ARBA MINCH UNIVERSITY

SCHOOL OF POST GRADUATE STUDIES

MBA PROGRAM

Group Assignment for Entrepreneurship and Innovation (651)

ON
Challenges and Opportunities Cottage Industries
GROUP MEMBERS

Name ID No.
1. Iyasu Samuel PRBE/042/11
2. Mesfin Sakato PRBE/061/11
3. Negash Fantahun PRBE/066/11
4. Mengistu Markos PRBE/056/11
5. Samuel Bekele PRBE/070/11
6. Mahedre Zenebe PRBE/047/11

Submitted to Prof. Antony Dhason, Ph.D.

January 2019
 Table of Contents
INTRODUCTION ...............................................................................................................................................2
Background of the Study.................................................................................................................................2
Scope of the Report ........................................................................................................................................2
Objective of the Report...................................................................................................................................2
Limitations of the Report ................................................................................................................................3
Small and Cottage Industry .............................................................................................................................3
THE STATE OF COTTAGE INDUSTRIES IN ETHIOPIA.........................................................................................3
RECENT DEVELOPMENT TRENDS OF THE SECTOR ..........................................................................................4
Challenges of Cottage Industry .......................................................................................................................5
Figure: 01, Process of marketing tool .......................................................................................................10
OPPORTUNITIES OF COTTAGE INDUSTRIES ..................................................................................................11
Some cottage industries photos in Ethiopia .................................................................................................15
CONCLUTION.................................................................................................................................................16

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 Challenges and Opportunities Cottage Industries

INTRODUCTION
Ethiopia is predominantly agriculture base and has limited industrial output and exports. The
cottage industry sector in Ethiopia is a huge contributor to the country’s economic growth. The
country faces severe competition in the world market to maintain and develop its trade and balance
of payment in its favor. The economy is not strong, as the industrial infrastructure and output are
not enough diversified. The problems of ensuring primary energy services are of prime importance
to industrial consumers. The Government of Ethiopia has taken steps to facilitate the
industrialization in Ethiopia. The paper addresses the prevailing problems, prospects and challenges
of small and cottage industry in Ethiopia. The move also defines the country's growing women
entrepreneurs for the first time.

Background of the Study

Thus, there are many opportunities in small and cottage industry field but there are some issues,
which become the barrier of it. Correction of this may allow doing business in this field and Ethiopia
can increase their economic growth as well. This study will show the opportunities and the
challenges of small and cottage industry.

Scope of the Report

Economic development generally refers to the quantitative and qualitative changes in the economy
to promote the standard of living and economic health of a specific area. This report focuses on the
role of small and cottage industry in economic development. We have identified various factors of
economic development on which the cottage industry is contributing a lot. To explain it we have
collected primary data through the structured questionnaire. This report also discusses the
opportunities and challenges associated with small and cottage industry.

Objective of the Report

The present study focused on the current condition of small and cottage industry and the challenges
faced by them in Ethiopia. What kind of opportunities, priority, and facility will they have? These
are the specific objective of this report.

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 Limitations of the Report
A collection of data is from secondary sources, there is a limitation in this report. We focused
basically, the Small and Cottage Industry sectors and the importance of these sectors. The study
evaluated present scenario of challenges and opportunity of Small and Cottage Industry sector in
Ethiopia. This study does not use any hypothesis and model for analyzing the present scenario and
challenges.

Small and Cottage Industry

A cottage industry is a small-scale industry often operated out of a home, rather than out of a
factory. Cottage industries are defined by the amount of investment required to start, as well as the
number of people employed. They often focus on the production of labor-intensive goods. Small
Industry can be both service and manufacturing. According to the new definition, in the case of
manufacturing, a medium-size industry/enterprise will be those with assets worth Birr 10 Million
to Birr 30 Million (excluding land and factory building, but including replacement value) or 100 to
250 workers. In both services industry and businesses, the medium enterprises will be those, which
employ 50 to 100 workers and have assets worth Birr 1 Million to Birr 15 Million (excluding land
and factory building). The circular said if a business fits into one of the criteria of a large industry,
it is considered as a large industry, even if it were other yardstick features of a medium one.
Cottage industry is a small-scale industrial unit run by the members of the same family either on
full or part time basis. Its maximum number of workers should be limited within 20; it uses
indigenous technology and not run by the power. If it uses power-run machinery, the maximum
number of workers should be ten. The NATIONAL BOARD OF REVENUE (NBR) considers the cottage
industry as an industrial unit run by a maximum of 50 workers using local skills without adopting
power-run mechanical equipment.

THE STATE OF COTTAGE INDUSTRIES IN ETHIOPIA

To start with, any attempt towards making a meaningful examination of the cottage industrial sector should
consider the policy environment under which then it had been operating in the past decade or so. Industrial
development was pursue along the expansion of large-scale public industries while the expansion of cottage
industries was deliberately suppress. In line with its socialist ideals, the previous government issued laws
and regulations, which deliberately suppresses privately owned small-scale industries. Investment was
restricted to certain areas of activities. Excluding building and land development costs, allowable private

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sector investment in cottage industries was no more than Birr 500,000. In addition, a one-man-one license
principle was in force. A number of discriminatory mechanisms in project financing, foreign exchange
allocation and raw material rationing were also applied. The combined effect of this policy environment is
obvious. Although it has not been able to shadow the dynamism of the sector altogether, the policy
instruments of the past government have hampered the rate of development of small- scale industries in the
country. In fact, the misguided policy of the past has restricted the domain of private initiatives only to
cottage industries, so much so that private and small used to be identified as one and the same.

The economic policy pursued by the government has hampered the expansion and growth of small-scale
industries in the country. As a result, cottage industries characterized by low level of development,
contributing no more than 3.8 per cent of GDP, 25 per cent of manufactured value added and 6 per cent of
the export trade of the country. If the share of cottage industries and grain mills is left out, their contribution
is even lower. The nature of output of cottage industries as well as that of the large-scale manufacturing
sector indicates that industrial development in Ethiopia is still at the first stage of import substitution. In
terms of employment, the contribution of the sector in 1984/85 was about five persons per establishment.

This situation may be explain by the fact that the survey included cottage industries employing one person
or more. Only 25 per cent of the establishments covered by the survey employed ten or more people. The
low export performance of the cottage industrial sector reflects the apparent lack of encouraging industrial
exports, which appears to be paradoxical for a country like Ethiopia.

RECENT DEVELOPMENT TRENDS OF THE SECTOR

In the preceding section, an attempt to make to give a bird’s eye view of the cottage industrial sector using
available information. In this section, the development trends in the last few years briefly presented.

The composition of output, which will remain dominated by the food industry in the near future, implies that
private investment in the cottage industrial sector is still imitative rather than innovative. Nevertheless, it
appears that a new class of entrepreneurs having the technical know-how and experience as well as the will
to enter into innovative and skill-intensive manufacturing activities is emerging. A few enterprises started
building machines and providing engineering services on their own initiative without any outside support.
Indeed, such enterprises can be the basis of industrial development in Ethiopia if they are supported and
encouraged.

To realize the benefit of this dynamic potential, adequate incentives and technical assistance by way of
design, prototype development, industrial training, etc. need to be given to such enterprises to enable them
develop into modem large-scale operations. The trend observed in the past few years does not only indicate

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the emergence of a new class of entrepreneurs but also shows that the country has private entrepreneurs
willing to invest whatever amount of capital they have even at times of political uncertainties.

The future industrial development of Ethiopia may be hampered not by the lack of willingness to invest in
industry but by lack of the means of investment. The fact that, of the total 2,355 investment proposals, only
two undertakings would require over Birr 10 million and that 96 per cent of them require no more than Birr
1 million signify that the generation of capital for industrial development would be the challenge the country
may face in the near future.

Challenges of Cottage Industry

The problems affecting cottage industries are many and diverse, ranging from lack of conducive policies to
day-to-day operational constraints. It is not possible to treat all of the problems in a small paper like this.

I. Lack of Adequate Capital:

Insufficient of capital can cause failure to a business. Sometimes it has become very
hard to manage the capital for cottage business for a single person.
II. Weak Investment Base:
If the investment base is weak, it will become very hard for the business run it properly.
A weak investment base is like the weak foundation of a building.
III. Insufficient Infrastructure:
For the basic physical and structured facility, a well infrastructure is must for a business
to operate. Insufficient infrastructure can lead a business to the failure.
IV. Lack of the Technological Knowledge :
In every sector of small and cottage industry business, they need well skilled technical
employee and the knowledge of technology to take the business in the next level. If this
knowledge and skill is less known in the business, it will become hard to stand still in
the end of the market.
V. Lack of Adequate Resources:
If we establish a business in a specific area, where resources are tough to get or the raw
materials of the product is rare, there will be complication to produce the product and
may create problem as well.

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 VI. Shortage of Energy:
Market failure is possible when monopoly manipulation of markets occurs. A shortage
can develop due to industrial actions like union organization strikes and government
embargoes. The cause may be over-consumption, aging infrastructure, choke point
disruption.
VII. Unskilled Human Resources:
As our country is not that much literate, the amount of skilled employee is very few.
For running, a business technical and educational skill is necessary.

VIII. Political Instability:

In political instability, doing business is very tough. Political unrest and political
pressure into the business may kill the existence of the business.
IX. Labor Unrest:
Sometimes labor unrest occur when they demand something that may increase cost of
the organization and the organization do not agree on their demand. Thus, labor do
strike and raise the conflict between the owners and the labor.
X. Limited Access of Credit from Bank:
Bank do have some limitation of giving access of credit. They have some rules and
regulation, which has set by the Commercial Bank of Ethiopia, the mother bank of
Ethiopia. Other bank do not have the permit of braking their laws.
XI. Competition from Dumped and Smuggled Imports:
Exporting goods at prices lower than the home-market prices. In price-to-price
dumping, the exporter uses higher home-prices to supplement the reduced revenue
from lower export prices. In price-cost dumping, the exporter is subsidize by the local
government with duty drawbacks, cash incentives, etc. Smuggled means,
to import or export goods secretly, in violation of the law, especially without the
payment of legal duty. This type of product have low price instate of other product,
which is become competitively tough for the business.
XII. Lack of Adequate Law and Order Condition:
Small and cottage industry have their own laws and order condition but many of the
business owners do not know the laws, which has to be maintain strictly.

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 XIII. Growing Incidents of Crime and Extortion:
The vast level of increasing crime and extortion can bring problem into the business.
This one kind of challenge for the business to stand still.
XIV. Absence of Effective and Transparent Legal System:
Our business legal system is very poor and less effective. Breaking of the laws in the
business should be punish but in our country because of the corruption, legal system is
not effective for all.
XV. Financial Constraints:
Restriction of the finance is another challenge of the cottage industry business. Without
finance, we cannot do business accurately.
XVI. Rigid Collateral Requirements:
Rigid means, which is not flexible and collateral, is a property or other asset that a
borrower offers as a way for a lender to secure the loan. If the borrower stops making
the promised loan payments, the lender can seize the collateral to recoup its losses.
Since collateral offers some security to the lender should the borrower fail to pay back
the loan, loans that are secured by collateral typically have lower interest rates
than unsecured loans. This requirements occurs when someone need funding for
business. As it is not that much easy, it is a challenge for small and cottage industry
business.
XVII. High Interest Rate for Bank Loans:
The high interest rate of bank loans, increase the cost of the business and if they fail to
gibe instalment of the interest rate of the loan in the due date, extra charge will add
with the interest.
XVIII. Export and Import Delays in Ports and Customs:
For some internal and external issues, the delivery of the exported or the imported
goods faces delay in ports and customs and it is a big challenge for the small and cottage
industry business, in the case of deadline projects.
XIX. Below Capacity Utilization:
Capacity utilization is a measure of the extent to which the productive capacity of a
business is being use. It can be defined as, the percentage of total capacity that is
actually being achieved in a given period.

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 XX. Lack of Appropriate Production Facilities:
The reason of unappropriated facilities of production is unskilled human resources and
the lack of technological knowledge.
XXI. Lack of Modern Technology and Information:
Lack of modern technology and information can drag the business strategies
ineffective.
XXII. Lack of adequate Investment in Small and Cottage Industry Entrepreneurs
Development:
Insufficient investment will discourage the entrepreneurs to do business in the small
and cottage industry. Investment in business is like giving life to the business.
XXIII. Non-availability of Raw Materials and Trade Information:
Doing business in the small and cottage industry will become challenge if the
availability of the raw materials are rare. Lack of the knowledge of trade information
is like walking in the road blindly.
Production and operation of business will get unorganized and production level will
goes downward because of the lack of skilled technicians and workers.
XXIV. Lack of Knowledge about Marketing Technique:
Marketing technique is a process, which increase the amount of sell as well as profits
and lack of this technique will decrease the sell and profits.
XXV. Lack of Research and Development Facilities:
There is a huge lack of research and development facilities, in small and cottage
industry. If there is enough research and development facility, we will able to find the
gap between the market and the consumers.
XXVI. Inadequate Human resource Development Program:
Human resources development program is not sufficient for the small and cottage
industry sector.
XXVII. Absence/Insufficient of Capital Support :
Insufficient of capital support can kill the opportunity of the small and cottage industry
business.

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XXVIII. Inadequate Policy Reforms and Illegal Imports & Non-Tariff Barriers:
Non-tariff measures include a very diverse array of policies that countries apply to
imported and exported goods. Thus, it has some barriers, which is tough for business
strategies. Inadequate policy reforms does not have market-oriented positive payoffs
and policy circles and illegal imports means, the import of goods without duty fee or
tax.
XXIX. Lack of Appropriate Infrastructure Facilities:
It means the shortage of power resources facilities, as most of the company needs water,
electricity and gas as a raw material and these are the essential component of products
as well as important element for companies. Lack of these infrastructures can harm the
cottage industry business.
XXX. High Employee Turnover:
Employee turnover has a direct impact on company revenue and profitability. For
example, according to the "Organization Science" magazine, the estimated cost of a
lost employee earning 8 birr per hour at a retail chain store is 3,500 birr to 25,000 birr.
Aspects contributing to this include hiring expenses, training labor, lost sales and
productivity.
XXXI. Lack of Information:
Lack of information about cottage industry can bring complexity to understand this
sector.
XXXII. Lack of Entrepreneurial Skill:
An entrepreneur have many skills to develop a business and if the entrepreneur is not
skilled enough, the business will face problems.
XXXIII. Access to Market and Lack of Awareness:
Getting the access of market is not so easy for new entrance of business and they are
not aware of the barriers of new entrance.
XXXIV. Importance of marketing tool:
The lack of the knowledge of marketing tool is like body without soul. The success of
the business come with the marketing strategies.

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 Figure: 01, Process of marketing tool

XXXV. Lack of quality assurance:

The consumers and the market can captured through maintain the quality of the
product. If the quality of the product become poor, the sell and the market condition
will decrease.
XXXVI. Lack of commitment to innovation and customer satisfaction:
Lack of product innovation and customer satisfaction is a challenge for small and
cottage industry base business. If we want to survive in the existing market, we need
innovative version of the product to satisfy the customer need.
XXXVII. Fierce competition with the cheaper foreign goods:
When foreign goods are available in cheaper rate it become a challenge to compete
with the foreign company, thus satisfaction of customer get complex.
XXXVIII. Insufficient Training Academy:
Insufficient training academy also a challenge in small and cottage industry to skilled
up the employee.
XXXIX. Lack of Women Participation:
Women are the 50% of the population of our country but still the contribution of women
are less in small and cottage industry. As women, have some internal barrier and lack
of proper knowledge about laws of small and cottage industry. Therefore, it is another
challenge of this sector as they can contribute in the economic growth.
XL. Borrowers are Less Skilled:
Most of the entrepreneur who invested in small and cottage industry have less
knowledge about the laws of interest upon bank loans and that hampers their business.

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 These are the challenges, which needs to solve as early as possible. There are many opportunities
to increase economic growth and reduction of poverty but we have barriers.

OPPORTUNITIES OF COTTAGE INDUSTRIES

There are many opportunities in small and cottage industry. In the law of industry ministry, they specified
the sectors of the industry, and give full information, how to access the government helps, and what are their
limitations. The opportunities are-

I. Women Priority: Different types of organizations provide either direct or indirect supports
to women entrepreneurs besides the government. Among various supporting organizations,
the financial institutions are consider most important.
II. Training Programs:
Private and non- private organization are arranging various kind of training programs that
increase their knowledge to do business.

III. Less Interest from Bank Loan in ICT Sector:

Nowadays our government is providing less interest rate of bank loan in Information and
Communication Technology sector to do business in this sector.

IV. Employment:

As there is lots of scope of doing business in small and cottage sector, employment of people
will increase gradually.

V. Play a Major Role in Economic Development:

Small and cottage industry is playing a vital role in economic development. Increase of
business in this sector will increase GDP.

VI. Provide a Secure Basis for a Rapid of growth of Income:

In the sector of small and cottage industry, the ministry of industry set a law, though which
rapid growth of income could be secure.
VII. Help in raising the standard of living:
If we take the small and cottage industry in international level and develop the economic
growth, our way of living will change by the change of our income.

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VIII. Provide Employment, Meeting High-Income Demands:
Increase of small and cottage industries will increase the employment and their high-income
demands. As economic sector will grow with the small and cottage industry’s rise.
IX. Brings in technological progress and change in the outlook of the people:
To improve the sector of small and cottage industry, technological progress and the change
of the outlook of the people should highlighted.
X. Has Decreased the Dependency on Foreign Resources:
When we have enough resources, why would we rely on foreign resources? We just need to
utilize it in proper way, wisely.
XI. Scope of Diversified Business:
We have lots of scope of diversified business. Diversified business is a business that has
multiple, unrelated businesses. It is the expansion of business vastly.
XII. Poverty Alleviation:
When employment increases, there is no place for poverty. Small and cottage industry can
give jobs to the poor so that they can earn and live their life.

XIII. Balanced Regional Growth:

Balanced regional development is an important condition for the harmonious and smooth
development of a country. It does not imply equal development of all regions of a country.
Rather it indicates utilization of development potential of all areas as per its capacity so that,
benefit of overall economic growth is shared by the inhabitants of all the different regions
of a country.
XIV. Provide Infrastructural Facilities:
The basic physical and organizational structures and facilities needed for the operation of
an enterprise is called infrastructural facilities of small and cottage industry. For running
business in small and cottage industry, basic infrastructure is essential.
XV. Provide Technical and Consultancy Services:
NGOs provide technical and consultancy services for betterment of the business.
XVI. Innovation and Adaptation of Appropriate Technology:

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 Bangladesh is developing country and our present government take the initiative to make
our country digital. Therefore, new technologies are coming and making the business
strategy easier.
XVII. Recommendation for Exemption of Duties and Taxes:
There is a law and rules of exemption of duties and taxes for small and cottage industry in
Ministry of Industry. Our government set some rules and extra facilities for those who are
running small and cottage industry base business.
XVIII. Recommendation for Import Entitlement of Raw Materials and Packaging Materials:
The raw material and packaging material, which is using frequently, and it is imported, this
type of material should import duty free, so that the price of the product will be less.
XIX. Regulatory Functions:
A concept stating that a company with a specific business should be supervise and reviewed
by the proper regulating body. Functional regulation is there to ensure that the most
qualified and knowledgeable people are overseeing the daily functions of a specialized
field.
XX. Other Pre and Post Investment Counseling:
Pre-money/investment refers to a company's value before it receives outside financing or
the latest round of financing, while post-money/investment refers to its value after it gets
outside funds or its latest capital injection. Pre-money valuation refers to the value of a
company not including external funding or the latest round of funding. Post-money
valuation then includes outside financing or the latest injection. It is important to know
which is being referee, as they are critical concepts in valuation. This kind of counseling
based organization give the best advice for the business.
XXI. Enhancing Access of Finance:
If the amount of funds are increase, the amount of total employment, economic growth, total
GDP will increase gradually. So. It will beneficial in many ways.
XXII. Use of Modern Technology:
At present situation new business are using new technology as like web sites, mobile
application, smart phones, software, ultra-intelligence machine etc. If we use modern
technology in small and cottage industry, it will boom forward to increase economic growth.

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XXIII. Organizing Trade Fairs, Symposiums, Workshops on Small and Cottage Industry on
Regular Basis:
Workshops, trade fairs on small and cottage should set up for regular basis. Because in fairs
and workshop, many people from home and abroad came for bought their products and
entrepreneurs find a new scope to do business in international level.
XXIV. Funding from NGOs and Privet Firm:
NGOs and privet firms are providing funding for small and cottage industry. They provide
funds with some terms and conditions.
XXV. Banks/Financial Institutions for Women:
Banks and financial institutions shall take initiative to advertise all the facilities for women
entrepreneurs in both electronic & print media.
XXVI. Special advice and service center for women entrepreneurs:
Banks/Financial Institutions shall establish special advice and service center for women
entrepreneurs in selected branches and ensure service friendly approach towards women
entrepreneurs.
XXVII. Expansion of Small and Cottage Industry:
Industrialization is a process, which happens in countries, when they start to use machines
to do work that once done by people. Industrialization changes the society as it happens.
During the industrialization of a country, people leave farming work to take higher paid jobs
in factories. As small and cottage industry is a sector of industrialization, expansion of
industrialization will help in many ways.
These are the opportunities of cottage industry. If we run the cottage industry business, all of the
above opportunities may inflight us to be more focus on this sector.

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 Some cottage industries photos in Ethiopia

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 CONCLUTION
We perceive, Cottage Industries are of cultural and economic importance to our country. They keep the age-
old traditions alive and provide employment to a number of people. Support should be provide by the
community to prevent exploitation and further develop these industries as they face stiff competition from
other economies. In the over-populated countries like ours, the only way to fight the monster of
unemployment is the development of cottage and small-scale industries. They will bring about a more
equitable distribution of wealth. Therefore, be said that 'Small is Beautiful'.

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