EFFECT OF SMALL SCALE ENTERPRISES ON THE GROWTH OF TOWNS IN UGANDA A CASE STUDY OF BANDA NAKAWA DIVISION KAMPALA DISTRICT

CHARPTER ONE

INTRODUCTION

1.0     Introduction

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, and the hypothesis, the scope of the study, the significance, justification and operational definitions

1.1 Background to the Study

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).

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.

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) asserts that Uganda was once rich in human and natural resources and possessed a favorable climate for economic development of towns all over the country, 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.

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).

According to Hall (2002), microfinance institutions refer to entities that provide financial services to micro-entrepreneurs and small businesses which helps to develop towns as they bring about increase in economic activities. However small businesses face numerous challenges like; lack of 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 but very few small business owner have enough security to qualify for this service; 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).

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).

Development of towns in terms of improved peoples welfare, infrastructure and revenue, asset base as a result of profitability of small business enterprises is the focus of this study. The growth of these towns is perceived to be affected by the performance of small scale enterprises.

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). Bandawhich is located in Nakawa division 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 roads, water supply.

The business environment in Banda 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).

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 Banda, 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 Bandaaccording to UBOS (2010).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 Banda.

1.4 Purpose of the study

The purpose of this study is to examine the factors affecting the performance of small Business in Uganda.

1.5 Objectives of the study

1. To assess the benefits of small scale enterprises on the development of Banda town.
2. To examine the challenges faced by small scale enterprises in developing towns like Banda
3. To examine the relationship between small business enterprises and the growth of towns in Uganda.

1.6. Research questions

1. What are benefits of small scale enterprises on the development of Banda town?
2. What the challenges faced by small scale enterprises in developing towns like Banda?
3. What is therelationship between small business enterprises and the growth of towns in Uganda?

1.9. Significance of the study

The research findings will be useful to stake holders in Banda 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 Banda business environment.

CHARPTER TWO

LITERETURE REVIEW

2.0     Introduction

This chapter will review relevant literature from different scholars on the  effect of small scale enterprises on the growth of towns in Uganda a case study of Banda Nakawa division Kampala district

2.1 Benefits of small scale enterprises on the development

The important economic contribution of SMEs has aroused significant interest from both international organizations and academic researchers whose goals include using public policies to trigger growth in SMEs, ultimately enhancing overall economic performance. Accordingly, since the 1970’s, many researchers have worked to establish an explanatory framework for the growth of SMEs, for, example Farouk and Saleh, (2010), established an explanatory framework for the growth of SMEs in Egypt. They argued that, despite the considerable attention paid to SME growth, to date very few theories have been able to adequately explain why some SMEs grow and others fail. They concluded that, the growth of SMEs is a complex phenomenon. Although it has gained vast academic interest, not a single model has been developed to date that can adequately explain why some SMEs grow and others do not (Farouk and Saleh, 2010).

SMEs Theory of Chinese on factors that affected the growth of township and village’s enterprises run by township and villages defined as collective at provincial by Biggeri et al., (1999). The paper examined SMEs theory and the role of human capital in the SMEs development. Following this, it analyzed the development of Chinese township and village’s enterprises and their role in the socio-economic development of rural areas and of the national economy. A panel analysis was then performed, using provincial panel data of Collective Township and village’s enterprises over the period 1986 to 93, in order to capture the major determinants of provincial growth. The results of the panel estimations highlighted some important features of township and village’s enterprises run by town and village sector, and provide empirical evidence in support to the positive role of clustering and human capital in the provincial growth of this sector (Biggeri et al., 1999).

Halim et al., (2011) they looked at the internationalization process of Malaysian SMEs and how it fits the internationalization theories particularly, Uppsala model, network approach and international new venture or born global theory. Findings indicated that all three theories were still applicable as not all SMEs that internationalized are born global in nature. Exporting was the most used mode of entry and increasing profit was the main reason for internationalization.

Small business management theory developed by Chittithaworn et al., (2011) stated that, SMEs characteristic, management and know-how, products and services, customer and market, the way of doing business and cooperation, resources and finance, strategy, and external environment are the factors affecting business success of SMEs in Thailand.

Alberto et al., (2013) developed a SMEs theory of planned behavior on what marketing for SMEs entrepreneurs, the need to market the marketing approach. The theory stated that, the adoption of the marketing approach is conditioned by entrepreneurs’ own conception of marketing, which may be substantially different from that proposed, in a paradigmatic way, by academics under different names that, is, the transactional, relationship existing between and among these SMEs, or inductional marketing. This implied that, the potential benefits for SMEs, coming from its adoption, rely upon what entrepreneurs really do when they think they are implementing a marketing programme (Alberto et al., 2013). Therefore the aim of this theory was: to shed light on SME entrepreneurs’ conception of marketing, in order to verify whether their interpretation differs from that proposed by marketing researchers, and to assess quantitatively the psychological determinants of the entrepreneurs’ intention (marketing technique) to adopt a marketing approach by applying a well-known model for predicting both human and organizational behaviors (Alberto et al., 2013).

Jones and Bartlett (2010) argued that, for any business with growth market strategies, the organization was attempting to gain more sales from existing market and alternatively native growth perspective might lead the firm to develop a new product or service that can generate sales from existing customers. Nguyen et al., (2010) argued that, Vietnamese government has mainly focused on increase the number of SMEs rather than improving the performance of SMEs and strengthening the business competitiveness.

2.2 Challenges faced by small and medium enterprises

Poor Infrastructure development

While the economic policy debate has gone through cycles of arguing for and against state intervention, the provision of infrastructure has always been regarded as one of the main tasks of the state according to Kikonyogo (2000). Kikonyogo (2000) further argues that the private sector can participate in making the infrastructure effective, but its regulation is above all a state function. The importance of this function has increased in recent years, because of the changing nature of competition in regional and global markets. Speedy and punctual delivery of manufactured goods has become a major parameter in the new competition. Kikonyogo (2000) further stresses that a well developed infrastructure – for moving goods from factories to ports and for rapid international communication significantly reduces the transaction costs involved in exporting.

According to Ankole Private Sector Foundation (APSF) 2010, Bushenyi district in general lacks a good road network in the rural areas for proper and efficient transport of agricultural and business products. Only about 40 per cent of the country has pipe-borne water, the provision of electricity is inadequate and very limited in rural areas. In spite of the huge investments in physical infrastructure in the recent past in water from Nyaruzinga and other areas, road expansion and constant road repairs on the tarmac stretch, the district still has very poor and inadequate facilities for industrial development (APSF, 2010). Save for the tea factories in Kyamuhunga and Mashonga trading centers together with the coffee factories (not value adding apart from removing husks) in Bassajjabalaba industrial area, industrial activities are still low and privately initiated (BDLG, 2011).

In order to foster the economic performance and competitiveness of small enterprises in the district, functional, high-quality basic infrastructure is required. An optimal physical and IT infrastructure includes a good, well maintained road network, a stable power supply and an extensive telecommunication network that business friendly. Overall it seems that while considerable progress has been made in reforming the regulatory and policy framework, there has been less progress in improving infrastructure (APSF, 2010).

The bureaucratic systems in registration of business

There is need for an impartial legal system according to Kauffmann (2005) that can help settle contract disputes, commercial law reform and drafting and clarifying land titles, as well as effective bankruptcy procedures that are vital for growth of the business sector. A country’s tax laws can either coax small businesses into the formal sector of the economy or keep them out of it. Governments should also make sure that they pay small enterprises promptly, since public contracts are vital to the financial security of these firms (Hill, 2001).

According to Kauffmann (2005), it’s often argued that, absolute and unfair commercial laws have increased transaction costs for small enterprises (more than for larger firms), thereby hampering their economic performance and competitiveness. However, in countries such as Mauritius and South Africa the legal system appears to be more developed and conducive to small enterprise growth and development.

An appropriate political or consensual environment requires a government’s mediating role in involving the main interest groups in the process of industrial restructuring to discuss problems, to reach commonly agreed action plans and to implement policy recommendations. An inter-institution networking approach creates an atmosphere of trust among the interest groups (Kauffmann, 2005).

Unfavorable government policies

According to Richards (2010), proper government administration in regard to policies is key for the better performance of small enterprises since it facilitates good policy formulation and implementation. He further asserts that centralized administration is a major challenge in the growth of small enterprises in Uganda since, regulations and policies have to be implemented by administrative institutions and authorities.

In many developing countries, bureaucracy has displayed a high degree of centralisation of resources and decision-making. Initiatives by local authorities to promote small enterprises activities are often stifled by a centralized decision-making process and lack of financial resources at the local level (David, 2011). This is followed by the problem of red tape. Procedures to comply with regulations such as registration, taxation, health and environmental regulations and procedures necessary to benefit from government incentives (Richards et al, 2010).

Poor management of financial records

Financial management plays a big role in the growth of small enterprises. Financial management involves all the activities like monitoring, control, budgeting and evaluation that enable an enterprise to obtain capital for growth, allocate resources efficiently, maximize the income potential of the business activity and monitor results through accounting documents. Such management requires a well-written, comprehensive financial management plan clearly outlining the assets, debts and the current and future profit potential of the enterprise (Bryan Ziegler, 1990). Note should be made to the effect that small enterprises hardly keep proper records that are crucial in directing business growth.

Proper financial management requires adequate financial control which Stonner (2002) defines (financial control) as the process of regulating an organization’s financial resources and activities such that actual performance conforms to the standards set.  Koontz and Heinz (2003), argues that the task of control is to make plans succeed; and normally control must reflect plans, and planning precedes control.  They further observe that a budget is a widely used device for managerial control, and argue that budgeting is the formulation of plans for a given future period in numerical terms. Mohsin (2002), also assert that financial control must complement financial planning, and that the control function is composed of four distinct phases i.e. determination of operational standards, evaluation of the enterprise progress in relation to pre-determined standards, investigation of organization financial function and taking corrective action in event of deviation, and lastly follow up actions by the executive personnel to ascertain whether corrective actions are effective.  Mohsin (2002) contends that the control function has to go hand in hand with coordination since the finance aspect affects almost every activity and department in an enterprise that the finance department has to coordinate various departments and activities by ensuring that financial information is availed to them so as to make consistent decisions in an enterprise.

Lack of uniform business management process

Over the years, the importance of business strategy in both large and small firms has been continuously emphasized in the strategic management. The business strategy comes from a well defined strategic plan which gives the vision, mission statement goals and strategic objectives of the enterprise. This helps to identify where the small enterprise is going, brings more individuals in the decision making process for the future of the enterprise through setting an organisational culture, proper change management, effective communication, problem solving mechanisms, team building, time management, motivation, and other aspects (Byaruhanga, 2005). Byaruhanga (2005) further states that strategic planning has got to give details on the short term, medium and long term plans of where the business is expected to be.

2.3 Relationship between small business enterprises and the growth of towns

In infrastructure planning, Ombura (1997) points that infrastructure networks are useful instruments within network economies. Infrastructure and related services help to make things happen, it feeds and it is fed by trade, it fuels foreign direct investment, it backs up the creation and sustainability of industrial clusters, it cuts costs and raises competitiveness. A spatial planning approach ensures the most efficient use of land by balancing competing demands within the context of sustainable development (Rozee, 2003). It becomes an ongoing, enduring process of managing change by a range of actors, in the interests of sustainable development (Tewdwr, 2004).

This makes efforts to promote industrial development extremely urgent and rural focused. Entrepreneurial and small and medium-sized enterprises (SMEs) firm performance is a complex, multifaceted construct that should be examined with an eye toward its complexity. Yonggui et. al. (2002) examined a set of internal and external factors/variables that may be critical to distinguish high-growth SMEs from those of poor performance. The study based on the relationship between factors and determinants concerning entrepreneur/top management team, firm characteristics, organizational strategies and external environment, and poor performance and high-growth performance in SMEs in China. Van de Ven (1993) emphasized that the process of entrepreneurship is not limited to the for profit sector; numerous entrepreneurial factors in the public and not-for-profit sectors play crucial roles.

It motivates one to examine the different roles played by these factors, and how their joint contributions interact to develop and commercialize a new technology. This in turn makes it possible to understand how the risk, time, and cost to an individual entrepreneur are significantly influenced by developments in the overall infrastructure for entrepreneurship. The small and micro enterprises (SMEs) play an important role in the Kenyan Economy. According to the Economic Survey (2006), the sector contributed over 50 percent of new jobs created in the year 2005. Despite their significance, past statistics indicate that three out of five businesses fail within the first few months of operation (Kenya National Bureau of Statistics, 2007).

According to Amyx (2005), one of the most significant challenges is the negative perception towards SMEs. Potential clients perceive small businesses as lacking the ability to provide quality services and are unable to satisfy more than one critical project simultaneously. Often larger companies are selected and given business for their clout in the industry and name recognition alone.

Many commercial banks in developing countries, particularly Africa, have tried to introduce M-banking systems to improve their operations and reduce costs. This has developed from the fact that bank branches alone are no longer adequate to provide banking services to cater for the needs of demanding customers. Therefore, the provision of banking services through mobile banking has provided an alternative means to acquire banking services conveniently and timely to bank customers (Amin et al., 2008). Consequently, mobile phone operators and banks have partnered to identify M-banking/M-payments systems as a potential service to offer customers. Financial institutions, which have had difficulty providing profitable services through traditional channels to poor clients, see M-banking as a form of “branchless banking”, which lowers the costs of serving low-income customers (Ivatury and Mas, 2008). For instance, in South Africa, banks are in partnership with mobile operators to offer mobile banking (mobile money) services. The mobile banking providers are making investments into the mobile banking infrastructure for effective provision of mobile banking service to the low-income market (Mobile Telephone Network (MTN) banking, 2009).

Chandler and Hanks (2004) argue that the model of growth indicate that performance is a function of ability, motivation and opportunity. The performance of a business founder is measured by the growth of the organization (Schein, 2007), which is in turn influenced by the environment in within which the organization emerges. Rosa et al (2006) also outlined four different measures of comparative growth of business, that is, primary performance measures (number of employees, growth in employees, sales turnover, value of capital assets); proxy growth measures (geographical range of markets); subjective measures (including the ability of the business to meet business and domestic needs); and entrepreneurial performance measures (the desire for growth, the ownership of multiple businesses).

CHAPTER THREE

METHODOLOGY

3.0     Introduction

This chapter presents the methodology which consists of the research design, area of study, study population, sample population and selection, sampling technique, data collection method, data quality control, data collection procedures and limitations of the study.

3.1 Research design

Qualitative and quantitative research designs will be used. the researcher will use the above methods because many aspects will be covered in the study concerning the topic of study, qualitative research method will be used because it collects information within a short time while quantitative will be through interview to cross check what has been given.

3.2 Study population and sample size

The studies will business people of Banda.

3.3 Sampling Design techniques

According to (Amin, 2005) sampling involves selecting a sample of the population in such a way that samples of the same size have equal chances of being selected.

3.3.1 Sampling Technique

Sekaran (2003) defines a population as the entire group of people, events or things that a researcher wishes to investigate.

The study will use purposive sampling, according to Barbie, (2001) Purposive sampling is one that is selected based on the knowledge of a population and a purpose of the study.

The study will use purposive sampling on all the respondents this is because purposive sampling helps the researcher to get specific information topic of study also because it will help the researcher get people who are well experienced and have enough knowledge about the problem under the study.

3.3.2 Sampling size

The sample will target 30 respondents that will be selected in a way that majority of the respondents are selected. While carrying out research, purposive sampling will be applied to the above different categories of respondents.

3.5 Sources of data collection

Source of data will be from both primary and secondary sources.

• Primary data

Primary data will be obtained from the questionnaires administered on the target respondents who include the business people of banda.

• Secondary sources

Secondary data is data which has been collected by individuals or agencies for purposes other than those of a particular research study. It is data developed for some purpose other than for helping to solve the research problem at hand (Bell, 1997). This will comprise of the literature related to the topic of study. Secondary data shall be obtained from, published articles, journals, News Papers, Text Books, publications relating to impacts of credit on the growth of small and medium enterprises.Secondary data will be sourced because it yields more accurate information than obtained through primary data, and it is also cheaper.

3.6 Data Collection Instruments

The major instruments for data collection will be questionnaires and interview guide. Surveys will be just one part of a complete data collection and evaluation strategy. The major method of data collection for the study will be the survey, which will be done using selected instruments like questionnaires. The questionnaire will provide respondents with ample time to comprehend the questions raised and hence, they will be able to answer factually.

3.6.1 Questionnaires

The questionnaire will be used to collect quantitative data. The researcher will administer the questionnaires to respondents in different respondents including, administrators, fiancé officers, and procurement staff, which will be designed basing on study objectives and questions. Respondents will read and write the questionnaires themselves. The questionnaires will be close ended and will be considered convenient because they will be administered to the literate and its anonymous nature will fetch unhindered responses.

3.6.2 Interviews

Qualitative data will be collected from the informants using interviews. The interview guide will be structured. This will be used since it’s the best tool for getting first-hand information /views, perceptions, feelings and attitudes of respondents. Both formal and informal interviews will be used to get maximum information from the different respondents to participate in the research.

3.7Data collection procedures

Upon receiving the University permission to carry out research, the area of study will be visited for purposes of familiarization.  The researcher will seek permission from administrators and once allowed to proceed with research, questionnaires will be issued and interviews will be carried out with the selected respondents.

3.8Quality control of data instruments

The instrument will be taken to the supervisor to check its correctness there after pilot study will be carried out to find out if it measures what it is meant to for.

3.8.1 Validity and Reliability

The data a collection tools shall be pre-tested on a smaller number of respondents from each category of the population to ensure that the questions are accurate clear and in line with each objective of the study.

3.8.1 Validity

It is the degree to which results obtained from the analysis of the data actually represents the phenomenon understudy, (Mugenda&Mugenda, 2003).  To ensure validity of instrument close guidance of the supervisor will be adopted. This will help to identify ambiguous questions in the interval and be able to re-align them to the objectives.

3.8.2 Reliability

Reliability tests and analysis shall be carried out.

3.9Data processing and analysis

The raw data will be coded, edited, and arranged ready for analyzing only completed raw data will be analyzed using statistical tables and graphs.

3.10 Limitations of the study

The researcher may face the following challenges in the course of the study;

• The researcher may not get enough time to interview all the respondents, but this will be solved by budgeting for the time appropriately.
• The researcher may also face challenges in language as other respondents may feel comfortable expressing themselves in local languages like luganda.
• Other researchers may ask for money from the researcher, this will not affect the study as the respondents will be persuaded that the research is meant for academic purposes

REFERENCES

Bryan Ziegler, 1990  U.S. Small Business Administration , financial management for the growing business. Indian Hills Community College Small Business Development Center Ottumwa, Iowa

Bushenyi District Local Government (2011).BDLG District Development Plan (2011-2016).

Byaruhanga Edger Walter 2010.Promotion of micro , small and medium enterprises through financial institutions, development initiatives Africa  . Wednesday 21st 2010.

Byaruhanga J.K. (2008); SMEsas a nucleus for Industrialization of Developing Countries, Paper Presented at the 35th International Small Business Congress, November 2008, Belfast, N. Ireland.

Céline Kauffmann (2005). Financing SMEs in Africa OECD development  center Policy Insights No. 7 Policy Insights No. 7 is derived from the African Economic Outlook 2004/2005, a joint publication of the African Development Bank and the OECD Development  Centre.

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Donald waters (2011). Qualitative methords for business,finance and performance, fifth edition. Ashford Press ltd Gosport

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Francis Heylighen and Cliff Joslyn   systems theory Prepared for the Cambridge Dictionary of Philosophy (Copyright Cambridge University Press)

Hall, Chris (2002). Entrepreneurship Densities in APEC and Europe: How many entrepreneurs should there be in China, or other developing economies? Small Enterprise Research,