The Role of Subsidy on the Growth of SMEs

The Role of Subsidy on the Growth of SMEs
BIRU, Ashenafi Gebremichael
Issue Date
KDI School of Public Policy and Management
The Ethiopian economy can be largely characterized as an agrarian economy. In spite of the fact that the economic growth performance was poor in the past; the country is experiencing strong economic growth at the current time. The Ethiopian government has drafted and implemented different strategies and programs in line with a poverty reduction program. Especially in accelerating the industrial transformation process, reducing unemployment and alleviating poverty, the government considered SMEs as the strategic sector by recognizing that SMEs play significant role in stimulating business, creating employment and encouraging innovation which is a base for industrialization. In Ethiopia, the SME sector is the second largest employment-generating sector following agriculture. The active development of the sector depends on the participation and integration of a wide range of actors in an equally wide range of support areas. These range from self-help activities of groups of small enterprises themselves and the abolishing of regulatory obstacles and strong support and subsidy by federal or regional government. However, in some situations, the support and subsidy for SMEs becomes the determining factor in weakening them and make them more dependent. The major question is whether subsidizing SMEs really helps them to be strong in their business operation and enables them to play a vital role in accelerating the industrialization process or not. The study comes to conclude that the support by the government is more at the lower level of enterprises. But, when the enterprises grow the support decreases accordingly. Thus, as the SMEs have not any incentive to grow, they prefer to stay small rather that grow to medium or large enterprises and this results dependency and inefficiency in the operation of SMEs.
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Master's Thesis (2013)

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