the enterprise successfully. However, enterprises owned by black African entrepreneurs are more often started by one person only, whereas those run by entrepreneurs of Arab or Asian origin are more often started by several people, usually family members. Entrepreneurs behind the GOEs delegate various tasks in the enterprise to others. And in quite a few cases they even give up control of some tasks. However, there is no correlation in this sample (which does not examine enterprises with more than 50 employees) between number of employees and propensity to delegate.

The GOEs generally focus on new market segments. They try to find a niche which often involves high-income groups. In doing so they tend to emphasize quality. To remain competitive and profitable the GOEs change with demand. Growth is rarely supply driven.

Growth has been achieved through reinvestment, using accumulated profits as well as external finance (for more on this issue see Chapter 10.5). This applies to all three sectors. Investments are generally put on hold in highly inflationary environments. Only in one case has new technology been employed to reduce the number of workers.

In describing what factors have been important for growth the entrepreneurs mention their own mentality and the commitment and skills of the workforce. The same points are emphasized when describing what it takes to grow generally. In both cases, finance is mentioned but not as a dominant element.

On a final note, although this chapter deals with enterprise-specific factors that promote growth, upon closer scrutiny it becomes clear that they all boil down to essentially the same issue, i.e. the quality of human resources.

9. Characteristics of the entrepreneurs

As has been emphasized above, the success of an enterprise must be seen as a function of the business environment, the enterprise per se and the individual(s) behind it. The previous chapters have discussed the environment and the enterprises, and it is now time to look at the entrepreneurs. Two broad areas will be studied - the personal and psychological characteristics of the entrepreneurs behind the GOEs in our sample.

9.1. Personal characteristics

Many different factors contribute to making one person more suitable or more likely than others to become an entrepreneur. In this section we look at the factors that relate primarily to an individual’s inborn characteristics and acquired competencies, namely: sex, ethnicity, family background, education, prior working and enterprising experience, and international exposure.

9.1.1. Sex ⁽¹⁵⁾

In most parts of the world, there is a heavy dominance of male entrepreneurs in the formal sectors: when we look at the informal sector the imbalance is less. The division by sex among the 43 GOEs interviewed is as follows.

Table 9.1. Division by sex

In relation to the total population it is hardly surprising to find that the share of women is significantly lower than that of men. The structure of opportunity is biased in this fashion. Rather, it is interesting that despite the unequal opportunities for men and women, almost 20 per cent of the GOEs are run by women. For unknown reasons, the figure is much higher in Uganda than in the other two countries.

Studies from different parts of the world indicate that while the share of women is somewhat higher in trade and services, it is generally much lower in manufacturing ⁽¹⁶⁾. Looking at this sample, there are no sectors where women are significantly over- or under-represented. Women are active in all three sectors, two in manufacturing (furniture and garments), four in services (cleaning, education, catering and travel) and two in retail (pharmaceuticals and groceries).

While there is certainly a dominance of men in our sample, we cannot conclude that sex is an important indicator of success, regardless of economic sector. However, there are certainly factors related to unequal opportunity that have a negative effect on women’s chances of expanding their business.

9.1.2. Ethnicity

Just as there are structural factors in society that affect the gender division of enterprising activity, there are structural factors that affect the ethnic composition of enterprising activity. In most countries south of the Sahara there are considerable income disparities between ethnic groups. These differences have historical origins and take on structural properties that tend to become self-reinforcing with time. In Zimbabwe the ethnic divisions are primarily between white people of British descent and indigenous black people, arising from the colonial period and independence. Although black rule eventually came in 1980, the differences are still very much alive. In the United Republic of Tanzania and Uganda the divisions are primarily between indigenous black people and people of Asian, i.e. Indian or Pakistani, descent. Again the differences date back to the period of colonization when Asians were encouraged to move to East Africa as merchants, making a kind of buffer between British and indigenous black people ⁽¹⁷⁾.

In the selection of enterprises we have tried to ignore the ethnic imbalances in society, attending only to enterprise characteristics. We did not try to select the enterprises in such a way as to reflect ethnic imbalances. The ethnic composition of our sample is as follows.

Table 9.2. Ethnic composition of the sample

Except for the lack of entrepreneurs of Arab or Asian descent in Zimbabwe, it seems that our sample at least partly reflects the ethnic make-up of enterprising activity in the region.

Are there any divisions along ethnic lines according to the sector of activity? The sample of white entrepreneurs is just too small to say anything. And although the same applies to those of Arab or Asian descent, there is definitely a sector division in that only one of the eight is a manufacturer (of wood products). Another has a manufacturing concern as well, but that activity has not grown. It is the wholesaling business (of spirits) that is expanding. Another two entrepreneurs are engaged in retailing (ceramic tiles and agricultural machinery), while the remaining four are service providers (computers, events management, film production and dry-cleaning). Consequently only one of the eight entrepreneurs of Arab or Asian descent (and none of the white entrepreneurs) is engaged in manufacturing. For entrepreneurs of Asian descent this might be explained by the fact that Asians often feel that their position in East Africa is threatened. A significant long-term capital investment is often considered risky because these assets may be appropriated by the government at any time. This had in fact already happened once to one of the entrepreneurs, and it is likely that most of them know of somebody who has been forced to leave. There is also a preconceived idea among the black population that people of Asian origin are primarily there to make "a quick buck". However, only one case indicates such a mentality. In fact, only one of the entrepreneurs of Asian origin was born outside East Africa and few of the others have ever been outside the area. None of them has ever lived in Asia for more than six months.

It should finally be noted that all non-black entrepreneurs are male: it is difficult to explain why this should be the case.

In sum, the majority of the entrepreneurs are black Africans. However, this does not mean that the dominant group is more likely to start growth-oriented enterprises. In relation to the total population, it is not the dominant group that is overrepresented, but rather the opposite. In relation to the total population of these three countries, white entrepreneurs in Zimbabwe and Uganda are overrepresented. The same is true of entrepreneurs of Arab or Asian descent in the two East African countries. Despite efforts to promote "indigenous business" in the three countries, the reasons for these differences probably lie in the different opportunity structures, e.g. education and access to finance.

9.1.3. Family-related issues

There is evidence to suggest that entrepreneurs are highly likely to come from families with an enterprising history - and quite often to have parents who are entrepreneurs - or at least to have grown up in an environment where business is a way of life (Katz, 1989; Stanworth et al., 1989). In such environments there are role models for the prospective young entrepreneur. In the countries of our study this might also be expected, but it should be borne in mind that the older generation often faced obstacles (legal and financial as well as social) to entering the formal sector. The prevalence of enterprising activity among the older generation of black people is consequently much lower than among white and coloured people. Research from the United Republic of Tanzania indicates that African entrepreneurs are less likely than Europeans to come from families with an enterprising history (Trulsson, 1997). What observations can be made from our sample?

Table 9.3. Family-related aspects of enterprising activity

Approximately 75 per cent of the entrepreneurs have a history of enterprising activity in their extended family; almost half have parents who were in business. The other 25 per cent had all been exposed to enterprising activity through family ties by living close to other entrepreneurs (mostly elder siblings). While there are hardly any differences related to gender in this respect, there is certainly an overrepresentation of non-indigenous entrepreneurs in this group. All of them have a history of enterprising activity in the family, and in six out of eight cases at least one of the parents of entrepreneurs of Arab or Asian origin ran their own business.

There are some indications from prior research of an overrepresentation among successful entrepreneurs of eldest children and people from families of chiefs. These two findings relate mainly to black African entrepreneurs. The reason why it is beneficial to be the eldest child is that black African families tend to invest more in the education of first- born sons (education is important for success). The reason why it is beneficial to come from the family of a chief is that such a background gives social status. Furthermore, these children grow up in an environment where some of the most important role models are people with strong leadership skills.

Looking at our sample, there is little to support the hypothesis that it is important for black African entrepreneurs to be the first-born. In fact, there is a higher percentage of non-black entrepreneurs who are first-born. This can partly be explained by the fact that only a little more than 40 per cent of the black African entrepreneurs in our sample grew up in an extended family. The corresponding figure for those of Arab or Asian descent is 50 per cent. This may indicate that, relative to the total population, the black Africans behind GOEs come from a more urban and non-traditional background.

If we look at the prevalence of entrepreneurs who come from families of chiefs or headmen, there is definitely an overrepresentation of this group, at least in Zimbabwe and Uganda. This is still true when we limit the group to direct descendants. In this case, there is an interesting gender division. Four out of five women in Uganda claim they come from this kind of background, as do both women in Zimbabwe! If we follow the stricter definition only one of the Ugandan women fails to qualify. And although the woman in the Tanzanian sample does not qualify, regardless of how we define the relationship, the percentage of women who come from families of chiefs or headmen is very high, 75 or 62 per cent depending on which figure we look at. The corresponding figures for the men in the sample are 29 and 11 per cent, which is also quite high.

Thus, it would seem that coming from the family of a chief is an important asset, especially for a woman. But of course, this does not automatically mean that such people will start a successful growth-oriented enterprise.

9.1.4. Education

The issue of whether education is beneficial or not to enterprising activity has long been debated in research on Western countries. Some, like Jacobowitz and Vidler (in Katz, 1989), argue that education has no bearing whatsoever on success, and that it may even be negatively correlated. Others suggest that the higher the educational level, the better the prospects for success (Hills and Narayana, 1989, page 72). Others are more cautious and argue that the required level of education varies with the kind of activity (Gasse, 1982). A variety of views also exists for research in Africa. Based on research in Kenya, Marris and Somerset (1971), for example, claim that only the basic skills of reading, writing and arithmetic are required. In neighbouring United Republic of Tanzania, Trulsson (1997) has found that successful entrepreneurs are often much better educated than the average. The reasons why better educated entrepreneurs succeed, however, remain unclear. Part of the reason may be that they are better placed to access resources (such as finance and donor support). It may also be that they are better trained to appreciate and carry out the fundamentals of business planning. What observations can be made from our study?

Table 9.4. Level of education

The educational level of our sample is quite high relative to the population as a whole, especially in the United Republic of Tanzania and Uganda. Approximately 25 per cent of the entrepreneurs have a university degree, another 50 per cent have taken their A-levels and some have also completed a diploma or certificate course. Only 25 per cent have no more than O-levels, which still indicates a fairly high level in comparison with the population at large.

Of those with higher education there is no specific field of study that dominates. About the same number who studied commerce, management or accounting studied a vocational subject such as education, pharmacy or engineering.

Consequently, the figures above give no reason to believe that a certain kind of education is more likely to produce a successful entrepreneur. However, they do lead us to believe that a relatively high level of education is an important asset in expanding an enterprise.

9.1.5. Work experience and prior enterprising activity

To have worked in the same field of activity as the new enterprise has a positive impact on success. Research indicates that people who enter an area with which they are well acquainted have a better chance of succeeding (Brockhaus, Sr., 1982). Apart from the technical skills required, they may also have useful contacts and sufficient experience to know what kind of product is in demand.

Prior enterprising activity may also improve the chances of success. It is quite common for entrepreneurs to fail a few times before they succeed. People learn from their own (or others’) mistakes. What can be said about the entrepreneurs in our sample?

Table 9.5. Prior employment and enterprising activity

When starting their business most of the entrepreneurs in the United Republic of Tanzania and Zimbabwe were at least 30 years old. In Uganda, however, the incidence of young and successful entrepreneurs is significantly higher. This might imply that the need for personal contacts gained through previous employment is somewhat lower in Uganda. Or it may simply be that business opportunities are better there at present.

An interesting finding is that the lowest number of entrepreneurs who have previously been employed occurs in the United Republic of Tanzania: many of them had other enterprises before the GOE. This might appear surprising given the socialist past of the United Republic of Tanzania where heavy emphasis was placed on cooperative development and large parastatal corporations. However, the observation only goes to show that underneath the formal sector activities there was a vibrant and healthy second economy running along the lines of private enterprise.⁽²¹⁾

In general, the number of entrepreneurs who have previously been employed is very high - 85 per cent had held at least one job before starting the GOE. Is this an important factor for growth? To find out more about this we looked at the kind of work they did and the kind of enterprising activity they have engaged in. This helps us discover what technical skills have been acquired, but intangibles such as contacts made and a general business sense remain unknown to us.

Table 9.6. Experience before starting the GOE

Tables 9.5 and 9.6 show that out of the 17 entrepreneurs who have previously had an enterprise 13 appear to have benefited from this experience. Of the 37 who had been employed before starting their GOE, 20 learned some important technical skills from their employment. We can be relatively certain about the points above, but there are still several aspects that escape the assessment. Thus, we can safely say that to start a GOE it is highly beneficial to have work experience and/or to have run a business in the same general field. However, the absence of such experience does not preclude a person from succeeding, i.e. it is not a necessary requirement, but it improves the chances of success.

9.1.6. International exposure

The question of travel outside the country of origin is not often raised in research. Nevertheless, in the African context it might be an important factor in enterprise growth, because growth might be related to the capacity to innovate. To facilitate innovation, an entrepreneur needs sources of inspiration - a wider frame of reference and new ideas. This is why we asked about travel. We want to know whether the entrepreneurs behind GOEs have seen more than most of their compatriots and capitalized on their experience.

Table 9.7. Instances of having lived abroad

Eighteen of the entrepreneurs, i.e. more than 40 per cent, have lived outside the country of operations for more than six months. The percentage is lower for the indigenous populations of the countries, where there is no gender bias. Six of the 18 entrepreneurs were born outside the country of operations.⁽²²⁾

The proportion of entrepreneurs in this sample who have lived outside their country of operations is definitely larger than for the population at large. In addition to this figure there are several more who have been abroad for shorter periods, e.g. for training. Some entrepreneurs even claim they go abroad only to find out about new business trends or ideas. Foreign exposure would seem to have a positive impact on enterprise growth.

There is no indication, however, that people who have lived abroad are more likely to export their products. Of the 18 entrepreneurs who have lived abroad, only six operate on foreign markets.

9.1.7. Conclusion on entrepreneurial characteristics

There is nothing in the background of the people behind GOEs that allows us to single them out beforehand. That is, there are no factors that conclusively lead us to believe that this or that person will start a successful and growing enterprise.

What we can say is that in some respects the entrepreneurs behind GOEs do appear to differ from the population at large. Seventy-five per cent of the entrepreneurs behind GOEs come from families where there is prior experience of enterprising activity. Likewise, 75 per cent have taken at least their A-levels, which means they are relatively well educated. Furthermore, a disproportionately high number of entrepreneurs (40 per cent) have at least six months of foreign exposure. Finally, most of the entrepreneurs have gained experience in jobs or other enterprises which has been helpful in their activities in the GOEs. In addition, on an aggregate level, ethnicity and sex affect the likelihood of growth through various structural features of society, primarily the opportunity structures. However, on an individual level, ethnicity and sex do not determine business success.

The fact that successful entrepreneurs differ from the population at large in some respects does not mean, however, that a prospective entrepreneur who does not differ in the same ways will not be successful. Neither does it mean that other people with those characteristics would be successful entrepreneurs if only they tried.

9.2. Variables related to the mentality of entrepreneurs

In this section we look at the mentality of the entrepreneurs, their psychological characteristics and their reasons for starting a business.

9.2.1. Psychological characteristics

We have identified six characteristics of successful entrepreneurs and tested them. The six are: high need for achievement (McClelland, 1963), internal locus of control (Rotter, 1966), high desire for autonomy (Collins, Moore and Unwalla, 1964), moderate risk-taking propensity (Brockhaus, Sr., 1982), high level of initiative taking (Frese, forthcoming) and high tolerance for ambiguity (Sexton and Bowman, 1985).⁽²³⁾ The tool for measurement, i.e. the questionnaire, can be found in Appendix 2. Results for each country are as follows (the scores range from a minimum of zero to a maximum of 100).⁽²⁴⁾

Table 9.8. Entrepreneurs’ scoring on psychological characteristics

It would appear that the entrepreneurs behind the GOEs show rather similar psychological characteristics. The average total is virtually identical and there are few national variations for any of the factors.

We find that the need for achievement is high in all three countries; so is initiative taking propensity. Risk-taking propensity is rather moderate. This may not fit the stereotype view of entrepreneurs, but research often indicates that this is to be expected (Brockhaus, Sr., 1982). Outsiders may think that entrepreneurs take large risks, but it is usually not so from the entrepreneurs’ own perspective. The total score for tolerance for ambiguity is perhaps somewhat lower than research would lead us to believe (Sexton and Bowman, 1985). Furthermore, the desire for autonomy appears to be lower in this sample than in studies performed in the West. This is probably because the societies in our three countries are less individualistic and rely more on social relationships, such as the extended family, than Western societies generally do. Similarly, starting an enterprise in these countries is more often motivated by the need to support primary groups than is the case for Western entrepreneurs ⁽²⁵⁾. The internal locus of control is relatively high. This implies that the entrepreneurs are willing to delegate some authority, but not very much. We will come back to this issue below. Finally, a relatively high total score was to be expected. We were looking at variables that have previously been shown to be important for success. To what extent this score would be different for non-entrepreneurs is difficult to say.

The average scores show trends in the sample, but it is more important to look at the spread of individual scores in order to assess the reliability of the results.

Table 9.9. Number of individual scores on measures of psychological characteristics

Three variables - need for achievement, initiative-taking propensity and internal locus of control - show the greatest consistency. This would indicate that these are the results we can trust the most. Apart from these, the scores on desire for autonomy and risk-taking propensity are relatively well-clustered. There is very little consistency, though, between the individual scores on tolerance for ambiguity.

9.2.2. Triangulation of data

In order to improve our understanding of the relevance of psychological characteristics we have tried to triangulate the data by analysing responses to other questions related to the above characteristics. For locus of control we have examined the way entrepreneurs speak about various aspects of their external environment - to which factors they attribute the success of their enterprise. Desire for autonomy has been related to the extent that entrepreneurs seek bank loans, i.e. engage in a relation of obligation to another party, and need for achievement has been related to their plans for further growth. The following observations can be made.

We found a relatively high incidence of internal locus of control. This impression is strengthened when we look at how entrepreneurs speak about the reasons for the successful growth of their enterprises. Categorizing the responses in terms of personal factors or enterprise factors, there was a marked underrepresentation of external factors. Some of those categorized as internal factors concern the quality of the labour force and customer orientation, but many concern the entrepreneur (e.g. experience, hard work, social relations, and financial discipline). Furthermore, the findings on internal locus are supported by the propensity to delegate, as discussed in Chapter 8 (see table 8.5). Despite the relatively large size of these enterprises, the entrepreneurs are generally not very willing to let go of control. Bookkeeping apart, no single task is delegated in more than half the enterprises.

As an indicator of desire for autonomy, we have examined the extent to which entrepreneurs look for outside financial assistance in expanding their enterprise. Chapter 10 (table 10.7) shows that a relatively large number of enterprises grow without external funding, preferring to be self-reliant as far as possible. This is partly related to high interest rates and in a few cases to difficulties with loan applications, but these are not the only factors. The entrepreneurs are also more likely to keep the demands of extended family members separate from enterprise operations.

There are more indications to support the finding that the need for achievement is very high among the entrepreneurs. Most respondents state that they have not finished growing and that in the long term there is rarely an appropriate time to stop growing. The only reason to stop would be to consolidate growth so that the enterprise does not become unmanageable. This seems to indicate that the entrepreneurs are high achievers who will rarely sit back and relax, but always want to move forward, set new goals and achieve them. They are apparently growth-oriented not only in action but also in their mentality⁽²⁶⁾.

If the object is to identify in advance the people who will start a successful GOE, one should look for high need for achievement, high initiative-taking propensity and strong internal locus of control. With less certainty we can say that a fairly strong desire for autonomy and a moderate risk-taking propensity might also be important characteristics. There is little to support the idea that tolerance for ambiguity is relevant.

It should be emphasized that we cannot say that this psychological profile helps distinguish a person likely to start and run a GOE from any other person. We can merely say that these characteristics appear to further the prospects for growth.

9.2.3. Reactive or proactive entrepreneurs

Is growth a feat of will or is it primarily accidental? Basically all the entrepreneurs in this study have professed a desire to grow. However, this does not mean they plan for growth. We asked about their plans for the future in order to see if they tend to plan as they go along, or if they make long- or short-term plans and try to achieve them. The former indicates a reactive strategy, while the other indicates a proactive one. Research shows that the latter is to be preferred for enterprise success (Frese, forthcoming).

Table 9.10. Plans for future development of the GOE

Only six entrepreneurs gave no indication of the direction their enterprise was heading. This may be because they had no ideas or because they did not want to disclose them. The information obtained from another five respondents may indicate a lack of direction for the future. These people talked about their ideas for the future, but the interviewers had the impression that the entrepreneurs were making up their plans as they talked, indicating a lack of real planning.⁽²⁷⁾ Of the 32 entrepreneurs who revealed their ideas in greater or lesser detail (and were considered sincere in doing so) most pertained to expansion per se. Half of the respondents talked about geographical market expansion. Ten said they intended to target new export markets.⁽²⁸⁾

The majority of entrepreneurs behind GOEs are proactive, but a significant number of reactive types also succeed in expanding their business. This may be explained by the volatile macroeconomic environment. Entrepreneurs may make plans, but few will be able to carry them through because of constantly and sometimes rapidly changing market conditions.

9.2.4. Reasons for starting a business

Among Western entrepreneurs the reason most commonly stated for starting a business is that they want to be autonomous, to be their own boss. This is not the most commonly stated reason in this sample. Neither was the response we anticipated (to make more money) most commonly mentioned. The most frequently mentioned reason was that they saw a business opportunity (19 out of 43 responses). The desire to be self-employed, which includes the desire to be one’s own boss, was only found in 12 responses. Monetary incentives were mentioned by 13 entrepreneurs. A substantial number of respondents had thought about starting an enterprise for a relatively long period and did so only when they decided they had enough money or experience to do it.

A national breakdown appears in table 9.11 Since some of the entrepreneurs behind the GOEs had started other enterprises before the GOE there are two rows for each country, one for motivation when starting the first enterprise and one for motivation when starting the GOE.

Table 9.11. Reasons for starting a business

There are a few interesting national differences. The number of respondents who cite opportunity as a reason for starting a business in Uganda is lower for both the first enterprise and for the GOE. For Tanzanian starters the incidence of reported opportunity is relatively high.

In Uganda and Zimbabwe, at the stage of starting a GOE, the number of entrepreneurs who had accumulated enough money and know-how is rather high, especially compared to the United Republic of Tanzania. In view of the availability of financial assistance in the two countries, it is not surprising to find that entrepreneurs in Uganda are more concerned with having the financial resources necessary for start-up, while entrepreneurs in Zimbabwe place more emphasis on having enough working experience.

The number of entrepreneurs who started their GOE for monetary reasons is higher in Zimbabwe than in the other two countries. Again the United Republic of Tanzania is more of an exception, possibly because of the socialist past, when making money from business was not viewed favourably. In other words, the entrepreneurs might understate the real reasons.

Finally, although it is difficult to explain, it might be noted that in Uganda the response rate for ambition (including the desire to be self-employed, as well as the more general ambition to create something) is relatively high.

9.3. Conclusion: Personal and psychological characteristics of the entrepreneurs that contribute to growth

In general one could say that the typical entrepreneur behind a GOE seeks opportunity, and has an ambition to be self-employed in order to earn a better income. We could also say that they have a high need for achievement and are exceptionally likely and willing to take initiatives. They also have quite a high internal locus of control, so that they may be willing to delegate, but not to give up much control. There is also evidence that growth-oriented entrepreneurs only take moderate risks and have a fairly high desire for autonomy. Finally, they appear to be proactive rather than reactive. However, this picture is a stereotype that does not fit very well with reality, and actually describes few of the entrepreneurs interviewed in this study. Successful entrepreneurs typically have one or several of these characteristics, but few have them all. The stereotype should thus be used with the utmost caution.

10.The growth process

All 43 enterprises in this sample have grown by at least 50 per cent in terms of employees during the 1990s. In order to design a management training programme, it is important to learn how the GOEs have grown. In this section we take a much closer look at the process, studying five areas. The first two describe the growth pattern in terms of employment and financial indicators. The third section traces growth patterns among the enterprises. The fourth section describes preparations made before starting the GOEs, while the fifth describes the resources that have been used and shows how they were obtained.

10.1. Growth in number of employees and quality of jobs

Growth in terms of employment has been substantial among the GOEs in this sample, as shown in table 10.1 below.

Table 10.1. Number of people employed in the GOEs

As quite a few of the GOEs employ casual or seasonal labour ⁽²⁹⁾, we have tried to account for these jobs as well. The figures above do not include the 40 people presently employed for a six-month period by one enterprise in Uganda. Nor do they include the Zimbabwean GOE that employs up to 500 casual workers in a year depending on the contracts they win. If these are taken into account, the employment figures jump to at least two or three full-time permanent jobs in each GOE. Thus, for this sample, in addition to the permanent employees, the number of casual workers employed is about another 10 per cent of the total (on a full-time basis).

There are no important sectoral differences, but there are significant differences between the national samples. This has repercussions on how we interpret some of the data.

The ILO is not only concerned with employment growth; it is also concerned with the quality of jobs, notably with safety standards, working environment, workers’ rights, adequate pay, etc. The present study did not look at these issues specifically, but the interviewers did make a personal assessment of the working environment. The interviews took place on the premises of the GOEs, and the assessment covered cleanliness, state of buildings and machinery, and spaciousness of the working area. In virtually all cases the judgements were positive. This confirms the hypothesis that enterprises that grow, at least in the formal sector, are usually those that create quality jobs. This is supported by the fact that nearly all respondents said it was important for them to feel that their workers liked to work for them. We have also seen that this group of entrepreneurs value their staff. It is likely that they try to take care of them so that they will stay.

A final comment. We have focused here on the direct employment impact of the GOEs. If we focus less on the enterprises and more on the people behind them, we find that ten entrepreneurs have actually started other enterprises since the GOE. Where capital investments have been required, they have in most cases come from profits accrued in the GOEs. Defined more broadly, it would seem that the employment effect of GOEs is even larger than the figures show.

10.2. Growth in terms of turnover and profits

The GOEs were asked to assess their growth not only in terms of employees but also in terms of financial progress. In the latter case, though, due to the high probability of getting inaccurate information we did not ask for figures. Instead we asked about the financial growth patterns of the enterprises.

Virtually all the enterprises defined as growth-oriented in terms of employment believe that they are also growing in terms of turnover and profit. Only one enterprise indicates that both turnover and profit are slowly declining. That enterprise did not grown in terms of employees until very recently when it began supplying a new range of goods.

Schumpeter’s theory indicates that rapidly growing companies are those that identify a unique opportunity to exploit a de facto monopoly position before other enterprises enter (Schumpeter, 1934/1993). In such companies profits soar quickly. When other enterprises enter, profits eventually slow down because competition forces profit margins down. Few enterprises in our sample indicate this kind of growth pattern.

Not surprisingly most indicate that turnover and profits have gone hand in hand. Only in Zimbabwe is there a relatively large discrepancy between the perceived development of turnover and of profit, implying that turnover has increased quite rapidly while profits have risen much more slowly. This would normally mean a more competitive business environment, but in Zimbabwe it may be the result of operating in a highly inflationary economy.

10.3. Character of growth

Growth may be achieved in a number of ways. At enterprise level, growth may be achieved simply by expanding existing operations in the same line of business, or by integrating existing operations horizontally as well as vertically. Vertical and horizontal integration can take place through organic growth or by acquiring another company. At the level of the entrepreneur, growth of activity may be achieved by starting up new ventures while continuing to operate existing ones, or by focusing on the expansion of one enterprise at a time. What are the growth paths of the enterprises and entrepreneurs in our study?

10.3.1. Growth at enterprise level

At first glance, the operations of the enterprises have changed in many ways since start-up. Not only are the growth paths different between the three sectors, but there are also significant variations within the sectors. However, a number of similarities can be detected as well.

Table 10.2. Changes in operations during growth

To begin with it should be noted that only eight enterprises have grown without changing their operations in one way or another. This would support the idea that enterprises that grow are willing to change (see Chapter 8.3). But, how do they change? To answer this we need to look at the sector level. Let us start with the manufacturers. Nine of the GOEs have changed their original product in some way. In some cases it was a matter of improving quality or design; in other cases new products were added, or there was a combination of these. Two of the GOEs totally abandoned their original concept and started to manufacture something quite different. This was due to falling profits and seeing the need as well as the opportunity to get into something new. Interestingly there are no cases of specialization, and only one case of vertical integration. The enterprises chose to start with a limited range of products and slowly change or add to it.

Moving on to the service providers we see several instances where the GOEs added to their existing range of services. Only two enterprises went the other way, i.e. specialized. Four have changed nothing. One has targeted new markets and added new services at the same time.

The same general observations that were made on service providers can be made about the wholesalers and retailers. Most have grown by adding to their range of products. Only one has grown by specializing. Adding new products is mostly a matter of trial and error. Growth was achieved in two cases simply by expanding volume, and in one case by improving the distribution chain. Two other GOEs have internalized more steps of the production chain; in one case a supermarket started baking its own bread and in another a computer supplier went into after-sales service.

Although the type of activity varies between manufacturers, service providers and wholesalers/retailers there appears to be little difference in how growth was achieved. In no case has one enterprise taken over another. Only a few enterprises have grown by adding vertically or horizontally to their operations. Some have grown merely by expanding the size of operations, but the majority of successful enterprises are those that attend to customer demand and adjust their products accordingly. Some will even abandon their original line of activity. Wholesalers and retailers are particularly prone to experiment with their product range, while manufacturers and service providers generally focus on a limited range and expand little by little. The latter indicates an emphasis on core competencies.

10.3.2. Growth at entrepreneurial level

In Chapter 8 we saw that commitment was one of the factors that entrepreneurs most frequently mentioned as contributing to enterprise growth. This pertained to their own commitment as well as that of their employees. Commitment does seem to be a very important factor behind growth in the GOEs studied and a further indication is the way that entrepreneurs approach their business. In Africa, a small entrepreneur is often a jack of all trades. That means being involved in many activities at the same time, which may easily have the adverse effect that they do not spend enough time on any single venture. At best, it means the enterprise will not develop to full capacity, at worst the business fails.

The entrepreneurs in this sample appear to avoid this trap. As shown in table 10.3 below, very few are running several enterprises simultaneously.

Table 10.3. Extent to which other enterprises are run simultaneously with GOEs

The table shows that only seven of the GOEs were added to existing operations and in almost half of these, the GOE activity was integrated into existing operations. That is important because activities which are integrated into an existing business require less time and effort on the part of the entrepreneur. In only four cases was the GOE an entirely new activity.

Looking at the other side of the spectrum we find that ten new activities were added to the GOE. Of these, two GOEs account for four additions, and in each case one new and one integrated activity were started. Consequently, only eight GOEs added new activities later, i.e. no more than 20 per cent. In two cases, the new activities were related to the GOE for cash-flow purposes. That is, new and different activities were started because the entrepreneurs wanted a steady cash flow and wished to keep up operations during slow periods.

Finally, it should be noted that different operations were run simultaneously in only four of the seven cases where an entrepreneur had several businesses before the GOE. In the other three cases, the activities were undertaken one at a time. The picture is thus of entrepreneurs who do one thing at a time. They rarely run more than one business at a time, and when they do the activities are often closely connected.

10.4. Preparations before start-up

It is now time to look more closely at what the entrepreneurs actually do as they grow. What kind of resources are needed and what preparations are made for expansion? In this section we look at the preparations made before starting up the enterprise. In the next, we see what external resources were acquired in the growth process.

Table 10.4. Preparations before starting the GOE

Out of the 43 GOEs as many as 17 (40 per cent) began operations without any specific preparation in terms of a market survey, a business plan or training. The two entrepreneurs who had some kind of business management training before starting their GOE both made their own market assessment. One "sketched in" a business plan, while the other claimed to have a business plan in his head.

As we can see few GOEs were started after a detailed market survey or business plan had been made. Where proper business plans had been made this was only because the banks demanded them, and in most cases the drafting of such plans was contracted to others.

It should also be noted that the preparatory training was in three cases of a technical type and in the other four cases it was managerial. ⁽³¹⁾

10.5. Support sought and obtained

Enterprises may need many different kinds of support, which is sometimes subsidized. Especially in the United Republic of Tanzania, but also to some extent in Uganda, subsidized support has historically been more frequently available. The kind of support GOEs seek outside the enterprise can be divided into two broad categories, non-financial and financial.

10.5.1. Non-financial support

Non-financial support entails a large variety of services, which are generally needed only for very limited periods of time and/or for very specific tasks. Examples are consultancy services for bookkeeping, auditing and training of employees. Other kinds of support fall broadly under the heading "information". This includes trade fairs and suitable literature. It may also include networks of useful business contacts.

The non-financial support that enterprises seek is an indication of the topics that might be included in a business management programme developed for GOEs. So let us take a closer look at the non-financial support which our respondents have sought. First we look at the extent to which the entrepreneurs have sought non-financial support from external sources in their previous enterprising activity. Then we look at the GOE itself.

Support obtained in previous enterprises

Twenty-three of the entrepreneurs, i.e. half of them, have previously run a business, 11 in the United Republic of Tanzania, five in Uganda and seven in Zimbabwe. Only four had any kind of external support in starting them up. One went for management training and one for technical training, another attended a training-of-trainers’ seminar, and one received some training as part of a finance package. One benefited from having a ready-made clientele from his former employment.

Support obtained partly or wholly at own expense

Now we look at the kind of external non-financial support obtained during the course of operations. What non-financial support have GOEs paid for?

Table 10.5. Non-financial support paid for by the GOEs

The figures above were obtained from respondents’ answers to a semi-structured question. The two categories "literature" and "seminars/…" were not mentioned specifically, but placed under the wider category of "information". This may account for the relatively low number of GOEs responding in the affirmative. Nevertheless a number of interesting points emerge. One is that while very few entrepreneurs have obtained any kind of training since start-up, almost half have invested in further training for their employees. Judging by the national breakdown this is partly related to size. The average number of employees in the United Republic of Tanzania and Zimbabwe is significantly higher than in Uganda, and it is in these two countries that we find the highest incidence of staff training. It is also in these two countries that GOEs are more likely to seek information from literature.

The kind of training varies a lot and there is none that dominates. The following types were mentioned: managerial, production specific, customer care, sales, marketing, design, computer, secretarial and bookkeeping. The financial outlay for training ranges from very little up to US$10-15,000 per annum for a company that sends two employees abroad every year.

The reasons for hiring consultants varied quite a lot. Services obtained this way were: marketing, technical information, costing, personnel management and logistics. Marketing was most frequently mentioned; three GOEs hired marketing consultants, and two specifically mentioned export marketing.

No-cost support

In an environment where there are many active donors, various kinds of support are more or less free. To what extent did the GOEs obtain that kind of support?

Table 10.6. Non-financial assistance obtained at no cost

The total gives the impression that all enterprises that sought assistance also received it. However, the national breakdowns show that that is not the case. Three enterprises requested support which they did not receive (two of them tried several times) and three received assistance which they did not actually seek. These were approached by offers of free assistance which they accepted. The following more country-specific remarks can be made.

All staff training in the United Republic of Tanzania was in technical skills - including training for the entrepreneur. Two enterprises received training for their staff through company-to-company collaboration (from different programmes). In one case the training was provided at no cost, as part of a donor programme where soft loans were given to acquire technology from South-East Asia. The other case was more regular business-to-business cooperation. The third enterprise received technical training for staff from the Netherlands and attended MEIDA seminars on quality control.

One of the GOEs in Uganda benefited from membership in the Uganda Manufacturer’s Association (UMA), through links with a Danish enterprise. Two Ugandan enterprises were offered free training; one for staff in Kenya and the other for the entrepreneur in India and Sweden.

The three GOEs in Zimbabwe that requested support had all done this through ZimTrade (the national trade development organization). ⁽³²⁾ ZimTrade membership makes it possible for small enterprises to link up to the international market and to receive training through domestic workshops. The fourth enterprise in Zimbabwe that received assistance did so as a loan condition.

Other non-financial factors contributing to growth

Most of the resources that go into an enterprise have a price tag of some sort, but there are also intangible resources whose price is difficult to determine. This includes personal contacts. We asked the entrepreneurs to estimate the importance of this type of assistance.

Table 10.7. Personal contacts

The area of personal contacts is of course a sensitive one and we might be doubtful about the low estimate of the importance of political contacts. Nevertheless, two things stand out from this table. One is the fact that 15 entrepreneurs had some sort of a "mentor"⁽³³⁾. There were no formal mentorship agreements, but in most respects the relationship might be characterized as such. In two cases the mentor was the former boss of the entrepreneur, in five cases simply a good friend. In four cases the mentors were employees and in another four cases the mentor was a family member.

The assistance received from mentors varied. In six cases (five in the United Republic of Tanzania) specific sector knowledge was obtained. In five cases technical skills were passed on. One case concerned financial advice and the remaining three involved more general advice.

The second thing we want to point out is that 75 per cent of the entrepreneurs think that personal contacts are important - one of them even said: "Business is contacts". Networking is an important part of enterprise success and should not be underestimated because it is difficult to cost.

Finally, it should be noted that one entrepreneur stated that positive media coverage was very beneficial to the growth of her operations.

10.5.2. Financial support

The overall impression is that the GOEs prefer to grow by reinvesting profits. Borrowing is shunned, especially in the United Republic of Tanzania and Uganda where interest rates have been very high during the major part of the 1990s. Very few GOEs in the United Republic of Tanzania and Uganda have taken a commercial loan. In Zimbabwe the GOEs have been more positive about borrowing from banks and other financial institutions, but that is likely to change with the steeply increased interest rates of the last two years.

The table below indicates where the necessary financial resources come from, showing at which stage of development assistance is sought and for what purposes.

Table 10.8. Financial support obtained by the GOEs

At start-up five enterprises made no initial investments. Three were service providers and the other two retailers. In subsequent investments one was a wholesaler and the other two were retailers. The predominance of retailers and wholesalers can be explained by the widespread practice of providing credit in this sector.

It is interesting to see the large difference between number of bank loans taken for start-up and the number taken for expansion. While bank loans were only used in the start-up phase of five of the GOEs, substantially more financial back-up came from banks in the growth phase. And correspondingly, while friends and family assisted financially in setting up 12 GOEs, only three used that source of finance for expansion. These findings are not surprising, but they clearly show that the size of investment required for growth means that friends and family can rarely be relied on at that stage. To grow, an enterprise needs financial assistance from another source. This is partly why enterprise savings are very important for subsequent growth. As we have seen, excluding the cases where bank loans were obtained, reinvested profits are involved in more than half of the cases. In an environment of high interest rates this is often the only way to go forward. Evidence is provided by looking at the two extremes, the United Republic of Tanzania and Zimbabwe. During most of the 1990s, interest rates have been very high in the United Republic of Tanzania and the instances of growth through bank borrowing is limited to one enterprise there. In Zimbabwe, where interest rates have been comparatively low until the last year or two, there are six instances of growth by borrowing from a bank.

10.5.3. Conclusions: Non-financial and financial support

More than half of the entrepreneurs already had one enterprise or more before starting the GOE. In setting up their first enterprise, though, very few sought any kind of support. They simply went ahead with little external involvement.

The situation is slightly different when we look at how the GOEs were set up. To begin with, one-sixth of the entrepreneurs took some kind of preparatory training, and one-third made at least a simplified market survey and/or business plan. However, they rarely carry out proper market surveys or business plans unless obliged to do so as a condition for a loan.

External support comes in at a later stage, when the business is operating. This support mainly takes the form of training, and more specifically the technical training of staff. Although some entrepreneurs also undergo training during the operational phase it is predominantly their staff that receive training. The content varies significantly, but in nearly all instances it aims at improving the operational skills of staff. In most cases the enterprises pay all or part of the cost of that training. This kind of investment becomes more important as the enterprise grows. With growth the entrepreneurs also become more likely to purchase other kinds of support from outside the enterprise. International journals are often used as a source of information and inspiration, and consultants are hired to deal with specific tasks.

When growing, the enterprise also tends to rely less on personal and family savings and more on banks for finance. In the United Republic of Tanzania and Uganda, this is not only a matter of choice, partly because interest rates are rather high. To avoid relying on banks entrepreneurs prefer to reinvest profits from the enterprise itself. Yet, the incidence of financial assistance from banks for expansion is much higher than for start-up ⁽³⁴⁾. And the incidence of long-term loans is only slightly more than short-term loans.

11. Summary

It is now time to synthesize the results of our research. This will be done by summarizing the most important findings and discussing them in relation to the research objectives.

11.1. The most important factors behind the growth of GOEs

11.1.1. The business climate

The United Republic of Tanzania, Uganda and Zimbabwe are in different economic situations. To begin with the GNP per capita figures vary widely. In these terms Zimbabwe is among the richer countries of sub-Saharan Africa while the United Republic of Tanzania is one of the poorest. Uganda is in between. However, the economies are moving in different directions. Uganda experienced a protracted period of high GNP growth in the 1990s. The United Republic of Tanzania’s growth record is fairly good as well, whereas Zimbabwe has experienced significant hardships after a few good years in the early 1990s. To some extent macroeconomic hardships can be attributed to the SAPs that were introduced early in the decade. SAPs have been in operation in the other two countries considerably longer and it seems that growth rates there can be attributed to the opening up of their economies.

Macroeconomic variables do indeed have an impact on growth. Where interest rates are high the willingness to borrow from banks is much less. This may slow some enterprises down but it does not impede growth, because many businesses expand by reinvesting their profits. However, to continue doing that, they need to hold foreign currency accounts to insure themselves against depreciation of the local currency, and subsequent inability to import investment goods from abroad.

With the declining strength of the local currencies and worsening macroeconomic conditions in general, overall consumer purchasing power suffers. This has repercussions on the activities of the enterprises and may explain why so many GOEs are targeting consumers in the higher income brackets.

A more developed economy such as Zimbabwe has a larger potential for exports, and the two enterprises that produce mainly for the export market are Zimbabwean. The country also has an institution for promoting international trade that seems to be appreciated by the entrepreneurs. Hardly any references are made to institutional support in the other countries.

Finally, the present economic environment has an impact on business planning. In countries where the momentum is positive, entrepreneurs generally think more positively; in countries where the momentum is negative, not much is happening. It would thus seem to be important for various actors, not least governments, to create a positive momentum.

11.1.2. Enterprise activity and its organization

In trying to assess whether an enterprise will be successful or not, the business idea is of course very important. Among the 43 enterprises studied, few are engaged in activities where there are a lot of competitors supplying the same market segment. Although several operate in areas which have existed for a long period, they try to find their own market niche. Quality is emphasized in these markets and customers are often higher income groups who are willing to pay for it.

Most of the enterprises have grown to such an extent that the entrepreneurs have found it essential to delegate responsibility. Bookkeeping is the task most frequently delegated. Buying and costing, marketing, periodica financial overview, personnel management and product development are also delegated. But whereas the entrepreneurs are more willing to let go of control in marketing, they are less inclined to do so in the other areas. Lastly, delegation of responsibility does not seem to correlate closely with the size of the firm in the enterprises studied here, i.e. up to 50 employees.

11.1.3. Personal and psychological characteristics

There is no sure way to identify entrepreneurs who will start GOEs before they have actually succeeded. However, the findings from this study suggest a few things that entrepreneurs behind GOEs tend to have in common. Relative to the rest of the population in their respective countries the entrepreneurs are rather well-educated. Approximately 75 per cent of our respondents have reached at least A-levels. Entrepreneurs behind GOEs tend to come from families where there is a prior record of enterprising activity. This also accounts for 75 per cent of our sample. We found that women from the families of chiefs or headmen were overrepresented (62 per cent). Furthermore, 40 per cent of our sample had spent more than six months abroad; a figure that seems to be significantly higher than in the population at large. This would indicate that international exposure is an important factor. Finally, although its significance is uncertain, we found that most of the entrepreneurs (85 per cent) had been employed before venturing into their own business. And those who had not been employed had run at least one enterprise of their own before. It thus seems important to have either some significant work experience or a history of enterprising activity, or both.

A very general psychological profile of the entrepreneurs behind GOEs would indicate people who are opportunity seeking, prefer to be self-employed and wish to earn a better income. They have a high need for achievement, are unusually willing to take initiatives, and have a rather high internal locus of control. In addition they appear to have a fairly high desire for autonomy, and from their own perspective they take moderate risks. They are also proactive rather than reactive. And last, but perhaps most important, the entrepreneurs show an interest in expanding their business more or less indefinitely. Although the successful entrepreneurs typically have several of these characteristics, few have them all.

Certain personal and psychological characteristics may enhance the chances of business success. However, the absence of these factors does not mean that entrepreneurs will not succeed anyway, while the existence of these factors does not guarantee that they will.

11.1.4. The growth process

Enterprises expand in different directions. Since we have focused on enterprises that are growing we may underestimate the importance of horizontal integration in the business empire of individual entrepreneurs. That is, there may be entrepreneurs who do not expand one particular enterprise, but prefer to expand by opening up new small businesses wholly or partly separate from each other, none of which will satisfy our selection criteria.

We have found that enterprises which grow rarely continue their original activity without making any changes. Readiness to change and respond to customer demand is essential for success. We also found that most entrepreneurs focus on one business at a time, rather than trying to operate several simultaneously. In a few cases where this was done, it was to ensure an adequate cash flow.

In expanding their enterprise the founders attribute their success to two major factors - their own mental capacity and the quality and commitment of their staff. It seems that the entrepreneurs in this study are genuinely interested in creating good jobs. They are willing to invest in training their staff and they consider quality employment to be an important reason for success.

The GOEs are relatively autonomous, only 25 per cent having sought any kind of free non-financial assistance in the growth process. In at least half of these cases they obtained training for themselves or for staff. More training has been obtained from external sources, with or without a subsidy. Only two of the entrepreneurs obtained training during the growth phase, but almost half of them obtained training for staff. The content of such training varies significantly, but it relates to the tasks that employees perform.

We have also noted that personal savings and reinvested profits play an important role in the growth of the GOEs. This is partly, but not entirely, due to the poor macroeconomic conditions. To avoid borrowing money indicates a high degree of independence. These observations should not downplay the fact that external financial assistance is important for business expansion. Such assistance can come in the form of a regular commercial loan, but we have seen many cases where growth has been achieved by taking a short-term credit (or overdraft) to provide working capital. We assume that any larger investments have been financed by reinvesting profits.

11.2. How can these factors be used to identify potential GOEs?

Our first research objective was to find out how GOEs can be identified before they have actually grown. Personal and psychological characteristics alone provide no ready answers, neither does the character of the enterprise tell us whether it will grow or not. However, a careful analysis of these two aspects might help identify potential GOEs. The nature of the business activity and the entrepreneur’s personal and psychological profile should be given special consideration in such an analysis.

11.2.1. Identifying the enterprises which will grow

The identification of potential GOEs requires a thorough investigation of the business idea and the people behind it. Evaluation of the business idea should build on evaluations of the type carried out by banks, perhaps together with a bank (thus building closer links to sources of finance). The business plan plays a crucial role, demonstrating that the idea is feasible, and identifying a market niche. In economies where purchasing power is still relatively low, enterprises that target higher income groups appear more likely to succeed. Where possible, the past performance of the enterprise should also be examined for an interest in customers and a willingness to adapt to consumer preferences.

The business plan may serve as the first screening tool. In addition, interviews should be held with the people behind the enterprise. The interviews should reveal new insights on customer orientation and on the desire to grow.

Caution should be observed when family members are going to be involved as business partners. A clear demarcation between family and enterprise interests is essential and measures must be taken to keep them apart.

The interview is also the time to assess the entrepreneurial capacity of the person. Researchers need to develop an instrument for evaluating the personal and psychological characteristics of the entrepreneurs behind GOEs. There seems to be no need to separate experienced from inexperienced entrepreneurs. These factors should not be used as the criteria for selection but assessment should be made of entrepreneurs who have:

A tool for determining the psychological profile of the entrepreneurs should be developed by adapting existing models to the target groups. Need for achievement, initiative and locus of control should be included, and perhaps also the desire for autonomy and risk-taking propensity.

11.3. Addressing the training needs of GOEs

The second and third research objectives were to identify the needs of GOEs and to determine how such enterprises can be assisted. We are now in a position to address these issues.

Until now most small enterprise business management training have been targeted at entrepreneurs. The subjects of our study were entrepreneurs behind enterprises that have grown significantly in the last few years. We learned that very few of the entrepreneurs behind these GOEs felt any need for their own further training. They were more interested in obtaining good training for their employees. In fact, few of them had obtained any training for themselves, but the majority had paid substantial amounts for training of their employees. The kind of training desired varies from secretarial courses to management development. Thus, while training efforts on the entrepreneurs behind SMEs must continue, there is a need among GOEs to widen the scope to include staff training. In more detail, the options are as follows.

11.3.1. Training the entrepreneurs

While seven entrepreneurs did seek some kind of training in the start-up phase of the GOE, only two sought it for the growth phase. Even though they would gain from further training, particularly in the skills of delegation, they may not believe this themselves. This interpretation would be wrong only if they have not sought training because they thought that no such training was available.

If we still believe that some kind of business management training would enhance the growth prospects of these enterprises, we would need to make great efforts to market the courses and to convince them that they really need training. One way would be to design the programme so that it focused on problems or opportunities encountered by the GOEs ⁽³⁵⁾. Rather than advertising a course on export marketing, it might be more useful to collaborate with an export promotion agency. Similarly, rather than advertising a course on expanding a business, we might collaborate with financial institutions so that they suggest or require the entrepreneur(s) to undergo training as a condition of credit. This raises a fundamental question. What kind of training do we think these entrepreneurs need, but perhaps do not realize they need?

Maintaining a focus on technical skills in functional areas such as marketing, production and finance, the following aspects may be emphasized and perhaps developed into separate modules of a new programme:

nStaff management. This module would emphasize the importance of delegating tasks and relaxing control. It would help entrepreneurs develop more trusting relationships with their employees and provide employment benefits. It would also cover skill development for employees.

nTargeting the market. This module would deal with finding the right market. It would include ideas on pinpointing and pursuing a niche. It would also emphasize adapting to consumer preferences.

nExporting. Special consideration should be given to export orientation. In order to reduce the adverse impact of structural adjustment, earn foreign exchange, reinvest more easily and contribute to the national economy, efforts to export should be promoted. Links may be developed with existing export promotion organizations in the countries of operation.

nDeveloping the product. This module would emphasize the importance of being open to change. It would help trainees keep abreast of developments on the supply side as well as on the demand side. Various sources of information would be identified and promoted. Links with training colleges or institutions for product development may be developed.

In addition to upgrading management skills, referral systems will have to be developed further to include not only financial institutions but also training institutes. The entrepreneurs have expressed a strong interest in developing the skills of their employees, managers as well as technical staff. In order to help them identify suitable training, organizations offering entrepreneur development programmes may develop strategic partnerships with vocational training centres that meet the required quality standards.

11.3.2. Training the management of GOEs

Changes in the size of a company require changes in management style. There appears to be much more delegation in the GOEs which means that we are looking at enterprises where various management tasks are not carried out by the entrepreneur.

There is therefore need to develop courses specifically for improving the competence of operation managers in SMEs. The curriculum would be very similar to that indicated above, i.e. personnel management, marketing and product development. The module on personnel management would have to be split into two - one for entrepreneurs and one for personnel managers. The module for entrepreneurs should emphasize the importance of delegation, while the one for personnel managers should emphasize human resource aspects.

The different modules should be designed to suit entrepreneurs as well as managers, leaving enterprises to decide who should attend the course.

The entrepreneurs have indicated that they really need good technical training for their employees. Thus, as a complement to management training, those offering the courses might establish partnerships with vocational training institutes in order to provide skills training to workers.

11.3.3. Recommendation

When enterprises grow, the division of tasks usually becomes greater and more managers are employed. To support such developments we cannot sustain a focus on the individuals behind the enterprises. We must look at what is good for the enterprise as a whole, and cater for the needs of employers as well as employees. It is thus suggested that for GOEs the focus for training interventions be shifted from the individual entrepreneur, toward the management of enterprising activity.

In addition, we want to emphasize that if the environment is not conducive to growth little growth will be achieved. In order to enhance the impact of activities in the SME sector it is therefore recommended the relevant government authorities be sensitized to the needs of this group of enterprises.

Bibliography

Appendix 1

Terms of reference

Terms of reference for study of growth-oriented enterprise

Final version, 31 May 1999, RPO SIYB/Harare

1. Introduction

ILO has for a protracted period of time been promoting job creation around the world through its support of micro, small and medium-scaled enterprises (MSMEs). Support has been provided by different means, among the more successful of which has been business management training through the Start and Improve Your Business (SIYB). At the time of writing, SIYB has been successfully introduced in more than 70 countries worldwide and there is continued increasing demand for the product.

After a period of growth the programme is now standing at the point of undertaking critical internal assessment. What has been accomplished? What works - why or why not? What kind of entrepreneurs does SIYB reach? And, what quality of jobs are actually created? These are all questions that when properly addressed feed into the future developments of MSME activities of the ILO. The issues raised concern several parties within the ILO, and it is for this reason that the following three parties: ISEP of ENT/MAN in Geneva; the Action Programme on Productivity Improvement, Competitiveness and Quality Jobs in Developing Countries in Geneva; and the RPO, Regional Project Office of SIYB in Harare, have joined forces to undertake a study of growth-oriented enterprises (GOEs henceforth).

2. Research objective

Interests of the parties converge in the following three broad areas:

nHow can GOEs be identified ex ante facto (beforehand)?

nWhat are the needs of GOEs?

nHow can the GOEs be supported?

The main research objective of this study is therefore to identify what factors have been most important behind the growth of SMEs.

3. Defining "growth-oriented enterprises"

For purposes of clarification it should be made clear that the concept of GOEs is a relatively new one, and its definition is by no means to be taken for granted. In defining what is meant by GOEs here, the concept should be divided into two: "growth orientation" and "enterprise".

Growth orientation

To be "growth-oriented" indicates a certain state of mind, whether it be collective or individual. It means that the people behind certain enterprises have the intention and capacity to significantly expand new or existing businesses. Success may be depending on the character of these people, but also the general kind of activity they are pursuing, and the environment in which they are pursuing it. Growth can be measured in different terms. For purposes of this study the main factor will be growth in employment (see below).

Enterprise

Especially in the case of MSEs the enterprise and the entrepreneur are almost inseparable. It is probably for this reason that most studies that have tried to pinpoint successful enterprises ex ante facto have focused on the entrepreneur. The ways in which an "entrepreneur" has been identified in such studies varies significantly. This study will not downplay the importance of the person, but rather upgrade the importance of other factors. And by enterprise we mean basically any business venture that meets set selection criteria (see below).

4. The study

In order to address the convergent interests emphasized in section 2 above, the study here outlined should entail a literature survey, followed by empirical work and resulting in a final report.

The literature survey

A literature survey should provide the background to the conceptual framework for the study of GOEs. It should answer questions like: How have GOEs been defined in other studies? How have these definitions been operationalized in practice? What lessons can be learned? In reference to the latter issue, emphasis should be placed on matters pertaining to job creation.

Previous studies that have tried to identify enterprises ex ante facto have ventured into the activity of mapping out traits and characteristics of entrepreneurs. Business success has been perceived as being strongly correlated to personality. However, no matter how good a personality an entrepreneur has the company will still not succeed if his/her business idea is not good enough, if the business environment is not beneficial enough, etc. Even though there is a correlation between personality and success, there are also several other factors that come into play. For this reason, although an overview of the research into entrepreneurial profiles should be included in the literature survey, the study should go one step further and probe the prospects of identifying enterprise, rather than merely person-specific traits. Such an approach entails also taking into consideration more context specific variables such as field of activity, the actual business idea, and business climate.

The empirical work

Building upon the results of the literature survey, the framework for an empirical study should be set up and subsequently the study would be undertaken. Due to the uncertainty we are presently facing as to what the literature survey will show, the coordinator of the study should liase with the three parties before actually undertaking the study. As a general framework, though, it is anticipated that the empirical work will be undertaken in three countries: the United Republic of Tanzania, Uganda and Zimbabwe. Uganda and Zimbabwe are chosen because they are the most advanced countries in their respective part of the RPO area - Zimbabwe representing the southern African region and Uganda the East African region. In addition, for purposes of bringing in perspectives from one of the poorer countries in the RPO area, the same kind of empirical work will be undertaken in the north-west of the United Republic of Tanzania. This work will be greatly facilitated due to the PC having conducted a study of SME entrepreneurs in that region five years ago.

The research will be based on qualitative research methodology. Data collection will be carried out through in-depth interviews. Interviews will be undertaken by personnel contracted locally. Local coordinators will be contracted to identify suitable enterprises and set up interviews. The PC will be present and partly active during the data collection period in each of the three countries. The interviews will follow an interview guide to be developed in the office of the PC. Areas discussed will centre on person as well as on enterprise. There should be at least 15 interviews from each country.

Growth orientation as a "state of mind" cannot be assessed without speaking to entrepreneurs or management. Therefore, for selection purposes, actual growth will be used as an indicator of growth orientation. Growth can be measured in many different ways, by number of employees, number of business ventures, turnover, etc. Growth orientation can also be detected through different indicators, e.g. use of more advanced technology, searching for market niches, and new product developments. Although such indicators will be taken into account during the interviews, focus in the selection of entrepreneurs will be on actual job creation. It is, after all, a good indication of growth orientation since it implies that expansion has been made in other areas, such as sales.

Selection of enterprises will be made according to the following criteria: over a five-year period, the companies should have increased the number of employees by at least 50 per cent. Present number of employees should be ten to 50.

The final report

The final report should adequately address the research objectives of the three parties which were stated in section 2.

Appendix 2

The questionnaire

In order to minimize space utilization and thus reduce the number of pages, the questionnaire is not presented in its full format. In the questionnaire that was used there was substantially more space within each box in order to enable the research assistants to fill in each question properly, and the font was in 12 points.

There are introductions to most sections. These introductions were provided for the interviewers to use as a frame of reference for why the particular questions were asked. The interviewers were furthermore told to convey the content of these introductions before each section (in their own words) so as to brief the entrepreneurs on what area would be discussed and why it was of our interest to know more about it.

Questionnaire for the study of GOEs

To be filled in without asking the entrepreneur:

Name of interviewer:

Name of entrepreneur:Sex (circle)  M  F

Ethnicity (circle): White  Coloured  Black

Language in which the interview was conducted:

Introduction

The first part (sections I, II and III) is primarily to find out about the entrepreneur as a person. To see if there is something in his/her background that suggests why the enterprising activities of his/hers have been successful. When all the data is later analysed, the ILO will look for commonality among GOEs in terms of family background, education, work experience and mobility.

I.General

II.Family

• No
• Yes

III.Education and work experience

IV.Other enterprises where the entrepreneuris or has been involved

In the original questionnaire the interviewers had four identical pages in this section following the format below. To avoid unnecessary repetition and save space, we will only provide one of the pages here.

On next page you will find the first of four identical pages. For each enterprise started by the entrepreneur him/herself, or together with others (excluding the enterprise you have indicated on your schedule), fill in the answers to the questions on one of these pages. If the entrepreneur has been involved in more than four enterprises use the back page of one of the pages. If she/he has been involved in less than four enterprises, leave the remaining sheets blank.

Introduction

The entrepreneur may be, or has been, involved in the setting up of several enterprises. Disregarding the one enterprise you will be asking more specifically about later (indicated on your schedule), we are now interested in what other businesses the entrepreneur has set up - on his/her own or together with others. This is for purposes of understanding what kind of learning experiences she/he may bring with him/her into the enterprise identified as a GOE.

• Still at least partly under the entrepreneur’s ownership and/or management:

• Entirely under somebody else’s ownership and/or management:

• Closed down:

V.The business activity

The following section relates only to the enterprise indicated in the interview schedule (in case there is not enough space in the boxes use the backside of the sheet).

Introduction

This section is the big one. It concerns this particular enterprise that was identified as growth-oriented. Lots of different questions will be asked concerning two different phases of the enterprise, the start-up and the actual operation and growth of it. We will be asking questions about issues that in earlier research have proven to have a bearing on success.

• No
• Yes

• A specific town area.
• The entire city and surroundings.
• Only in the major cities of the country.
• All parts of the country.
• Neighbouring countries.
• Various countries in Africa.
• Various countries in Asia.
• Various Western countries.
• Other, namely:

• Bank loan:%
• Borrowed from friends and family:%
• Given from friends and family:%
• Own savings:%
• Retrenchment capital:%
• Partner investment: %
• Other, namely:%
• No finance required%

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

• No
• Yes

VI.Novelty

1.When the enterprise started, were the products/service different in any of the respects below (tick appropriate box(es))?

• The method of production was markedly different from that of other local producers.
• Had another market orientation than others in the locality.
• The product/service had not previously been marketed in the locality.
• The source of supply gave a competitive advantage over other producers.
• No.

• The method of production is markedly different from that of other local producers.
• Has another market orientation than others in the locality.
• The product/service is not marketed in the locality.
• The source of supply gives a competitive advantage over other producers.
• No (if "No", also in question 1 - go to question 4).

• No
• Yes

• No
• Yes, namely:

VII.The business environment

Introduction

There is a lot of talk about the importance of the business environment for the enterprising activity. In this section we want to find out how the entrepreneur perceives of it. What is good and what could be improved?

• No
• Yes

VIII.Factors contributing to enterprise growth

1.What does the entrepreneur feel have been the most important factors behind the growth of his/her company? Explain why.

• No
• Yes

• No
• Yes

• No
• Yes

IX.Personality

The following statements should be read out by the interviewer without changing the wording, and answered by the entrepreneur. The interviewer ticks the appropriate box.

Introduction

This last section relates to you as a person. The success of the enterprise is often closely related to the entrepreneur’s personal character/leadership style. Therefore, we want to find out a little bit more about his/her personality in order to see if there seems to be any personal traits that she/he shares with other growth-oriented entrepreneurs.

Assessment of person and enterprise

To be completed by interviewer at end of interview.

Notes

International Labour Organization (ILO): Contact us | Site map |

Copyright and Permissions 1996-2009 International Labour Organization (ILO) - Disclaimer