Factors affect the technical efficiency of micro and small enterprises in Ethiopia

Abstract

Micro and small enterprises (MSEs) play a crucial role in Ethiopia's economy. Measuring the technical efficiency of enterprises is thus of interest to various stakeholders. This study measured and estimated technical efficiency using a stochastic frontier and a maximum-likelihood approach to measure factors that determine the efficiency of enterprises. The study relied on primary data from a sample of operators collected through survey questionnaires. A multistage sampling technique was utilized to select respondents, and cross-sectional data were collected from 357 operators. The results show that operators’ technical efficiency is roughly 72.3%, indicating that with existing technology, there is room to raise efficiency levels by an average of 28.1%; other factors remaining constant. The results from maximum likelihood estimation show that education level, experience level, initial investment, business plan, government support, MSE location, and motivation significantly and negatively affect technical inefficiency. In contrast, variables like other sources of income affect technical inefficiency positively. The study suggests that governmental support is crucial, with an emphasis on providing sufficient initial funding. Moreover, there is a need to offer training in business plan development and to facilitate an increase in educational standards. Additionally, careful consideration should be given to selecting optimal operational locations.