Introduction
Entrepreneurship is widely considered an important factor in the search for development, competitiveness and sustainable success. Like many other developing countries, Tanzania has recognised the importance of entrepreneurship for economic development and poverty alleviation. Historically, Tanzania, after its independence, chose the path of socialism and self-reliance for national development. Along this path, almost all means of production and exchange were put under the direct control of the State. As a result, major businesses were nationalised and the government, through its parastatals, owned almost all the activities and investments that had previously been in the private sector. However, the nationalisation of the private sector led to poor economic results and to a number of macro-economic imbalances and, consequently, to an economic crisis that lasted for over a decade (Kanaan 2000). This crisis signalled a need for a movement towards a market economy. In the 1990s, the significance of the private sector to economic growth became very clear and was widely recognised; available data suggests that about a third of the Gross Domestic Product (gdp) originates from the sme sector (
urt 2003). Since then, a number of policies and programmes have been undertaken to strengthen and widen the role of the private sector in economic development. At the national level, Vision 2025 – National Strategy for Growth and Poverty Reduction (nsgpr) was established, a programme which emphasises the significance of the private sector as the engine of economic growth in Tanzania (
urt 2003). Unfortunately, despite the existence of various programmes, the outcomes of these efforts have generally yielded poor results with only a few smes managing to expand and develop. Most of the smes have remained at the micro level (Kinunda-Rutashobya and Olomi 1999; Olomi 2001). This phenomenon in Africa has been referred to as the “missing middle” (the lack of medium-sized enterprises, as smes can be categorised as micro, small and medium-sized firms) and this continues to be a long-term concern for African policymakers (Agyapong 2010).
Through a review of previous research regarding business development in Tanzania, we found that most of the studies regard firm performance as being significantly affected by external factors and firm characteristics. As a response to such findings, several initiatives and programmes in Tanzania are focusing on solving environmental problems, such as providing government assistance, examining the role of banks, and providing infrastructure and competition, while ignoring the individual running the firm. Though some of the issues addressed in these studies have changed, the performance of the sme sector has not yet been impressive. This suggests the need to further investigate the factors that influence sme growth from different angles. Owing to the crucial role played by individuals, several studies worldwide have acknowledged the importance of entrepreneurs for the development of smes. Accordingly, Kuratko and Hodgetts (2001) have proposed that the effectiveness of programmes aimed at the development of smes depends on a thorough understanding of the individual owner-managers. This is because the majority of smes are owned and managed by a single entrepreneur; thus, the entrepreneur is the one who makes important decisions concerning products, markets, motivation of employees, expansion plans and other strategic decisions concerning the firm (Von Gelderen et al. 2000). Thus, this leads to the possibility that a large proportion of the difference in performance among smes can be explained by the individual entrepreneurs (Shane 2007). The purpose of this paper is to analyse the challenges affecting entrepreneurship development in Tanzania. A qualitative study comprising of three case studies on Tanzanian smes has been conducted with the aspiration to describe the drivers of being entrepreneurs, drivers for sme development and challenges affecting their business performance.
Literature Review
Brief Overview of Entrepreneurship
The important role of entrepreneurs in economic growth is well documented. However, the precise meaning of the word entrepreneur is not clear (Amit, Glosten and Muller 2003; Kobia and Sikalieh 2010). The problem of the identification of an entrepreneur has been caused by the fact that there is still no generally accepted definition of entrepreneurship (Chell, Haworth and Brearley 1991; Kobia and Sikalieh 2010). The lack of an agreed definition has led to a variety of opinions regarding its meaning (Shane and Baron 2008). Indeed, various scholars have defined the terms entrepreneur and entrepreneurship differently. In the next section, an overview will be given of the development of the terms entrepreneur and entrepreneurship.
Who is an Entrepreneur?
The term entrepreneur comes from the French verb entreprendre, which means to undertake (Hebert and Link 1989). The first economist who is believed to have recognised the role of the entrepreneur was Richard Cantillon (around 1730; Kirby 2003). According to Cantillon, the entrepreneur is an individual who assumes a risk by buying at a certain price and selling at an uncertain price and bears the risk caused by price fluctuations in the market, with the difference being a profit or loss (Bridge, O’Neill, and Martin 2009). Cantillon saw the role of the entrepreneur as lying in the creation of entrepreneurial income through operating under conditions of uncertainty.
Later, Knight (1921) refined the Cantillon idea by distinguishing between the risk, which is insurable and the risk which is not insurable (uncertainty). He related insurable risk to recurring events whose relative frequency is known from experience, whereas uncertainty relates to unique events whose probability can only be subjectively estimated (Hebert and Link 1989). According to Knight (1921), uncertainty is the basic element and starting point when defining an entrepreneur. On this point, Knight (1921) considers an entrepreneur as a calculated risk-taker and the recipient of pure profit, where profit is seen as the reward for bearing the costs of uncertainty.
Schumpeter (1934) had a different approach and emphasised the role of innovation. Clearly, Schumpeter was the first author to draw attention to the central role of an entrepreneur in the innovation process. According to Schumpeter, the entrepreneur is an innovator who implements change within markets as a result of carrying out new combinations. In his theory of economic development, the entrepreneur does not invent things but exploits them by carrying out new combinations such as the introduction of new products or processes, identification of new export markets or sources of supply, or creation of new types of organisation (Carrasco and Perez 2008). Other scholars (e.g. Kirzner 1979) came up with other definitions of an entrepreneur. Kirzner (1985) considers an entrepreneur as someone who perceives profit opportunities and initiates action to fill currently unsatisfied needs. The author argues that the entrepreneurial process is always competitive and that an entrepreneur has nothing but his alertness (Kirzner 1979). For Kirzner, the role of the entrepreneur is to achieve the kind of adjustment necessary to move economic markets towards the equilibrium state.
Definition of Entrepreneurship
From the above definitions, it seems clearly that there is no agreed definition of an entrepreneur. As a consequence, there is also vagueness about a functional
From this mass of definitions, it is apparent that entrepreneurship is interdisciplinary in nature. And, given its nature, various theories or approaches can be used to gain better understanding of this concept (Kuratko and Hodgetts 2001). One way of understanding this concept is through the schools of thought from which entrepreneurship can be divided into specific activities (Cunningham and Lischeron 1991; Kuratko and Hodgetts 2001). The entrepreneurship schools of thought provide a means of examining the diversity of viewpoints about entrepreneurship (Hebert and Link 1989; Kuratko and Hodgetts 2001). These schools of thought illustrate what an entrepreneur does and what functions and processes are key (Kuratko and Hodgetts 2001).
Definition of smes
Like entrepreneurship, there is no single, uniformly accepted definition of smes (Storey 1994). Different countries define smes differently depending on their level of development. A study by usaid (1993) for example, found more than 50 different definitions. Although there are several definitions, a distinction can be made between quantitative and qualitative definitions. The former define smes based on quantitative characteristics, whereas the latter define smes based on qualitative characteristics. Within these two types, the quantitative definition is commonly used for defining smes, and often the definition is based on the number of employees, sales revenues/turnover, total assets and capital invested in machinery. The first three criteria are most widely used in defining smes. In support of this argument, usaid (1993) shows that the majority of countries use the number of employees or total assets to define smes. Accordingly, in the context of Tanzania, sme is a term used to refer to micro, small and medium-sized enterprises in non-farming activities, which include manufacturing, mining, commerce and services ( urt 2003). Furthermore, the number of employees and capital invested in machinery are the two criteria used to define smes in Tanzania. Subsequently, a micro enterprise is defined as a firm with fewer than five employees, whereas a small firm is a firm with 5 to 49 employees and a medium-sized enterprise is a firm with 50 to 99 employees. Any firm with 100 employees or more is regarded as a large enterprise (see Table 10.2). In the case where an enterprise falls under more than one category, the level of investment would be the deciding factor.
Definition of the Entrepreneur in this Study
There is no single uniformly accepted definition of the term Entrepreneur. In this study, the terms entrepreneur and owner-manager are used
Growth and Entrepreneurship
Several researchers have revealed growth to be an essential part of entrepreneurship, thus making the relationship between growth and entrepreneurship relevant. This link is very important, especially when the theory of the firm is considered, in which both entrepreneurship and growth play important roles. For example, Davidsson, Delmar, and Wiklund (2002) look more deeply into this relationship and identify the aspects of growth which form part of entrepreneurship and those which do not. Specifically, they argue that if entrepreneurship is defined as the creation or emergence of a new firm then growth is not formally part of the definition of entrepreneurship. But as most of these start-ups remain very small for their entire existence, it is wise to include aspects of early growth in the entrepreneurship definition (Davidsson, Achtenhagen, and Naldi 2007). It is further suggested that if entrepreneurship is defined as the creation of new economic activities and the like, then firm growth is an aspect of entrepreneurship which can be achieved through the introduction of new products and services. However, if growth is achieved through the acquisition of activities, which were already run by businesses, then growth is not an aspect of entrepreneurship (Davidsson, Delmar and Wiklund 2002). From these elaborations, it is then obvious that growth is an aspect of entrepreneurship if the term is understood as the creation of new economic activities.
The Concept of smes Growth
In discussing firm growth, it is important to firstly define the term. Growth refers to a change in size or magnitude from one period of time to another (Wiklund 1998). Furthermore, when it comes to the growth of a firm, the term growth has two meanings: it sometimes merely denotes a change in amount and, at other times, implies an increase in size or improvement in quality (Penrose 1959). Just as researchers have often noted the heterogeneity of entrepreneurship theories, they also assert that there is no single theory which can explain firm growth. Due to this dilemma, a large number of theories have been developed to explain aspects of smes growth. These theories can be distinguished according to the underlying assumptions they make about the growth process (Dobbs and Hamilton 2007).
For instance, O’Farrell and Hitchens (1988) are among the authors who have reviewed theories of small firm growth. They identified four main groups of theories: the static equilibrium approach, the stochastic model, the strategic management approach, and the stages model. The recent review of smes growth conducted by Dobbs and Hamilton (2007) classified the available approaches to the study of small business growth into six groups: stochastic, descriptive, evolutionary, resource-based, learning, and deterministic.
It can be argued that each of these theories consists of logical concepts and assumptions, but most of them consistently share the same theoretical perspective. For example, the commonly mentioned theory is that of a stages model which is based on showing several stages through which most organisations pass. A few examples include the three-stage models (Smith, Mitchell and Summer 1985), the four-stage models (Quinn and Cameron 1983) and the five-stage models (Greiner 1972; Galbraith 1982; Churchill and Lewis 1983; Miller and Friesen 1984; Scott and Bruce 1987). These multistage models use various organisational characteristics to explain organisational growth and development. Collectively, these models suggest that the organisation may progress sequentially through major steps of development (e.g. birth, start-up, survival, growth and maturity). For instance, Masurel and Van Montfort (2006) focused their attention on analysing the differences between the subsequent stages in the life cycles of smes in the professional service sector. Their results reveal that firms do change over the course of their lifecycles from start-up to maturity.
It has been observed that most of the theories that have theoretical firms as a point of departure have rarely proved to be accurate in the real sense of the word and, as such, they have added confusion in terms of understanding small firm growth (Ardichvili et al. 1998). Furthermore, none of these theories was
The inability of the existing theories in explaining firm growth has led researchers to look for a different approach (Davidsson and Wiklund 2000). One of the common approaches is to utilise some of the theories grounded in real world firm conceptualisation, called empirical firm theories, by Seth and Thomas (1994). For example, Ardichvili et al. (1998) classified empirical growth studies into two groups, namely: factors of growth studies and growth process studies. The former can be labelled as a deterministic approach, and the latter as an evolutionary approach. Davidsson and Wiklund (2006) categorised empirical growth studies into four groups, based on their underlying assumptions. Three groups belong to the deterministic approach while one group belongs to the process approach. Between these two approaches, the deterministic approach has gained popularity in entrepreneurship research. This approach focuses on identifying the set of explanatory variables relating to people, the firm and its industry that can explain firm growth (Dobbs and Hamilton 2007).
Determinants of smes Growth
The surveyed literature regarding the determinants of smes growth has shown that the factors that influence smes growth can be divided into internal and external factors (Dobbs and Hamilton 2007). External factors are those factors, which are outside the entrepreneur’s control. On the other hand, internal factors relate directly to the entrepreneur and to specific firm characteristics.
Empirical Research on smes Growth
A number of studies have attempted to develop and test different factors that influence the performance of smes. For example, Davidsson (1991) developed a model of small firm performance in which the actual growth is seen to be the function of ability, need and opportunity. His findings suggest that need,
Challenges Faced by smes
Despite this acknowledged importance and sme contribution to economic growth, smes across the world and in Tanzania in particular, are still faced with numerous challenges that inhibit their business survival and performance. In support of this, previous studies (e.g. Muhammad et al. 2010; Foon et al. 2006) have identified various challenges facing smes in the World. These include low productivity, lack of managerial capabilities and financing, technology, heavy regulatory burden, and lack of access to formal business. According to Naicker (2006), problems experienced by smes can be categorised according to the nature and stage in which smes are currently in. Those constraints can be categorised as formal, informal, economic and others across different stages. The framework which identifies sme development trends based on an analysis of 35 empirical studies on constraints facing sme development in transition countries, found that more fundamental barriers in early stages are related to legal issues while more specific constraints related to human resources, and skill development characterise at later stages. Furthermore, researchers found that three formal constraints, taxes, policy instability and legal regulations, form a barrier for business development throughout the stages. This confirms a previous study conducted by Benzing, Chu, and Kara (2009) in Turkey, which found that the most serious problem facing entrepreneurs is confusion and complex tax system. In the same way, studies conducted in Africa argued that the principal challenges facing smes include difficulty in accessing start-up capital, stringent credit conditionality, high interest rates on credit, inadequate government support for smes, the added expenses of corruption and bribery, a weak economy, limited access to financial capital, an inability to hire reliable employees, and too much competition (Gray, Cooley, and Lutabingwa 1997; Ivy 1997; Kiggundu 2002; Benzing, Chu, and Callanan 2005; Chu, Benzing, and
Apart from sme funding and access to finance, the gem Reports (2001–2010) noted that South African smes suffer from poor management skills, which is a result of a lack of adequate training and education. In addition, Tushabonwe-Kazooba (2006) revealed that poor record-keeping and lack of basic business management experience and skills are major contributors to failure of small business. In fact, Ogunjiuba (2004) observed that several small-scale enterprise operators are highly proficient in their technical field but are less well experienced in managerial competence. This may be part of the reasons for the longevity in their backwardness. Mbugua et al. (2013) found that (in)adequacy of availability of finances, good or poor business management skills, good or poor marketing and entrepreneurial attributes of the owner managers were statistically significant in determining growth or lack of growth of these enterprises.
In Tanzania, smes are faced with unique problems including heavy costs of compliance resulting from their size. Other constraints include insufficient working premises and limited access to finance. In addition, Business Development Services, namely services related to entrepreneurship, business training, marketing, technology development, and information are underdeveloped and not readily available ( urt 2002). On the other hand, sme operators lack information as well as appreciation for such services and can hardly afford to pay for the services. As a result, operators of the sector have rather low skills. Also, there is no umbrella association for smes. At the same time, the institutions and associations supporting smes are weak, fragmented and uncoordinated partly due to lack of clear guidance and policy for the development of the sector ( urt 2002).
This exploratory study focused on micro and small wood furniture manufacturers in Tanzania. The exploratory case studies were conducted in Dar es Salaam city and involved three owner-managers. The choice of the sector was based on their predominance in the micro and small manufacturing sector. Furthermore, this sector is not very import-dependent because most of the raw materials used are found in Tanzanian forests (Harding et al. 2002). Dar es Salaam City was selected because it is the largest commercial city in Tanzania, with more than 3 million people and most of the smes in this region. The three firms used for this study were purposely chosen on the author’s judgement of how well the firm related to the topic in question. Three criteria were used in trying to find suitable interviewees by the author’s own judgement. These criteria are: the respondent has to be an owner-manager, the firm is considered to be successful, the awareness of the respondent in the area under study. In this study, we define a successful business as one that has been able to increase its firms’ assets and sales since its establishment.
The main source of primary data was in-depth interviews with three owner-managers of wood furniture manufacturing. The interview guide consisted of the following set of questions: owner-manager’s personal demographic information, reasons behind establishment of the current business, firm specific factors, drivers for the firm’s success and challenges affecting business performance. The interviews lasted between two to three hours. Data analysis was qualitative, consisting mainly of making summaries and tables according to key issues and themes.
Findings
Personal Demographic Information of Owner-managers
As shown in Table 10.1, the age of entrepreneurs range from 31 to 44 years. One owner-manager is a primary school leaver, one is a secondary school leaver, and one is a degree holder in Forestry Management. Moreover, the findings indicate that all owner-managers sampled have attended vocational training (carpentry education), offered by various colleges in Tanzania. Owner-managers in the case show a wide range of experiences. Two owner-managers had entrepreneurial experience prior to starting their current business. Likewise, all of them had managerial and industrial experience prior to starting their current business. All the owner-managers interviewed in the study are married
All firms sampled were established more than ten years ago. With regard to their legal framework, the results revealed that all smes interviewed operate as limited liability companies.
The three owner-managers are running their business by themselves, working full-time in the business, and are the primary decision makers in their own business.
Motivation for Starting a Business
The motivation for the interviewed owner-managers to start a business varied from need for independence, to make a living, to increasing personal income. One respondent felt that he enjoyed working better in his own business than working for somebody else. Another owner-manager had been pushed to starting a business because it was the only way he could survive. On the other hand, another respondent started a business because he was dissatisfied with the salary he was getting from his previous employment. These motivating factors are not dissimilar to those given by researchers in both developed and developing economies (Mitchell 2004; Swierczek and Thai 2003; Kirkwood 2009; Isaga, Masurel, and Kees 2015). For example, Respondent Juma explains the motivation for starting a current business.
Juma is a graduate who comes from the Songea region in Tanzania. While studying, Juma also worked as a part-time employee in his uncle’s carpentry business. After finishing his Bachelor’s degree, Juma got employed with a banking firm for five years before starting his current business. During the interview, Juma started to say that the main reason for starting his current business was the desire to be independent and to do the work he wanted to do most. Juma further noted that having been involved in the wood furniture business from the early age of ten to 23, he knows what the business environment is in that industry. Juma was convinced that before entering into that business he needed to investigate why foreign wood products are cheaper than local products and to raise some capital for his potential businesses. After his research, Juma decided to look for a paid job so that he could raise some money before starting his current business. While working at the bank, Juma managed to buy some wood works machines and save some money for starting his current business. Juma started his business while he was still working with the bank. However, organising and managing the firm next to his job in the bank became increasingly complicated and after three months he decided to quit the paid job and started working full time on his current business. Currently, the firm produces wood furniture and it is situated in a busy area in Dar es Salaam. The firm has an open workshop including a number of heavy sawing machines. The company also saws wood and parts for other furniture producers, as a paid service. The firm has also opened two showrooms in Dar es Salaam. The firm currently has fifteen workers. Three out of the fifteen have fixed employment contracts. His goal is now to expand the business and lay the groundwork for exporting the products.
Drivers for sme Development
My business is growing, expanding to be more precise. It has been eleven years since I started out and I already own two workshops and one show room.
Hamisi started his business in Dar es Salaam in 2001 as a sole proprietor with a retail shop selling a variety of items. He moved to self-employment after completing secondary school education. After making a reasonable profit, in 2005, Hamisi decided to move into the furniture business because the money in circulation in the furniture industry was higher than in the retail shop. He further argued that when you sell one wood furniture product the profit you make is far better than the profit you could be making in a retail shop for a month. The furniture business started to expand after winning a tender to supply office furniture and students’ desks to ten primary schools. The profit obtained from the tender was partly injected in the business and some was used to buy 20 acres of trees. He also employed his wife as an assistant manager and he employed one full-time employee. Since 2010, despite some ups and downs, the demand for his products has been increasing significantly. With the loan, profits and savings, the owner managed to buy three large machines and five small hand machines and moved to a larger premise. The machines enabled him to produce furniture faster, and of higher quality than his local competitors. On the other hand, the larger premise enabled him to accommodate the expanded stock and machines.
In summary, the research shows that the firms interviewed had grown or developed in some way, and that there was a significant increase in the number of employees and firms’ assets from their start-up. Significantly, the findings also show that most of those employed were on permanent contracts. There are also signs that as the business develops, owner-managers make improvements in the benefits they put in place for employees, and increasingly they recognise the value to the business of putting these benefits in place.
Moreover, self-determination, creativity, passion and respect for business were at least mentioned by all owner-managers interviewed as major driver for their success. Other success factors include the desire to fulfill family responsibilities, having more customers and trust.
Challenges Affecting Their Business Performance
There are a number of challenges that affect the development of the wood furniture business in Tanzania. From the interviews, lack of access to finance, international competition and cheap imports, a problematic business environment, unreliable power supply and poor infrastructure were perceived as major factors affecting the performance of wood furniture enterprises in Tanzania.
Previous studies (Gray, Cooley, and Lutabingwa 1997; Ivy 1997; Kiggundu 2002; Benzing, Chu, and Callanan 2005; Chu, Benzing, and McGee 2007) have also noted the lack of access to external finance to be a major constraint to smes.I have seen how external financing affected my Uncle’s business and I don’t want to lose control of my firm or be burdened with the risk of debt or lose my house and put all my family in pressure because of the debt. I am comfortable to fund my firm’s expansion through internal funds.
The effect of societal norms and practices regarding low-level trust between small sme owner-managers and customers in business operations were also cited to be among the challenges facing owner-managers. For example, the owner-managers were of the opinion that Chinese products that are exported to Africa are of low quality and lack durability. But he wonders why Tanzanian clients buy this lower quality Chinese furniture at a much higher price. From this finding, it is obvious that owner-managers of furniture enterprises in Tanzania faced challenges related to the imported wood products. This is in line with the study conducted by Urban and Naidoo (2012) who both found that the“And because of the imported furniture it is more difficult to get orders from the government offices. Most government agencies prefer imported furniture.” The owner wonders why the government is buying imported instead of local products – “people from the government usually say that they will buy furniture from Tanzania but I have never seen them actually buying local furniture.”
Furthermore, the survival and performance of the smes may also be constrained by environmental challenges such as an unfriendly business environment, government’s legal and regulatory framework and developments in the wider economy. Regarding the business environment, the owner-managers were of the opinion that the business environment is not conducive for them to run their business successfully. In fact, the owner-managers blamed the government for not playing its part on making an enabling environment to entrepreneurs. To them, they find the government to be more of a bottleneck than a support agency to entrepreneurship development in Tanzania. One of the respondents further noted that
- – “Most of the time when government officers come here, they are coming for their official issues. For example, an official from the municipality is interested in business registration or tax collection, a representative from the Ministry of Natural Resources is interested in inspecting the wood.”
- – “I never see government officers coming here to talk or ask how the business is going or what problems I am facing.”
- – “several times we have complained to the Tanzanian government about the high interest rate which is charged by commercial banks and asked the government to establish a venture capital agency, which will enable the majority of us to secure external finance at reasonable rates but in vain.”
Moreover, owner-managers who have been interviewed had difficulties in accessing modern equipment, appropriate technologies, and access to the international market.
Conclusion and Recommendations
The purpose of this paper was to investigate the challenges affecting entrepreneurship development in Tanzania. A qualitative study comprising of three case studies on Tanzanian smes was conducted with the aspiration to describe the drivers of being entrepreneurs, drivers for sme development, and challenges affecting their business performance. The findings suggest that the motivation for the interviewed owner-managers to start a business varied from their need for independence, to make a living, to increasing personal income. The findings also suggested that lack of access to finance, international competition,
• Owner-managers
To minimise some of the challenges experienced by owner-managers of smes, as revealed by this study, owner-managers should participate in networking discussions where they can share their experiences on business success and the challenges they are facing to run their businesses. Furthermore, smes are recommended to attend entrepreneurship and financial management training so as to enhance their competencies.
• Government
The business environment needs to be one that will foster the growth of smes including the wood furniture business. However, the policymakers need to understand the business environment, which should be conducive to smes. Based on the findings, some of the issues that need to be addressed include the legal and regulatory framework, cheap imports and financial incentives to smes. Regarding the cheap imports the government should concentrate on creating policy and regulations that will promote products that are produced locally and encourage small firms to grow. The government should also develop a financial scheme that protects smes from high interest rates.
• Stakeholders
This study noted that some non-governmental organisations are doing a commendable job in promoting smes. However, most of these organisations are rather weak, concentrated in urban areas and uncoordinated. This calls for linkages of the institutions supporting smes.
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