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