Challenges for entrepreneurship development in rural economies: the case of micro and small-scale enterprises in Ethiopia

ABSTRACT

The question of why some small businesses survive and become profitable while others exit the market continues to attract attention. This study analyzes the role of the institutional environment and business formation process in entrepreneurial activity (defined by total early-stage entrepreneurial activity rate) in the context of a high populous and low institutional trust environment. We find that the government's involvement in entrepreneurship through direct support programmes, differential incentives for enterprises engaged in different sectors, and to achieve social goals and political pluralism may reduce entrepreneurial activity. Also, support programmes aimed at promoting the formation of Micro and Small-Scale Enterprises may encourage the entry of entrepreneurs lacking a business strategy that takes into account risk-return tradeoffs. By focusing on the business formation process, this study adds to the debate on the implication of government intervention programmes in entrepreneurship and small business development.