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Abstract
This paper explores the determinants of debt financing choices among small-scale manufacturing enterprises in Ethiopia—with special focus on the role of government policies. The study exploits survey data gathered from 1321 enterprises in the Amhara region of Ethiopia and employs conditional mixed process (CMP) system estimation technique to test the effect of public policy on firm debt levels. The relevant econometric findings confirm that policy activism through the provision of training and related intervention schemes boosts debt utilization in startup finance mix while it lowers the probability of firms' falling into higher debt levels over time. The results also show that enterprises that had some debt mix in their startup capital are more likely to be in higher debt categories than those enterprises that kick start exclusively with their own internal resources. In addition, the findings also reveal that self-reported profitability, firm age, and ownership structure have strong effects on the degree of firms’ indebtedness. One major bottleneck to the survival and growth of SMEs is their relatively large default rates. One strand of the existing literature shows that firm default rates are strongly correlated with debt levels. As default rates driven by high debt levels have devastating implications for creditors, debtors, and regulators, it is very important to understand the determinants of debt levels. This study is the first to apply conditional mixed process system estimation on firm level data from Ethiopia to test the effects of government policies on debt level choices.
Highlights
The contribution of small-scale enterprises to gross domestic product (GDP) is higher than that of big companies and small and medium firms constitute the majority of business establishments in developing economies (Bas et al, 2009; Ayyagari et al, 2011)
The relevant econometric findings confirm that policy activism through the provision of training and related intervention schemes lower the probability of firms' falling into higher debt levels
The results show that enterprises that had some debt mix in their startup capital are more likely to be in higher debt categories than those enterprises that kick start exclusively with their own internal resources
Summary
The contribution of small-scale enterprises to gross domestic product (GDP) is higher than that of big companies and small and medium firms constitute the majority of business establishments in developing economies (Bas et al, 2009; Ayyagari et al, 2011). Over the past couple of decades, the government of Ethiopia has given considerable attention to small-scale enterprises in general and to manufacturing firms in particular as an important instrument of poverty reduction and job creation in urban areas. In the second Growth and Transformation Plan (Ministry of Finance and Economic Development of Ethiopia, 2010) the government of Ethiopia envisaged the GDP contribution of small and micro manufacturing establishments to rise from 1.1% in 2014/15 to 2% by 2019/20. The new ten year economic development plan for 2021–2030 aims at creating 2 million micro enterprises of which 10% to be promoted to small-scale and 1% to medium-scale manufacturing enterprises in order to enhance their contribution to employment and industrial development over a ten year period (Planning and Development Commission of Ethiopia, 2020)
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