The role and impact of investment incentives on small and medium sized enterprise development in Ethiopia

Ayele, Seife (2003). The role and impact of investment incentives on small and medium sized enterprise development in Ethiopia. PhD thesis The Open University.



In 1950 Ethiopia became an African pioneer by introducing an industrial modernisation policy to attract foreign capital and technology transfer. It took further pioneering steps in the early 1960s by using its investment incentives scheme to support indigenisation of industry and SMEs. However, during the 1970s and 1980s while many countries were learning fast from the experiences of others, these early initiatives were suppressed in Ethiopia, and only reintroduced in the early 1990s with a narrow approach to enterprise start up, and few lessons learnt.

This thesis examines the role and impact of incentives, constituting exemptions from paying duties on imported capital goods and income taxes, on the choices of industry, location and size of enterprises in Ethiopia. It uses theories predicating the reasons for entrepreneurial motivations to start enterprises, and draws on statistics from 4246 projects licensed for investment incentives over 1992-98, as well as new evidence generated from a follow up in-depth investigation of six SMEs. The thesis concludes that the influence of investment incentives on the industry, location and size of SMEs start ups is limited. Antecedent factors like entrepreneurial experience, level of training and financial resources, alongside market and infrastructure were the triggers and determinants of SMEs start ups.

However, the study found that sometimes the value of the licence for investment incentives was superior to the holder when used, not as tax breaks as intended, but as a moderator of access to state controlled resources like enterprise sites. Projects that received licences looked viable for bank credit, and the authorities provided some projects with preferential (and subsidised) access to resources.

The study suggests that enterprise support initiatives should focus on key driving forces of enterprise development, such as entrepreneurs' technical and managerial skills, better access to land, infrastructure and streamlined procedures for business legalisation.

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