FACTORS AFFECTING THE PERFORMANCE OF SMALL
ENTERPRISES IN UGANDA: A CASE
STUDY OF BUSHENYI DISTRICT
INTRODUCTION
1.0 Introduction
The study sought to examine the factors contributing to the performance of Small enterprises in Uganda, using a case study of Bushenyi District. The independent variables were the factors whose dimensions under study were microfinance institutions’ practices, government support and organizational management practices while the dependent variable was performance of small enterprises.
This chapter presents the background to the study, the statement of the problem, the purpose of the study, objectives of the study, the research questions, the hypothesis, conceptual framework the scope of the study, the significance, justification and operational definition1
1.1 Background to the Study
1.2.1 Historical Background
Globally, the concept of performance of small enterprises developed in the 17th and 18th centuries as the public grew to overcome great hardships to carve a home and a way of life out of the wilderness (Hill, 2001). Still according to Donald(2011) as the nation’s population grew and cities assumed increased economic importance, the dream of being in business for oneself evolved to include small merchants, independent craftsmen, and self-reliant professionals as well that conceptualized the emergence of small enterprise growth and performance (Donald, 2011).
Furthermore, facts show that prior to the late 19th century, cottage industries, mostly small scale businesses controlled the economy of Europe (Céline, 2005). The industrial revolution from 1750 to 1850 changed the status quo and introduced mass production. The twin oil shocks during the 1970s undermined the mass production model, which triggered an unexpected reappraisal of the role and importance of small sized enterprises in the global economy (Céline, 2005).
According to Kikonyogo (2000), in Uganda small enterprises and businesses were mostly peasant agricultural production based economic activities since pre-colonial times. Despite an active trade in ivory and animal hides linking Uganda with the east coast of Africa long before the arrival of Europeans, most Ugandans were subsistence farmers. After declaring Uganda a protectorate in 1893, Britain pursued economic policies that drew Uganda into the world economy primarily to serve Britain’s late nineteenth -century textile industry. Cotton cultivation increased in importance after 1904 and once it became clear that cotton plantations would be too difficult and expensive to maintain, official policy encouraged smallholder farmers to produce and market their cotton through local cooperative associations. This became the starting point for the development of small business enterprises in Uganda by the introduction of small holder farmers (Kikonyogo, 2000).
The performance of small enterprises in Uganda has been affected by a number of factors that include managerial skills, government support, access to finance and the general business environment (Byaruhanga, 2008). Byaruhanga (2008) asserts that Uganda was once rich in human and natural resources and possessed a favorable climate for economic development, but in the late 1980s it was still struggling to end a period of political and economic chaos that had destroyed the country’s reputation as the “pearl” of Africa. Most of the economic infrastructure, including the power supply system, the transportation system, and industry, operated only at a fraction of capacity. Other than limited segments of the agricultural sector–notably coffee and subsistence production and small enterprise growth was almost at a standstill. And in the wake of the much publicized atrocities of the Idi Amin Dada regime from 1971 to 1979 and the civil war that continued into the 1980s, Uganda’s once flourishing small scale enterprises faced the challenges of reconstruction. Successive governments had proclaimed their intention to salvage the economy and attract the foreign assistance necessary for recovery, but none had remained in power long enough to succeed (Byaruhanga, 2008).
The Government of Uganda launched an Economic Recovery Programme (ERP) in May 1987, followed by a series of rehabilitation and development plans (Kasekende, 2003). Initial efforts were aimed at rehabilitating the production sectors and infrastructure, especially small enterprises on which the economy depended. Problems in the balance of payments were addressed by liberalizing the exchange rate, encouraging exports and seeking donor support. The trade regime has been fully liberalized, and there are no restrictions on both the current and capital accounts. In addition, the government pursued, with vigour, a policy of privatizing parastatals, with the result that more than a half of them have been divested with the intention of promoting the performance of private businesses and enterprises (Kasekende, 2003).
1.2.2 Theoretical background
The study was guided by the systems theory proposed in the 1940’s by the biologist Ludwig von Bertalanffy and furthered by Ross Ashby (1956) in his Introduction to Cybernetics. Von Bertalanffy was both reacting against reductionism and attempting to revive the unity of science. He emphasized that real systems are open to, and interact with their environments, and that they can acquire qualitatively new properties through emergence, resulting in continual evolution. Rather than reducing an entity to the properties of its parts or elements, systems theory focuses on the arrangement of and relations between the parts which connect them into a whole. Particular organizations determine systems, which are independent of the concrete substance of the elements. Thus, the same concepts and principles of organization underlie the different disciplines, providing a basis for their unification. Systems concepts include: system-environment boundary, input, output, process, state, hierarchy, goal-directedness, and information (Francis et al, 1992).
Systems analysis, developed independently of systems theory, it applies systems principles to aid a decision-maker with problems of identifying, reconstructing, optimizing, and controlling a system, while taking into account multiple objectives, constraints and resources. It aims to specify possible courses of action, together with their risks, costs and benefits. Systems theory is closely connected to cybernetics, and also to system dynamics, which models change in a network of coupled variables (Francis et al, 1992).
Small enterprises thrive and perform based on relationships with the environment they interact with. In the systems theory there is an open and closed system. Small enterprises as a system greatly relate to the elements of an open system. A small enterprise with its management interfaces and interacts with its environment, the government, and microfinance institutions by receiving services and finance that improves their performance and growth. As Francis (1992) puts it, they possess permeable boundaries, which permit interaction across its boundary, through which new information, inputs and ideas are readily absorbed, permitting their incorporation and diffusion. Because of this, small enterprises can adapt more quickly to changes in the internal and external environments for better performance. This allows small enterprises to ultimately sustain growth and better performance so as to have a stronger probability for survival (Francis 1992).
1.2.3 Conceptual background
There is no single universally accepted definition of small enterprises but many vary according to regional differences (Hill, 2001). Gore et al (1992) as cited by Hill (2001) states that Like the proverbial elephant the small enterprise is one of those things that is recognized when seen but difficult to define. The most widely accepted definition was forwarded by the Bolton Committee from an economic perspective which suggested a small enterprise is one that has a relatively small share of the market place; managed by owners or part-owners in a personalized way, and non-formalized management structure; and independent, that is not forming part of a larger enterprise (Hill, 2001). In order to achieve better performance and be able to achieve the set goals and objectives, small enterprises have to maintain good organisational management practices since according to Kauffmann (2005), effective management ensures profitability for the organization and gives a sense of direction to the employees as it binds the employees together and gives them a sense of loyalty towards the business.
According to Hall (2002), microfinance institutions refer to entities that provide financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories. The Financial Institutions Act (2004) gives two main mechanisms for the delivery of financial services to such clients and these are relationship-based banking for individual entrepreneurs and small businesses; and group-based models. In here, several entrepreneurs come together to apply for loans and other services as a group based on the set policies and procedure by the government (Donald, 2011). More so, these microfinance institutions provide account services to small balance accounts for small entrepreneurs that would not normally be accepted by traditional banks and offers transaction services for amounts that may be smaller than the average transaction fees charged by mainstream financial institutions (Hong, 1999).
The government is crucial in enhancing better performance of small enterprises since it helps to improve and develop their businesses by providing business advice, training and finance , build stalls and provide financial support, provide business start-up training, entrepreneurial skills, and mount a proper monitoring system to help in the running of small businesses (Mukras, 2003).
Performance of small enterprises in terms of increased output, revenue, asset base, profitability and business sustainability is the focus of this study. The performance of small enterprises is perceived to be affected by microfinance services, government policies and organisational management to the extent that if each of these variables is delivered to their best, the performance of small enterprises will improve. The most comprehensive summary of factors affecting performance was noted in literature review by Theo, et, al (2007) to include: individual characteristics, parental influence, business motivation and goals, business strategies, goals and motives, networking and entrepreneurial orientation together with the environmental factors.
1.2.4 Contextual background
In Uganda, small enterprises are increasingly taking the role of the primary vehicles for the creation of employment and income generation through self-employment, and therefore, have been tools for poverty alleviation. Small enterprises also provide the economy with a continuous supply of ideas, skills and innovation necessary to promote competition and the efficient allocation of scarce resources (Kasekende, 2003). The strategic importance of small enterprises in Bushenyi district today is highly acknowledged mainly due to their contribution in creating employment at a higher rate than large firms. The private sector and in particular small enterprises form the backbone of the district economy and earnings. They curb the monopoly of large enterprises in the district like Kampala International University (KIU), coffee factories at Bassajjabalaba industrial area and in turn offer them complimentary services and absorb the fluctuations in the economy (Sarapaivanch, 2003).
In Bushenyi, small enterprises are very heterogeneous entities of business usually operating in the provision of goods and different services. These enterprises are usually weak and family owned in nature with an environment that is not so friendly which has caused business failure and stagnation. These enterprises include agribusinesses, manufacturing, trade, handcraft makers, welding as well as medical and education services. Most of these enterprises are dynamic, innovative, performance and growth oriented while others are satisfied to remain small and in most cases family owned (Sarapaivanch, 2003).
Note should be made that small enterprises in Bushenyi face different barriers and challenges in survival, growth and innovation. Research by Larsen and Lewis (2007) found out that the majority of failures in small enterprises performance are due to multiple factors such as under capitalization, short term liquidity problems, insufficient working capital and short term capital, poor financial management as well as lack of overseas markets that limit their financial and human resource development.
To overcome these barriers the government came up with a number of strategies as interventions. The government programmes like the youth fund, NAADS programme, and presidential initiatives on improving plantational agriculture like Matooke farming have not really trickled down to the small enterprise businesses and farmers (Bushenyi District Local Government, 2011). Apart from the main road stretch from Mbarara to Kasese, the rest of the road infrastructure has been ignored or was left to the local authorities to run making them inaccessible and costly to use by small business people. These factors indicate that small enterprises cannot and have not thrived well in Bushenyi district so as to perform as expected of a model district in small enterprise development (Bushenyi District Local Government (2011).
1.3 Statement of the problem
There has been a considerable increase in the number and size of the small scale enterprises in Uganda according to Kasekende (2003). Bushenyi district administration has been implementing measures to address the barriers to performance of small enterprises through the Competitiveness and Investment Climate Strategy (CICS) through physical infrastructure development mainly in energy, water supply from Nyaruzinga with a Matooke factory, improved bi-laws on business and administration (NDP, 2010/11 – 2014/15). NAADS for the agricultural sector was introduced with the aim of providing improved seeds and breeds as well as Uganda Coffee Development Authority (UCDA) that provides training to farmers on how to provide quality coffee for export.
The business environment in Bushenyi can be rated good and small enterprises are supported to perform since there is access to finance through many microfinance institutions, SACCOs and Rotating Savings and Credit Associations (ROSCAs). A one stop centre to provide registration services for the various licenses required to start up small enterprise business was introduced in addition the small enterprises business guide has been developed to provide them with information on available financial, business development services (BDSs), and business licensing information (budget speech financial year, 2012/13).
Despite the above strategies and the fact that small enterprises constitute a large population of the private sector from which income and more jobs are created in the district, the performance of small enterprises remains relatively low compared to other countries and with a business failure rate of 60% before they reach five years in Bushenyi according to UBOS (2009).This leaves some information gap on what could be the factors affecting the performance of small enterprises in Uganda. This therefore necessitates an investigation through a study research in order to get empirical evidence on this scenario for better management and performance of small enterprises in Bushenyi.
1.4 Purpose of the study
The purpose of this study was to examine the factors affecting the performance of small enterprises in Uganda.
1.5 Objectives of the study: The study was guided by the following specific objectives
- To assess the effect of microfinance institutions’ practices on the performance of small enterprises in Bushenyi district.
- To find out the relationship between government support and the performance of small enterprises in Bushenyi district.
- To examine the contribution of organizational management practices on the performance of small enterprises in Bushenyi district.
1.6. Research questions
- To what extent do microfinance institutions’ practices contribute to the performance of small enterprises in Bushenyi District?
- What is the contribution of government support to the performance of small enterprises in Bushenyi district?
- Is there a relationship between organizational management practices and the performance of small enterprises in Bushenyi district?
1.7. Research hypothesis
- Microfinance institutions’ practices positively affect the performance of small enterprises in Bushenyi district.
- There is a positive relationship between government support and the performance of small enterprises in Bushenyi district.
- Organizational management significantly contributes to the performance of small enterprises in Bushenyi district.
1.8. Conceptual framework
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conceptualized showing relationship between factors and performance of small enterprises
Figure 1: Showing the linkages between factors and performance of small enterprises
Source: Adopted from the Project Excellence Model (Westerveld, 2003) with the modification by the researcher.
The conceptual framework given above shows a hypothesized relationship on the factors that affect the performance of small enterprises. The dimensions of Microfinance institutions, government policies and organisational management will be considered as the Independent Variable (IV) while the performance of small enterprises will be considered as the Dependent Variable (DV) measured in the dimensions of increased output, business sustainability, revenue maximization, profitability and increased asset base. If the dimensions in the IV are full operationalised, it will be assumed that they will lead to better performance of small enterprises in Bushenyi district. However, it will also be assumed that poor operationalisation of the IV will lead to business stagnation, low output, business failure, low revenue , unprofitable businesses and little or minimal asset base and thus under performance of small enterprises. It’s on this basis that any changes in the IV will significantly contribute to the performance of small enterprises in Bushenyi district.
1.9. Significance of the study
The research findings will be useful to stake holders in Bushenyi district because it provides information to both local and central government authorities on the factors affecting the performance of small enterprises.
The findings of the study will enable policy makers, planners and economists especially at national and district level to make informed decisions and plans based on researched information made available by this study.
To the research community, the study will be a basis for future research on how to improve the performance of small enterprises, especially by identifying the knowledge gaps for future research. Besides, it will add on the existing knowledge about performance of small enterprises particularly in Bushenyi district business environment.
1.10. Justification of the study
Whereas studies were carried out on business performance, little effort has been put in place by researchers to find out the factors affecting the performance of small enterprises. Therefore, a deeper understanding of these factors may help the government and the business communities counter the effects of poor performance of small enterprises.
The study findings have provided strategies for closing the gaps on the factors affecting the performance of small enterprise which is a basis of this study.
1.11. Scope of the study
Geographical scope
The study was carried out in Bushenyi district located in south western part of Uganda. It borders with Rubirizi in the north east, Sheema and Buhweju north east, Sheema in the east, Mitooma in the south west and Sheema in the south. This district was chosen because there are limited studies if any on financial management in relation to performance of small enterprises, besides there were gaps which need to be addressed in performance of small enterprises. There are a number of economic activities in the district ranging from agriculture, retail and whole selling, welding and metal fabrication services to mention but a few. Bushenyi district is composed of three constituencies i.e. Igara West, Igara East, and Bushenyi-Ishaka municipality, with 9 sub counties, and 3 divisions within the municipality, and has total population of 240,150 people, of which 117,000 are male and 124,500 females (UBOS, 2011). Samples were picked from district headquarters within Bushenyi-Ishaka Municipality.
Content scope
The study focused on factors affecting the performance of small enterprises in Bushenyi district with independent variable being factors with its dimensions being microfinance institutions’ practices, government support and organisational management practices. The dependent variable was performance of small enterprises with the dimensions of increased output, business sustainability, revenue/sales maximization, profitability and increase in asset base.
Time scope
The study covered a period from 2007-2011. This period was preferred because it was a period when the government of Uganda adopted the National Development Plan (NDP). Bushenyi district was also assessed by the National Assessment Team (NAT) from the ministries of Planning and Local Government on Minimum Conditions of performance and the government increased significantly funding to the performance of small enterprises in the district (UBOS, 2009). The researcher focused on the time scope in order to get in-depth information regarding the performance of small enterprises during the period of study.
1.12. Operational definitions
Small enterprises: businesses started by an individual(s) for profit making purpose mainly employing few people most of which are family members.
Organizational management practices: The culture, rules and regulations that the small enterprise uses to propel its growth and development.
Government support: Efforts put in place by government to support the performance of small enterprises.
Performance: How well an individual is fulfilling the requirements of the job or the employee output that focuses on quality and quantity of work against the time taken to realise such out puts.
Skills: competence to perform work
Efficiency: optimum use of resources including time and the attainment of organisational objectives, targets or tasks.
Effectiveness: achieving the intended results in terms of quality and quantity in accordance with set standards and time.
