Challenges in Developing New Small

Businesses: Evidence from Ethiopia

BY

Demeke Chimdessa Gutu

June, 2020
Addis Ababa, Ethiopia
 College of Business and Economics

Challenges in Developing New Small

Businesses: Evidence from Ethiopia

A dissertation
Submitted to the Department of management for the Partial
Fulfillment of Doctor of Philosophy in Management

BY

Demeke Chimdessa Gutu

June, 2020
Addis Ababa, Ethiopia
In memory of my dear mother Workishe Tato who passed away
before the Dissertation was completed.
Acknowledgments

While writing these acknowledgments all the emotions I experienced during this have come back
to me. The journey was full of excitement, joy, and sadness. There were repeated shifts in my
feelings of being an achiever and a loser. When I achieved a milestone during the journey, I was
excited but that feeling did not last long. The feeling of being no one popped up as the process
crashed or work stacked up. I experienced a feeling of being lost in the ‘middle of the ocean’ too.
It would not have been possible to overcome the challenges without the support of many people.

I was fortunate enough that I was surrounded by many people who provided me a scaffolding. I
was lucky I was supervised by Professor Lucia Naldi, Professor Leona Achtenhagen, and Dr
Yitbarek Takele (Associate Professor). They supported me both morally and academically. Their
support kept me on track throughout the process. Without their support, it would have been
impossible for me to finish this dissertation. I would really like to thank my supervisors for
everything they offered me while I was repeatedly under stress. Your support played an invaluable
role in getting me to the end of the process.

Similarly, the support of all my family members, especially my life partner Etalem Kindanu, made
me persist through all the depression and sadness during the process.

I also forward my heartfelt thanks to German Academic Exchange Service (DAAD), and the
people of Germany for granting me financial support during the study period. I was a beneficiary
of the scholarship in the program In- Country/ In- Region Scholarship Program Ethiopia, 2015
with personal reference number 91602344.

Finally, I realized that the journey of the PhDing has an end. Thank you all!

Addis Ababa, June, 2020

Demeke Chimdessa Gutu

 Abstract

This dissertation discusses the challenges that effect the development of new businesses in a
developing economy. The study focuses on challenges related to the different phases in a new
business’ development in a developing economy including product development, resourcing a new
business, and market development. Through case studies of seven new businesses, I make sense
of the process of developing a new business in Ethiopia. My findings stress that a new small
business uses government support provided by the SMEs Development Agency to overcome the
challenges. This support effects the process of developing a new business in different ways. It
helps a new business overcome its lack of resources in its start-up phase. Most new businesses
start operations with no or limited resources. They also face challenges in connecting with
customers and other relevant stakeholders. The government’s support helps the new businesses to
overcome challenges related to the “liabilities of newness and smallness”. A new business with
low or no resources, aligns its choice of product ideas with the government’s priorities. The
founders search for a product from among the government’s priority areas that matches their
experience. The process of developing a product in a new business with government support starts
with the founder (s)’ limited initial knowledge. The government’s support enhances this search by
encouraging the founders of new businesses to take risks and try their products with customers.
Additional knowledge is acquired through interactions with stakeholders as the new business’
development unfolds. In addition, the government provides the business with training on how to
develop its product. Suppliers and customers contribute to the founders’ knowledge. As a new
business aligns more with government policies, it gets more resources, earns more legitimacy, and
establishes market connections faster. A new business formed under the SMEs development
policy’s directives has the possibility of achieving early market connections. The government
facilitates connections between a new business and its potential customers. However, a reliance
on government support has negative effects as well. When the support stops, the new business has
to deal with the challenges of finding new customers. As a result, a new business faces major
problems in generating enough revenue to cover its costs, facing the liability of early market
scaffolding. The findings of my dissertation have implications for both the founder(s) of new
businesses and the SMEs development policy. This dissertation contributes to broadening the
understanding of the founders of new businesses when they take decisions and undertake activities
as the new business’ development process unfolds. The findings of this dissertation will also help
policymakers to take informed decisions on the contents of the SMEs support package.
 Table of Contents
1. Introduction .............................................................................................................................................. 4
1.1. Setting the stage ........................................................................................................................... 4
1.2. Prior research on new small businesses’ development ..................................................................... 6
1.2.1. The process of developing a new small business ........................................................................... 6

1.2.2. New small business development in developing economies ....................................................... 10

1.3. Business informality and government interventions in developing economies ............................ 10

1.4. Purpose and research context ........................................................................................................ 12
1.5. The structure of the dissertation ..................................................................................................... 12
1.6. Definitions of some concepts........................................................................................................... 13
1.6.1. Newness and smallness of a business........................................................................................... 13

1.6.2. ‘Developing’ a business ................................................................................................................. 15

1.6.3. Informal enterprises or informal firms ......................................................................................... 16

1.6.4. A developing economy.................................................................................................................. 16

2. Methodology ........................................................................................................................................... 18
2.1. The philosophical positioning of the research ............................................................................ 18
2.1.1. Ontological stance................................................................................................................... 18

2.1.2. Epistemological stance............................................................................................................ 19

2.2. Research approach...................................................................................................................... 20

2.3. Research design .......................................................................................................................... 21
2.4. Analyzing the empirical material ................................................................................................ 27
3. The Ethiopian context for developing a new business ........................................................................... 31
3.1. Introduction ..................................................................................................................................... 31
3.2. SMEs development policy and strategy in Ethiopia ......................................................................... 32
3.3. Support schemes ............................................................................................................................. 34
3.3.1. Stages of growth in a new business, challenges, and related support ......................................... 35

3.4. Informal economic activities in the Ethiopian economy ............................................................ 38

3.5. Reflections on the context ............................................................................................................... 40
4. New business development in Ethiopia: Dominant problems and solutions ................................. 42
4.1. Introduction ..................................................................................................................................... 42
4.2. Literature review ......................................................................................................................... 43
 4.3. Case studies................................................................................................................................. 50
4.4. Analysis and interpretation ......................................................................................................... 58
4.4.1. Roles of different agents in the main activities while developing a new business ................ 58

4.4.2. Interactions of the main activities as the new business development unfolds............................ 60

4.5. Lessons from the chapter ............................................................................................................ 61

5. Developing a product in a new business ................................................................................................ 64
5.1. Introduction ..................................................................................................................................... 64
5.2. Literature review.............................................................................................................................. 65
5.3. Case description ............................................................................................................................... 72
5.4. Analysis and interpretation.............................................................................................................. 79
5.5. Lessons from the chapter ................................................................................................................ 81
6. Finding resources as a new business’ development unfolds .................................................................. 83
6.1. Introduction ..................................................................................................................................... 83
6.2. Literature review.............................................................................................................................. 84
6.3. Case description ............................................................................................................................... 89
6.4. Analysis and interpretation............................................................................................................ 100
6.5. Lessons from the chapter .............................................................................................................. 104
7. Developing a market for a new business ...................................................................................... 105
7.1. Introduction .............................................................................................................................. 105
7.2. Literature review....................................................................................................................... 106
7.3. Case studies .............................................................................................................................. 110
7.4. Analysis and interpretation....................................................................................................... 120
7.5. Lessons from this chapter ......................................................................................................... 123
8. Findings, conclusions and implications, limitations, and directions for future research ..................... 126
8.1. Findings and conclusions ............................................................................................................... 126
8.2. Tension between the formality-informality of a new business and its development ................... 126

8.2.1. The role of the government’s support package and new business development in Ethiopia ... 127

8.2.2. Consequences of a new business becoming a user of the government’s support package ...... 128

8.3. Contributions of the dissertation.................................................................................................... 131

8.3.1. Theoretical contributions............................................................................................................ 131

8.3.2. Practical contributions ................................................................................................................ 133

 8.4. Limitations and directions for future research .............................................................................. 134
References ................................................................................................................................................ 136
Appendix- Sample of interview guide for interviews with different stakeholders of a new business. .... 169
Appendix- Sample of site visits and observations guide........................................................................... 174
 1. Introduction
The purpose of the dissertation is understanding the challenges that effect the development of new
businesses in a developing economy. This introductory chapter sets the context of the study by
presenting a case of a metalwork business and a literature review and its discussion. The
introductory chapter also gives the purpose of the dissertation, the research questions it poses and
finds answers to, and provides the structure of the study.
1.1. Setting the stage
The following is a case of a new metalwork business operating in Ethiopia. This sets the stage for
this dissertation by illustrating the research problem that it addresses.

Metalwork was established by entrepreneur Mohammed with an initial capital of 700 Birr in 1996.
He used this money for buying a small welding machine. Before starting his business, Mohammed
had work experience in different jobs. When he was a teenager, Mohammed worked as an assistant
to a taxi driver. When he turned 18, he joined a training center and got a driving license. After
working as a taxi driver, he was employed as a salesperson in an importing company in Ethiopia.
The company imported cereal milling machines from Turkish manufacturers. The importing
company copied the specifications of the milling machines produced in Japan and Italy and
ordered the same products from a Turkish company. The Turkish company delivered these
machines at much lower prices.

This experience inspired Mohammed to start his own business. Though he did not have the
financial resources, he wanted to imitate imported products and produce them locally at a low
cost. He took his time thinking about his idea. Mohammed faced his first challenge even before
starting his business as he had no money for starting the business. When he discussed the business
idea with his parents, his father promised him some seed money. He provided Mohammed the
initial capital of 700 Birr collected through a loan from friends. His father also allowed him to
use a residential place for his business and Mohammed bought a welding machine.

Mohammed faced additional challenges till 2004. For instance, there wasn’t a large enough
market for locally made cereal milling machines. Consequently, he did not manage to sell many
machines as sales were infrequent leading to irregular earnings. In addition, Mohammed was
addicted to alcohol and he spent a lot of money on it. His addiction hindered the business’
expansion. Moreover, residents around his workplace complained about the noise that the welding
activities made. Once Mohammed had collected some capital by selling his machines, he rented a
workplace but he faced the same problems. The owners of this workplace repeatedly complained
about noise from the welding activities. As a result, he had to change his workplace several times.
He was also attacked by the proprietor of the place once with a knife complaining about the sound
pollution that his business was generating.

Further, Mohammed had to overcome a pressing shortage of funds and deal with fluctuating
market demand. He got a loan from his friends and an advance payment from his customers and
purchased raw material on credit to overcome his financial problems. He recalled a time when a
customer ordered a milling machine with special features. He produced the machine with money
borrowed from six friends. Unfortunately, the customer refused to buy the product. It was a
depressing moment. Mohammed recalled, “I cried like a kid then." Luckily, he managed to sell the
product to another customer. He added that the religious education that he had received and his
father’s moral support helped him deal with the challenges that he faced.

In 2004, Mohammed registered his business as a micro-enterprise at the Addis Ababa city
administration’s SMEs’ development bureau with a total capital of 5,000 Birr. The bureau gave
him a place to work at a rent of 92 Birr per month. A similar workplace would have otherwise cost
him about 6,000 Birr per month. "That was great support!" he said. His business continued
producing milling machines that could act as substitutes for expensive imported machines.
Mohammed imported engines from China and made the rest of the machines using locally
available metals.

Within two years’ time, his business made remarkable progress. In 2006, its capital was about
35,000 Birr, which enabled Mohammed to classify his business as a small-scale enterprise. In the
same year, he bought a pickup car to serve two purposes. It transported goods for the business
and Mohammed also used it for generating some money by giving it out to others. In 2011, the
business registered a capital of 1.5 million Birr and became a middle-level enterprise. In the same
year, Mohammed leased some land for constructing a factory.

In addition, as a part of its policy for small businesses, the Ethiopian government helped the
business get a loan from the Development Bank of Ethiopia. Mohammed got a 3 million Birr loan
to procure machines on lease. Since the loan required collateral, his brother let Mohammed use
his cars as collateral for the loan.

Currently, the overall capital of the business is about 2 million Birr, not including the value of the
land. Further, Mohammed’s business is also engaged in the construction of the factory. About a
million Birr has been invested so far, which amounts to 30 percent of the cost of construction.
However, the business is operating with old machines and thus has to out-source welding activities
to others.

Metalwork’s journey was full of hurdles. Developing this new small business meant many
challenges including scarcity of financial resources and hostility from the community around the
workplace. In addition, there was turmoil in the product market. However, with support from the
government, family members, friends, and acquaintances Mohammed could help his new business
overcome these challenges.

In particular, this case vignette provides an illustration of the process of new business development
in a developing economy such as Ethiopia, and calls for a better understanding of the relationship
between government policies, entrepreneurial actions, and specific social relations; this is needed
for overcoming the challenges that new small businesses face.

1.2. Prior research on new small businesses’ development

This section is divided into two sub-sections. The first sub-section reviews scholarly works on the
process of developing new small businesses in general. The second sub-section reviews extant
literature on new small business development in developing economies. Newness and smallness
are two main features of a business at beginning of its life, Thus, challenges related to newness
and/or smallness of a business need to be studied (Bruderl & Schussler, 1990). Hanks, Watson,
Jansen, and Chandler (1994) reviewed stage models and combined the stages of the selected stage
models into five stages: start-up, expansion, maturity, diversification, and decline. They
characterize firms in the first three stages in young businesses (Hanks et al., 1994).

1.2.1. The process of developing a new small business

Developing a business involves a progression (Van de Ven & Poole, 1995) with a series of internal
changes (Penrose, 1959) and activities for advancing the product, technologies, and relationships
with stakeholders (Kind & zu Knyphausen-Aufseß, 2007). Gartner (1985, 1988) criticized existing
entrepreneurial studies as they targeted entrepreneurs’ personal qualities and advocated that the
focus of entrepreneurship studies should be on the activities undertaken for creating a new
business. Low and MacMillan (1988, p.141) extended this view, and defined entrepreneurship as
the "creation of new enterprise". Similarly, some scholarly work classified a new business as a set
of activities (Arenius, Engel & Klyver, 2017; Brush, Greene & Hart, 2001; Carter, Gartner &
Reynolds, 1996; Davidsson & Gordon, 2012; Delmar & Shane, 2002, 2003; Reynolds, 2000;
Reynolds & Miller, 1992; Wiklund & Shepherd, 2005; Shane, &Venkataraman, 2000). Some
scholars also view the development of a new business as a learning process (for example,
Davidsson, & Gordon, 2012; Miner, Bassoff & Moorman, 2001; Pentland & Feldman, 2005;
Prashantham & Floyd, 2012) with little or no initial knowledge (Stinchcombe, 1965), under the
bounded rationality (March, 1978) of the founders and uncertain situations (March & Olsen, 75 ),
and little or no possibility of imitating available knowledge in the industry (Aldrich & Ruef, 2006).

In addition, developing a new business is also seen as complex and dynamic decision making
(Alvarez & Barney, 2005; Baker, Miner & Eesley, 2003; Baker & Nelson, 2005; Delmar & Shane,
2003; McMullen & Shepherd, 2006; Sarasvathy, 2001).

The process of developing a new business starts with questions like who the entrepreneur is, what
the entrepreneur knows, and who the entrepreneur knows (Sarasvathy, 2008). One line of inquiry
which focuses on the initial conditions that influence the process of developing a new business
maintains that this is influenced by initial conditions (for example, Arenius Engel, & Klyver,
2017). The founder(s)’ initial motivations, aspirations, and purpose effect the new business’
development (Venkataraman, Sarasvathy, Dew, & Forster,2012). Specific conditions like
founder's prior entrepreneurial and industry experience, social connections, trust, goodwill, and
financial resources have differential effects as the new business development unfolds (Bruderl,
Preisendorfer & Ziegler, 1992; Cooper, Gimeno-Gascon & Woo 1994; Davidsson & Honig, 2003;
Delmar & Wiklund, 2008; Rotefoss & Kolvereid, 2005; Fichman & Levinthal, 1991). Some
studies argue that these initial conditions help overcome the early stage 'liability of newness'
(Stinchcombe, 1965). Stinchcombe conceptualized the liability of newness to show the problems
of establishing connections with external stakeholders, building social relations among members
of the business, and learning new roles for the business. These initial conditions support the new
business for some time which is called the 'honeymoon period', even when the business is not
performing well (Fichman & Levinthal, 1991).

Another line of inquiry focuses on some distinct stages of development (Greiner, 1972; Lewis &
Churchill, 1983; Kazanjian, 1988; Scott & Bruce, 1987; Steinmetz, 1969). Research emphasizes
various stages including the critical stages in a small business’ growth (Steinmetz, 1969). These
include five stages of a small business’ growth (Lewis & Churchill, 1983; Scott & Bruce, 1987),
and five evolving managerial practices as a young and small organization grows (Greiner, 1972).
These stages focus on dimensions constituting a stage of development (Hanks, Watson, Jansen &
Chandler,1993), and dominant problems in between stages and the activities undertaken to
overcome them (Greiner, 1972; Kazanjian, 1988; Lewis & Churchill, 1983; Steinmetz, 1969).
Several stage models use a biological analogy for explaining firms’ growth by focusing on
problems and solutions through internal transformation (Levie & Lichtenstein, 2010). For
example, different management styles are used for overcoming crises related to leadership, control,
and coordination (Greiner, 1972). However, this line of argument emphasizes less on the role of
the external environment that influences stage transitions and instead emphasizes on a
predetermined of number and order of stages in the development of an organization (Aldrich &
Ruef, 2006; Levie & Lichtenstein, 2010).

Another stream of research has emerged which disregards previous assumptions of progressive
stages in a business’ development and recognizes the importance and influence of the context in a
firm’s development process (Aldrich & Ruef, 2006; Katz & Gartner, 1988; Levie & Lichtenstein,
2010). For example, Levie and Lichtenstein (2010) question the validity of the stage models that
focus only on internal problems and give an alternative explanation for a new business’
development by incorporating the role that the external environment plays in this. They recognize
how the management’s decisions, actions, and activities match the internal situation in a new
business with external stakeholders’ demands.

Inspired by complexity science, Levie and Lichtenstein (2010, p. 333) conceptualize a dynamic
state as “network of beliefs, relationships, systems, and structures” to create value matching
demand of external stakeholders. A firm modifies part of the state, reconfigures its elements or
develops a new dynamic state, depending on the pace of change in the external environment. Katz
and Gartner (1988) and Aldrich and Ruef (2006) view a new business’ development as the
construction of intentionality for achieving explicit purposes, assembling resources, creating
boundaries, developing activity systems, and indulging in an exchange with the external
environment.

Business development is related to all activities intended to "creating value and revenue potentials
for the company, developing products and technologies so that they can be commercialized,
building and maintaining and enhancing relationships with potential partners, customers and other
stakeholders” (Kind & zu Knyphausen-Aufseß, 2007, p. 185). Business development is a good
starting point for further studies (Aldrich & Ruef, 2006; Arenius, Engel & Klyver, 2017; Katz &
Gartner, 1988). Thus, Aldrich and Ruef (2006); Katz and Gartner (1988); Kind and zu
Knyphausen-Aufseß (2007) and Levie and Lichtenstein (2010) streamline the issues involved in a
study of the challenges and remedial activities of a new business’ development into developing
products, building internal activity systems, assembling resources, and maintaining relationships
with the external environment for resources and markets.

While existing research lists the important initial conditions, the process of developing a new
business remains open to further investigations (Arenius, Engel & Klyver, 2017; Dimov, 2010;
Venkataraman, Sarasvathy, Dew & Forster, 2012). According to Achtenhagen, Ekberg, and
Melander (2017) and Davidsson, Achtenhagen, and Naldi (2010) there are very few studies on the
actions, decisions, and activities undertaken for overcoming challenges as the development of a
new business unfolds. Scholars also call for studies to focus on new business development in the
context of developing economies (Austin, 2002; Carter, Gartner & Reynolds 1996; Zoogah, Peng
& Woldu, 2015). This is important because firms' behavior and the outcome of their behavior
differs depending on a number of factors including the context in which they operate (Welter,
2011).

Welter (2011) and Zahra (2007) also argue that theories are context sensitive, where a theory
explaining a phenomenon in a particular context may not be able to explain the same phenomenon
in a different context. Accordingly, developing countries are different from developed countries
in formal and informal institutions, physical infrastructure, social networking, and business
environment (Hashi & Krasniqi, 2011; Welter, 2011; Zahra, Wright, & Abdelgawad, 2014). Thus,
existing studies focus on identifying the critical challenges that new businesses face in developing
economies which are connected to: 1) new product development, 2) accessing critical resources,
and 3) market development and remedial activities.

1.2.2. New small business development in developing economies

Extant literature on the development of new businesses in a developing economy focus on
antecedents influencing the variations in their growth rates (Bekele & Worku, 2008; Bigsten &
Gebreeyesus, 2007; Naude, Gries, Wood & Meintjies, 2008; Nichter & Goldmark, 2009; Singh &
Belwal, 2008). Institutional situations and availability of resources are major challenges that
influence the effectiveness of firms in Africa like level of sales and profitability (Meyer & Peng,
2016; Zoogah, Peng & Woldu, 2015). Variations in the growth of small businesses according to
their geographical context is also associated with firm related factors. Such factors include the
level of formality and links to the value chain (Nichter & Goldmark, 2009) and the extent of access
to formal bank finance (Naude, Gries, Wood, & Meintjies, 2008). In particular, the lack of formal
registration of a business is negatively related to its growth (Nichter & Goldmark, 2009).

Informality makes a firm limit its size to avoid the risk of visibility thus attracting legal
enforcements (Snodgrass & Biggs, 1996). However, this also restricts firms from accessing formal
support which consequently limits their growth (Walther & Filipiak, 2007). Further, informal firms
lack easy access to organized markets, financial institutions, and formal education and training
institutions (Enquobahrie, 2003). Using a study of cross-national variations among 38 emerging
economies, Williams (2014) highlights that the prevalence of informal business activities is
associated with the level of GNP per capita, tax rates, level of social contributions, and poverty
rates.

1.3. Business informality and government interventions in developing economies

Businesses which are not legally registered and/or do not pay taxes “represent one common form
of firm activity that falls within the boundaries of the informal economy”; these firms “make up
the informal economy and represent 40-60 percent of the GDP” in developing economies (De
Castro, Khavul & Bruton, 2014, p. 75). The level of formality of a business is a critical factor that
influences small business development in developing countries. Informal businesses (Godfrey,
2011; Hart, 2006; ILO, 2000) operate outside the administrative, legal, and economic structures in
a country (Bissrat, 1993) but produce legal products for sale (Hart, 2006). This is conceptually
different from illegal activities-forbidden by law, or carried out by unauthorized producers and
underground activities-legal when performed in compliance with regulations but are deliberately
concealed from public authorities (Saha, Kar & Baskaran, 2004). However, the process of
developing an informal business involves interactions with external stakeholders and/ or intra-firm
relationships, which are governed by norms, values, customs, and personal ties (Godfrey, 2011).
It is assumed that informal activities are embedded in local communities where social norms,
values, and customs instrumentally determine how a business develops its products, how it hires
labor, and accesses potential sources of capital (Banfield, 1958; Chen, & Lin, 2004; Godfrey, 2011;
Putnam, 2000; Venkatesh, 2006). In many developing countries, a heavy burden of taxes, bribes,
and bureaucratic problems force firms to work in the informal zone (Azuma & Grossman, 2002).
Thus, whether a firm develops a business as a formal or an informal economic activity, the business
is influenced by regulatory frameworks, economic cost-benefits analyses, and value driven criteria
like beliefs, norms, and customs (Godfrey, 2011; Zoogah, Peng & Woldu, 2015).

Nevertheless, businesses in developing economies eventually become formal entities either

through institutional enforcement or voluntarily as their development processes advance. This also
implies that an important challenge for new businesses is considering institutional incentives,
opportunity costs of not making the businesses formal entities, and the costs of making the entities
formal businesses like application processing, taxes, and cost of compliance with laws (Nelson &
De Bruijn, 2005). When the costs of formalization are not very clear, firms may formalize their
operations but they use coping strategies like avoiding making necessary investments, withholding
or falsifying information given to the authorities, and making informal arrangements with
government officials to evade formal obligations (Nelson & De Bruijn, 2005, p. 589). Extant
literature on firms’ formality focuses on the determinants, costs, and benefits of formal and
informal business activities (Acquaah, 2007; Bolton & Dewatripont, 2005; DeSoto, 2000; Godfrey
& Dyer, 2011). However, how formal and informal business activities substitute and complement
each other as a new firm’s development unfolds is not clear (Godfrey, 2011). In addition, how the
government supports and encourages formal business activities and the choice between firms
having formal or informal status needs further study (Azuma & Grossman, 2002; Nelson & De
Bruijn, 2005).
To sum up, a new business’ development in a developing economy is essentially embedded in its
contextual elements (Welter, 2011) and theoretical insights into new business development are
context sensitive (Zahra, 2007).

1.4. Purpose and research context

This dissertation aims at gaining a better understanding of the process of developing new small
businesses in a developing economy. It focuses on understanding the different challenges that new
businesses have to face and overcome in their growth process.

This research was done in the context of Ethiopia’s economy where informality is central to the
local economy and where the Ethiopian government supports formal small businesses with
workplaces, skill training, extension support, market development, technology support, and access
to finance (Amha, Woldehanna, Tamrat & Gebremedhin, 2015). Since the 1991 revolution, the
Ethiopian economy has changed from a centrally planned one to a market economy (Brixiova &
Asaminew, 2010). Thus, the government supports new businesses so that they can play a
significant role in the economy. The nature of government support has evolved over time. From
1991 to 1997, the government promoted indigenous start-ups and influenced their choice of
industry and location by providing incentives like exemption from income tax and duties on
imported capital goods (Ayele, 2006). For this, it developed a small and micro enterprises
development policy and strategy in 1997 which was revised in 2011. This was accompanied by
dedicated agencies at the federal, regional, and local levels.

1.5. The structure of the dissertation

Chapter 2 of this dissertation discusses the methodology that it uses. This chapter explains the
ontological and epistemological positions underlying this study and discusses the research
approach, mode of inquiry, research design, and data analysis. Chapter 3 explores the Ethiopian
context for developing a new business. It presents Ethiopia as a developing economy. This chapter
is based on empirical material collected from government officials and a review of documents on
the SME development policy and strategy that the Ethiopian government implemented in 1997.
The rest of this dissertation is structured according to the essential aspects of a new business’
development. Accordingly, Chapter 4 discusses the challenges related to the phases in the
development of a new business in a developing economy, product development, resourcing a new
business, and market development. It also focuses in detail on how new business development
unfolds. The chapter ends with the identification of three critical challenges that new businesses
in developing economies face which are connected to: 1) new product development, 2) accessing
critical resources, and 3) market development. The three subsequent empirical chapters (Chapters
5-7) investigate each of these challenges and the remedial activities that the new businesses follow
to address them. The last chapter, Chapter 8 discusses the overall findings of the dissertation. It
discusses the findings in relation to the overall purpose of the dissertation and presents its
theoretical and practical contributions. The chapter ends by giving the limitations of this study and
providing some research directions for future studies.

1.6. Definitions of some concepts

I now present how some concepts are used in this dissertation.

1.6.1. Newness and smallness of a business

As the liability of newness and smallness co-exists, there is a need to conceptually differentiate
between the two (Bruderl & Schussler, 1990). Stinchcombe (cited in Bruderl & Schussler, 1990,
p. 530) characterized the 'newness' of a business as new roles and tasks to be learned and invented,
social interactions in the organization among strangers lacking a common normative basis or
informal information structure, and stable links not being established with clients, supporters, or
customers when an organization begins operations. In addition, the term 'new' is used in connection
with age related to the extent of accumulated experience (Aldrich & Ruef, 2006). The concept of
'experience' corresponds to the degree of a prior actual engagement with activities (Heidegger,
1962). As there is more engagement, there is more accumulation of experience. Thus, newness is
the degree of a business’ prior engagement with stakeholders and internal processes. Therefore,
aging and lasting in absolute time are not synonymous (Aldrich & Ruef, 2006).
There are also problems differentiating between ‘new' and 'established' businesses. In Global
Entrepreneurship Monitor research, a research project on entrepreneurship, the number of years in
operations is used for differentiating between new and established businesses. Here, businesses
that have been operational for three and a half and less are categorized as new businesses while
those that have lasted more than these years are considered established businesses. Scholars
working on 'stages of business growth' like Greiner (1972), Kazanjian (1988), Lewis and Churchill
(1983), Scott and Bruce (1987), and Steinmetz (1969) differentiate between new and established
businesses based on their stage of growth.

In this dissertation, a new business is assumed to start with an intention along with action, a
decision or an activity for developing a product, accessing resources, or connecting with
stakeholders, regardless of whether it is operating in the formal or informal space. This is in line
with Katz and Gartner’s (1988) study which explored the boundary between the pre-existence and
existence of a firm. They showed that a new business started existing with the founder’s intention
to start the business, his actions for mobilizing resources, when he started developing a boundary
for the firm like a formal registration, and undertaking an exchange with outsiders. Thus, a new
business in this dissertation means when the founder decides to leave his/her employment and
begin one’s own enterprise, when a team of founders agree to start a business in line with
Ethiopian SME development requirements for resource acquisition, or when a founder starts
discussing with his/her parents support in terms of resources, for example, using a part of the
residence and compound for starting a business.

Smallness is about size. There are different measures for the size of a firm. Measures of smallness
of businesses are context specific (Shepherd & Wiklund, 2009). In Ethiopia, two government
agencies use different indicators to categorize firms economically into different groups. On the
one hand, the Federal Small and Micro Enterprises Development Agency categorizes firms into
four groups -- micro, small, medium, and large -- as a base for its micro and small enterprises
development strategy and support frameworks (FDRE, 2011; Ministry of Trade and Industry,
1997). The agency uses total assets and a headcount of the workers that a business employs as
criteria for dividing firms into these categories. In addition, the type of sector, that is, industrial or
service, that the firm is operating in is also considered. As a result, enterprises in the industrial
sector with up to five workers or/and whose total assets are not more than 100,000 Ethiopian Birr
are categorized as micro-enterprise. For the service sector, the criteria include five workers or/and
total assets not more than 50,000 Ethiopian Birr. Similarly, the criteria for small enterprises in the
industrial sector is those firms employing 6-30 people or/and total assets of 100,001 Birr up to 1.5
million Birr. A small service enterprise employs 6-30 people or/and has total assets between
50,001 and 500,000 Birr. Further, the agency indicates that if there are divergences between the
workers’ headcount and total assets, total assets will be the leading criterion. An enterprise above
the indicated size is categorized as either a medium sized or a large sized enterprise. Since the
agency’s mission is supporting micro and small enterprises, it does not define the exact
demarcation between medium and large sized firms. Further, the definition of the agency excludes
higher technology and consultancy service firms.

On the other hand, being responsible for generating data related to the socioeconomic conditions
in the country, the Central Statistical Authority (CSA) of Ethiopia uses different criteria for
measuring the size of economic entities. The agency uses type of technology and headcount of
staff members as criteria for categorizing enterprises into different size levels. Accordingly, the
lowest category includes handcraft and cottage industries run by family members manually
without using motor powered machines. Small-scale manufacturing enterprises have less than 10
workers and use motor powered machines. Finally, large and medium scale manufacturing
establishments engage 10 or more workers and use power-driven machinery. However, the agency
emphasizes on the manufacturing industry and does not include other sectors in its classification.

The measure of smallness used in this dissertation is a combination of criteria used by the Ethiopian
Federal Small and Micro Enterprises Development Agency and literature. As the agency provides
different types of support based on the firms’ size, I used the first criterion to identify small
businesses that could be included in my study. In addition, I considered the classification of
businesses into small and large in stage model literature. As a result, I followed the
conceptualization of smallness as provided by Hanks, Watson, Jansen, and Chandler (1993) as it
helped distinguish between growth processes of small and large businesses for the analysis.

1.6.2. ‘Developing’ a business

‘Develop’ is defined in the Oxford Advanced Learner's Dictionary of Current English (p. 995) as
"to start or cause something to start to exist and then become greater." Penrose (1959)
conceptualizes the ‘development' of a firm as an increase in its size or an improvement in its
quality. Likewise, defining a process as progression or the order and sequence of events in an
organizational entity’s existence over time and change as the difference in form, quality, or state
over time in an organizational entity, Van de Ven and Poole (1995, p.512) describe development
as a change process – a progression of change events unfolding during the existence of a business.
Further, Kind and zu Knyphausen-Aufseß (2007, p. 185) define business development as all
activities intended to "creating value and revenue potentials for the company, developing products
and technologies so that they can be commercialized, building relationships with potential
partners, customers and other stakeholders, and maintaining and enhancing those relations in the
interest of the company.” This definition connotes conscious human actions and decisions.
Accordingly, the discussions in this dissertation deal with conscious activities, actions, and
decisions in the process of developing new businesses.

Therefore, my definition of ‘developing’ incorporates both the activities and actions of the agents
which is in line with Kind and zu Knyphausen-Aufseß’s (2007) conceptualization and the progress
of change in a firm as conceptualized by Penrose (1959) and Van de Ven and Poole (1995).
Thus, the definition of developing used in this dissertation is developing is increasing a firm’s size
and improving its quality over time as a result of initiating and improving an offer; building,
maintaining and enhancing relationships with potential stakeholders; and acquiring the necessary
resources.

1.6.3. Informal enterprises or informal firms

The terms informal business and informal enterprise are used interchangeably. The concept
informal business is used in this dissertation to designate firms operating outside government
regulations (Nelson & De Bruijn, 2005) which do not register their trade, issue invoices, or pay
income tax (Fransen & Van Dijk, 2008; Nelson & De Bruijn, 2005). Informal business activities
are actions performed by both formal and informal enterprises when they do not act in compliance
with government rules and regulations (International Labour Office, 2000). Informal business
activities also connote intra-firm activities performed not in accordance with internal rules and
regulations (Godfrey, 2011; Kok & Berrios, 2019).

1.6.4. A developing economy

Economies/countries in the world are classified into different groups by different international
organizations like developed economies, economies in transition, and developing economies
(United Nations, 2018). When an economy’s degree of integration into the global financial system,
fuel exports, and per capita gross national income (GNI) are considered Ethiopia, falls among the
developing economies (United Nations, 2018).
This dissertation focuses on businesses operating in the Ethiopian economy. This means that the
new businesses operate in the economy with a low degree of integration with the global financial
system, have low fuel exports, and low per capita GNI.
2. Methodology
"...Doing research is not like strolling along an easy, well-marked path to a familiar destination;
it’s more like zigzagging up and down a rocky hill through overgrown woods, sometimes in a
fog, searching for something you won’t recognize until you see it. But no matter how indirect
your path, you can make progress if at each step of the way you plan for predictable detours
(and maybe even avoid some of them) ...." (Booth, Colomb, Colomb, Williams & Williams, 2003,
p. 50).
“…there is no method, strictly speaking, in social sciences. All there is are other works as
sources of inspiration, an array of various techniques, and a systematic reflection on the work
that is being done” (Czarniawska, 1997, p.vi).
“Research is a craft” (Daft, 1983, p.539).
This research does a qualitative study of seven businesses which included 52 interviews. The
research is anchored in critical realism.

2.1. The philosophical positioning of the research

This dissertation adopts a critical realist approach. Research should have a clear positioning in its
philosophical stance which is also called the ‘research paradigm’ (Alvesson & Sköldberg, 2009;
Bhaskar, 1975; Creswell, 2003; Morgan & Smircich, 1980). Moreover, there should also be
consistencies in the assumptions of the researcher about the object of the study, nature of
knowledge about it, and use of appropriate methods fitting the assumptions (Morgan & Smircich,
1980).

The following sections discuss my ontological and epistemological stances.

2.1.1. Ontological stance

I believe that the process of developing a new business is composed of events, decisions, actions,
and activities (Van de Ven, 1986). These elements are a result of the underlying structures and
mechanisms of the phenomenon (Bhaskar, 1975; Easton, 2010; Sayer, 1992). Bhaskar (1975)
shows that events are not passive, but a result of extrinsic or intrinsic 'agents’. Events can be caused
by organizations, people, relationships, attitudes, and resources being "human, social or material,
complex or simple, structured or unstructured" (Easton, 2010, p. 120). Moreover, these 'really
exist' as each of them manifests itself through its effects on the process of developing a business
(Fleetwood, 2005).

The process of developing a new business comprises of structures signifying internally linked
things or objects and the mechanisms of their interactions (Sayer, 1992). In this dissertation,
‘mechanism’ is used as described by Bhaskar (1975, p. 14) as, “nothing other than the ways of
acting of things." Every object or entity acquires the ability to cause observable events because of
its intrinsic constituents and/or its relations with another entity (Bhaskar, 1975). In addition, the
contingent interactions of the entities underline observable empirical events in the development of
a new business (Tsang & Kwan, 1999). The contingencies include extrinsic factors relevant for
the process of developing a new business. I believe that the process of developing a new business
has its elements regardless of me conceiving them (Fay, 1996). This is in line with the idea that
the elements of the process of business development are not dependent on the specific activities
that are researched (Fleetwood, 2005).

This dissertation investigates "what 'makes happen’ the observable event, action, and decision or,
what ‘enables’ or ‘leads to’ them " in the process of new business development (Sayer, 1992,
p.104). Bhaskar (1975) describes reality as layers of the real, actual, and empirical respectively.
The empirical layer represents the observed part, and the actual layer is derived from observations
for seeking patterns of events to understand causal laws. The deepest layer -- real -- represents
things and their structures and mechanisms that lead to an event which is derived through
interpretations (Bhaskar, 1975). Thus, the ontology of my study is in line with Bhaskar (1975) and
it focuses on the entities and their relationships in the transformation of a new business. As a result,
I subscribe to critical realism (Bhaskar, 1975; Easton, 2010).

2.1.2. Epistemological stance

The ontological view sets the base for knowledge and its contents (Morgan & Smircich, 1980).
From a critical realist’s point of view, positioning is important since the purpose of my study is
"understanding the things that produce and the mechanisms that generate the flux of the
phenomena of the world" (Bhaskar, 1975, p.56). Understanding the mechanisms that generate the
transformation of a new business follows a stepwise approach moving from experiences to the
patterns of events or causal laws (Bhaskar, 1975). This goes beyond the exploration of ‘relations
between events’ or explaining regularities or 'causal laws.' Instead, it focuses on understanding the
mechanisms of the occurrence of one event and how this event leads to subsequent events
(Bhaskar, 1975).

Knowledge about the process of new business development is built on an understanding of the
phenomena of interest (Fleetwood, 2005; Tsang & Kwang, 1999). Hence, understanding also
comes by adopting a hermeneutic phenomenology perspective focusing on the 'lived experience'
in developing a new business which is retrospectively accessed (Van Maanen, 2016). Thus, in this
dissertation, knowledge is generated by going beyond the observable surface and understanding
the lived experience.

My exposure to different theoretical lenses shaped my understanding and cognitive schema of the
process of developing a business. During the data collection, I was informed by pre-existing
theories that framed what empirical data I should look for. However, I was open to new ideas that
emerged during interactions and interviews with entrepreneurs and government officials.

Further, the analysis was done reflexively going back and forth between the empirical data,
theoretical lenses, and existing literature (Alvesson & Sköldberg, 2009). The simultaneity of
refining the theoretical lenses and analyzing and interpreting the data helped synchronize the
empirical data with the theoretical lenses. Therefore, the knowledge developed in theory is laden
based on pre-existing theoretical lenses and understanding (Alvesson & Sköldberg, 2009).

The next section discusses the research approach that I adopted. This approach emanated from my
ontological and epistemological stances (Morgan & Smircich, 1980).

2.2. Research approach

As I intended to understand the structures and mechanisms that produce events, which in turn
generate the process of transforming a new business (Creswell, 2003; Morgan & Smircich, 1980),
I chose a qualitative approach (Morgan & Smircich, 1980). Conducting qualitative research helped
me understand the complexity of the process of developing a new business in the Ethiopian context
(cf. Stake, 1995).

This means that an understanding of the challenges in the process of developing a business is co-
produced with stakeholders, that is, the researcher, owner managers, suppliers, customers,
employees, and government officials. While I sometimes became a narrator of the knowledge
produced by the respondents, at other times I also became the producer of knowledge. The
respondents had their own explanations based on their practical knowledge and I convey their
explanations in my dissertation. The respondents are not only the producers of empirical data in
this dissertation but they are also stakeholders who play an active role in knowledge production.
The respondents also came up with answers to the ‘know how' and know why' questions (Alvesson
& Sköldberg, 2009).

I approached the fieldwork with some understanding and pre-exposure to theoretical lenses, with
flexibility to accommodate emerging empirical data. However, I was reflexive during the
discussions and in dealing with empirical material. I reconsidered my existing understanding and
theoretical lenses (Alvesson & Sköldberg, 2009) to prevent new knowledge from being biased by
existing theories.

2.3. Research design

This dissertation did case studies of seven new businesses where I interviewed seven
entrepreneurs, 10 employees, 13 customers, three suppliers, and five government officials. I also
gathered relevant policy documents. All these sources helped me make sense of the process of
developing a new business in Ethiopia.

The fieldwork began by securing support letters from the Department of Management, Addis
Ababa University addressed to the Addis Ababa City Administration Micro and Small Enterprises
Development Bureau, the Addis Ababa City Administration Trade and Industry Bureau, and the
Federal SMEs Development Agency. The Addis Ababa City Administration SMEs Development
and the Trade and Industry bureaus gave me letters for their respective sub-city offices -- Gullele
sub-city, Arada sub-city, and Addis ketema sub-city. I interviewed five government officials for
about 40 minutes each at the Gullelle sub-city SMEs Development Agency and trade and industry
offices. These offices support new firms and understand how new firms behave with regard to the
support that they provide.

The interviews addressed the implementations of laws, regulations, and directives in relation to
new business development. The empirical material also included a review of the first
comprehensive SMEs development policy and strategy in 2006 and the revised one in 2011. The
information from these sources was used for a further understanding of the context of the Ethiopian
economy (discussed in Chapter 3).

Table 2.1. Interviewed government officials

Officers Interviews Length in time Place

(in minutes)
SMEs market linkage officer 1 49:05 Workplace

SMEs-manufacturing sector 1 29:00 Workplace

support facilitating officer
SMEs growth level and 1 55:00 Workplace
transition officer
Trade and industry inspection 1 42:00 Workplace
and regulatory officer
Enterprises’ formation support 1 23:09 Workplace
case team officer
Total interviews 5

Officials at the woreda level (administrative unit lower than the sub-city) helped me to purposely
identify new firms that were formally created and which had growth potential. The officers
suggested 25 new businesses. Of these, I could access nine. The remaining were not accessible for
different reasons. Five of them did not trust that the data was needed only for academic purposes.
Instead they feared that the report could be used by the government such as for taxation purposes.
Another eight firms denied access because they felt over-researched. They claimed that they had
given many interviews to different researchers and that the outcomes of the previous studies had
not benefited them. Therefore, they felt that yet another interview would be a waste of time. The
last three firms denied appointments even after repeated requests. These three firms canceled at
least three scheduled interviews. Therefore, I requested referrals from those owner managers I had
interviewed earlier. With these references, I got access to five more new businesses.
For each new business, I first interviewed the owner manager, and the owner manager helped me
identify those I could interview from the firm's suppliers, customers, and employees. In all the
interviews, semi-structured interview questions were used to begin the discussion while more
questions emerged while interacting with the interviewees. Further, I did not decide on the number
of firms to be included as cases in this research at the beginning of the interview process. Instead,
the selection was iterative and I planned to stop when I thought I had enough data for the purpose
of the dissertation or when data saturation was achieved (Stake, 1995; Yin, 2005) Accordingly, I
conducted face to face interviews with owner managers of 14 new businesses. The interviews
typically lasted 1.5 hours with one outlier that lasted 4 hours. In addition, I also did face to face
interviews with three selected employees, three suppliers, and three customers of some businesses.
On average, these discussions lasted 30 minutes each. Table 2.2. shows the sources of information
for each case.

My experiential learning on data collection helped me to figure out how I should proceed with data
collection and who I should target. Originally my primary focus was owner managers but after
going to the field and meeting a few owner managers, I realized that more stakeholders needed to
be included in the interviews. Hence, I extended the sources to include suppliers, customers, and
employees. I was convinced that these groups of individuals could provide data on forming,
maintaining, and ending their relationship with the target business. The transcripts of the
interviews with the stakeholders were used for developing case studies of the new businesses that
they represented.

Among the 14 new businesses that I accessed; seven cases were selected which form a part of this
dissertation. The selection was done after repeatedly listening to the audio recorded interviews and
reading all the transcripts. The seven cases were richer in terms of access and the information that
was gathered like they provided access to more stakeholders. The last column in Table 2.2 shows
how the cases are used. The seven cases include D-Garage service, S-Publishing enterprise, E-
Coffee processing plc, Y-Leather products partnership, A-Food processing plc, K-garment plc, and
M-Aluminum and metalwork. The first six cases form a part of the empirical chapters and the
seventh case is used as a case vignette in the introduction chapter.
Table 2.2. Interviews with new businesses

Cases Interview with owner Number of other interviewees Other Remark

manager sources of
data

Date Place Employees Customers Suppliers

Lengt
h (H:
M

D-Garage 01:54 Nov.22,2016 On site 3 3 1 Site visits

service- sole and
proprietorship observations
S-Publishing 04:00 Nov.30,2016 On site 3 2 2
Site visits
enterprise-
and
sole
observations
proprietorship
E-Coffee 01:00 Dec.22,2016 On site 2 3 Site visits

Case business
processing plc and
observations
Y-Leather 01:11 Dec.20,2016 On site 2 2 Site visits
products and
partnership observations
A- Food 01:00 Dec. On site 3 Site visits
processing plc 21,2016 and
observations
K- Garment 01:33 Apr. On site Site visits
plc 10,2017 and
observations
M- Aluminum 01:41 Apr. 19, 17 On site Case
Site visits
and metal vignette
and
work -sole
observations
proprietorship
H-Garment 01:06 Apr. 16, On site Site visits
Background information

plc 2017 and

observations
H-Reeling plc 01:22 Apr. 16, On site Site visits
2017 and
observations
Z-Garment plc 01:42 Apr10, 2017 On site Site visits
and
observations
A- 01:30 Apr.19, On site Site visits
Construction 2017 and
plc observations
G-Home and 01:30 Apr.20-2017 On site
Site visits
office
and
furniture - sole
observations
proprietorship)
K-Home and 01:29 Apr.21, On site Site visits
office 2017 and
furniture observations
G- Rubber and 01:26 Apr. 28, On site
Site visits
plastic 2017
and
production
observations
and selling plc
Total 14 10 13 3
interviews

The remaining seven cases are not included directly in this dissertation. However, interviews with
representatives of each case helped me learn more about the context of developing new businesses
in a developing economy. I was actively involved in the interviews, site visits, and observations.
In addition, I took time to carefully listen to and transcribe the interviews. These enhanced my
understanding of the implementation of the SMEs development policy and strategy and informal
businesses’ activities in Ethiopia. The information, including interviews with government officers,
are used in Chapter three on the Ethiopian context as a developing economy.

Focusing on the selected seven businesses, I re-read the interview transcripts. These helped me
select the most representative case studies with storylines related to different research questions.
The cases showed the complexity of developing a new business and detailed interactions with its
contexts – its “complexity and contextually” (Stake, 1995, p.16). As the cases were selected based
on research questions and for a general understanding, they are instrumental in understanding a
phenomenon (Stake, 1995). The cases help understand the challenges of developing new
businesses in developing countries. I selected one case representing challenges related to product
development; another case for illustrating resources; and two cases to illustrate the challenges
related to the market development of new businesses. Two more cases are used for illustrating the
critical stages in a new business’ development. This enabled a case by case analysis of the selected
cases. Finally, one case is used as an inspiring vignette at the beginning of the introductory chapter.
From the beginning, I was inspired to better understand why and how new businesses develop in
developing economies. With this broad thinking, I went to the field to collect empirical data. For
the fieldwork, my empirical context was new businesses in Ethiopia. But before collecting the
data, I prepared semi-structured interview questions directed at the businesses’ owner managers.
The questions were in line with the general purpose of this dissertation. The interviews were
intended to explore and gather experiential narrative material for developing a richer and deeper
understanding of the process of developing new businesses in a developing economy (Van
Maanen, 2016).

The questions were grouped into categories for addressing issues related to stakeholders in the new
business ecosystem. The stakeholders included owner managers, suppliers, customers, employees
in firms, and employees of the local office of the SMEs Development Agency (Teece, 2007). The
use of multiple informants helped minimize potential biases because of hindsight and
rationalization as the information was collected from retrospective reconstructions of past
experiences (Alvesson & Sköldberg, 2009). The stakeholders were accessed as a source of data
(Table 2.3). The questions were iteratively improved during the interview sessions.

Table 2.3. Interviewees contacted

Owner Employees Customers Suppliers Government Total

managers of new of new of new officers
businesses businesses businesses

Number of 14 13 15 5 5 52
interviewees

Unit and level of analysis. The problem of specifying the beginning and ending of a process makes
the choice of a unit of analysis in studying a process challenging (Selden & Fletcher, 2015).
Arguing that social events infinitively regress to past and future contexts, Selden and Fletcher
(2015) highlight the need for sub-dividing the process into sub-processes including activities
which when joined form a larger process. The beginning and end of the process is marked by
changes in the pattern of activities (Selden & Fletcher, 2015). Similarly, the process of new
business development begins with the actual entrepreneurial activity of starting a business and
ends when activities which characterize large and established businesses start. Thus, the end of the
process of developing a new business is marked by its transition to a large and established business
(McMullen & Dimov, 2013).

This process needs to be punctuated with critical sub-processes explained through the actions and
interactions of their components, prior events, actions, and sub-processes (Selden & Fletcher,
2015). I identified the critical phases as sub-processes of new business development. The identified
process is explained by underlying things and mechanisms for arranging the sequence of discrete
events (McMullen & Dimov, 2013). Defining the level of analysis is also challenging as there is
continual interaction between the context, process, and content of a new business’ development
(Pettigrew, 2012).

The investigation in this dissertation considered different levels of analysis including individual,
relational, team, and social networks. Hence, the analysis incorporates investigating activities and
actions in the process of new business development at the indicated level of analysis (cf. Pettigrew,
2012).

2.4. Analyzing the empirical material

The journey for understanding the process of new business development started with the verbatim
transcription of the audio recorded interviews. I read the transcripts repeatedly and found different
storylines integrating each process. Each process involved linking the parts in the business
development process. As a result, each process exhibited different storylines. These storylines
dealt with different aspects of the process of new business development and included product
development, resourcing, market development, and phase transitions in a new business’
development. Based on the storylines, I constructed case studies of the different businesses from
the transcripts. This transformation of empirical material into a format suitable for analysis formed
a major step in the research process (McMullen & Dimov, 2013, p.1485).

Further, re-reading the case studies helped me select the most representative cases with storylines
related to various aspects of a new business. Accordingly, the case studies were clustered into
product development, resourcing, market development, and phase transitions in new business
development depending on the degree of dynamics manifested in each case study. Then I selected
a case study that best represented the process of developing a product in a new business. Likewise,
case studies were selected and aligned with the process of resourcing, market development, and
phase transition in the various aspects of a new business’ development.

Next, I concentrated on each case study. I started with an analysis and interpretation of the case
studies selected for understanding phase transitions of new businesses development; this was
inspired by an analysis of the narrative. The alignment with the narrative analysis method was
chosen in line with scholarly arguments like those by Gartner (2007, p.616) who specifies that
"...narrative approaches provide some very powerful tools for exploring what entrepreneurs (or
others) say about what they do." Each case study was constructed temporally with initial
conditions, actions, and activities, and ended with the ending of the process (Larty & Hamilton,
2011). The analysis of a case study focused on the dynamics of actions, happenings, and activities
that composed this process (Sandelowski, 1991). This was done through interplaying the selected
case studies and extant literature on phase transition of developing a new business. The choice of
this stream of literature was inspired by the challenges faced and remedial activities manifested in
the case studies.

The first case represents a new business supported by the SMEs Development Agency. The second
business represents a business developing with no government support. The analysis emphasizes
the role of different agents in the three main activities of developing a new business. This analysis
focuses on identifying the agents involved, their roles in the main activities of product-market
fitting, resourcing the business, and building the organization. Further, the analysis shows how the
agents interacted and the characteristics of each agent’s influence while the business’ development
unfolded. In addition, the analysis shows how a business supported by the SMEs Development
Agency developed, and how it reconfigured itself when the support stopped. Further, the analysis
focuses on whether and how the main activities interacted. It shows how the main activities of
product-market fitting, resourcing the business, and building the organization influenced each
other as the business’ development unfolded. This was done by comparing two cases to see if there
were any differences or similarities in the interactions among the activities in developing a
business with and without government support.

Secondly, the study emphasizes on an analysis and interpretation of the case study selected for
product development. From this analysis, I understood that knowledge management is an
important aspect of developing a product in a new business. With this understanding, I took time
to read literature on knowledge management in product development in the context of new
businesses. This led me to choose the knowledge management perspective as the conceptual
framework for Chapter five on product development. Accordingly, I reviewed extant literature on
product development with a focus on knowledge management. This showed the roles of different
agents in developing products in new businesses and their interactions among themselves. The
literature review sensitized me to frame the analysis and interpretation of the case studies. I worked
to fuse ideas from the analysis and an interpretation of the case study and literature review. I went
back and forth between theoretical orientations and empirical data so that both reflexively
reinforced each other (Ryan, Tähtinen, Vanharanta, & Mainela, 2012.; Tsang & Kwang, 1999).
This means that I produced new knowledge by fusing my existing understanding and empirical
data. Hence, knowledge was co-produced by the active engagement of all the stakeholders (Van
de Ven, 2007) and this knowledge production was 'iterative cyclical,' and ‘non-linear' (Gioia &
Pitre, 1990) leading to reflexivity ruling the process of knowledge production (Alvesson &
Sköldberg, 2009).

The findings contributed to the lessons presented in Chapter five on product development. These
are based on the interplay of the ideas from the analysis, an interpretation of the case studies, and
the literature review. Thus, Chapter five on product development is structured into four sections:
literature review, case study, analysis and interpretation, and lessons learned. The same procedure
is used in all the empirical chapters.

The third empirical chapter, Chapter six, deals with resourcing new business development in a
resource constrained environment. I started with an analysis and interpretation of the case study
selected for resourcing a new business. The analysis showed the roles that different actors played
in searching for resources as a new business’ development unfolded in a developing economy. I
also investigated how the agents interacted as the new business found more resources during its
development. From the analysis of the case study, I understood that the need for resources and
their different sources were not pre-determined. Instead, the need for resources and the different
sources used for them emerged as a new business’ development unfolded. I linked this issue with
literature on entrepreneurial bricolage. With this understanding, I reviewed extant literature on
entrepreneurial bricolage. The themes that emerged from the review made me re-frame the analysis
and my interpretation of the case studies.
The same procedure was applied to the chapter seven on developing a market as a new business’
development unfolded. I started with an analysis and interpretation of the case studies selected for
developing a market for a new business. Being inspired by the social networking perspective, I
developed themes for the analysis and interpretation of the case studies.

Finally, I did an analysis of the material on the Ethiopian context as a developing economy. This
involved extracting information on the SMEs development policy and strategy and supporting it
with interviews with government officers and owner managers of the seven new businesses. The
contents of the policy document helped understand how the Government of Ethiopia
conceptualizes different stages of development in a new business, challenges related to each stage,
and how the government intervenes in the development process of new businesses in the economy.
The interviews were used to complement the policy document and for learning about informal
business activities in Ethiopia. This was done by transcribing the audio recorded interviews in a
question-answer form focusing on the content. Then, re-reading the transcripts, I integrated them
with issues that emerged from an analysis of government’s policy.
3. The Ethiopian context for developing a new business
3.1. Introduction
The Ethiopian government is implementing a national development plan, the Growth and
Transformation Plan II covering the period 2016/16-2019/20 (National Planning Commission,
2016). The plan has a national vision of becoming a low middle-income country by 2025 (National
Planning Commission, 2016). This was preceded by the Growth and Transformation Plan I
covering the period 2010/11-2014/15 (MoFED, 2010). In these national plans, micro- and small-
businesses are recognized as important contributors to the gross national product. Hence, the
SMEs, small- and micro-enterprises Development Agency facilitates the preparation and
implementation of national level policies and strategies supporting the development of small- and
micro-businesses in the economy.

The Ethiopian economy provides a context for studying new business development as the
government is intervening in new business development through industrial policies (Mkandawire,
2001) and there are significant economic activities in the informal sectors (Franken & Van Dijk,
2008). The Ethiopian government provides diverse support to SMEs like a workspace, skill
training, consultations, market development, technology support, and access to finance (Amha et
al., 2015). This support is provided during five consecutive years or less and it targets formal
enterprises and not informal ones (Walther & Filipiak, 2007). However, many small businesses
are informal (about 26 percent of the recorded economy) which evade tax payments of about 10
percent (Asaminew, 2010).

For a long time, the country had socialist leanings and the private sector was discouraged (Brixiova
& Asaminew, 2010; Geda & Degefe, 2002; Taddesse, 1992). Taddesse (1992, p.172) examines
the suppressive laws and regulations of the socialist government for privately-owned small-scale
industries in the economy and says:
Investment was restricted to certain areas of activities. Excluding building and land
development costs, allowable private sector investment in small-scale industries was no
more than Birr 500,000. And 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.
These restrictions pulled back the rate and scale of development of new businesses in Ethiopia
(Taddesse, 1992). The 1991 revolution overthrew the socialist government and changed the
economic landscape of the country. The new government introduced market reforms, reduced
bureaucratic procedures, and encouraged the private sector (Geda & Degefe, 2002). At the outset,
the government pledged to minimize its role in economic activities to allow the private sector to
take on this role gradually. Since 1991, the Ethiopian economy has been struggling to overcome
the burden of its socialist practices. There are also very few formal small-scale enterprises in the
country (Brixiova & Asaminew, 2010; Wudneh, 2005).

From 1991 to 1997 the Ethiopian government supported small businesses under the investment
incentive scheme (IIS), including exemption from income tax and duties on imported capital goods
(Ayele, 2006). The main objectives of the scheme were to induce indigenous startups, and
influence SMEs operated in specific industries and locations (Ayele, 2006; Brixiova, 2009). This
has grown into a compressive SMEs development policy and strategy in 1997.

3.2. SMEs development policy and strategy in Ethiopia

The first compressive SMEs development policy and strategy in 1997 was revised in 2011. The
policy documents make explicit the expected socioeconomic roles of new businesses in the
economy. With the primary vision of becoming a competitive economy, businesses are expected
to create job opportunities, increase the society’s income and its fair distribution, and trigger
sustainable economic development (FDRE, 2011; Ministry of Trade and Industry, 1997).
Businesses are also expected to sustain rural development. To these ends, the support package
considers new businesses in selected sectors of the economy (FDRE, 2011; Ministry of Trade and
Industry, 1997) including manufacturing, construction, services, trade, and urban agriculture. The
policy documents pay special attention to the manufacturing sector. In addition, new businesses
with a larger number of owners, females in the ownership, disabled owners, and members with
HIV/AIDS are prioritized for support (FDRE, 2011). Acceptance of a new business in the support
system is related to some pre-conditions like willingness to engage in priority sectors, willingness
to work in a team, and support letters from the local administration where the entrepreneur resides.
However, new businesses engaged in activities such as beauty salons, stationary, health services,
and education services do not qualify for the support package (FDRE, 2011; Ministry of Trade and
Industry, 1997).
The implementation of the SMEs development policy is managed by a mainstream government
structure in which the federal SMEs Development Agency is at the top. The structure includes the
SMEs Development Agency’s offices in regions and city administrations and continues to the
lowest administration unit.

The SMEs Development Agency is mainly working at helping unemployed citizens (FDRE, 2011;
Ministry of Trade and Industry, 1997). Unemployed citizens with academic qualifications
(diploma and degree certificates) are supported for starting new businesses related to their
professional training. For example, graduates from the department of civil engineering are
supported in establishing new businesses in the construction sector. Likewise, graduates from
computer engineering are supported in starting new businesses in computer maintenance and sales.
Unemployed citizens with no formal education are required to take short-term training in a priority
sector of their preference for starting a company. On completion of the training, they are required
to pass an examination to obtain a certificate of competence (COC). With the certificate, they can
apply for start-up support to the local SMEs Development Agency. Then, they can go through the
required administrative procedures to start a new business. Entrepreneurs have to register the new
businesses as sole proprietorships, partnerships, private limited companies, share companies, or
cooperatives. They are also required to register for trade licenses and taxpayer codes. An officer
in the SMEs Development Agency’s office at a sub-city level said this about the process:

… in general, there is a lot of support given by the micro and small development office. If we
see from the beginning to the end, first the office is working at creating job opportunities in
society. The main criterion for selecting individuals is joblessness! Graduates and unemployed
(persons) are screened through the lowest administration level (at the kebele and woreda
levels). The individuals need to prove that they are jobless. During registration, the
classification is be done as per the sector choice of the individuals which can be construction,
textiles, garments, weaving, tannery, or brick producing. Then the list is given to the TVET
school and they get training as per their registration. Based on the certificates that they get
from TVET, they go to the local micro and small enterprise development office and they go
through the administrative process and start their enterprises.
3.3. Support schemes
The Ethiopian government gives different kinds of support to selected new and existing businesses
in Ethiopia including land, working premises, training, market linkages, purchase facilitation,
equipment on lease, and financial loans (Amha et al., 2015). This support is meant to help the new
businesses play a role in the economy and continues during the first five years of the businesses.
After this period, the support stops as the new businesses are expected to be self-reliant by then
(FDRE, 2011; Ministry of Trade and Industry, 1997).

The SMEs development policy and strategy classifies support schemes according to the scale and
growth stages of a new business. Accordingly, the support packages are intended to enhance the
economic viability of small- and micro-businesses and facilitate the transition of new businesses
from the micro-enterprise level to the medium-scale level.

Hence, the agency categorizes businesses into four groups (micro, small, medium, and large) as a
base for different support frameworks (FDRE, 2011; Ministry of Trade and Industry, 1997). As
shown in the policy documents, the agency uses total assets and headcount of workers as criteria
for dividing the firms into these categories. In addition, the type of sector, that is, either industrial
or service, of the firm is also considered. As a result, enterprises in the industrial sector with up to
five workers or/and whose total assets are not more than 100,000 Ethiopian Birr are categorized
as micro-enterprises. For the service sector, the criteria for a micro-enterprise include five workers
or/and total assets not more than 50,000 Ethiopia Birr. Similarly, the criteria for a small enterprise
in the industrial sector is employing 6-30 people or/and total assets between 100,001 and 1.5
million Birr. A small service enterprise is one that employs 6-30 people or/and whose total assets
are between 50,001 up to 500,000 Birr. A business in the industrial sector with a capital of 1.5
million Birr and employing more than 30 permanent employees is a medium sized business.
Likewise, a service business with a capital of 500,000 Birr and employing more than 30 permanent
employees is a medium sized business. Further, the agency stipulates that if there is a discrepancy
between the staff headcount and total assets, total assets will be the determining criterion. Since
the agency’s mission is supporting micro- and small-enterprises, it does not define the exact
differences between medium and large size. Further, the agency’s definition does not include
higher technology and consultancy service firms (FDRE, 2011; Ministry of Trade and Industry,
1997).
Moreover, the policy documents divide each scale of a new business into three growth stages:
start-up stage, young stage, and established stage. A new business starts as a micro-scale start-up
or small-scale start-up depending on the number of employees and the capital that it has registered.
Then, the transition between growth levels is based on a rigorous evaluation done by the agency.
A new business’ evaluation starts after six months of its formation and requires a financial audit.
The new business is evaluated through nine criteria before being promoted to the next growth
level. A government official of the SMEs growth stage transition case team in a sub-city said:

… The (evaluation) criteria include number of jobs created, capital level, profitability, market size,
productivity, utilization of previous support, use of improved technology, organizational
management and structuring, and discharging responsibilities (paying taxes and renewing the
trade license). Based on the evaluation’s results the businesses are rated out of 100 percent. Then,
they get promoted to next higher-level by considering their number of employees and capital levels.

3.3.1. Stages of growth in a new business, challenges, and related support

To understand how the SMEs development policy and strategy works in practice, the various
stages of growth and the challenges faced by the new businesses are now discussed.

The government agency’s officers include a trade regulatory and inspection officer while officers
in the SMEs Development Agency include a market linkage service officer, a manufacturing case
team officer, and a growth level transition case team officer. It is assumed that the support given
to new businesses will reduce the challenges that they face and accelerate their development based
on their growth stages -- start-up, young small, established small, and early medium growth. The
policy recognizes three stages of small businesses before they progress to the medium stage.

Support starts during the start-up stage. At this stage, the new business needs to become a legal
entity and begin producing and rendering services. The start-up phase faces many challenges like
lack of initial capital, lack of knowledge of legal business forms, lack of knowhow in bookkeeping
and business operations, and lack of entrepreneurial skills. As a result, the local SMEs
Development Agency encourages entrepreneurs to have their own saving accounts as seed money
and/or mobilizing their families for money. The SMEs Development Agency supports small
businesses with seed money to get loans, benefit from state-owned projects and programs, supports
the start-up to set-up stages of their legal business forms, acquiring taxpayers’ codes, getting legal
trade certificates and registration, and providing training on basic business management,
entrepreneurship skills, and basic bookkeeping (FDRE, 2011).

After the start-up stage is complete comes the young/early growth stage. At this stage, a new
business strives to become competitive in terms of prices, quality, supply, and profits by making
use of the support that it is given. The young business grows in manpower and total assets. It relies
on bookkeeping systems. At this stage, a business faces challenges like lack of timely and
adequately finance for the nature of its work. The entrepreneur also lacks the necessary skills and
technology for improving productivity and the quality of its products. The young business does
not know about the standards to be maintained and is unable to obtain proper premises and sales
points. Hence, a business may indulge in illegal business practices (FDRE, 2011; Ministry of Trade
and Industry, 1997). The policy document prescribes solutions like facilitating the supply of
regular loans, supporting the development of business plans, strengthening skill and technology
support, providing working and sales places at affordable rents, and helping the enterprises to
operate within the legal framework (FDRE, 2011).

The last stage of a small business as recognized by the policy is the established stage. At this
stage, the business is competitive and profitable thanks to using the support given; the business is
also able to garner new investments. The challenges at this stage include incapability to produce
sustainable and quality products for becoming competent in the market, lack of awareness about
international standards regarding production and productivity, and limited capacity to get
technology and means of production to ensure its competitiveness in the market (FDRE, 2011).
The interventions required at this stage include creating a competitive enterprise (providing
training that capacitates production and productivity and providing market expansion support help
in using modern international standards in the relevant sectors), identifying the means of
production and lease that helps a business to move to the early medium growth stage, and certifying
the enterprises that move to this stage (FDRE, 2011; Ministry of Trade and Industry, 1997).

As a small business moves through these established stages, it gets promoted from the small to the
medium stage of growth (FDRE, 2011). With this transition, using production and selling
clusters/centers stops. The business also cannot get loans from micro finance institutions (MFIs),
and government purchase benefits also stop. The manpower that is developed by using technical
and vocational educational institutions also stops and a business is required to have complete
bookkeeping records and submitting financial statements approved by auditors. The business also
has to pass through strict controls pertaining to taxes and VAT (FDRE, 2011; Ministry of Trade
and Industry, 1997). These new challenges discourage some small businesses from progressing to
the medium stage. The following quote taken from interview with an official of the SMEs growth
stage transition case team in a sub-city to substantiates this:

After five years of supporting small businesses, whether they are transformed to medium
businesses or not, they are forced to leave the working premises given by the SMEs Development
Agency. If they succeed in achieving a medium stage, their connections have to be with the
investment office in the area. The SMEs Development Agency is connected to these businesses for
sharing experiences, and they serve as medium sized businesses serve as learning site for small
businesses under the support of the agency. No further support is given to businesses that are
promoted to medium size or to those businesses which are forced to leave their working premises.
The premises are used for other newly established small businesses.

An officer of the SMEs Development Agency talked about the challenges that entrepreneurs face
when their businesses are promoted to medium size:

… there are directives prohibiting support from the SMEs Development Agency which have
been promoted to medium size for creating market linkages. Businesses complain that they do
not get access to market linkages. According to them being promoted is meaningless and they
start thinking of dissolving their enterprises and establishing SMEs to get market opportunities
and employment. Enterprises also complain that having a graduation certificate (certificate of
promotion to the medium size) and thus getting an investment certificate is harmful for them.

However, the government facilitates this transition by providing a readymade industrial zone,
buildings for production and sales, and provisions for reasonably leased land; support through
loans from commercial and development banks; and priority in getting foreign currencies (FDRE,
2011).

Thus, different support is given to new businesses at different stages of their growth considering
the challenges that they face. As a base line, the policy documents recognize that a significant
number of small- and micro-businesses operate as informal businesses and remain small because
of the different challenges that they face including lack of raw materials, capital, and working
premises (FDRE, 2011; Ministry of Trade and Industry, 1997).

When it comes to SMEs’ contributions for tackling the challenges of unemployment, economic
growth, and equity in the country, the policy document shows a systematic approach in alleviating
SMEs’ problems and promoting them to medium and large firms (FDRE, 2011). The policy
document specifies the main challenges faced by small businesses at different stages in their
development and the actors responsible for supporting the businesses. The responsible actors
include the SMEs Development Agency, MFIs, the local government administration, non-
governmental organizations (NGO), capital asset leasing organizations, the Development Bank of
Ethiopian, and vocational and training institutions (FDRE, 2011; Ministry of Trade and Industry,
1997). All these organizations play different roles individually and in collaboration with others, at
different stages of growth of small businesses.

3.4. Informal economic activities in the Ethiopian economy

In general, informal economic activities make a significant contribution to many economies. For
example, Kok and Berrios (2019) indicates that informal economic activities constituted up to 60
percent of the total employment across the 99 countries sampled, ranging from less than 5 percent
in several high-income countries to more than 90 percent in several low-income countries.
Moreover, scholars like Fransen and Van Dijk (2008) show the prevalence of informal business
activities in the Ethiopia economy. Most economic activities like bicycle repairs at the corner of the
street, many small traders along the roads, and all kinds of small-scale transportation are informal in
Ethiopia (Fransen & Van Dijk, 2008).

The Central Statistical Agency of Ethiopia characterizes informal business activities as those
having no books of accounts and having no licenses, but making products / services for the market
(CSA, 2013). In this context, formality signifies the practices of starting and operating businesses
according to trade laws and regulations; the other businesses are considered informal businesses.
Formalization of a business involves trade registration and making required payments like paying
the income tax. A review of the SMEs development policy and strategy document and interviews
with government officers show that the Ethiopian economy has a significant number of informal
new businesses, along with the formal ones. From the interviews, I learned that many entrepreneurs
prefer to operate informally, avoiding the costs and controls related to becoming formal entities
but they get money from the production of legal goods and services. These make the businesses
competitive as compared to the formal ones. However, some businesses operate as informal
businesses as they cannot afford the costs of running formal businesses. This condition is
recognized by the Ethiopian government and it provides support to these businesses. An officer of
the Trade and Industry Bureau in a sub-city said:
…In the sub-city in general there are different types of very small business activities. There
are many people with ambition and skills for undertaking trade, but they lack the capacity to
penetrate the market. Taking this into consideration, the city administration made Saturdays
and Sundays free for informal traders to supply their goods on the streets. The city
administration understands that these traders cannot rent shops because they do not have
enough capital. So, on weekends the main roads are open to them for selling their products
freely.

A special feature of the sub-city is that there are large sales of cultural clothes which come
with weaving patterns. The weavers do not have enough capital to sell their products in bulk.
To solve this problem the sub-city constructed a shade in the open market area and every
Saturday and Sunday these people can sell their products in the shade. They are informal
traders but are facilitated with land and shade to earn their livelihood. This helps them as they
have a fixed place for selling their products rather than wandering here and there on the roads
in the city. This also helps them accumulate resources which they use later to form formal
businesses. After working for some time as informal businesses in the area provided, the
businesses get another shade where they operate formally after securing trade licenses and
getting competency certificates. The work done by the trade and industry bureau before the
businesses become formal is called preparatory work. After some time, most entrepreneurs
grow and register as formal businesses. Then, they get trade licenses, register their capital
and addresses, and rent working premises.

However, since there is large number of traders, this preparatory work is not available to all.
That is why many people are still working on the streets and fighting with police officers
because they are not allowed to work there. We believe that these are good citizens who have
skills and a good attitude towards their work. So, the government needs to consider this aspect
as well.
 The trade and industry bureau is working to bring traders into formal and legal activities by
prohibiting illegal trade practices and having fair trade practices in the area. The office is
undertaking surveillance to identify those businesses that are working without trade licenses,
renewal of trade licenses, and doing other illegal trade. This is for identifying those businesses
which avoid paying taxes.

As informal activities form a significant part of national economies, countries take steps to
encourage informal activities to enter the formal economy through raising tax thresholds,
eliminating the need for business licenses for most small businesses, drafting new laws to make it
easy to register a business online and for accessing tax incentives, and giving tax reductions to
small firms (Bosma, Hill, Ionescu-Somers, Kelley, Levie, & Tarnawa, 2020).

3.5. Reflections on the context

The purpose of this chapter was trying to understand the context of developing a new business in
Ethiopia. The discussion focused on two features of the economy -- the SMEs development policy
and strategy, and informal business activities. These are significant aspects that influence the
development of new businesses in the Ethiopian economy.

The policy primarily gives government support to new businesses to help them evolve from
informal and small businesses into formal medium and large businesses. It is assumed that this
support reduces the challenges that they face while they develop. Instead, being supported by the
government has varying effects as a new business’ development unfolds. Perhaps a new business’
actions and activities matter more than this support.

Thus, there is a need to understand the behavior of a new business over time in the context of the
government’s policy. This involves understanding how new businesses behave while they are
getting the support package, immediately after the support package stops, and the differences and
similarities in the behavior of new businesses with and without the support.

Even though the government supports formal businesses differentially, a significant number of
informal businesses exist in the Ethiopian economy. This contradiction shows the paradoxical
effects of formality. The government’s basic assumption is that the benefits of formality outweigh
its costs. Instead, the benefits of formality may vary as new business development unfolds. Perhaps
businesses’ situations and events affect the outcome.
This is why this dissertation discusses contextual elements because they are important in
understanding new business development in developing economies. Developing a new business is
naturally embedded in its context (Austin, 2002; Hashi & Krasniqi, 2011; Ramírez-Pasillas et al.,
2017; Welter, 2011; Zahra et al., 2014).
 4. New business development in Ethiopia: Dominant problems
and solutions
4.1. Introduction
New business development is receiving increasing scholarly attention. A new business is seen as
a system of distinct but inter-related and interdependent attributes (Beverland & Lockshin, 2001;
Greiner,1972; Kazanjian, 1988; Levie & Lichtenstein, 2010; Lewis & Churchill, 1983; Phelps,
Adams, & Bessant, 2007; Siggelkow, 2002). These attributes include both quantitative indicators
of firm size such as amount of sales, employment, size of assets owned, and market shares (Gilbert
et al., 2006), and qualitative features including activities, activity systems, product and process
characteristics, and organizational culture (Levie & Lichtenstein, 2010). Change in firm size is
influenced by interacting changes in its qualitative elements (Penrose, 1959). In qualitative
dimensions, the change consists of variations in the extent of each element and emergence or
disappearance of some elements (Siggelkow, 2002).

Studies highlight how new businesses develop into complex systems of interdependent elements
leading to a configuration of the elements and a transition between these configurations (Levie &
Lichtenstein, 2010; Siggelkow, 2002). A firm’s contemporaneous elements are highly
interdependent and have a high influence on future elements of the firm (Siggelkow, 2002).

The support that the government is providing to new businesses may influence their development
processes. As discussed in Chapter 3, the context of developing a new business in the Ethiopian
economy is characterized by government support. The government supports some businesses by
providing them resources and market connections. However, the government prefers certain
industries and markets over others. In addition, the support extends only for a limited period, after
which the new businesses need to become self-reliant in resources and marketing their products.
It is not clear how the government support influences the process of developing a new business,
whether ending the support triggers stage transition, and how the business reconfigures itself to
cope with the transition.

Therefore, the purpose of this chapter is understanding how government support influences the
evolving challenges that new businesses encounter and the remedial activities that they undertake
in their development processes in the Ethiopian economy. The discussion is framed by the phase
transition perspective. It includes a review of literature and an interpretation of two case studies,
of which one is a beneficiary of government support. This rest of this chapter is organized as
follows. Section 2 presents the literature review and Section 3 discusses the two case studies.
Section 4 does an analysis and interpretation of the cases. Section 5 discusses the lessons from the
chapter.

4.2. Literature review

Scholars have characterized a new firm’s development process as a set of dominant challenges and
the firm’s response to these through remedial activities (Garnsey, 1998; Hanks et al., 1993;
Kazanjian, 1988; Lewis & Churchill, 1983; Miller & Friesen, l984b; Phelps et al., 2007). As a new
firm’s development unfolds, challenges related to its internal and external environment emerge
that demand activities which can address them (Garnsey, 1998; Hanks et al., 1993; Kazanjian,
1988; Phelps et al., 2007). Studies give different explanations of how and why these challenges
occur. Some scholars assume that developing a new firm follows a life cycle like the life cycle of
organisms (Kazanjian, 1988). New firm development is also modeled as a pre-determined number
of stages occurring sequentially (Greiner, 1972; Lewis & Churchill, 1983; Kazanjian, 1988). Other
studies provide a holistic view of how strongly interdependent and mutually supportive dimensions
interact in developing a configuration of a firm, called ‘gestalts’ (Miller, 1981, p. 3). These studies
focus on creating ‘gestalts’ through the interaction of factors related to the environment, structure,
and strategy (Gartner, 1985; Gartner, 1988; Ketchen & Shook, 1996; Miller, 1981, 1987; Miller &
Friesen, 1980).

Studies on life cycle models consider the whole life span of a small firm, ranging from its birth to
decline stages, dividing the life cycle into a specific number of stages. Literature indicates that
there is no empirical confirmation of the specific number of stages and their sequential
relationships (Levie & Lichtenstein, 2010; Phelps et al., 2007). However, the idea that a growing
firm displays distinguishable stages or configurations at different times in its history is related to
attributes and factors (both internal and external). The attributes and factors trigger phase
transitions (Levie & Lichtenstein, 2010). Thus, as my purpose is understanding how small
businesses overcome the challenges in their early stages, this review focuses on the phase
transitions that small firms go through before they reach maturity (cf. Hanks et al., 1993). A phase
transition is a result of a major change in the state of a new business (Greiner, 1972). The change
from one state of gestalt or configuration to another is characterized by a transition period
(Miller,1981). This is a result of major changes that take place in environmental, structural, and
strategic features (Levie & Lichtenstein, 2010; Miller, 1981, 1987; Miller & Friesen, 1980). Thus,
how a given configuration of a new firm is viable in certain conditions and how the progression
through the states related to the knowable environmental condition progresses are relevant issues
in studying new businesses’ development (Levie & Lichtenstein, 2010; Miller, 1981, 1987).

A thorough reading of the life cycle models shows how small and young businesses tend to
encounter three general categories of phase transitions: legitimacy building, survival orientation,
and growth orientation. During the transition phase, a small and young firm encounters diverse
challenges (Hanks et al., 1994). Being informed with scholarly works on the dimensions of
developing a new business (Aldrich, 1979; Aldrich et al., 2006; Katz & Gartner, 1988) the actions
required for developing a new business include locating new business opportunities, accumulating
resources, marketing products and services, producing the products, building the organization, and
responding to the society and government’s needs (Gartner, 1985, pp. 699-700). I capture the
challenges and remedial activities discussed in the life cycle models along three main dimensions:
product-market fitting, building the organization, and resourcing. Each of the three phase
transitions involves different dimensions with different challenges. Figure 4.1. introduces the
transition phases in relation to the traditional stages which—according to the stage model and life
cycle literature—include the three stages of start-up, expansion, and maturity characterizing young
small businesses (Hanks et al., 1993). The upper part of the figure shows the transition phases and
the lower part shows the traditional stages.
Figure 4.1. Transition phases and traditional stages (according to the stage model and life-cycle
literature)

• Product- Survival
market fitting: orientation •Product-market fitting:
•Organization building:
•Product-market fitting:
• Organization •Resourcing:
•Organization building:
building •Resourcing:
• Resourcing:
Legitimacy Growth
building orientation

Start-up Stage Expansion Maturity

The transition phase -- legitimacy building

The transition phase involves a transition from non-existence to existence. In this phase a young
small business has no track record of its performance as it has not yet established trust among its
external stakeholders (Stinchcombe, 1965). The market is also not aware of its products, and its
suppliers and resource providers do not know the business. As a result, it faces life or death
moments (Steinmetz, 1969) which require creativity (Greiner, 1972), and the work's inception
(Scott & Bruce, 1987) for addressing them effectively (Churchill & Lewis, 1983). Scott and Bruce
(1987) argue that the difficulties in establishing acceptance for a product depends on the life cycle
of the specific industry.

Characteristics of the level

Product-market fitting. Here, the business needs to get off the ground by creating a product and a
market for it (Greiner, 1972). The main problems at this level are finding customers and expanding
the customer base and making the product and the business viable (Churchill & Lewis, 1983). The
founders' physical and mental energy is focused on creating and selling products (Greiner, 1972).
Scott and Bruce (1987) highlight that a single market characterizes this with limited channels of
distribution, and the business' market coverage is selective till its consumers start accepting its
products. They underline that the main efforts of a business in this phase are developing
commercially acceptable products, securing a market for the products, and establishing legitimacy
for the firm.
Building the organization. In this phase, the business is a one-person or a small group of founders’
operations (Steinmetz, 1969). Its organization is simple; the owner is the business—the owner
does everything important and directly supervises his subordinates and systems; formal planning
is minimal to non-existent (Churchill & Lewis, 1983). Scott and Bruce (1987) add that there are
low levels of forward planning at this stage. Greiner (1972) emphasizes that this phase is
characterized by the founders’ disregarding the management as their physical and mental energy
is absorbed in making and selling their products and communication among employees is frequent
and informal. In addition, long hours of work are rewarded with only modest salaries and the
promise of future ownership; decisions and motivation are sensitive to the market and the
management acts as the market reacts (Greiner, 1972).
Resourcing. Steinmetz (1969) highlights that in this phase, an entrepreneur is often without capital,
without apparent social skills, and without even a good idea. Yet, the owner is the major supplier
of human and financial resources, but with support from relatives and friends (Churchill & Lewis,
1983). Churchill and Lewis (1983) also stress that securing cash for financing the expenses of a
new business is a critical issue at this level. The business typically operates with a capital that is
less than its costs (Scott & Bruce, 1987).
Thus, after considerable effort a growing new business needs to secure its existence. There is a
point where the business demonstrates that it is a workable entity and enough customers are
sufficiently satisfied with its offerings (Churchill & Lewis, 1983). However, the business can
remain in this phase for a limited period of time only (Scott & Bruce, 1987). The business reaches
a critical point, a 'tip-off' point, which demands new activities to moved ahead in the growth
process (Steinmetz, 1969).
Consequently, the business needs to perform new activities to overcome the challenges that emerge
at this stage. These activities are grouped under the next transition phase of development.

The transition phase -Survival orientation

As a new business establishes credibility among its customers and other stakeholders, there is a
related increase in the volume of its activities (Churchill & Lewis, 1983). This brings additional
paperwork and more employees (Steinmetz, 1969) and a need for managing efficiencies of a
larger-scale manufacturing process, formalizing communication, and motivating employees
(Greiner, 1972). In addition, there is also a need for additional capital and new accounting
procedures for financial control (Churchill & Lewis, 1983). As a result, the founders become
overburdened with unwanted management responsibilities. Then there is also the problem of
negative cash flows. Unless a business takes up quick activities, it cannot exist with these pressing
problems (Scott & Bruce, 1987). It is a question of a new small firm’s survival.

Characteristics of the phase

Product-market fitting. Scott and Bruce (1987) highlight that in the survival phase a new business
operates with a limited product line and its growth is through market expansion. Growth in this
phase involves expanding the channels of distribution and the new small business needs to reach
an expanded market (Scott & Bruce, 1987).
Building the organization. In this phase, leadership problems might arise, demanding infusion of
new managerial knowledge as a critical component for overcoming this challenge (Greiner, 1972).
This can be done, for example, by replacing the founding manager with a capable manager who
has adequate skills and knowledge or through training the founder and upgrading his or her
capabilities in managing a more complex business. In addition, Greiner (1972) also discusses
structural mechanisms to keep the business growing. He says that a functional structure emerges
at this stage, including manufacturing and marketing sections with specialized job assignments.
But lower levels and supervisors are typically treated as functional specialists rather than as
autonomous decision makers. This is accompanied by the introduction of accounting systems for
purchasing and inventory. Systems like incentives, standards, and budgets need to be formalized.
Communication among the employees becomes formal as hierarchies grow (Greiner, 1972).
Churchill and Lewis (1983) also highlight that in the survival stage, a new business is characterized
by a simple organization; it has a limited number of employees supervised by a sales manager or
a general foreman; the employees do not take major decisions independently, but instead carry out
the orders of the owner; and formal planning is, at best, cash forecasting. They emphasize the need
for delegating responsibilities as the volume of activities and the number of employees increase
during this phase.
Resourcing. According to Greiner (1972) managerial expertise is critical in the survival phase.
Scott and Bruce (1987) add that financial resources are required for financing the working capital.
There is also a need for more inventories and receivables (Scott & Bruce, 1987). Depending on
the credibility earned in the previous stage (Stinchcombe, 1965), these can be financed through
creditor financing, bank overdrafts, and short-term loans (Scott & Bruce, 1987).

Scott and Bruce (1987) argue that a business may remain in the survival stage earning marginal
returns. Churchill and Lewis (1983) highlight that a business can generate enough cash to stay in
business, and given industry growth and its niche market, it can get the required cash for growth.
A business might stay in the survival phase for a longer period depending on the resources at hand
(Bruderl & Schussler, 1990; Fichman & Levinthal, 1991), and credibility generated among
customers, suppliers, and resource providers which is based on the legitimacy earned earlier
(Aldrich, 1999; Granovetter, 1973).

Nevertheless, challenges are a part of the continuity of a new business’ developmental process.
Centralized management practices eventually become inappropriate for controlling the business as
it becomes a more diverse and complex organization (Greiner, 1972). Market competition forces
the business to continue growing (Scott & Bruce, 1987). Further, the owner manager might decide
to continue the growth process (Churchill & Lewis, 1983). This requires performing new activities
for overcoming the challenges that come with this expansion. The activities are grouped together
though differently labeled as delegation (Greiner, 1972); making it to stage III (Steinmetz, 1969);
growth (Scott & Bruce, 1987); and success (Churchill & Lewis, 1983). I label this as the stage of
growth.
The transition phase -- Growth orientation
This phase is characterized by an increase in sales volume and profits. This requires increasing the
number of activities which necessitates more differentiation and integration of the activity systems
(Churchill & Lewis, 1983; Scott & Bruce, 1987; Steinmetz, 1969).
Characteristics of the phase
Product-market fitting. According to Scott and Bruce (1987) the characteristics of this phase are
expansion of the market base which requires expanding to different locations, selling to a new
market, and expanding distribution channels. This forces the business to compete when it comes
to pricing and taking up cost control measures.
Building the organization. In this phase, increased activities require formalized control systems
(Scott & Bruce, 1987) and there is the need for functional managers, for example, for marketing,
finance, and production (Churchill & Lewis, 1983). These authors also stress that there is a need
for professional staff members and functional systems being in place for the first time in a new
small business. There is a need for delegation of authority to the functional managers (Greiner,
1972).
Resourcing. Scott and Bruce (1987) characterize the growth phase as being profitable but the cash
is re-invested for financing the increased working capital that is needed. Churchill and Lewis
(1983) highlight that in this stage a business tends to have ‘plentiful' internal cash.

These three phases are the main transitions that a small and young business faces (Hanks et al.,
1993). However, scholars have criticized this life cycle approach of modeling a firm’s
development (Kazanjian, 1988; Levie & Lichtenstein, 2010; Phelps et al., 2007) as this approach
assumes that organizations develop as though they are organisms through a ‘specific number of
stages’ in a linear and sequential way and that the stages represent an ‘inherent program of
development’ (Levie & Lichtenstein, 2010, p.320). Even though these assumptions are intuitively
appealing, they are not empirically valid (Levie & Lichtenstein, 2010; Phelps et al., 2007). Despite
these problems, the stage approach does provide some insights that are empirically confirmed.
Firms operate in some definable state for some period of time within a specific range of conditions
(Levie & Lichtenstein, 2010). This insight has helped scholars to treat it as point of departure for
building a more flexible approach to modeling young and small businesses’ development (Levie
& Lichtenstein, 2010)..
Another model of new business development emphasizes on factors leading to the emergence of a
given configuration or dynamic state and its subsequent reconfigurations (Levie & Lichtenstein,
2010; Miller, 1987). Miller (1987) highlights the genesis of the configurations and specifies factors
behind their emergence. The factors reside in the external environment including technology, or
internally such as in the organizational structure, leadership, and strategy (Miller, 1987). The
factors are assumed to be resistant to change, but their change results in a transformation of the
configuration (Miller, 1987). Similarly, Gartner (1985) describes a new business’ development as
the creation of ‘gestalts’ of factors in four dimensions: the person(s) involved, the organization’s
structure and systems, the situation surrounding and influencing the firm, and the actions taken by
the individual(s). Fundamentally, developing a business involves assembling on-going
interdependent actions into sequences (Weick, 1979) in the interactions among the factors
(Gartner, 1985).

Gartner (1985, pp. 699-700) identifies the actions involved in developing a new business including
locating new business opportunities, accumulating resources, marketing products and services,
producing the products, building the organization, and responding to the society and government’s
needs. As the process unfolds, a given configuration develops with an internal logic, integrity, and
evolutionary momentum that gives it stability (Miller, 1987). However, the state of the firm
changes, either incrementally or dramatically through a reconfiguration of its dimensions in
response to changes in the external and/or internal conditions (Gartner, 1985; Gartner et al.,1989;
Ketchen & Shook, 1996; Levie & Lichtenstein, 2010; Miller, 1981, 1987; Miller & Friesen, 1980).

Studies address viable configurations following which a new business evolves, and indicate that a
demanding phase transition is one of the challenges which triggers a reconfiguration of the
business. However, it is not clear how a new business started with government support forms a
new configuration and whether stopping this support triggers stage transition, and how the business
reconfigures itself to cope with such a situation. Thus, the following sections focus on further
understanding the process of developing a new business using two cases studies. The first case is
a business that received government support for some time whereas the second case is a business
that has never received government support.

4.3. Case studies

These two case studies cover a new garment manufacturing business and a new garage service in
Ethiopia. The discussion is structured as follows. First, I present the case studies from the point of
view of their owner managers and then I present my analysis and interpretation of the cases. The
analysis and interpretation help enhance our understanding of growth in the early stages of new
businesses.

Case one: K- Garment plc

Garment was established in 2009 and started operations in February 2011. It produces gowns,
uniforms for students and office workers, and t-shirts. It was founded by a team of four family
members who got support in the form of a workplace and a loan from the Ethiopian government.
This support was in line with the policy of the SMEs Development Agency. One of the owners
was previously self-employed doing the same job though on a different scale. He had been tailoring
clothes for a long time. But the remaining family members had no prior business experience nor
any related experience. The entrepreneur with prior related experience is in his late 40s. Even
though he did not attend a formal school, he is familiar with sewing as he has worked with other
tailors as an apprentice. After learning how to sew clothes, he started his own business which he
ran for a long time before starting this business.
Garment started with four working owners, two old sewing machines, and 2,000 Birr as working
capital. Currently, it has 52 workers and 25 modern machines. Its capital today is 2,000,000 Birr
in cash with a total capital of 16,000,000 Birr.

Initial conditions
“Before establishing Garment, I was doing the same work on different size. The connections that
I had helped me get jobs for the new business. Meanwhile, I got information about a government
policy that supported individuals who could work as a team. I formed a team with my family
members.
The team consisted of me, my wife, and my sister’s two sons. We established a garment enterprise
in line with the SMEs Development Agency’s requirements and requested support from it. The
Ethiopian government gave us the workshop at a low rent. In addition, I took a loan from the Addis
Credit and Saving Association to use as initial capital using my personal house as collateral.
Initially, we started Garment as a cooperative. However, the government directed us to change it
to a private limited company. Currently, Garment is owned by two persons (me and my wife) while
the other two co-owners have left and started their own enterprises with support from the SMEs
Development Agency.”

Market
“I used different means for selling our products. I opened a distribution shop which sells our
products to retailers. Initially, most of my customers bought my products by chance. Once they
bought my products, they became loyal clients. Existing customers come again and refer me to
others.
I also participate in bids, including bids by government agencies, private organizations, and non-
governmental organizations (NGOs). Sometimes the government allows us to participate in bids.
Our other customers include NGOs and those supporting orphans. They buy school uniforms for
the orphaned students and give us repeat orders. Besides, health institutions are also our customers.
Even though I always follow up on bids to identify new customers, I focus on specific categories
of customers.
The venture sells different types of products in different seasons. During the dry season, it sells
uniforms to organizations for guards, gowns for workers, and other clothes for other workers and
during summertime we prepare uniforms for students. In the shop, I sell readymade clothes daily,
but for bidding I only prepare samples and produce the final products after winning a bid. This is
infrequent selling. So, daily sales and selling bids complement each other, and have also helped us
diversify our channels of distribution to overcome the challenges of finding markets.
For promoting the products, I prepare business cards and distribute them in bazaars. I have
established connections with other ventures which are selling the same products. They connect
customers to me whenever they cannot supply the type and amount of goods demanded.”

Expansion
“Initially we had four workers, including me. All of us were owners of the venture. Two did the
sewing, one fixed the buttons, and I worked on supply of materials and searching for markets.
After some time two co-owners left and started their own businesses. My wife and me were the
only workers for some time. We decided to share the work according to our existing knowledge
and experience. I sewed and my wife sold the products. We increased the number of workers over
time. Now we have 52 workers, 26 of whom are permanent. Among the workers, some work on
sewing, others on ironing, and the remaining on fixing buttons. I look for markets and my wife
works as a salesperson in the shop.
The new business started with two old sewing machines, but the employed workers were reluctant
to work with old machines. We bought 25 modern machines over time, partly financed through
credit, with the remaining money coming from what I collected by participating in 'ikub’ (ikub is
a local practice where a group of persons comes together and each member agrees to contribute a
given sum of money in an agreed period of time. Each member receives the total amount of money
contributed in each period by rotation. It either ends in one rotation or continues for many
rotations). I have already paid for a land lease, which will hopefully help me expand my business.
The business has already expanded sequentially. This increase in the volume of work has led to
increasing the number of both contract and permanent workers. I hire contract workers whenever
there are more jobs. These workers are paid on a per piece basis while the permanent workers are
paid periodically. Before 2015, the maximum number of workers that we had was 40 (15
permanent), but in 2016 we had more than 50 workers (26 permanent).
We added machines based on the availability of money and jobs. For example, in 2015 I bought
six additional machines. These were bought whenever there were more jobs that required more
workers. So, for each additional worker, I bought new machines needed for engaging the new
workers.
In 2016, the venture graduated from the small to the middle level and was certified by the SMEs
Development Agency as a medium sized enterprise as it fulfilled the criteria. It had a registered
capital of 1.5 million Birr. Earlier the Ethiopian government provided us support letters which
helped the business in bidding as they worked as performance bonds securing delivery on winning
a contract. But after we graduated to the middle level, the government stopped giving us these
letters.
This forced us to buy cash performance orders (CPOs) from banks depositing large amounts of
cash. That was not possible for a small firm like ours. I did not have cash in hand as it had been
used for buying machines and other things needed for the business. If I sold existing property to
get cash, then I would have had to reduce my workers making them unemployed.
The government allowed me to take machines on lease. But my problem was working capital.
However, the government was pushing me to take machines on lease but I did not avail of this
working capital. I have enough machines, but I needed more working capital which would help
expand operations. I needed money to buy raw materials. Once I tried to use my house as collateral
and borrow money from a bank. But the collateral had to be owned by the enterprise and could not
be a private property. This is the case when the amount of loan is in millions of Birr. My venture
did not have a property registered in its name. So, I had a problem of getting additional working
capital.
In addition, the other big challenge was getting skilled workers. We hire graduates from technical
and vocational education and training (TVET) institutions, but they do not have enough skills.
When they are given a chance to train on the job, they lack patience. Currently, I am filling vacant
positions by hiring individuals with experience on a contract basis.
Lastly, there are challenges related to the administration of the internal operations of the venture.
I have the responsibility of searching for markets and managing internal operations. I am working
on planning and controlling the preparation of garments, financial flows, and following up on the
day to day activities of the workers. In addition, I am also searching for customers and dealing
with them. These voluminous activities are beyond what I can do daily and I have become
inefficient.”

Summary of information from other sources about the garment manufacturing business
During my visits to Garment’s workplace, I observed how the owner manager dealt with his
customers. He collected information on bid announcements by potential customers by reviewing
local newspapers. Moreover, he distributed documents describing his offer to potential customers.
The selection of potential customers was based on reading bid announcements, and through
soliciting would-be buyers. He distributed business cards to the latter category of potential buyers.
I observed various telephone conversations that the owner manager had with potential customers.
He discussed the variety of products the business offered. In addition, I had a chance of observing
a customer visiting the production site. The customer was checking the number of sewing
machines and employees. I learned that he wanted to find out the business’ capacity and if it would
be able to deliver the products on time. In my discussion with the customer I understood that the
visit was for comparing different suppliers based on their capacity to deliver the products on time.

Case two: D-Garage service- sole proprietorship

The new garage business was established in 2009 in a rented place. Its initial capital was 7,000
Birr and a few hand tools. It was a sole owned business. The entrepreneur was born in a village
and grew up in a farming family. He moved to Addis Ababa to live with his married brother when
he was 6 years old. He was advised to work in a garage. He joined a garage as an apprentice.
Before starting the current business, the entrepreneur was engaged in several activities. He was
employed as a taxi driver and he also worked in a garage as a mechanic. He started and operated
a kindergarten on his own and co-owned a garage. With all this experience the entrepreneur started
his new garage service in 2009.
The entrepreneur’s prior experience

“I started work in 1992 with a daily payment of 6 Birr. The payment was very low as compared to
the living costs at that time. It was not enough to even cover my daily food expenses. However,
the payment increased slowly and reached 25 Birr a day in 1999.

I worked in the garage for seven years, got a driving license in 1999, and became a taxi driver.

In 2002, I bought a plot of land on the periphery of Addis Ababa for 2,600 Birr. Using this land, I
constructed a house in which I opened a kindergarten school. But I had no knowledge about
running the school and nor did I have the necessary educational background for running it. I hired
teachers from among those who had completed high school. After working for some time, I sold
the house for 220,000 Birr.

Meanwhile, I was employed in a garage as a mechanic. This helped me to improve my skills in

garage work.

I opened a garage in 2006 in partnership with three mechanics who had been working with me
earlier. One of us was assigned to collect cash and register financial flows. We did not hire an
accountant or office worker. After working for three years, there was a disagreement among us
because the one who was assigned to record financial transactions was cheating and misreporting
our earnings. We closed the garage and I took only 7,000 Birr and a few hand tools as my share.
My customers advised me to start my own garage. And that is what I did.”

The new Garage Service Business

“I started a sole owned garage business in 2009 at a rented place. I paid 7,000 Birr as rent. As soon
as I started the new garage, many people including customers of my previous colleagues came to
me because they trusted my honesty. I bought a minibus with 30,000 Birr.”

Operation. “Unfortunately, the place I had rented was not legally allowed for a garage. The
government penalized the owner of the compound who forced me to leave the premises. I shifted
the business to the current compound in 2011.
Another challenge I faced was getting a professional certificate. The certificate requires a diploma
in a technical discipline, but I have only studied till Grade 8. Not having this certificate hinders
me in competing for bids floated by large companies.

However, some companies offer me jobs through personal connections. For example, I established
connections with a company through its driver. I knew him and he recommended me to the
company. The company gave me a job. Unfortunately, the finance department of the company
denied me my payment. The person there argued that the contract was not legal as I did not have
a professional certificate.

There was also pressure from the trade and industry office, a government unit, to have a
competency certificate (COC) in garage work. Every year, they warned me that they would not
renew my trade license unless I got this certificate. But getting the certificate needed an education
certificate. The competency certificate required me to be a graduate from a TVET institution, and
I did not qualify for this as I had only completed Grade 8. Recently, the office renewed my trade
license with the last warning.

The other problem was potential customers’ perceptions. They thought that a mechanical worker
had to be physically big and muscular. Some persons prejudged me saying that I could not serve
them because I was not physically big. Some went away just looking at me without giving me a
chance to work on their vehicles. Those who let me try were surprised with what I could do.”

Market. “Most of the time I get new customers through referrals from my existing customers. For
example, a friend of mine convinced a customer to come to me. The customer owns many cars.
He came with a damaged car. Even though he had tried a number of garages, he had not been able
to get the car repaired. He came to my garage to try for the last time. I made all necessary repairs
and charged him only 200 Birr. He was surprised. He gave me an additional 100 Birr because he
was happy with my service. After some time, he became my client for all his cars and he also
referred me to many others, and I got many customers through his referrals.

I also managed to retain customers because of my skills and knowledge, and the way in which I
interacted with the customers. I understood that firms expanded if the customers trusted the quality
of their work, and existing customers referred the firm to other customer based on their trust in the
quality that it offered.”
Summary of information from other sources about a new garage service business
I visited the site many times and also interviewed its customers. During the visits, I learned that
the business was facing a challenge of working premises. Its premises were a small rented
compound surrounded by houses. There was a very small office room with one office table and
two chairs. The office also had a cash register machine and was crowded with different spare parts
and tools.
The small compound served as a workshop for the garage. It was occupied by disassembled cars.
Those customers waiting for services parked their cars outside the compound. They parked their
cars on the road near the garage. There were friendly conversations between the customers and the
owner manager of the garage. In my interviews with the customers, I learned that they were
satisfied with the services. Since the business did not have enough parking space, customers waited
at home. They were ready to wait for as long as it took to get the service. They had been with the
business for a long time. Service quality and trustworthiness of the owner manager were the main
factors cited for their loyalty. The employees had embraced the tolerance level of the owner. They
joined the business with only general knowledge about car maintenance. Some joined the business
after graduating from technical vocational schools, with little practical knowledge. They learned
on the job after joining the business. The owner manager helped the employees learn. Some
employees joined the business after working in other garages. But they learned most of what they
know after joining this business. Suppliers were selected based on the quality of materials that they
provided. After repeated purchases, suppliers started selling to the business on credit.
 4.4. Analysis and interpretation
This section does an analysis and interprets the two case studies. The analysis focuses on
identifying the agents involved, their role in the main activities of product-market fitting,
resourcing the business, and building the organization. The analysis shows how the agents interact
and the characteristics of each agent which influence the business’ development. In addition, the
analysis shows how a business which is supported by the SMEs Development Agency develops,
and how it reconfigures itself when the support stops. The discussion focuses on two transition
phases that a new business proceeds through as its development unfolds: engaging with the SMEs
Development Agency, and disengaging from this agency.
The second sub-section of the analysis focuses on how the main activities of product-market
fitting, resourcing the business, and building the organization influence each other as the business’
development unfolds. This is done through a comparison of the two cases to see if there are any
differences and similarities in the interactions among the activities in developing a business with
and without government support.

4.4.1. Roles of different agents in the main activities while developing a new
business
4.4.1.1. Transition phase: engaging with the SMEs Development Agency
The SMEs Development Agency shortens the time required for product- market fitting activities.
The agency mediates between a new business and the government and its stakeholders. The
empirical case manifests that a new business established in line with the SMEs Development
Agency is given priority when participating in bids floated by government agencies. The agency
also gives support letters to new businesses which help them participate in the bidding processes.
The support letters guarantee the performance of the new business among prospective buyers,
thereby helping a new business to win their confidence. In addition, the support letters also help a
new business participate in bids without being required to buy cash performance orders (CPOs)
from banks that require depositing large amounts of cash with the bank.
However, the founder’s experience and social connections improve the influence of the support
given by the agency. The empirical cases make it clear that selling to a limited number of initial
customers cannot sustain a new business. New small businesses need to increase the number and
category of their customers. A new business which has government support survives by using
complementary selling mechanisms. It sells its product to markets connected through the
government. It also sells through other outlets that the founders have experience in. For example,
the manufacturing business opened a distribution shop. Through the shop, it distributes its products
to other retailers. The retailers sell these products to final users in different areas. The new business
also participates in bidding processes. But this is infrequent selling. This includes bids announced
by government agencies and private organizations. Sometimes the government supported the
business in participating in bids. Further, the garment manufacturing business changes its products
seasonally. So, the mechanisms complemented each other and helped the business overcome the
challenges faced in finding a market.
Less dependence of a new business on government support enhances sustainability of its resource
bases. A higher level of the founder’s social interactions provides a buffer to the new business
against shocks resulting from the government withdrawing support. Government support is given
for a limited period. It stops immediately after the business progresses through the various stages
of survival. In addition, the support is limited. Termination of government support while the
business is expanding leads to new challenges. As a business’ activities expand, there are
challenges of finding skilled persons and financial resources. Financing growth is also a significant
challenge. It includes the problems of covering working capital and investing in fixed assets. First,
the internally generated cash is not enough to cover the expansion. Second, the formal banking
system does not accommodate ventures that are growing. Formal banks require a new business to
have fixed assets as collateral to get a loan. But new businesses do not have these. This leads to
the paradox of whether the chicken came first or the egg.
However, a business uses social mechanisms as a remedy for dealing with such paradoxes. The
business in the first case used the traditional money collection method, ‘Ikub’, and got loans from
friends as alternative sources of finance for meeting its needs.
As the extent of government support increases, it negatively influences human capital development
in a new business. The empirical case shows that the new business did not have the attitude of
long-term human capital development as it needed short term returns from the new workers. It
opted for hiring experienced workers from other organizations on a contract basis for addressing
its immediate needs.
The extent of government support in connecting to markets influences the type of main activities
and the internal structure of a new business. As the extent of support for market connections is
high, the founders need to do less market search activities thus focusing on production. As a result,
the founders get more time to focus on the administration of internal operations. In addition, they
need a lesser number of additional workers. This keeps the internal activities structure simpler.

4.4.1.2. Transition phase: engaging with the SMEs Development Agency

However, stopping government support leads to other challenges. A new business needs to search
for additional market connections for its expansion activities. In addition, the challenge of dividing
jobs also emerges. The first empirical case shows that when the government support stopped, the
owner manager was overstretched because of the diverse activities that he had to handle. The
activities included administration of internal operations and searching for more customers. Hence,
the owner manager became inefficient in both the activities. It required the division of job
responsibilities and assigning separate persons for the administration of internal operations and
searching for markets.

4.4.2. Interactions of the main activities as the new business development unfolds
This sub-section compares the interactions in the main activities of a business which has
government support and a business without this support. The two businesses discussed in this
chapter have similarities and differences. They started as small businesses. Their owners had prior
experience in their respective industries, and they used their existing market connections for
finding initial markets for their products and services. Moreover, the owners of both the businesses
had prior experience of starting new businesses. But the two businesses are also different. One is
in manufacturing, whereas the second is a service business. In addition, the first started with
support from the Ethiopian government for a workplace and a financial loan. But the second had
no such support. The first business was started by a team of owners, whereas the second is owned
by a single person. The two cases help compare and contrast the challenges faced, and the solutions
when a new business starts with support from the Ethiopian government and one which has no
such support.

Whether a business is supported by the government or not does not bring about any changes in
their behavior of indulging in cost minimizing activities. The new businesses started with
government support and without government support focus on activities that help them minimize
costs. In both the empirical cases, the businesses employed workers on a non-permanent
employment basis as a mechanism of coping with the unstable demand that they faced. This helped
the businesses to easily lay-off non-permanent workers as demand for their products declined.
In addition, the founders’ prior work experience and social connections influenced the
development of the businesses whether they were supported by the government or not. Prior work
experience and social connections of the founders helped both the categories of new businesses.
The empirical cases show the role that prior experience played in helping the new businesses in
establishing connections with their initial customers. In the garment manufacturing business, the
founding manager had been doing the same work earlier. This helped the business choose its
distribution channels and it opened a distribution shop in the place where the founder earlier sold
his products. The new garment manufacturing business also sold its products to retailers that the
founder knew through his previous business. Similarly, the garage case shows how prior personal
connections helped the founder connect with new customers. As he founded the new garage, his
previous customers became customers of his new business. The cases also show how referrals by
initial customers helped in earning the trust of new customers. In the garment manufacturing case,
the owner manager indicated that once the customers bought his products, they become loyal
clients. Existing customers also referred him to other clients. Therefore, the business benefited
from its chain of customers. Similarly, the garage business also used referrals from existing
customers to get new customers. The owner manager of the garage business stressed that new
customers trusted him because his existing customers trusted him.
Whether a business is supported by the government or not does make a difference to the speed at
which the business learns about the political and legal environment. A new business supported by
the SMEs Development Agency develops more knowledge of the political and legal requirements
than its counterparts. It gets more orientation and training. In the second case it is clear that lack
of prior knowledge about government rules and regulations in the specific area of the business led
to legal action against it. Hence, lack of prior knowledge about the legal requirements is a threat
to new businesses. In addition, a new business with no government support faces more challenges
in establishing legitimacy in the Ethiopian economy. For instance, the owner of the garage business
was struggling to get a professional license and renewing his trade license.

4.5. Lessons from the chapter

The purpose of this chapter was understanding the influence of government support in addressing
the evolving challenges and undertaking remedial activities as a new business developed in the
Ethiopian economy. The discussion included a review of literature and an interpretation of two
case studies. The chapter identified the main agents who played roles that influenced the
development of new businesses in developing economies and gave an insight into their roles as
the process unfolded. Involving the SMEs Development Agency helped in the main activities of
product-market fitting, building the organization, and resourcing of a new business which
influenced the configuration of the activities as the new business developed. The degree of
influence varied as per the nature, extent, and timing of this involvement. The development process
was positively influenced when the agency involved itself more in resourcing than in product
market fitting and building the organization. New businesses in developing economies start with
limited financial resources and have no owned working premises. In addition, the formal financial
system in the country does not provide financial services to small businesses. However, as the
amount and length of support through resources increases, it delays the development of a new
business as it delays the founders getting engaged with other sources for resources. This negatively
affects the development and the configuration of the business’ main activities. To overcome this
challenge, the founders intensify their search for other sources for resources in parallel with
support from the SMEs Development Agency. This search unfolds as the business develops. This
helps sustain the configuration of activities with less influence of the withdrawal of government
support as the process unfolds.

The involvement of the SMEs Development Agency in product-marketing fitting activities results
in challenges that extend the problems for the businesses. Firstly, the founders’ social ties
complement government support in enhancing the extent of the challenges of building the
organization. I call this the liability of early market base scaffolding. The concept conveys the cost
that accrues as a new business depends on the government for market support. However, this
depends on the extent to which a business relies on government purchases while it is getting
support from the government. If a new business diversifies its customer base, including individual
customers, it acquires knowledge about marketing practices in the industry. It also gets a bigger
customer base in case the government withdraws its support. Consequently, it reduces its liability
of early market base scaffolding. The Government of Ethiopia supports new businesses by
connecting them to government purchases. As part of the support package, the government helps
businesses to directly sell their products to projects run by the government. In addition, the
government mediates between a business and its other buyers. To fulfill the demand from the
government, a new business needs to acquire material and human resources. This in turn increases
the need for internal differentiation and integration of the role structure. These make the business
accumulate resources and other infrastructure. But the support is only given for a limited period.
As the support stops, the new business needs to deal with the challenges of finding new customers.
This is new learning for the business.

The extent to which a business finds additional markets determines the level of utilization of its
accumulated resources. Holding unutilized resources involves additional costs. Employees need
wages and salaries. In addition, the business needs to incur costs to maintain its other infrastructure.
But the business may lack skills and connections in business practices with individual buyers. As
a result, a new business faces problem in generating enough revenue to cover its costs.
5. Developing a product in a new business
5.1. Introduction
Developing a product is an integral part of a new business’s development (Schoonhoven et al.,
1990; Ulrich & Eppinger, 2004). Researchers argue that developing a product involves managing
knowledge related to the product (Safdar et al., 2017) through the creation of new knowledge, a
synthesis of existing knowledge, and the use of prior experience (Schoonhoven et al., 1990). This
process comprises learning by doing (Marion et al., 2012; Söderquist, 2006) and collaborations
with external entities (Clauss & Kesting, 2017; Freel, 2003; Luzzini et al., 2015). These activities
help new businesses in overcoming different challenges (Marion et al., 2012; Zimmerer &
Scarborough, 2008) including those emanating from economic, political, and regulatory
uncertainties in developing economies (Lingelbach et al., 2005) effecting the process of
developing a product. As shown in Chapter 3, the Ethiopian context is characterized by limited
access to finance, unpredictable markets, the existence of discriminatory regulatory practices, and
lack of business skills and managerial expertise (Ageba & Amha, 2006; Amha & Ageba, 2006 ;
Gebreeyesus, 2011; Kelley, Singer, & Herrington, 2012; Kebede & Simesh, 2015). However, the
Ethiopian government supports select new businesses in overcoming such challenges including
the facilitation of external finance and providing training on product development and
commercialization. This overall support is a part of the Ethiopian government's SMEs
development policy and strategy. But the support is provided to only selected new businesses for
a limited period of time.

Thus, the purpose of this chapter is developing an understanding of the challenges encountered
during a new business' product development and identifying how a new business can overcome
these challenges in the Ethiopian economy. It examines the activities of managing knowledge for
overcoming the challenges. The chapter includes a literature review, a case of a new coffee
processing business, and an analysis of the case.

This rest of this chapter is structured as follows. Section 2 presents the literature review, and
Section 3 discusses the case. Section 4 provides an analysis and interpretation of the case while
Section 5 discusses the lessons learned.
 5.2. Literature review
Scholars stress that developing a product requires diverse knowledge (Kim & Kim, 2011). The
need for having appropriate knowledge is fulfilled by creating new knowledge, which includes
combining existing knowledge and using prior experience (Schoonhoven et al., 1990).

The following section discusses different aspects of the use of prior knowledge, and creation of
new knowledge when developing a product in a new business. After that, it reviews the literature
on developing a product in the context of a developing economy.

Prior knowledge when developing a product

Developing a product involves reusing the knowledge generated through experience by codifying
and storing it for future use (Kim & Kim, 2011; Shahin et al., 1999). Schoonhoven et al. (1990)
argue that experiencing and observing product development projects and prior start-up experience
shorten the product development time. Previous experience with a start-up provides skills on how
to benchmark the product vis-à-vis other competing products (Ucbarasan et al., 2009). Founder (s)
with prior start-up experience can draw on high levels of task-specific knowledge to mobilize,
coordinate, and combine engineering and R&D resources in developing new product innovations
(Gruber et al., 2008). The knowledge gained from prior start-up experience is a resource that
cannot be developed easily through other types of learning (Delmar & Shane, 2006).

Most knowledge is grounded in experience, procedures, emotions, and skills (Nonaka et al., 2000)
and remains tacit (Johannessen et al., 2001; Lubit, 2001; Polayni, 1944). Kim and Kim (2011)
found that around 40 percent of all design information requirements in developing a product were
met by personal information and knowledge. Tacit knowledge is utilized by engaging the
knowledge holders in the process of actual product development activities (Johannessen et al.,
2001; Lubit, 2001). Literature highlights that a founding team with diverse expertise considers
aspects such as the product's quality, cost, manufacturability, user requirements, and delivery time
(Liker et al., 1996; Patanakul et al., 2012). I explain this as follows.
Knowledge and experience of the founding teams. Scholars emphasize the benefits of teamwork in
developing a product in a new business (Akhavan et al., 2016; Dong & Yan, 2006; Kim & Kim,
2009). The fruitfulness of the team's work depends on the complementarily of their skills and
knowledge (Akhavan et al., 2016). The selection of team members considers the members’
contribution to the information sharing (Akhavan et al., 2016). A balanced functional mix of the
members achieves higher manufacturability of the product (Akgün, Lynn, & Yılmaz, 2006). The
team's structure depends on the extent of information sharing (Bai et al., 2017; Sivasubramaniam
et al., 2012). For instance, more marketing expertise is desirable when the level of innovativeness
of the product is incremental (Dong & Yan, 2006; Kim & Kim, 2009).

Knowledge sharing among team members is influenced by factors like the extent of common
information bias (Zhang et al., 2014) and psychological safety levels (Safdar et al., 2017). Team
members tend to use common information shared by all team members while neglecting critical
information unique to a person (Zhang et al., 2014). Besides, individuals with high psychological
safety levels are more inclined to consult fellow team members, while individuals with low
psychological safety levels are more likely to choose external sources (Safdar et al., 2017). People
are more likely to offer ideas, admit mistakes, ask for help, or provide feedback if they are part of
a team and if they believe it is safe to do so (Safdar et al., 2017).

Also, the team process influences goal clarity, external and internal communications, group
cohesiveness, and has a strong relationship with new product development outcomes
(Sivasubramaniam et al., 2012). Moreover, new businesses need to acquire additional knowledge
as their product development unfolds (Marion et al., 2012; Sarasvathy, 2001; Schoonhoven et al.,
1990). This is critical for new businesses in Ethiopia as they lack prior skills and managerial
expertise (Ageba & Amha, 2006; Gebreeyesus, 2011; Herrington & Kelley, 2012; Kebede &
Simesh, 2015).

New knowledge acquisition when developing a new product

'In house' knowledge creation. Developing a product involves learning by doing, consisting of a
series of activities of developing solution for a problem (Söderquist, 2006). This process is
influenced by who the new venture’s founders are - their traits, tastes, and abilities; what they
know- the knowledge corridors they are in; and whom they know - their social networks
(Sarasvathy, 2001, 2008). The process consists of various activities at every juncture including
problem-solving, alternative-generating, and adapting-alternatives (Nomaguchi & Fujita, 2013;
Schoonhoven et al., 1990). The new venture’s founding members, who have no experience, jump
to the task, learn, and get the job done (Marion et al., 2012, p. 647). Such a process involves
activating knowledge embedded in existing product solutions, extracting as much tacit knowledge
held by others as is possible, and capturing and assimilating new knowledge as much as possible
as the process unfolds (Söderquist, 2006). However, the greater the extent of knowledge that is
created or synthesized in a unique way by a venture, the longer it takes the venture to market its
first product (Schoonhoven et al., 1990). Besides, developing a product by a venture operating in
a competitive and dynamic environment needs to consider external stakeholders including
costumers, material suppliers, academic institutions, and competitors (Chesbrough, 2003;
Cammarano, Caputo, Lamberti, & Michelino, 2017). Product innovation unfolds with a continual
acquisition of knowledge through interactions between the founders and the stakeholders (Berends
et al., 2014; Sarasvathy, 2001).

Acquisition of knowledge from external stakeholders. Considering that a firm operating in an

industry characterized by and change in market preferences and material suppliers available in the
market it requires stakeholders (Behnam et al., 2018; Chesbrough, 2003; Wang & Libaers, 2016).
Thus, collaborations with external stakeholders increase the venture's existing knowledge base,
which in turn advances its innovation capabilities (Clauss & Kesting, 2017; Freel, 2003; Luzzini
et al., 2015; Zhou & Li, 2012). It gives access to information about markets and how to serve them
better (Elfring & Hulsink, 2003). Researchers also argue that ventures seek ideas and knowledge
from external stakeholders as it takes time, money, and effort to develop them internally
(Cammarano et al., 2017; Greco et al., 2016). Further, the inclusion of ideas, expertise, and
knowledge from external stakeholders helps align the product with market needs and technological
changes in the industry (Han et al., 2012; Naqshbandi, 2016). Such an inclusion helps align the
product with suppliers' technologies and makes it compatible with complementary products
(Chesbrough, 2003). Further, information gathering from customers, competitors, markets, and
technologies plays a critical role in the incorporation of market and technical knowledge in
organizations (Akgün et al., 2006). Searching for information widely and deeply can provide
higher knowledge in developing a product (Laursen & Salter, 2006). Chesbrough (2003)
emphasizes that the market and material suppliers are the two most relevant external sources of
knowledge when developing a product.

The market as a source of knowledge. The market signifies a person, an organization, or a

community expected to individually or in a group, use or take decisions about buying a product
(Von Hippel, 1986). However, the time taken for incorporating market needs into the development
process varies. Moreover, some contingencies determine the extent of the role of the market in
developing a product.

There are a variety of models representing the steps in new product development. Booz et al.,
(1982) developed a model with seven steps (new product strategy, idea generation, screening and
evaluation, business analysis, product design and development, testing, and commercialization).
Cooper (1988) regrouped these seven steps into three major phases. The first phase is pre-
development activities or up-front activities including idea generation, screening, project
definition, and business analysis. The second phase is product development, and the last phase is
commercialization activities (backstage activities) including product testing, testing the market,
production for a trial, and market launch. Cooper (1988, pp. 246-247) also argues that up-front
activities play a central role in developing a product. The outcomes of the activities, results in
"knowing the customer, the product needed, and competitive products. In addition, it helps to have
a clear definition of what benefits the new product must deliver and knowing how it must be
differentiated from competitors' products in order to gain an advantage in the market."

The process of developing a product pre-supposes that firms can specify future market needs for
their products and customers know their future needs. This assumption works when the product is
familiar to both the firm and the market (Verworn & Herstatt, 1999). Further, scholars also
highlight that the very essence of the process model is separating the planning and execution parts
of the product development process. This is rooted in traditional marketing research (Lilien et al.,
2002). It also involves getting information about market needs from a sample of the potential
market. The process model assumes a sequential undertaking of planning and execution. However,
this model has a limitation in dealing with 'new' product development (Veryzer, 1998).

Von Hippel (1986) popularized the lead user method as an alternative for developing a market
driven new product. This method involves procedures and is grounded in the problem-solving
model. The process starts by identifying important dimensions of product innovations. This
incorporates the interests of the top management, expert recommendations, or a market survey
(Lilien, et al., 2002; Von Hippel, 1986). The second activity is identifying lead users. These are
individuals with an intense need, and the product can provide a solution for this need (Von Hippel,
1986). But the composition of lead users depends on the type of product. For industrial products,
it is composed of individuals working as experts in user organizations who use the product in their
day to day activities. These individuals have direct use experience of the product and can suggest
appropriate improvements to the product. Lead users also help in developing consumer goods. The
lead users for consumer goods include individuals who have been using the product and are
perceived to have enough experience to propose solutions for addressing their needs that the
existing product does not fulfill. It also involves analyzing lead users' needs. This includes
considering the interests of the top management and the availability of resources. Finally, the
process requires projecting lead users' needs on to the general market of interest. This is an
evaluation of whether lead users' needs are representative of the future needs of the target market
(Von Hippel, 1986). This also helps decide the feasibility of producing the product (Eisenberg,
2011; Herstatt & Von Hippel, 1992; Hienerth et al., 2014; Schweisfurth, 2017; Schweisfurth &
Raasch, 2015).

Researches argue that the lead user method has certain advantages over traditional market research.
It helps in developing a radical innovative product at a low cost in a shorter period. It also helps
cope with changes in industries characterized by fast changes in technologies (Franke et al., 2006;
Lilien et al., 2002; Schweisfurth, 2017). Von Hippel (1986) notes that relationships between lead
users and innovative firms vary. On the one hand, a firm accesses the lead users who are external
to the focal firm, it obtains information about their needs, and finds recommended solutions
through market research. On the other hand, innovating firms hire experts who have been using
the product (Schweisfurth & Raasch, 2015). These individuals can either be employees of other
organizations who buy the innovating firm's product. The individuals employed are those who
have been working as experts in customer organizations.

The innovating firm can hire consumers who have real-world experience of the product and can
thus give specific solutions in relation to the product. In both these cases, hiring lead users
enhances the quality of information collected as also the innovations made to the product. Franke
et al. (2006) highlight that the information collected from external lead users is limited to possible
solutions that can be codified. In addition, there is a distortion of the messages while processing
the information. As a result, the product that is designed does not reflect the exact needs of the
lead users and the solutions that they propose. Scholars argue that in contrast, hiring lead users
provides an opportunity to understand the tacit aspects of their needs and proposed solutions in
innovating a product (Schweisfurth, 2017; Schweisfurth & Raasch, 2015). However, Marion et al.
(2012, p. 649) found that a "new venture did not actively utilize retailer, sales, or customer input
during developing product. Instead, it utilized experience and instinct of core team members acting
as led users."

Material suppliers as a source of knowledge. Material suppliers are individuals or organizations

who supply material inputs during the production of a product. Scholars argue that the role of
external suppliers depends on the strategy of the firm regarding sources of material inputs
(Chesbrough, 2003). Petersen et al., (2005) emphasize that if a firm outsources the supply of
materials to external suppliers, its product development needs the involvement of external
suppliers. This helps a firm acquire appropriate technology and aligning the product that is
developed to the suppliers' technological improvements (Petersen et al., 2005). Song and Di
Benedetto (2008) stress that when suppliers are a part of the process, they provide a firm with
engineering capabilities and help in setting the properties for the product. Suppliers also help
identify potential problems that may emerge in the process of developing the product. Researchers
also argue that the early involvement of suppliers improves the quality and speed of developing a
product (Petersen et al., 2005; Ragatz et al., 1997; Song & Di Benedetto, 2008).

Product development in the context of developing economies.

Most studies on developing products in SMEs come are based in developed economies
(Hadjimanolis, 1999). However, unlike developed economies developing economies are
characterized by economic, political, and regulatory uncertainties (Lingelbach et al., 2005).
Similarly, the context of developing a new business in Ethiopia is volatile as it is characterized by
limited access to finance, unpredictable markets, and the existence of a discriminatory regulatory
body (Ageba & Amha, 2006; Gebreeyesus, 2011; Herrington & Kelley, 2012; Kebede & Simesh,
2015). Such challenges influence the process of developing a product in a new business (Marion
et al., 2012; Sarasvathy, 2001). Therefore, these findings of new product development in developed
economies might not apply to developing economies and some scholars have started studying new
product development in the specific context of developing economies.
Based on a postal survey of 448 SMEs in Croatia done in 2004, Radas and Božić (2009) explored
the factors that drove innovation activities in SMEs in an emerging transition economy compared
their findings with the findings from developed economies. They found that the most important
factors in developed economies were also important in developing economies but the market scope
was a very important factor in product development in developing economies. Mu et al. (2007)
examined the key success factors of new product development in Chinese SMEs. They found that
Chinese SMEs did not consider financial returns, but focused on the uniqueness and newness of
their products as the primary criterion in the idea-generation stage. Further, they also found that
technological, marketing, commercial, and managerial factors were important across all stages of
product development.

Most research on product development by SMEs in developing economies has focused on

institutional conditions. Minh and Hjortsø (2015) analyzed SMEs innovation and networking
practices while taking considering the institutional framework in Vietnam. They found that social
norms influenced SMEs in forming trust-based friendship networks, potentially limiting
knowledge acquisition and weakening business rationality. Further, institutional pressures
reinforced negative influences on SMEs' incentives for developing innovative ambidexterity. They
argue that new institutional economic sociology helps understand how institutional frameworks
influence SMEs' innovation practices in emerging economies. In addition, Siu et al. (2006) used
an institutional perspective for examining the interplay between government interventions,
manufacturing systems, and business approaches and its impact on product development practices
in 43 Chinese, 26 Hong Kong, and 28 Taiwanese SMEs. They found four stages in the new product
development process in Chinese SMEs including coordinating and searching for ideas from buyers
and competitors’ products for generating ideas, using various government and expert opinions for
developing prototypes, understanding the importance of market testing before commercialization,
and seeking endorsements from government officials. Still, open innovations have also been the
focus in literature, for example, Krause et al. (2012) explored the use of open innovations within
South African SMEs. They found that SMEs used operation innovations, but without a following
a systematic approach.
In terms of a theoretical perspective, scholars use institutional and social network (Minh & Hjortsø,
2015; Siu et al., 2006) and open innovations (Krause et al., 2012) for understanding new small
businesses’ product development in developing economies.

Hence, this review shows that extant literature on product development highlights the role of the
founder (s)’s initial knowledge of the process. It also discusses the roles played by the founding
teams, customers, and suppliers in developing a product in a new business. The different agents
undertake diverse activities as product development unfolds. Further, their interactions determine
how knowledge is managed in developing a product in a new business. However, it is unclear how
these activities and interactions are influenced when a new business starts with support from the
SMEs Development Agency in Ethiopia.

The following sections focus on further understanding the process of developing a product in a
new business. First, I present a case from the point of view of the founder manager, and my account
of the narration from a third person point of view. Second, I present the analysis and interpretation
of the case. The analysis and interpretation involve the integration of information from the
interviews with customers and suppliers, site visits, and observations. The data from these sources
complements the case study, enhancing my understanding of product development in a new
business. The interviews with customers helped me understand the extent of interactions between
customers and the business. From the interviews, I learned that suppliers trained workers of the
focal business in the characteristics of raw materials and how to process them. In addition, on my
visits to the business’ premises, I learned how the owners interacted, oriented, and followed up
their employees.

5.3. Case description

The case Coffee processing is constructed from interviews with one of the founder and owners of
the venture. The entrepreneur works as both the general manager and salesperson. The case
narrative describes the product’s development from her point of view; she sometimes uses 'we' to
refer to all the owners but she also uses 'I' to signify herself.

Narration by the owner manager

Introduction. The business was established as a partnership between five owners for processing
and selling coffee in 2014. The business undertakes coffee processing activities including sorting
the coffee, roasting it to different standards, and grinding it at different standards The owners
include four men and one woman. Before starting the business, the partners were engaged in
different activities. The interviewed entrepreneur was preparing and selling Injera to hotels,
restaurants, and cafeterias. Injera is a type of local Ethiopian bread prepared from the locally
available cereal teff. Another partner was selling mobile accessories, while one was working as an
electrician installing electric wires in condominiums. The remaining two were working in different
trades activities.
Start-up activities. “We, the partners knew each other before we started this venture. We lived in
the same area and were born and grew up in Addis Ababa. After we agreed to start a business, we
went to the local SMEs Development Agency's office to request for support. The agency told us
that we would need to fulfill its requirements. The requirements included obtaining a trade
registration, securing a taxpayer identification number, and formalizing the partnership agreement.
After fulfilling the formal requirements, we got permission to start our coffee processing business.
Even though we had been doing business before, none of us had worked in a coffee processing
business.
However, we developed an interest in coffee processing when we heard about it in public
discussions. People told us that the coffee processing and selling business was good and profitable.
Moreover, we were aware that the Ethiopian government facilitated financial loans and working
premises for start-ups. As a result, we started the coffee processing business with a capital of
79,000 Ethiopian Birr. With this money, we bought one roasting and one grinding machine, which
cost us 70,000 Birr. The remaining 9,000 Birr was used for purchasing raw coffee (raw material).
The sources of this initial capital were our personal savings and a loan from a microfinance
institution. The SMEs Development Agency facilitated the loan. The agency also provided us with
the working premises that we are using now. We have been paying a small amount as monthly rent
since the establishment of our business and are allowed to use it for five years.
For the start of the firm, we first established a clear division of jobs among the owners. We are
fully engaged in this firm, and this division has enabled us to work in harmony. Moreover, each
member is paid a fixed monthly salary and profits are used for the venture's expansion. Our
decisions on the division of labor and fixed salaries were based on our prior observations of other
firms. We knew that many other enterprises closed down because of conflicts among the owners.
We also learned that other ventures had two problems. For instance, the owners from other
ventures lacked division of labor and were engaged in different activities outside their joint
enterprise. They saw the enterprise's work as being secondary.”

Operations and Marketing. “Our firm's operations are divided into coffee processing activities.
These include sorting the coffee, roasting it at different standards, and grinding it at different
standards. We supply roasted coffee as per our customers' needs. Their needs range from black to
brown roasted, while some need medium roasting. The deep black roasted coffee is mostly used
for macchiato. We grind coffee at different standards, but the grinding also depends on customers'
needs. Some need finely ground coffee; some want the middle standard; and still others need
coarsely ground coffee. Our customers' interests are mainly led by the type of boiling machines
that they have. Final consumer tastes (customers of our customers) also influence the type of
roasting and grinding that we must supply. Since our customers are cafeterias, restaurants, and
hotels, their consumers also influence our operations.

Also, coffee's inherent characteristics dictate what we do. First, roasted coffee should be kept
overnight before being ground. And the ground coffee should be distributed to customers without
keeping it with us for long as the flavor of the coffee deteriorates when it is kept for long after
grinding.

The coffee's production and distribution activities are interlinked. We always search for new
customers while we also sell to our existing customers. When we look for new customers, we
distribute business cards and a sample of our roasted and ground coffees. Customers test our
products for different uses, including macchiato, espresso, or pure coffee. They order over the
phone. If our coffee fits their needs, they order sample products. Otherwise, customers order coffee
and tell us what to change. When we receive the orders from new customers, we ask them about
the roasting and grinding standards, and we supply the products as per their orders. But for existing
customers, we ask only the type and quantity of our product that they need. We mainly produce
after receiving orders. We also search for new customers once we have produced coffee. We
started doing this once we knew what the market needed in terms of the standard of roasting and
grinding. We roast, grind, and distribute coffee daily. For distribution, we use our own car to reach
our customers at their doorsteps. We do not store our products on shelfs as our customers
frequently place orders and we produce and supply as per their orders. They order different
quantities ranging from 10 kg to 50 kg per package.
While searching for new customers, as a salesperson I face different reactions from potential
customers. They have different views on the similarities between the sample and the subsequent
delivery of the order. Initially, we started giving a small free sample of the prepared coffee. But
later the customers felt that we supplied a better-quality sample (sample is very small) but the
subsequent delivery did not have the same quality. Because of such fears, customers resisted taking
a sample and preferred buying a kg and trying it. They felt this was safer because it was part of a
large production. If they found it good, they placed an order. Others reject my request at the very
beginning since they have other suppliers.

Coffee processing and selling is a difficult business. While searching for customers we have to
deal with many stakeholders. We must convince managers of businesses, owners, baristas, and
waitresses about the quality of our products. There are many decision makers from the point of
view of the customers. Even those who do not know much about coffee comment; they still need
to be critical of the quality of the product. However, there are some people who encourage us.
They give us positive comments stating that our coffee is good.

Customer searching is not a simple task. It needs hard work and being tolerant of criticism. This
process requires continuous improvements to our product in terms of quality and testing. In
addition to searching for new customers, I work hard to maintain our existing customers because
getting new customers is difficult.

I get new customers in two ways. First, I search for new customers by going from door to door.
When I meet them for the first time, I get access to either the owners or professional managers. I
try to convince them by telling them about the quality of our product and giving samples. They
test these with their customers (customers of our customers) in either macchiato, espresso, or pure
coffee forms. Their customers' reactions determine whether they will become our customers. As a
salesperson, I tell our customers about the quality of our products in terms of the standard of
roasting and grinding. So, from the very beginning, this process involves convincing customers
even before they take our products. I also need to convince them to accept our samples. Even when
I try to persuade them, some potential customers are not willing to accept the samples.

We also participate in bazaars organized by the SMEs Development Agency. This helps us
promote our products, selling on the spot, and distributing our business cards. We have obtained
potential customers in the bazaars - cafeteria owners and some others who ordered after visiting
us in the bazaar.”

Competition. “Since there are many competitors in the coffee supply business, customers reject
us quickly. They do not hesitate to change suppliers, even if I have been supplying them for a long
time. Customers try new suppliers to get better quality at a lower price. Even though we supply
good quality coffee, some of them prefer our competitors as they sell at a lower price. So as much
as possible, we provide coffee at competitive prices while delivering better quality. Further,
customers also want to test varieties. Hence, we are struggling.
It is challenging to satisfy all customers' needs. However, we accept our customers' comments and
change accordingly. We believe our customers are reasonable. They directly tell us if they are not
satisfied with the color (determined by the standard of roasting) or the grinding standards. We also
believe that our product is the work of human beings, so mistakes can happen in roasting or in
grinding. Some customers intentionally mix coffee from different suppliers for different reasons.
Some of them use coffee from a single supplier; a majority are single supplier users.

Our customers prefer our products because they like our coffee in terms of taste and color (we
supply brown colored coffee). We carefully sort, neatly prepare, and roast it in a way that it has a
brown color. We know that deep black roasted coffee will not have a pleasing taste. Even though
many of our customers need deeply black roasted coffee for coloring macchiato, we rarely supply
that because it harms the taste of the coffee. Instead, we advise our customers to use brown color
coffee so that it has a good taste. Through discussions, we try to convince our customers about our
standard of roasting, and many of them also accept our idea (of using brown colored coffee). We
learned this after working on coffee processing for some time. We learned from experience and
from customers' responses. Our experiential knowledge is supplemented by training. One of our
members (among the owners) got training from ECX and got a certificate for it. The training was
on how to select raw coffee, how to roast it, and how to check the taste of the coffee after it was
roasted. The knowledge he obtained from this training helped us a lot. The SMEs Development
Agency facilitated the training. The person who attended the training is now working on roasting.
There is a difference in the quality of our products before and after he got the training. He could
differentiate between the quality of raw coffee after the training.”
Current status of the venture. “Currently, the venture is bigger than what it was when it started.
Initially, we bought raw coffee from retailers, which resulted in low quality at a high cost as this
process involved many intermediaries leading to high costs. Small traders mix different types of
coffee, which leads to poor quality of raw coffee. When our capital increased, we were able to buy
raw coffee from ECX (the Ethiopian commodity exchange market), the largest wholesaler. ECX
sells a minimum of one lot of 3,000 kg, which meant that we needed to have enough capital to
afford buying so much coffee at one time. This also gave us a chance to purchase high quality raw
coffee. Further, the number of our employees increased from two to four. Two of them are sorting
coffee, while the other two are roasting, grinding, and packing. We also bought one more roasting
machine. With two roasting machines, it became possible to roast up to 200 kg of coffee per day,
and the grinding machine can also process 200 kg of coffee per day.
These improvements are a result of hard work, we worked hard on getting more customers, which
helped us get money. As a result, we bought more stocks and machines and hired more employees.
The firm is performing better than it was when it started!”

Summary of information from other sources for the coffee processing business
During my site visits and observations, I observed the extent to which the owners interacted among
themselves and with their employees. I found that they used the lunchtime for discussions. They
had lunch at the production site, and shared their experiences while eating. The salesperson shared
feedback collected from both potential and existing customers. She talked about the comments by
existing customers about the roasting standard, and the grinding of their products. She told the
members that some customers needed deeply roasted coffee (black), but the other customers
wanted it lightly roasted (brown). Then, the team members discussed the different standards of
roasting. The discussion also included comments by existing customers on the grinding standards.
In addition, the salesperson presented different responses of potential customers. The salesperson
shared that potential customers accepted the product sample with the promise of calling up for
additional product after trying the sample. But others rejected the sample saying that they had
already formed connections with other suppliers. Meanwhile, the owners told the employees about
what they should do to improve the quality of their products. This was a common practice at the
workplace during my visits.

In addition, my interactions with three customers of the business helped me learn more about how
the business developed its product. First, I made sure that the customers could identify the business
product. Then, I discussed with them how they identified the product, and their role in improving
it. I learned that customers compared the product with products supplied by other suppliers and
told the focal business where it could improve its products. One of my interviewees cited a repeated
comment made about product about changing the standard of roasting and grinding and the size of
packing. But the business took time to respond to these comments. In the early days, during the
distribution of samples, customers proposed changes and the venture implemented their
suggestions. When the venture received orders based on the free samples that it had distributed, it
asked the customers the standard of roasting and grinding that they needed and supplied the
product as per their orders. But this did not continue indefinitely. Instead, the venture reached a
point where more suggestions from customers could not lead to more product modifications. So,
the venture fixed an 'appropriate' substance and form for the product.

Moreover, during my interview with the supplier, I learned that the supplier trained its customers
on how to preserve and process coffee beans. It was not tailor-made to suit the needs of a specific
business. Instead, it was a general-purpose training package meant to address all its customers.
5.4. Analysis and interpretation

This section focuses on the analysis and interpretation of the empirical material. The analysis and
interpretation follow the new business’ product development process. The analysis aims at
understanding the challenges in developing a product in a new business and the activities that the
new business performed to cope with these challenges. It also emphasizes the role of the SMEs
Development Agency in supporting the founding team. In parallel, the team also interacted with
its customers and material suppliers.

A business starting with support from the SMEs Development Agency chooses a product idea.
Such an idea is influenced by the government’s priorities, the founders resource endowments, and
the prior experience of the founding team. A new business with low or no resources, aligns its
product choice with the government’s priority. This decision helps the business in obtaining
government support. Then, the founders search for a product among the government’s priority
areas that matches their prior experience. The extent of influence that the government’s priority
has depends on the extent of the resources that the founding team has. If the founding team does
not have the necessary resources, the business starts with a product from among the government’s
priority areas even if the team has poor knowledge about it. The team starts with limited knowledge
of how to produce and/or market the product. In addition, the product gets launched without a
thorough market study.
Once an idea for a product is selected, the commitment for financial resources further limits the
types of product that the business can consider. Given this limitation, the business tries a product
prototype with consumers. The prototype is designed based on the founders’ existing
understanding. This understanding gets tested on potential customers through distributing samples
and collecting feedback about the samples for improving the product by incorporating the
comments from the market for some time. Prior start-up experience, initial social connections, and
initial commercial experience of the founders supplement their deficiencies. Prior commercial
experience helps a new business to search for and deal with customers. It helps establish the first
target market based on previous social connections and becoming courageous in dealing with the
market. In addition, the marketing experience of the coffee processing business’ founder also
helped her choose of initial market.
This leads to offering an early version of the product to customers. Then, the interaction between
the business and its customers continues with differing power relations. In the early stages, when
the company is distributing samples, more power is in the hands of the customers. At this stage,
customers propose modifications and the business implements the changes in the substance and
form of the final product. But this power structure does not continue indefinitely. Instead, the
venture reaches a point where more learning cannot lead to more product modifications. Rather,
the business determines the 'appropriate' substance and form of the product. At this point the
business starts educating its customers about the benefits of its product instead of changing the
product. This depends on the perceptions of the founders about the satisfaction level of additional
knowledge and the extent of flexibility of the business’ accumulated resources. After a given level
of accumulation of physical and human resources, the business starts resisting additional variations
its product.

The process of developing a product in a new business with government support starts with limited
initial knowledge of the founder(s), their social relations, and their ambitions. These limitations
form the foundation of the new business. Given the initial vision of the founder(s) an initial
prototype of the product is developed, and the new business starts interacting with the market and
other stakeholders. The stakeholders give comments and suggestions on the initial prototype of the
product. These become part of the input for improving the product. Every interaction generates
additional knowledge for improving the product and additional requirements for the new product.
These requirements are imposed by different stakeholders like potential customers, suppliers, and
resource providers. This cycle continues as long as the founders and other committed stakeholders
are willing to improve the existing version of the product. But the cycle stops when the
stakeholders are unwilling to continue modifying the product. This results in a new product. This
cycle is illustrated in Figure 5.1.
 Product features

Market

Founding team:
• Prior experience/knowledge of the SMEs development
product agency
• Prior commercial experiences
• Initial financial resources
• Prior start up experience
• Prior social connections Suppliers

Figure 5.1. Framework of developing a product in a new business with government intervention
5.5. Lessons from the chapter
The purpose of this chapter was understanding how a new business develops its product in an
economy where the government intervenes in new business development through business
development policies. My findings show that a new business in the specified context starts with
little prior knowledge about the product. This contributes to the concept that the process of
developing a product by a new small business is characterized by iterations of trial and error
(Cooper et al., 1994) and involves a series of activities in developing a problem and a solution
simultaneously (Söderquist, 2006). This helps a new small business overcome the challenge of
lack of initial knowledge about the product. The government’s support enhances this process. This
support is in the form of financial loans and working premises which encourages the founders of
new businesses to take the risk of trying their products with customers. Additional knowledge is
acquired from interactions with stakeholders as the new business development unfolds. In addition,
the government provides the business with training on how to develop the product. Suppliers and
customers contribute to the founders’ knowledge. This study specifies the moderating role of the
government support while suppliers and the market contribute to the process of developing a
product by a new small business. Continuous improvements of the new product are a result of
interactions among stakeholders. Thus, my findings specifying how the SMEs Development
Agency influences product development in a new small business contributes to the logic of
effectuation (Sarasvathy, 2001, 2008).
6. Finding resources as a new business’ development unfolds
6.1. Introduction
Developing a new business involves bringing together resources like human and financial capital,
property, and credit (Amit & Schoemaker, 1993; Barney, 1991; Carter et al., 1996; Katz & Gartner,
1988; Miller & Shamsie, 1996; Mowery & Rosenberg, 1979). Resources become available through
initial endowments (Bruderl et al., 1992; Davidsson & Honig, 2003; Rotefoss & Kolvereid, 2005;
Schoonhoven et al., 1990), and/ or subsequent access to different sources for the resources as the
new business’ development unfolds (Baker et al., 2003; Davidsson et al., 2017; Lichtenstein &
Brush, 2001).
The initial endowments help a new business overcome the early stage 'liability of newness'
(Stinchcombe, 1965), supporting the it through its 'honeymoon period', even when the initial
outcomes of the process become unfavorable (Fichman & Levinthal, 1991). But new businesses
usually start with a limited initial resource base (Aldrich, 1999; Bhide, 2000; Davidsson, 2006;
Ebben & Johnson, 2006; Hanlon & Saunders, 2007; Marion et al., 2012; Zimmerer & Scarborough,
2008). Even a new business starting with a higher initial endowment, faces the 'liability of
adolescence' (Fichman & Levinthal, 1991), and its initial resources deplete demanding a search
for new resources.
Access to resources as a new business’ development unfolds involves managing dependencies on
the external environment (Pfeffer & Salancik, 1978; Thompson,1967), building itself internally
(Dierickx & Cool, 1989; Peteraf & Barney, 2003), and generating diverse values from available
resources (Baker & Nelson, 2005).
Scholars like Baker and Nelson (2005), Baker et al. (2003), and Davidsson et al. (2017) challenge
the assumptions that resources are accessible from the external environment and that they can be
built internally. Instead, they advance the assumption that new businesses begin with limited
access to resources from the external environment, and have no luxury of time to internally build
the needed resources. So, they refocus on the processes by which new businesses generate diverse
values from seemingly identical resources. As a result, Baker and Nelson (2005) conceptualized
the phenomenon as entrepreneurial bricolage.
Moreover, developing economies provide limited access to financial and other resources (Bruton
et al., 2009, 2013; Hoskisson et al., 2000). A new business in operates within the context of severe
resource limitations (Le & Nguyen, 2009). Consequently, it is crucial for new businesses in such
contexts to identify different means of accessing resources as their development unfolds
(Lichtenstein & Brush, 2001). The Government of Ethiopia supports some selected new
businesses. It provides working premises, facilitates loans, and gives training to support the new
businesses in their early stages of development. But this support is limited in amount and is for a
limited period. Recipients of the support need to generate additional resources during the period
when they are getting government support and all necessary resources after the government stops
the support. In the same economy, some new businesses do not receive government support. And
there are informal new businesses in the economy which are neither eligible for government
support and neither do they get financial capital from formal financial institutions.
Thus, the purpose of this chapter is understanding the typical challenges encountered a new
business' resource access and how can these be overcome in the Ethiopian economy. The
discussion is underpinned by the concept of entrepreneurial bricolage and the resource dependence
approach as foundational theoretical frameworks. It includes a review of literature and an
interpretation of a case study.
This rest of the chapter is structured as follows. Section 2 presents the literature review and Section
3 gives the case study. Section 4 does an analysis of the case study and provides some
interpretations. The last section discusses the lessons learned from the chapter.

6.2. Literature review

Scholars recognize the challenges that small businesses face in accessing resources in developing
economies. Wang (2016) used the Enterprise Survey from the World Bank covering 119
developing countries and found that SMEs perceive access to finance as the most significant
obstacle which hinders their growth. In addition, Fowowe (2017) used data for 10,888 firms across
30 African countries and showed that access to finance constrained and exerted a significant
negative effect on firms’ growth. In addition, Quartey et al. (2017) found that the problem of
accessing formal finance by SMEs within the West African sub-region was connected to SMEs'
lack of collateral, difficulties in providing creditworthiness, small cashflows, inadequate credit
history, high risk premiums, underdeveloped bank-borrower relationships, and high transaction
costs.
Fatoki and Chindoga's (2011) investigation of the obstacles that that the young entrepreneurs in
South Africa face shows that lack of capital and skills are among the main obstacles in actualizing
their entrepreneurial intentions. Generally, scholars underscore that developing economies provide
limited access to financial and other resources (Bruton et al., 2009, 2013; Hoskisson et al., 2000).
A new business in the economy operates within the context of severe resource limitations (Le &
Nguyen, 2009).
Tengeh et al. (2011) did an empirical study of African immigrant-owned businesses to investigate
how their owners acquired the necessary capital for start-up and growth phases. They found that
personal savings, business credit, family credit, and loans from informal financial institutions were
useful during the start-up stage in overcoming the challenges of accessing formal financial
institutions. They also found that a need for further funding was fulfilled through friends, co-
ethnics, and self-help financial associations.
Baker and Nelson (2005) theorize entrepreneurial behavior in a resource constrained environment.
They conceptualize it as entrepreneurial bricolage. Bricolage represents the behavior of making
something with whatever is at hand (Lévi-Strauss, 1967), whereas entrepreneurial bricolage is
"making do by applying combinations of the resources at hand to new problems and opportunities"
(Baker & Nelson, 2005, p. 333). This view challenges conventional assumptions about the role of
the environment in determining the success or failure of an enterprise where entrepreneurs
construct their own resource environments (Phillips & Tracey, 2007).
The three elements of bricolage behavior are making do, finding new value for resources at hand,
and a recombination of existing resources for new purposes (Baker & Nelson, 2005, pp. 334–336).
Making do means bricoleurs are willing to experiment and work to find ways of accomplishing
their ends without worrying about having the "right" resources (Baker & Nelson, 2005). As the
other two elements are related to ways of accessing resources, they are central themes in my review
of literature on resourcing a new business’ development in a resource-constrained environment.
The following discussion focuses on the two themes.

Finding new use for the resources at hand

Entrepreneurial bricolage involves finding the value of inputs that other firms view as worthless
(Baker & Nelson, 2005). This is underpinned by Penrose's (1959) argument which implies an
idiosyncratic relationship that each firm has with its resource environment. Entrepreneurial
bricolage includes finding new use values in forgotten and discarded materials; using pre-existing
network ties with family members, friends, and any others to access labor for free or at low
payments; and permitting and encouraging the use of amateur and self-taught skills that would
otherwise go unused (Bacq et al., 2015; Baker et al., 2003; Davidsson et al., 2017). Baker and
Nelson (2005, p. 345) support the idea of self-taught skills with an exploration of bricolage
practices of "doing carpentry, plumbing, sheetrock, roofing, heating or cooling installation,
electrical work, or occasional backhoe or auto repair projects." They found that none of the skills
were obtained through formal training. Instead, they were learned through watching and on job
while working.
Therefore, social networks play a pivotal role in resourcing new businesses' development in
resource constrained environments. Aldrich (1999) highlights that the founders' personal networks
influence their access to social, emotional, and material support. Baker et al. (2003) found that
founders used their pre-existing social networks as a means of accessing critical resources.
Aldrich (1999) notes two dimensions of social relations: diversity and their affective or emotional
strength. Diversity in turn is characterized by a range of sectors through which a nascent
entrepreneur moves (Granovetter, 1973) and the number of structural holes in a nascent
entrepreneur's social network (Burt, 1992). Burt used the term “structural hole” to represent a
relationship of the non-redundant contacts. Affective strength is categorized into strong ties, weak
ties, and dealing with strangers (Aldrich, 1999). Ruef (2002a) underlines that a combination of
strong and weak ties also determines the extent of diversity in social relations.
Aldrich (1999) argues that multiple and diverse social connections are important for accessing
information and other resources, regardless of their strength. Burt (1992) shows that 'redundant'
ties are less important in information flows. However, people tend to favor similar ties because of
'homophily' (Marsden, 1987; McPherson & Smith-Lovin, 1987; McPherson et al., 2001) and need
for an emotional and personal 'balance' across social relations (Cartwright & Harary, 1956; Davis,
1963).
Scholars also show that the importance of different types of ties varies based on the context.
Aldrich (1999, p.69) highlights that "strong and weak ties may be more important than contacts
with strangers for the mobilization of resources in the early stages of business development."
Granovetter (1993) shows that strong ties involve a strong degree of trust and emotional closeness.
A new business having a limited resource base (Aldrich, 1999; Bhide, 2000) still adopts various
tactics for acquiring critical resources from the external environment (Casciaro &Piskorski, 2005;
Pfeffer & Salancik, 1978). Pfeffer and Salancik (1978) lay the foundation for theorizing the tactics
of procuring critical resources from the external environment.
Khayesi et al. (2014) empirically examine the relationship between social connections, resource
access, and a firm’s performance in Africa. They highlight that shared identity in a social network
like family ties results in a high quantity of resources, but with higher costs because of family
obligations, opportunism, and agency problem.
The following discussion focuses on creating interdependence and legitimacy as a means of
procuring critical resources from the external environment.
Interdependence. As a new business creates mutual dependence with other entities, this
dependence has a differential effect on its access to resources (Casciaro & Piskorski, 2005). Pfeffer
and Salancik (1978) state that organizations depend on other organizations for critical resources
and this dependence is often reciprocal. The interdependencies thus created give an entrepreneur
the power to access critical resources (Ulrich & Barney, 1984). According to Casciaro and
Piskorski, (2005) higher mutual-dependence creates substantial incentives for actors to exchange
resources with each other, and opens up significant scope for negotiations. They indicate that the
level of mutual dependence varies according to the extent of alternative sources of resources and
the level to which one seeks critical resources from others. Casciaro and Piskorski (2005) argue
that actors who are mutually dependent engage in inter- organizational arrangements like alliances
and joint ventures which enable the focal business to develop new products with a low resource
base (Ahuja, 2000; Gulati, 1998; Mizruchi, 1996). But power imbalances have an effect on the
process of resource exchange (Casciaro & Piskorski, 2005).
Legitimacy is instrumental in resource procurement. The extent of legitimacy has an impact on
the acquisition of resources by a new business. Suchman (1995, p.574) defines legitimacy as "a
generalized perception or assumption that the actions of an entity are desirable, proper, or
appropriate with in some socially constructed systems of norms, values, beliefs, and definitions."
Organizations that appear desirable, proper, or appropriate are likely to get resources from their
audiences (Parsons,1960). Garnsey (2002) argues that a nascent firm's ability to access vital
resources from external resource providers is impacted by how it is perceived by the providers.
According to Zimmerman and Zeitz (2002) legitimacy helps a new small venture in acquiring
resources. Moreover, legitimacy helps overcome the liability of newness (Stinchcombe, 1965).
Hence, scholars emphasize that reputation and the founders’ prior experience, preparing a business
plan, legal incorporation of the business, and inter-organizational approvals are sources of
legitimacy for a new business (Delmar & Shane, 2004; Shane & Cable, 2002; Stuart et al., 1999).
Researchers also highlight that founders of new businesses build legitimacy using organizational
structures, procedures, and entrepreneurial teams (DiMaggio & Powell, 1983; Oliver, 1995).
A combination of resources for new purposes
According to Baker and Nelson (2005) combinations of resources for new purposes are a creative
re-combination of resources for purposes for which they were not originally intended. Stinchfield
et al. (2013, pp. 904-905) compare entrepreneurial behavior and highlight that "for bricoleurs,
integration of resources is never for aesthetic, traditional, or even efficiency purposes but rather
for strictly finding a workable solution. It is tied to 'making it work'." Senyard et al. (2014) show
that by engaging in bricolage a new small firm can make do by applying a combination of the
resources at hand to opportunities for innovativeness. For example, information system designers
"paste together a few components into 'something,' see how it looks like, play with it, check if it
works, evaluate, modify or reject” (Lanzara, 1999, p. 337).
Bricolage’s role in developing a new small business
Bricolage helps entrepreneurs pursue opportunities without potentially delaying attempts at
finding high standard resources needed for facing the challenges (Stinchfield et al., 2013). It also
creates opportunities for experiential learning (Baker & Nelson, 2005). Baker and Nelson (2005)
argue that bricolage creates a context for developing creativity, improvisation, combinative
capabilities, and learning tolerance for ambiguity, messiness, social skills, and networks. Senyard
et al. (2014) found a strong and consistent positive relationship between bricolage and a new firm's
innovativeness. Baker and Nelson (2005) highlight that entrepreneurial bricolage helps overcome
the challenge of competing with existing firms in providing products or services that would
otherwise be unavailable to customers by challenging commonly established rules and practices.
Witell et al. (2017) argue that a formalized new service development process could be counter-
productive and a bricolage perspective might better explain service innovations in a resource
constrained environment. De Klerk (2015) underlines that bricolage enables people in an industry
environment to share their long-term visions.
Success in developing a new business varies according to the extent of bricolage used. Baker and
Nelson (2005) identify the domains for undertaking bricolage as input domains (materials, skills,
labor), regulatory and institutional domains, and customers. As the number of domains increases,
it creates a community of practices with connections with suppliers, customers, and employees so
that it gets interlocked. Further, scholars also argue that relationships with less innovative suppliers
and less demanding customers are both likely to inhibit innovativeness for firms that engage in
high levels of bricolage (Senyard et al., 2014). Scholars have found that selective bricolage helps
generate relatively efficient business routines that permit businesses to develop patterns of
behavior in specific areas of work (Baker & Nelson, 2005; Fisher, 2012). Linna (2013) provides
empirical evidence on how bricolage is used in innovation processes in the context of developing
countries. He recognizes a social mindset combined with resourcefulness; making do with
resources at hand; and improvisation as three different types of bricolage in innovations by Kenyan
entrepreneurs designing low-cost renewable energy solutions for rural people. Mair and Marti
(2007) use the concept of entrepreneurial bricolage to investigate how local poor entrepreneurs in
developing economies bring together resources at hand to build a platform which enables them to
participate in a market overcoming the weak institutional arrangements that impede them.
Even though entrepreneurial bricolage is crucial when businesses face resource constraints (Baker
& Nelson, 2005), little attention is paid to empirically investigating entrepreneurial bricolage in
the context of developing economies (Linna, 2013).
Therefore, the following sections focus on further understanding how a new business gets
resources as its development unfolds in the Ethiopian economy through the government’s industry
development policies.
First, I present the case description. It includes the case study from the point of view of the owner
manager, and my account of the empirical evidence from other sources. Second, I present an
analysis and interpretation of the case. The last section deals with the lessons learned from the
chapter.

6.3. Case description

This section provides a description of the case. I first present a narrative of the entrepreneur's prior
experience and his experiences in the printing and advertising business. The narrative is
constructed from interviews done with the owner of the business. He works both as the general
manager and salesperson. The narrative is constructed from his point of view and he uses 'I' to
mean himself. Then, I give a summary of information from other sources including interviews
with employees, customers, suppliers, and site visits and observations
Narration by the owner manager

The printing and advertising enterprise was established in 2003 and is owned by an entrepreneur.
The entrepreneur had different prior experience. He was engaged in a number of informal business
activities. Finally, he started the printing and advertising enterprise with help from the Ethiopian
government and its SMEs Development Agency.
Prior experiences. “Being born in an economically poor family, I started working when I was 8
years old in construction firms.
Fortunately, a tenant living in our compound suggested that I should cut and sell grass available in
the compound. He told me to sell the grass to people coming to the church. Initially, I was afraid
of social norms but he convinced me that it was a business! I earned a lot of money cutting and
selling the grass; this was more than what I earned in a week as a daily laborer. This opened my
eyes and I started trading in the Symbol of the Cross and religious books around churches. I also
attended school for half a day and traded during the rest of the day.

There was another turning point in my life. Customers who bought the Symbol of the Cross from
me, advised me to produce candy on a small scale. I started candy production. I was in the business
for six months. However, I started candy production in the wrong season. The appropriate time
was during 'TIMKET' (Ethiopian Epiphany), when there is more demand for candy. I became
bankrupt. Since I had invested all my resources in candy production, I lost all my money and I
could not even feed my parents. I was forced to start from scratch and I went back to daily labor.

After working for a month as daily laborer, I looked for another job that I could do without
interrupting my school attendance. I decided to sell religious books as I had done earlier. I attended
school for half the day and sold books during the rest of the time. I sold the books informally on
the streets.

Meanwhile, the government had tightened its control over informal trade. Police officers
repeatedly took me to prison and then issued a final warning. I then switched to selling damaged
soap by first working on it. I got the soap from wholesalers in the Markato marketplace. In a month,
I earned a lot. My colleagues who were working like me could not earn as much and were
surprised.

After a while, there was chaos in Markato because of a conflict between the public and security
officers. The situation became tense and it was not possible for me to work there as an informal
trader.

In the meantime, there was a change in the government's education policy, and I observed that
there was a shortage of books in schools. But I did not have enough money to supply them. A
friend who is cashier in the local Idir (an association of the local community which helps in case
a member faces a problem) lent me 200 Birr. I bought books and started selling them around
schools. Unfortunately, I faced opposition from the other people selling books at the same places.
However, I was better in selecting the books that were needed and so I was able to overcome this
challenge. After some time, I got books on credit from my suppliers. In addition, I ordered books
from different suppliers.

I also started buying damaged books by the kilo at a low cost and sold them at a higher cost by
repairing them. In addition, I also sold books at a fixed price per unit. This was not done by other
traders. I earned 7,000 Birr in three months. My friends were shocked by my performance and as
a result they started fighting with me. This led to repeated visits to the police station. The police
officers urged me to leave the place. Since I was working informally, I could not resist this
enforcement. In addition, since the place where I worked was in front of a church, the church also
forced me to leave the place. After I left, I could not get buyers for religious books.

Then a teacher suggested some books that I could sell around schools. This worked. I earned good
money. In addition, I also started attending school. In the same year, I sat for the high school
leaving examination. Unfortunately, I did not score the required grades to join a university. My
business too was not doing well. I was disappointed. However, I did get a diploma in accounting
from the vocational school that I was attending.

Even though I could get employment, I decided to search for business opportunities. Fortunately,
an old friend of mine informed me that there were trade opportunities in Tappei. I went with him
taking some products from Addis Ababa. As the items that I was selling did not match the market,
I lost money. In addition, I could not cope with the weather which was very cold. I came back to
Addis Ababa.

After that I decided to go to Harar, a place that I knew. Even though I took some items to sell, I
started working as a daily laborer till I understood the market situation. Fortunately, I found an old
friend in Harar. He oriented me to the market practices in the locality and I started selling my
items. Over time I came to know the local people and I settled down. I took goods from Addis
Ababa to Harar. After trading there for some time, I came back to Addis Ababa and started selling
books when the schools opened. I took books on credit from suppliers. But the business had tough
competition, and conflicts were inevitable.

When the schools closed, there was no market. So, during summer time, when the schools were
closed, I went back to Tappei. With the capital accumulated from my trade in Harar and selling
books in Addis Ababa, I bought different items from Addis Ababa and took them to Tappei; I sold
salvaged clothes and other items. After working for some time, I developed good relationships
with the farmers in the area. However, the local traders accused me of spoiling their culture. They
pretended that I had come from another place (Addis Ababa) for implicit reasons and that I was
working in connection with local people to get more customers. They become jealous. This
challenge became bigger and I withdrew from the area and came back to Addis Ababa with some
capital.”

The printing and advertising enterprise

“Fortunately, in 2003 the Ethiopian government designed a program for unemployed persons and
started formalizing informal businesses. The government gave working places to entrepreneurs.
Using this opportunity, I requested for a working shed to sell books. After a number of delays, the
government gave me a working place near Addis Ababa University. Fortunately, it was the place
I had requested. I also requested the government to allow me to work using my talent of selling
books. I believe that working with my talent made me successful.

Though I got permission to use the land, the local people were not happy. I appealed to the local
administration which forced the local people to allow me to construct my workplace. I am still
using that place. I also formed a network with the local people by employing them to construct
rooms on the land. The employed people helped me network with other local people. I started
selling books in 2003. I sold the same books that I had sold earlier on the street, and I also started
a photocopying service.

I started the photocopying business by buying a machine. To get money for buying the machine, I
joined my friends to run an Ikub. In an Ikub the members agree to contribute a given sum of money
in an agreed period of time. Each member receives the total amount of money contributed in each
period by rotation. It either ends in one rotation or continues for many rotations. The Ikub members
gave me priority with a 10 percent service charge. I bought one photocopying machine.

Initially, it was difficult to get customers for the photocopying service. It was difficult to earn
enough money to look after my family (wife, my son, and my mother). I also could not repay the
loan I had taken to construct the workshop. Suddenly I recognized that there was a shortage of
calculus book in the market. A calculus book costs more than 1,200 Birr. Students could not find
the book so I bought one original book and made photocopies. I priced the photocopies at 200 Birr
per book and started selling them. But the students still could not afford them.

I took time to think about how to solve this problem. Then I decided to sell the photocopied books
chapter by chapter. A student bought the chapter he needed and then bought the other chapters as
needed. I went a step further and started taking orders on the phone and I designated a student
representative in each campus. The students were happy and I was able to penetrate the market.
When the photocopying machine became old, I could not replace it as I was using what I was
earning to look after my family.

Even though I liked the work I could not replace the machine so I decided to join a machine
maintenance training school. Besides, I kept using the old machine as much as possible.”

Resourcing dynamics

“Meanwhile, my previous customer ZG who was working in DE College, came up with the job of
duplicating books for the college. I outsourced a portion of the job to other photocopying stations.
The job was done overnight. During the night, I helped the photocopying stations by maintaining
their machines free of cost in case they faced failed. The machine maintenance training I had just
attended enabled me to support them. The job was completed and was ready the next morning.
The customer was very happy. I made a profit of 1,000 Birr and with that profit I bought necessary
spare parts and repaired my old photocopying machine.

Then Arbaminch University announced a job and I won the bid for photocopying services. I again
outsourced a portion of the job to other photocopying stations. I completed the job before the
deadline and I earned a profit of 10,000 Birr. The university wrote me a letter of appreciation. The
letter helped me a lot in winning more bids.

Soon after I completed the job, I became aware that Hosana Health Science College had announced
a bid for photocopying services. I competed and won the bid. The letter of appreciation I received
from Arbaminch University helped me to win the bid. This was the first time that I had won a
35,000-Birr contract. I completed this one too in time.

With the money earned from this job, I bought an additional machine. I also joined a training center
run by a Chinese. Then I started providing maintenance services to other business centers for a fee.

Meanwhile, a friend came from Beirut; I had helped her earlier. She saw the challenges I was
facing and asked me to buy a car for moving the goods. She promised to lend me money. She gave
me 25,000 Birr. Another person lent me 13,000 Birr and another friend lent me 10,000 Birr. By
combining this money, I bought a LADA car. I used the car to move my products, and also used it
as a taxi during other times. I worked the taxi service in the night till midnight. After midnight, I
went home and worked on binding the books that had been photocopied during the day.

In the meantime, Hosana Health Science College announced a bid for students' graduation holding
folders. I took part and won the bid. I equipped my workshop with the profit I earned.

Besides I also had a photocopying machine maintenance service. By this time my sources of
income had expanded and included a maintenance service, a secretarial service, a photocopying
service, and a taxi service. I attended a technical school in 2009 to learn how to publish.

In the same year, Aksum University offered me a job for 250,000 Birr. The university needed the
work completed in a short period of time. In the committee that decided on the final bidder was a
previous customer of mine and he influenced the committee to offer me the job. I had to complete
it in a month, and I agreed. Later, I told them I did not have capital to do the job. They decided to
give me 100,000 Birr as advance payment. I completed the order in 30 days and I made a 40,000-
Birr profit. In addition, I collected 50,000 Birr from the Ikub I was contributing to. I decided to
engage in the public transport business and I bought a transport car that carries about 45 persons
with the money I earned. The car was intended to help my longtime friend, who had a driving
license but could not get a job. It was a used car that cost 50,000 Birr and I spent another 30,000
Birr upgrading it. I invested all the cash I had.

With the help of a broker I found a job with a construction company at 21,000 Birr a month. After
receiving a month's payment, I renovated the car and it operated for five months more and earned
105,000 Birr.

When the contract with the construction company was due to end, the company hesitated in paying
me my money. I was forced to take it to court.

The legal procedure took a long time. However, I won the case and the customer paid me 70,000
Birr as initial payment. From this amount, I paid 30,000 Birr for the motor of the car.
Unfortunately, the workers in the garage had stolen parts of the car. I quarreled with them and they
repaired the car. But after some time, the car failed again. So, I felt I could not keep it and sold it
for 70,000 Birr on credit. But the buyer paid me the money after a long time. It was unfortunate
that my transport business was not successful. It consumed a lot of my capital resulting in a
financial loss.

I faced personal health problems in 2011. My doctor informed me that my health problems were
because of work stress and he asked me to rest for some time.

During that time, I was also running a publishing Plc. I was a major shareholder and the main actor
in its management. It failed during my illness, as did my printing and advertising business because
I could not lead the businesses and the other partners were not capable of running them. The whole
business failed.

After my recovery from the health problems, my previous customers helped me revive my
businesses. First, Addis Ababa University offered me a job. I told them I did not have machines.
They gave me advance payment and a payment above the market price, because of our previous
relationship. The university bought me a machine, and made me work with the advance payment.
I completed the job within a short time and the machine remained with me. Later, a private college
gave me a job. In addition, my previous customer, AT College, offered me a job and D E College,
another previous customer, offered me another job, which enabled me to buy one additional
machine.

The turning point came at the end of 2011. Based on the positive lessons that I had learned from
the Plc that I co-owned, I decided that the existing firm should follow a financial record keeping
system. Further, I decided that the period from June 2011 to June 2012 would be a testing time for
record keeping of business transactions. With the income from working with one machine that I
got from Addis Ababa University, I bought five additional machines in 2012 at a total value of
150,000 Birr. In August 2012, I became a VAT registered business. The firm registered with a
total capital of 150,000 Birr, of which 4,300 Birr was in cash and the remaining was in capital
assets. I registered my business as a sole proprietorship, and my file was transferred from the
woreda (lower administrative unit) to the sub- city. I also facilitated training on the VAT system
for the workers. In addition, I hired an accountant.

My registration in the VAT system helped me compete in bids with a legal backing. As of
September 19, 2013, I had competed in a bid floated by Wolkite University and won it. I signed
the contract, on September 21, 2013, at a value of 1,090,000 Birr. Taking the contract, I went to
suppliers whom I had known in my previous business and I told them that I had won a contract
and showed them the formal signed contract. A supplier gave me eight machines at 25,000 Birr
each (200,000 Birr in total) on credit with all necessary supply materials. In 15 days, I had finished
a portion of the job at a value of 500,000 Birr. From the 500,000 Birr, 100,000 Birr was used to
repay a portion of the debt for the purchase of the machines. The remaining amount was used for
buying supplies to finish the remaining job for Wolkite University.

I also competed in a bid by Adama University and won the 1.8-million-Birr contract. The
university awarded me the contract on the basis of my performance. I told the university that I did
not have money at hand and needed advance payment. They required me to secure this with a
third-party collateral.

My relative whom I had supported during his bad times owned a house. I had custody of the house.
The house had an estimated value of 800,000 Birr and I used this for collateral. The university
gave me an advance payment of 565,000 Birr. I used this money to complete the remaining contract
for Wolkitie University. Then I bought eight more machines on credit from the same supplier for
completing the remaining job for Adama University. The supplier joked saying ‘you are going
beyond.’ Surprisingly, the supplier did not have a credit invoice and he gave me the money only
on trust.

My business expansion brought multifaceted challenges, one of which was finding a working
place. My friends helped me as one friend allowed me to use his two-room house as additional
space for photocopying. The other challenge was managing the early expansion. I outsourced the
management of the production by hiring a manager on a contract basis. The manager was mandated
to organize and manage human resources. He had management capabilities. I also outsourced the
work of external relations. I hired another individual on a contract basis. He helped me in managing
cases in his employer’s university. As a result, my jobs were completed on time. Initially, the
librarian from the university hesitated in offering me jobs but I won her trust with the quality of
my work and the speed of delivery.

In 2013 the business performed well. It earned a revenue of 3.6 million Birr. At the beginning of
the year I had 30 workers of whom 14 were permanent workers while the others were on a contract
basis. The business hired 10 more laborers thus creating 40 job opportunities. Moreover, it
collected VAT with a total value of 400,000 Birr. Besides, it generated a 37,000-Birr profit before
tax in the same year.

This was a convincing enough performance for the finance officer who had hesitated during my
VAT registration. Later, I said to him ‘capital does not generate capital, it is the mind that creates
capital.’ This convinced him. Now he is my friend.

In 2014, Adama University was divided into two universities: Adama University and Assela
University. They needed 2,400 copies of different books and they decided to get the work done
using limited bids. My firm competed and won the bid for the 1.5-million-Birr contract. My
business won mainly because of its previous performance. Performance certificates from previous
customers, including Adama University helped in winning the bid. The university gave priority to
my firm. It considered the technical capability and previous work performance of my business.
The whole job was completed in 20 days, even though it was supposed to take 60 days. This was
possible as I made the workers work overtime giving them a place to stay, serving them meals,
and promising them a recreation tour at the end of the job. The employees worked day and night,
and completed the job 40 days before the deadline. I also used my parents' residence for
accommodating the workers. In addition, I installed a big power generator and installed a big water
tanker to overcome the problems of power and water supply respectively.

In 2014, the total sales of my firm were 1.8 million Birr. In the same year, the business bought
eight more machines. The machines were imported by an investor, who could not proceed with his
businesses. As a result, I was registered as an investor. Since I could not get a workshop for the
additional machines, I rented rooms from the same person by partitioning his workshop. His
project was not operational and he had gone back to Germany.

The investor who sold me the machines asked me if he could send a car from Germany as part of
the investment. It was intended for transporting papers for production and delivering the final
products to customers. I processed his application with the investment office and got permission
to import the car. Unfortunately, I could not receive the car from the customs authority. I was told
that it was impossible to own the car unless my annual capital budget reached 10 million Birr. I
decided to pay import tax on the car but I did not have enough cash in hand. I had to take loans
from different individuals to pay the tax, which I did.

However, I did not have enough money to repay the loans so I decided to sell the car. But selling
the car required that I had to audit my firm and get clearance from the Inland Revenue Authority.
The audit process brought another crisis. The money I had collected from my friends as loans was
deposited in my business account and the officers said that it should be taxed. That happened
because the money I had received from my friends was not formally documented as loans. So, the
auditors considered it as income and I could not prove otherwise. This mistake cost me about
600,000 Birr. I discussed the issue with lawyers and tax authorities and I tried to explain to them
that the money was received as loans. But they cited government regulations that saw the money
as unknown income, even as 'money laundering' and they could not help me. I agreed with the tax
authority to pay 25 percent (91,000 Birr) plus 26,000 Birr every month. This drained my capital
and the business became weak because of shortage of money. In addition, the business was not
doing well in 2014.
The next year too was not good for the firm. There was capital shortage, water supply problems,
and electric power supply problems. To address the power problem, I decided to install a power
generator, which needs a 9m2 area of land. But I could not get the land. The local administration
could not supply me the land. There were regular power failures that resulted in a delay in the
delivery of orders. After some time, I was forced to outsource the orders. I applied to the woreda
and to the sub-city but no one had a solution. The woreda sent me to the sub-city which sent me
back to the woreda. With all these problems, Haromaya University announced a bid which I won.
But delivering the order was a big challenge.

However, I completed 50 percent of the job and claimed partial payment. They released half the
money which I used for completing the remaining portion of the order.

In 2015, the firm registered a loss of about 365,000 Birr because of poor supply of infrastructure.
My firm was forced to reduce its permanent workers from 14 to seven. In 2016, I reduced my
workers to five. Sadly, I lost trained workers mainly because of the chaos in Oromia and other
regions (countrywide public unrest that resulted in the government changing in April 2018). The
chaos resulted in pulling down the national economy. It also resulted in a shortage of raw materials
in the market. As a result, there was a decline in the printing industry. The period between 2016
and 2018 was a time of public uprisings in Ethiopia. There was political resistance in the country.
Consequently, there was a change in the Ethiopian government, and a new government was formed
in April 2018. During this period, the business faced a decline in both demand for its product and
supply of raw materials. As a result, the business performed badly. After the new government came
to power, the performance of the business has improved again.”

Summary of information from other sources

This sub-section presents information from other sources including interviews with employees,
customers, suppliers, and site visits and observations. The data from these sources complemented
the case study enriching the information which helped in understanding how the new business
created access to resources. The interviews with customers helped me understand how the focal
new business used its buyers to overcome resource constraints. The learning focuses on
mechanisms of financing the purchase of material inputs. Similarly, from the interviews with the
suppliers I understood that they were part of the solution for handling resource constraints. In
addition, interviews with employees helped me to know more about how the focal business
accessed and maintained its human resources. In addition, from my visits to the workplace, I made
sense of the how owner interacted, oriented, and followed up his employees. The visits also helped
me to realize how the new business configured different sources to overcome resource constraints.
From my site visits and observations, I recognized that the entrepreneur used his parent's residence
compound for business purposes. He used a very small room as a working place where customers
came and met him. In this small room, customers' orders were received, and printing services
provided. But larger work was done in the residence’s compound. All binding and printing for
larger jobs was in the compound. The entrepreneur moved goods between the two locations using
his personal automobile. Workers were also moved between these two places, whenever needed.
In some cases, they were moved during working hours. In addition, the workers worked in the
residence compound during their off time. Whenever, there was an overload of work the employees
were made to work during night time in the residence compound. I observed bedrooms and
kitchens with utilities ready for use in such situations. I confirmed this during my interviews with
employees. Employees worked during night time whenever there was tight job schedule. They
were served meals and paid overtime.
There was friendly relationship between the employees, and between the employees and the
entrepreneur. The first employee of the business had been a classmate of the entrepreneur’s sister.
She joined the business through her classmate. The second employee is a sister of the first
employee. The other employees were friends of the two employees. In addition, none of the
employees had job specific skills. They were given training after joining the business.
From my interviews with the customers I learnt that they had been waiting for a delay in delivery.
From interviews with suppliers of machines and stationery, I learned that the business earned the
trust of its suppliers. The business initially received small quantities of input on credit. However,
as its turnover increased, it started getting larger quantities of input on credit. From my interviews
with the representative of the suppliers, the repayment history of the business helped strengthen
its relationships.

6.4. Analysis and interpretation

This section presents an analysis and interpretation of accessing resources as a new business’
development unfolds in Ethiopia. This involves identifying business activities related to accessing
resources. Accessing resources corresponds to formal-informal business activities, and how they
build on each other. It focuses on overcoming challenges of accessing resources as a new business’
development unfolds. The analysis emphasizes on the role of the SMEs Development Agency and
founding entrepreneurs and their interactions. The identification and classification of activities was
inspired by the concept of entrepreneurial bricolage (Baker and Nelson, 2005) and the scholarly
discussions about how a new small businesses accesses resources in developing economies
(Quartey et al. 2017; Tengeh et al., 2011).

Configuration of business activities for accessing resources

A new business in Ethiopia increases its access to resources by configuring different business
activities. This configuration involves shifting between business activities over time and
undertaking different business activities concurrently. The shift between business activities starts
from activities that require no or low financial and human capital investments. These business
activities generate a moderate amount of revenue and help an entrepreneur acquire business
experiences and social connections. The process continues as prior business activities help later
ones through a provision of resources. For example, the entrepreneur in my case, switched careers
from cutting and selling grass, to trading the Symbol of the Cross and religious books. Then, he
started producing and selling candy. The entrepreneur continued shifting between business
activities engaging in selling academic books and repairing and selling damaged soaps and books.
These changes helped the new venture accumulate financial resources and business experience.
This helped the venture learn from experience as the founder did not have enough capital to
undertake business research in identifying viable business ideas. In addition, the diverse business
activities helped the venture to meet different people which benefitted it in accessing new business
ideas and more social capital.
Moreover, a new venture in the Ethiopian economy undertook different activities in the same area
and/or the same activities at different places to increase access to resources. The venture sold
different types of products or services so income from one activity helped finance other business
activities. For example, the empirical case shows that the venture engaged in printing and
publishing as additional activities to increase access to resources. The entrepreneur used a car
intended to transport books as a taxi during off-work hours. In addition, he provided maintenance
services expanding his sources of income to include maintenance services, secretarial services,
photocopying services, and a taxi service. He bought a public transport car which became another
business.
However, the benefits of flexibility in the bricolage of business activities depends on the match
between a business opportunity and the resources committed to exploiting that opportunity. When
the opportunity is uncertain, making large investments locks resources, restricting flexibility and
adaptability. This in turn results in a loss of resources. From the empirical case, the investments in
candy production and the bus for public transport resulted in losses as there was no prior market
experience.

Identifying new uses for resources

Another means of enhancing the resource base is by finding new or better uses for forgotten or
discarded materials. In the case study, the entrepreneur first cut and sold grass that was freely
available in the entrepreneur’s parents’ compound. The grass was used for generating an income
though this was not the intended purpose of the grass as it grew seasonally and then dried. This
happened when a tenant living in the compound suggested that the entrepreneur could cut and sell
the grass available in the compound.
Buying damaged soap and books at a low cost, making necessary changes and selling them at a
profit is another incident in the case. The business also bought damaged books and sold them after
repairing them.
Finally, the entrepreneur used his parents’ residence for accommodating workers and his friend’s
residence as additional space for photocopying. This shows that a new business in a financially
constrained environment can develop by avoiding the need for financial resources. Thus, this
shows new ways of enhancing the resource base of a new business.

The SMEs Development Agency and a new venture accessing resources

New ventures formalize for resource acquisition rather than fulfilling legal obligations. The SMEs
Development Agency controls various resources available to new ventures in Ethiopia. It
administers working premises that have been prepared for accommodating different types pf
businesses. It has the legal power to connect new businesses to micro-financial institutions for
financial loans. In addition, the agency also facilitates new ventures through training from
academic and training institutions. These services are available with no or low payments.
However, the support from the agency addresses a limited number of new ventures during a given
time period. As a result, getting this support is a competitive exercise among new businesses.
Moreover, the ventures need to formalize themselves for accessing the resources from the agency.
A formal new business has more chances of accessing resources than its informal counterparts.
This requires starting a new business in line with government policy to access land and having a
VAT registration for enhancing its access to government projects and competing in bids. Incidents
in the case study show that registering for a value added tax (VAT) helped the business get the
right to compete for bids. In addition, the formal registration of the new business also helped the
entrepreneur in using a government program designed to encourage new business formation. As a
result, the entrepreneur secured land as a working place free of charge or at a low cost and also
loan facilities. If the costs of formalizing outweigh the resources generated as a result of
formalizations, ventures decide to remain informal.

Configurations of contracts and accessing resources

A new venture configures different contracts as a means of accessing resources. A business pools
together different types of contracts with different stakeholders to access resources without
committing resources of its own.

The founders' personal ties facilitate locking in suppliers and the market so that they provide
resources to the new venture. I found a complicated relationship among the supplier, the new
business, and the market. The business won and signed a contract without having resources to
complete the job. Then taking the contract, he went to a supplier whom he knew and told him that
he had won a contract and showed him the formally signed contract. The supplier gave him enough
machines on credit with all the necessary supply materials. The business completed a portion of
the job and collected a portion of the money from the first customer.

However, he used some of the money received to repay a portion of the debt that he had when he
bought machines on credit. He used the remaining amount to buy supplies to finish a portion of a
job for a second customer. Meanwhile, the business competed in another bid from a third customer
and won the contract. He told the third customer that he did not have money in hand and needed
an advance payment. The customer gave him an advance payment for a portion of the contract. He
used this money to complete the remaining portion of the job for the second customer. He also
bought more machines from the same supplier on credit to complete the remaining job for the first
customer. The supplier did not ask for a collateral. Instead, he gave credit based on the trust that
they had established earlier.
Finally, the configuration of contracts extended to include getting financial resources through
Ikub.

6.5. Lessons from the chapter

The purpose of this chapter was understanding how a new business gets resources as its
development unfolds in an economy where the government intervenes in the new business sector
through its industry development policies. The chapter integrated ideas from both the reviewed
literature and an interpretation of the empirical material.
The empirical case was from developing economy where there is less accessibility to financial
resources. The credit system is not well developed and collateral requirements of financial
institutions are not attainable by new businesses.
Literature on the concept of entrepreneurial bricolage focuses on how a new business gets access
to resources in such contexts (Bacq et al., 2015; Baker et al., 2003; Baker & Nelson, 2005;
Davidsson et al., 2017). My findings contribute to literature as they discuss the role that the
informality of business activities plays and also ties with government officials as a means of
accessing resources. I found that entrepreneurs with low initial resource endowments opted for
informal business activities for accumulating resources. In addition, I also found that social ties
with government officials helped in resource acquisition.
In the Ethiopian economy the government controls resources like land, and is a significant buyer
of goods and services. In addition, the government manages economic development through
development policies like the SMEs development policy. As a new business aligns itself with
government policies, it gets more access to resources like land, finance, and credit facilities. In
addition, I found that the act of formalization also helps a new business earn legitimacy that helps
it in accessing resources.
In addition, prior research on the concept of entrepreneurial bricolage emphasizes the need for
combining resources for new uses (Bacq et al., 2015; Baker et al., 2003; Baker & Nelson, 2005;
Davidsson et al., 2017). My findings extend this conceptualization by adding configuration of new
business activities as being instrumental to the resource base. A new business engages in various
activities that contribute to the learning of the business. In addition, income from one activity helps
as an additional source of resources for another business activity.
7. Developing a market for a new business
7.1. Introduction
Developing an initial market is of tremendous importance for a new business. The initial market
serves as a signal of its birth (Reynolds, 2017), ensures its existence (Lewis & Churchill, 1983),
helps bring up unnoticed product flaws for the first time (Tomas Gomez-Arias & Montermoso,
2007), and serves as a reference for potential customers (Ruokolainen & Igel, 2004). Connecting
to initial markets is enhanced with initial endowments like resources and legitimacy (Stinchcombe,
1965). As outlined in the previous chapter six, new businesses lack resources and legitimacy
(Stinchcombe, 1965; Zald, 1969). New businesses also lack important things like prior business
experience, human and financial capital, and networking at their starting points (Bailey & Helfat,
2003; Boeker, 1997; Cooper et al., 1994; Harris & Helfat, 1997; Mosakowski, 1993). As a result,
new businesses engage in a process of experimentation (Cooper et al., 1994) for developing market
connections.

Studies on market development are grouped under ‘discovery of market’ versus ‘creation of
market’ (Sarasvathy, 2001, 2008; Sarasvathy & Dew, 2005). Literature on market discovery
assumes the prior existence of market opportunities as a ‘given’, and the primary focus is
systematic market research for discovering the market (Sarasvathy & Dew, 2005). This is based
on the assumption that a new business develops with a visionary recognition and exploitation of
existing opportunities (Sarasvathy, 2008). On the other hand, literature on market creation deals
with how activities transform extant reality into a new market through a chain of stakeholder
commitments over time (Sarasvathy, 2001, 2008; Sarasvathy & Dew, 2005). This creation begins
with a given set of causes and continues with the formation of new commitments by stakeholders
as a new business’ development unfolds (Sarasvathy, 2008). Literature on market creation assumes
that the market situation is uncertain (Sarasvathy & Dew, 2005).

Much of the research on small firm marketing has been conducted in the context of developed
economies (Siu, 2001), with less emphasis on specific social, cultural, and political contexts in
developing economies (Siu, 2005). But there are uncertainties in the economic, political, and
regulatory situations in developing economies (Lingelbach et al., 2005) and unpredictable markets
and existence of discriminatory regulatory practices in the Ethiopian economy (Amha & Ageba,
2006; Gebreeyesus, 2011; Herrington & Kelley, 2012; Kebede & Simesh, 2015). Developing
markets in the Ethiopian economy means facing interventions by the government in the form of
support. However, the government prefers certain businesses over others. In addition, the support
extends for a limited period of time, after which the new businesses have to become self-reliant.
Moreover, the Ethiopian economy is characterized by the prevalence of a significant number of
informal new businesses. Thus, the purpose of this chapter is understanding how new businesses
develop markets for their products in the Ethiopian economy.

The rest of this chapter is structured as follows. Section 2 presents the literature review while
Section 3 gives the two case studies. Section 4 does an analysis of the cases and gives some
interpretations. Section 5 gives the lessons learned from the chapter.

7.2. Literature review

Role of initial customers as a new business develops
Scholarly works emphasizes that selection of initial customers is critical for the subsequent
development of a new business. They serve as a source of earning early revenue (Tomas Gomez-
Arias & Montermoso, 2007; Schoonhoven et al., 1990). Initial sales are a signal of the birth of a
business (Reynolds, 2017). In addition, Ruokolainen (2005) emphasizes that finding the first
customers for its first product is a critical aspect in developing a new business. Initial customers
also give accurate feedback on product improvements (Urban & von Hippel, 1988; von Hippel,
1986) and the expected level of customer services (Ruokolainen, 2005). Moreover, initial
customers help in market penetration by serving as a reference for other potential customers
(Ruokolainen & Igel, 2004). Further, strategic preventive measures and cost leveraging benefits
accrue to a new business from its initial customers (Tomas Gomez-Arias & Montermoso, 2007).
Acquiring customers and delivering a product or service contracted for are a matter of existence
for a new business (Lewis & Churchill, 1983). Emphasizing the speed at which the first product is
brought to the market, Schoonhoven et al. (1990, p.177) maintain that fast selling of the first
product is important for a new business in "gaining early cash flow for greater financial
independence, gaining external visibility and legitimacy as soon as possible, gaining early market
share, and increasing the likelihood of survival."
Early connections with the market are influenced by a new business’ initial conditions.
Founding conditions of a new business in initial market connections
Developing a market requires being aware of technology and market conditions in a specific
industry (Roberts & Berry, 1985). In addition, scholars highlight that developing a market for a
new business also requires information about the competitive conditions, regulations specific to
the industry, and establishing goodwill and trust with industry actors like buyers (Bailey & Helfat,
2003; Boeker, 1997; Cooper et al., 1994; Harris & Helfat, 1997; Mosakowski, 1993). Studies
underscore that these understandings come through prior experiential learning (Boeker, 1997;
Gimeno et al., 1997). Knowledge about how to connect with the market is mostly tacit and is
commonly acquired by substantial investments of time in observing, studying, and participating in
the same activities (Cooper et al.,1994). This requires the involvement of persons who have this
tacit knowledge.
Likewise, the founding structure of a new business that incorporates the direct and interactive
effects of manufacturing and marketing functional expertise enhances the possibility of early
market connections (Cooper et al., 1994; Schoonhoven et al., 1990). Further, social networks help
entrepreneurs identify market opportunities and establishing credibility in the market (Oviatt
&McDougall, 2005). In addition, prior market knowledge speeds up market connections for a new
business (Oviatt & McDougall, 2005). Mosey and Wright (2007) emphasize that entrepreneurs
with prior business ownership experience have broader social networks and are more effective in
developing their networks further. Stinchcombe (1965) points out that the founders’ prior
legitimacy is critical for establishing initial market connections. Similarly, Cooper et al. (1994)
highlight that a business’ initial human capital and financial resources improve its capabilities of
establishing networks with the initial market.
Thus, scholars emphasize that initial endowments, including human and financial capital, help new
businesses in shielding themselves against shocks arising from the trial and error methods that they
have to follow so that they can subsequently earn credibility among customers and suppliers
(Cooper et al., 1994; Stinchcombe,1965). Cooper Gimeno-Gascon, & Woo (1994)also argue that
initial financial capital allows a new business to pursue more capital-intensive strategies.
But new businesses tend to be deficient in resources and legitimacy when it comes to developing
business relationships with customers (Stinchcombe, 1965; Zald, 1969). Therefore, new
businesses hold little power and influence over the market and competitive conditions (Romanelli,
1989). Moreover, lack of prior business relationships with customers and suppliers forces a new
business to create legitimacy for starting exchange relationships (Hannan & Freeman, 1984).
Stinchcombe (1965) also highlights the challenges associated with newness, including the need to
learn about the environment and establishing legitimacy in the eyes of the initial customers.
Aldrich and Auster (1986) underline experiential barriers to market entry as well as various
external challenges that a new business faces such as established organizations’ brand recognition
and market acceptance, illegitimate acts by competitors, and licensing and regulatory barriers.
Cooper et al. (1994) argue that new businesses are engaged in a process of experimentation in
which concepts are tested. This process is characterized by iterations of trial and error.
Therefore, the following discussions focuses on how a new business that is deficient in resources
and legitimacy (Stinchcombe, 1965; Zald, 1969) develops its initial market connections.
Approaches followed for establishing initial market connections
Regardless of the initial deficiency in resources and legitimacy, a new business uses different
approaches for developing its initial market. This is possible through involving knowledgeable
individuals and capitalizing on the founders and their social networks.
A new business involves other individuals with necessary knowledge and skills to help it establish
connections with the market. This is possible either through using external advisors or making
knowledge and skill holders members of the entrepreneurial team. A new business may partly
compensate its resource and legitimacy deficiencies through outside advisors. The presence of
industry-experienced outside advisors enhances trust relationships with stakeholders, portrays a
more credible image for the business, and provides access to critical information and resource
networks in the industry (Kor & Misangyi, 2008). Outside advisors also supplement the founding
entrepreneur by providing advice, legitimacy, and social capital for a new business (Kor &
Misangyi, 2008). In addition, they bring in management know-how by providing profession advice
(Cooper et al., 1994; Hay & Ross, 1989).
In addition, increasing diversity and composition of an entrepreneurial team enhances initial
market connections. Team members may differ in gender, ethnicity, educational levels and type of
education, prior management know-how, and prior industry experience (Cooper et al., 1994). This
diverse experience lends to a greater breadth and depth to the expertise, which in turn enhances
initial market connections. For example, Cooper et al. (1994) highlight that an individual with
industry specific know-how brings in a tacit understanding of the key success factors in the
industry, specialized knowledge of the product or technologies, and accumulated goodwill among
customers and/or suppliers. Scholars also stress that diversity among team members enhances the
credibility of a new business in the potential market and its other constituents (Stinchcombe, 1965).
The other means used by new business is through social capital. Social capital is an instrument for
establishing initial market connections (Ruokolainen, 2008). Social capital is conceptualized in
different ways. Putnam (1995) views social capital at the social group level and conceptualizes it
as features of a group consisting of networks, norms, and social trust that facilitate coordination
and cooperation for mutual benefit. Bourdieu and Wacquant (1992) maintain that social capital is
resources accruing to an individual member or the social network as a result of mutual
acquaintances and recognition. Nahapiet and Ghoshal (1998) indicate that social capital signifies
resources accrued from contacts with various actors.
Founders' social ties enhance a new business’ initial market connections. Firstly, scholars
underscore that initial customers help a new business enter the market (Ruokolainen, 2008) and
they also share risks (Clarkson, 1994) with the new business. Aldrich (1999) shows that founders'
personal networks influence the extent of support that a business gets from its initial customers
and Granovetter (1973) underlines that the reciprocal interaction between a new business and its
initial customers is underpinned by the strength of ties that are characterized by a strong degree of
trust and emotional closeness between the two. Ruokolainen (2005) argues that social contact is
more important than the price and novelty of the product being offered in finding the first
customers for a new high technology start-up. Thus, personal trust and emotional closeness
between the founders and potential customers, and reciprocal interactions between them enhance
initial market connections for a new business. The founding team’s members pool together diverse
social ties (Aldrich, 1999) which improve important information flows (Burt, 1992) for the
business.
The following discussion focuses on marketing of small businesses in developing economies.
The context of developing economies
Small businesses in Africa includes the use of traditional marketing tools (Cant & Wiid, 2016),
strategic marketing planning by small business (van Scheers & Makhitha,2016), marketing
communication efforts by small businesses (Kallier, 2017), and determinants of the market
orientation that is adopted by small businesses (van Scheers, & Makhitha, 2016). These scholars
disregard the roles of contextual factors in marketing by small businesses. However, a few scholars
have shown how contextual factors influence small businesses’ marketing practices in the Chinese
economy. Chinese SMEs use personal networks to extend their distribution channels while
developing new businesses (Siu, 2001). Small firms in China establish close and good relationships
with buyers and government officials as they are influenced by the Chinese culture’ relational
orientation (Siu, 2001, 2005). In addition, Siu (2005) examines the impact that the interplay among
government interventions, manufacturing systems, and business approaches has on the marketing
activities of SMEs in China, Hong Kong, and Taiwan. The author found that SMEs in China
operate under strong government influence and use a relation-oriented marketing approach as
compared to SMEs in Hong Kong which use transaction-oriented marketing activities. The author
thus emphasizes establishing various relations with customers, buyers, middlemen, and
government agencies for marketing a new business’ products (Siu, 2005).
Existing literature on developing new businesses in the Ethiopian economy shows lack of or
fluctuations in product markets as one of the reasons for the failure of new businesses (Ageba &
Amha, 2006; Herrington & Kelley, 2012; Kebede & Simesh, 2015).

7.3. Case studies

Now I do an in-depth analysis and interpretation of two cases studies. The cases are new
businesses in food processing and in leather product processing. The food processing business was
established in 2014 and the leather product processing business was established in 2012. The
discussion is structured as follows. I first present the two case studies from the point of view of
their owner managers after which I present an analysis and interpretation of the cases. The analysis
proceeds with one case at a time identifying the key factors that explain how the business
developed its initial market connections. I also analyze the challenges and other key factors that
helped the business to overcome these challenges. The other sources included in the interpretation
include interviews with customers, site visits, and observations. The data from these sources
complemented the case studies enriching the information for understanding how the new
businesses established connections with their customers. Interviews with customers helped me to
understand how the new businesses created and maintained connections with their customers. The
learning focuses on ways of connecting and maintaining these connections. Similarly, from my
visits to the workplaces, I learned how the businesses interacted with the customers coming to
them while I was visiting.
This is followed by a discussion of the themes that emerged from these two analyses and the
conclusions that are drawn.
Case one: Food processing business
The food processing business was established in 2014 by six family members as owners with an
initial capital of 1,000 Birr in cash and a machine valued at 20,000 Birr that was donated by the
founders’ parents. The owners include a wife and her husband and the husband’s brothers and
sisters. All the founders had previous experience of working in a bakery. They had all completed
Grade 10 and one of them had a diploma in health. In addition, one of the founders was working
as a salesperson in a bakery and distributing its products from door to door.
What follows is a narrative of this food processing venture. The narrative is constructed from the
interviews done with one of the six owners of the venture – the husband of one of the owners and
the other members’ elder brother. He works as both the general manager and salesperson. I have
chosen him as he is knowledgeable about the business. The narrative is constructed from his point
of view, and sometimes he uses 'we' to refer to all the owners and he uses 'I' to signify himself.

Founding situation

The venture is engaged in food processing and selling. Its products include cookies, dabokolo,
keshekeshe, and bube (this are different types of cookies in the local language).

“Before starting the venture, I was employed in my relative's bakery where I worked as a
salesperson selling products from door to door. The specific idea of starting a business in food
processing was inspired by the existing family bakery. We are selling similar products in our new
venture.

Our parents suggested that we should start a new business. I also knew that what I was earning as
an employee in the bakery was not enough. I also had a feeling that working as an employee limited
my role to a specific job. I was mindful that there were differences between doing one's own
business and being employed. I also understood that starting one's own business gave freedom and
enabled one to experience different things. Thus, I was convinced by my parents’ suggestion and
I decided to start a new business with a team.

The bakery I was employed with gave me a letter of work experience. This helped us get a license
from the government agency for starting this venture.
We divided the work amongst ourselves and all of us were assigned jobs according to our work
experience. As a result, I was made the manager. I am working as both the manager and
salesperson. I had performed similar roles in my earlier job where I worked as a salesperson and
driver for the bakery. The other co-owners were also assigned tasks based on their personal
experience and skills. One of the owners has a diploma in nursing and was assigned the role of a
quality control officer. The others are made production workers.

After working for some time, we employed six more workers on a contract basis because the
workers did not want to be employed on a permanent basis. They needed freedom to shift jobs
whenever they got more money. In addition, they wanted to be paid based on a per piece basis
rather than getting a fixed salary every month.”

Market and competition

“Currently, we are selling our products with no specific labelling. Our products are consumed by
all categories of people during holidays and birthday celebrations; they also use them as gifts while
visiting relatives and sick people in hospitals.

To sell our products we search for retailers to shelf our products. We sell to retailers either on
credit or in cash. When we sell the products on credit, we claim payment only after the retailers
have sold our products. We use different mechanisms for convincing retailers. We make them taste
the products, give them samples, and verbally try and convince them that our products are better
than others. In addition, we also use our relatives' retail shops to display our products and for
promoting them.

The SMEs Development Agency helped us in linking with the market. The agency organizes
bazaars where we promoted our products and distributed our business cards. This helped us in
linking with a few customers. After participating in the bazaars, some customers have been coming
and buying our products from our production site. This is the only promotion that we have done
for our products. The main reason for this is that our working place is not convenient for contacting
customers as it is also serving as our production site and we do not have selling shops.

Our business is selling its products in a competitive market. There is uniformity of products among
suppliers. Besides, there are many informal producers supplying the same products to the same
market. But the informal producers supply these at low prices as their costs are low because they
do not pay taxes and have no administrative costs. They make the products in their residences and
distribute them using the same retailers that we use for our business.

On top of that, informal producers are also competing for skilled employees. They employ workers
by paying them higher wages as compared to formal producers. Even though they pay more wages,
they compete with lower prices in the market. Our former workers have also started producing the
same products informally after they learnt how to do this while working with us. As a result, no
worker has stayed with us for more than six months. Once they get skills, they leave for better
options. This is one of our challenges in penetrating the market.

Moreover, it is also difficult to compete with established firms. They buy inputs directly from
farmers while we buy them from traders at higher prices. So, we cannot compete with them in
terms of prices. Since large firms buy more inputs at lower costs, we cannot compete with them.
In addition, large firms sell branded products because of which they enjoy a reputation among their
customers. Then larger firms can also access a large number of customers in a wider area. They
are trusted more by customers as compared to the smaller ventures. In addition, the market is faced
with by political instability and seasonal demand. The current instability in Ethiopia influences the
market situation. Further, demand for our products fluctuates as per religious practices. Users do
not consume our products during the fasting period as they feel that our products are not
appropriate for these periods.”

Government Regulations

“Our business was established with support from the government’s SMEs Development Agency.
The agency provided us with a production site of 60 m2. We paid 75 Birr per month as rent for this
in the first year and are now we are paying 150 Birr per month in our second year. We will pay
225 Birr per month in the third year, and 300 Birr per month in the fourth and fifth years. The first
year’s rent payment is 25 percent of the total rent cost, which goes up to 50 percent of the rent cost
in the second year, then to 75 percent for the third year, and 100 percent for the last two years.
Actually, the cost is low compared to the market rates in the city. It is a subsidized price. The
agreement covers five years. We were promised provision of better working premises after five
years. The size will be determined by the expansion levels that we achieve in the first five years.

The SMEs Development Agency also helped us in creating market linkages. The agency organized
bazaars and exhibitions that helped us meet potential customers. However, we faced challenges in
dealing with government agencies when we went to the Oromia region, around Laga Tafo, to sell
our products. Police officers in that area prohibited us from selling our products stating that the
business was allowed to sell its products only in Addis Ababa, where the firm was established. As
a result, they penalized us. However, we did not know of the existing government policy that
prohibited us from selling outside Addis Ababa.

The government has also helped us in getting workers. There is a government system of registering
unemployed individuals, training them in different professional areas, and connecting them to
small and micro enterprises. The government also helps them start their own businesses. Our
business benefited from this.

We faced several challenges in our first year, including market problems and employee turnover.
Employees left without completing the work that they had started. As a result, many products were
destroyed. In addition, we did not have a market which resulted in our products getting spoiled.

We also had a problem in the supply of inputs. Currently, the government is rationing the sale of
sugar, edible oil, and wheat flour. We get limited supplies of these inputs from the government.
The government justifies this situation by saying that we are producing luxurious products and
priority is given to those firms which produce products like breads (this is part of the government’s
priority policy for subsidizing items of necessity). According to the government’s policy, bread is
a necessity and hence producers licensed to produce bread get priority in buying subsidized inputs.
Further, there are also implementation problems with the rationing policy. For example, our
business is allowed to buy 2,000 kg of sugar and 7 units of 20 liters each (140 liters) of edible oil.
But at the woreda level (lowest government administrative unit), they sell us only 200 kg and 2
units of 20 liters (40 liters) of edible oil. We have to buy all the needed wheat flour from private
suppliers at a higher cost.

Other rules and regulations related to SMEs’ development are not properly implemented. If the
regulations are implemented properly, small firms will benefit. But the regulations are complicated
at the lowest administrative level. As a result, most of the benefits that the trade and industry office
should provide to SMEs are not implemented.”

Expansion

“We bought one oven in a short period of time at a total cost of 20,000 Birr.”
Summary of information from other sources about the food processing business
The new business operated in a shared working place provided by SMEs Development Agency.
The rooms are partitioned parts of a larger hall. The hall is divided into rooms where different
businesses operate in different rooms. It is not convenient to use the place for selling products.
Instead, the salesperson sells the products to the retailers through door to door distribution. During
my site visits, I learned that the salesperson was struggling to sell the products. Some retailers
rejected his offer. Others were not willing to pay on the spot. Instead, they postponed the payment
until the last product had been sold. As there are multiple suppliers of similar products, retailers
were reluctant to buy products making immediate payments. As a result, the new business was
selling on credit. In addition, I learned that the owner manager repeatedly visited the SMEs
Development Agency’s office. He did that to keep in touch with the officers but to get up to date
information about the government’s plans of organizing bazaars and the government’s purchase
plans.

Case two: A leather product processing business

The leather product processing business was established in 2012 as a partnership between a woman
and her husband. They had different work experience. The wife had been a co-owner in another
venture producing and selling leather products. She worked there for three years. The husband was
new to the industry. He had a minibus and was working for a taxi service in the city. After getting
married, she left her former venture and they started the new business. What follows is a narrative
of a leather product processing business. The narrative is constructed from the interviews done
with one of the two owners of the business. He works as both the general manager and a production
worker. The narrative is constructed from his point of view, and sometimes he uses 'we' to refer to
both the owners and he uses 'I' to signify himself.

Founding situation

“The business produces and sells different types of leather products, including leather wallets,
leather document holders, belts, ladies leather bags, students’ leather bags, travel leather bags, and
leather key holders. The products are partially made by hand and are machine supported. We have
diverse users of our products, including different organizations, students, and individual adults.
The manufacturing business requires risk taking, I am not good at risk taking and she is more of a
risk taker. She quit her previous work with three years experience. She told me that manufacturing
was better than taxi driving, but I could not see the opportunities. I resisted her for some time.
However, I helped her in working on the new venture during my breaks. She told me that I was
good at producing leather products. I also saw what she was earning by selling the leather products.

Once she produced a few items and sold them in a bazaar and she earned a lot. I was surprised. I
compared her income with what I was earning from the taxi service. At that time, on average I was
earning 200 Birr per day, but she earned the same amount by selling only one item. I started taking
out time to learn how to produce the leather products.

Initially, I did not have any knowledge about a leather sewing machine. I learned the work over
time and decided to sell my taxi and invest all the money in the business. However, the investment
absorbed all the money I got from selling the taxi. I was frustrated. I did not have experience in
the business. My experience was getting cash at the end of every day. But we invested the money
with expectations of future returns. The early stages were frustrating for me.

The business started production in January 2012. Before that, we went through all necessary formal
procedures. First, we applied to the SMEs Development Agency’s office in our woreda. The office
directed us to formalize our partnership agreement. After the partnership agreement was approved,
we went to the Inland Revenue Office to get registered and get a taxpayer identity number. We
had the alternative of registering as a turnover tax (TOT) payer, or a value added tax (VAT) payer.
Even though I knew that a leather products business was required to formally register in the VAT
payer category, I chose the TOT payer category to get advantage of paying less tax. Since the
business was registered with the SMEs Development Office, it gave us power to request the Inland
Revenue Office to categorize us as a TOT payer, and the office allowed us this.

Then we went to the trade and industry office to get registered and secure a trade license. Finally,
we commenced production in January 2012 in our residence. Hence, we are not paying any rent
for the place of production.”

Market and competition

“The business accesses customers in three ways: participating in bazaars organized by the
government, participating in bids, and some buyers come to the production site or place orders
over the phone.

The government organizes the bazaars at least once every two months. The bazaars are intended
to connect new businesses organized through support from the SMEs Development Agency with
prospective customers. Our business participated in these bazaars. The bazaars helped us in two
ways. First, we sold our existing products directly in the bazaars. Secondly, we distributed our
business cards to the people participating in the bazaars. Some people who accessed information
in the bazaar either came to our production site or ordered over the phone directly. In addition to
organizing bazaars, the SMEs Development Agency wrote a support letter for our new business.
This worked as a substitute for a cash payment order (CPO) guarantee that is required during
bidding.

The business also participated in bids. Once it participated in a bid floated by Education Strategy,
a government office. It was a bid for 250 bags. We prepared the bags and printed the logo of the
institution on all of them. We earned a good amount from this. Our participation in bids is limited
because of our taxpayer category. According to existing regulations, a business in the TOT
taxpayer category can only participate in bids with maximum total sales of 50,000 Birr at a time.

As a result, the business could not compete in many bids with larger values. This was a result of
the mistake we made in choosing the TOT category for our business. However, after three years
of operations (2012 to 2014), we appealed to the Inland Revenue Authority to change our
taxpaying category to a VAT payer category. Even though we got this registration it resulted in
unexpected expenses. The authority complained that a business should be registered as a VAT
payer when it is formed. The authority registered our firm in the VAT payer category
retrospectively from 2012. This forced the business to pay the deferred VAT that was to be
collected starting from 2012. This was 15 percent of all sales during three years of operations. But
the business had been collecting only 2 percent as turnover tax (TOT). This resulted in an
additional payment of 13 percent on all previous sales during the three years. We had not collected
this from our customers. We appealed to the federal Inland Revenue Department. Our case is still
pending.
We also faced problems selling our products to retailers. On the one hand, they bought our products
on credit and held the stock for long, and on the other hand there was high competition from
informal producers. They supply the same products but at low prices. The informal businesses can
afford low prices as they incur less costs than formal businesses. Our business pays taxes, which
are added to the price making the price at which we sell our products uncompetitive.

Finally, the business could not export its products because exports require bulk production. We
started dealing with firms who have export licenses. In addition, the Ethiopian government has
also started linking small businesses to large exporters. The idea is that small enterprises supply
their products to the exporters and those who have the capacity to export collect the products from
small enterprises and export in bulk.

In general, the business is operating under several challenges. The first challenge is maintaining
trained workers. We have been hiring unskilled workers and training them. Two skilled workers,
who learnt from us have left the firm and started their own business. As a result, the business is
forced to employ skilled workers on a contract basis paying them a per piece rate.

The other problem is related to input supplies. Leather factories target traders who can buy in bulk
for material costing 100,000 Birr or 200,000 Birr. But our business can only buy small quantities.
We usually buy leather at a maximum value of 4,000 Birr a ton at a time. Hence, we are forced to
buy leather from retailers at higher prices. We buy leather any time we have enough money and
stock it for later use. Sometimes we cannot get leather when we need it so we keep a stock of raw
material to use whenever orders come. Keeping these inputs helps us meet these orders. But it also
means that our capital is tied.

The cost of finance is another challenge. During the start-up phase, we got a loan from a
microfinance institution. But it was expensive. The institution charged a flat interest payment for
three years even though the loan balance decreased with time. This is not the case with commercial
banks. As a result, we could not pay back all the loan we had taken for a long time. The interest
drained much of the profits of the business.”

Expansion
“Initially we did all the activities but later we employed one permanent worker. The business also
uses additional contract workers whenever there are more jobs. This generally happens when we
win some bids. For hiring contract workers, we have a short list of skilled candidates with their
phone numbers. In case the person we contact is busy, he/she refers us to friends. In the industry,
there are individuals with specific skills. For example, someone who can sew ladies’ bags cannot
sew document bags. So, we have lists of skilled individuals according to their specializations. We
call them whenever there is a job that is suited to their skills.

Regarding sewing machines, initially we only had a textile sewing machine, which my wife was
using in her previous business. It sewed both textile and leather. Then we bought two sewing
machines. But we sold them and bought the existing two sewing machines. We also bought one
additional machine with the profits that we made. We use this machine for designing work.
Currently we have three machines. We also have tools for measuring and cutting. We buy
additional machines with what we earn from sales. Whenever we participate in a bazaar, we earn
more, and we use this money to buy more machines and leather inputs. Our initial capital was
3,000 Birr and our current total capital is around 15,000 Birr.

We also took part in training given by the government on exporting. This training helped us learn
how to export, how to choose countries, and other issues related to exports.”

Summary of information from other sources about the leather product processing business

The new business operates from rooms in the owners’ residence. The rooms are used for producing
the leather products. In addition, there are places to store inputs, and display final outputs.
Customers come to the production site to make purchases. Some of them were informed about the
business during promotions in the bazaars and they contacted the business. In addition, some
customers got information about the business through person to person information sharing.
Previous customers and the owners’ relatives are among those promoting the new business. Some
buyers bought the products for personal use, while others were retailers. I learned that the new
business was giving a price discount to those customers who bought their products from the
production site. I was among the buyers. During my visit, I bought a belt for myself and a bag for
my wife.
 7.4. Analysis and interpretation
The two cases helped me understand how a new business develops its initial market connections
in an economy with government interventions and a significant number of informal new
businesses.

Case one

Role of prior experiences. In the first case, the founders were familiar with the nature of their
products. They started a new business with products that they had been producing and selling. In
addition, the salesperson of the new business was working in the same job with the same products
earlier. This made him aware of the marketing practices to be followed for selling their products
and information about the possible locations of customers. The previous work experience gave the
salesperson a chance to capitalize on his personal ties already established with the customers of
business where he worked earlier. As a result, he took over the role of market search in the new
business. This role allocation was underpinned by the assumption that the person knew the
marketing practices in the food industry and also knew prospective customers for the new business.

Social connections. If founders of a new business have more ties with businesses in the supply
chain of their products, the speed of initial market connections increases. The first case manifests
that the owners’ social connections helped the new business in displaying its products in places
where they could be noticed and it also helped them to promote their products in person. The
founders’ relatives helped them in displaying and promoting their products in their retail shops.
Otherwise, initial market connections require an intensive search for retailers to shelf the products.
On the other hand, transacting with retailers from an arm's length forced the new business to sell
on credit and claim credit payments only after the retailers had sold the products to final users.

Role of government policies in market connections. Doing a business in line with government
policies increases the visibility of a new business’ products. In the first case, the SMEs
Development Agency helped the new business by linking it with its market through organizing
bazaars where it promoted its products and distributed business cards. After the events, customers
came and bought its products from the production site.

Financial resources, formality, and market connections. A formal new business with higher
financial resources connects faster with its market than a new business with less financial resources
in a developing economy. On the one hand, a new business with non-innovative products faces
problems in competing with established firms. The latter buy inputs in large volumes at low costs
per unit, while a new business buys them from retailers at higher prices. So, the new business faces
problems in competing with these established firms in terms of prices. In addition, large firms sell
branded products because of which they enjoy a reputation among their customers. Larger firms
can also access a large number of customers in a wider area. They are more trusted by customers
than new small businesses.

Further, a formal new business cannot compete with informal businesses in a developing economy.
Informal producers supply the same products to the same market. But the informal producers
supply these at low prices as their costs of production are low because they do not pay taxes and
have no administrative costs. They make the products in their residences and distribute them using
the same retailers that the formal businesses use. On top of that, informal producers are also
competing for skilled employees. They employ workers by paying them higher wages as compared
to formal producers.

Case two

Prior experience of founders. In the second case, the founding owners did not have any prior
marketing experience for the same product. But one of the founders had prior experience of
producing the same product. In addition, both founding owners had prior experience of owning
and running a business. This helped the business indirectly on how to manage the business’ market
relationships.

Role of government policies in market connections. Being eligible for the government’s support
package increases the chances of forming initial market connections. It includes facilitating
training on how to export, and how to choose countries of export. Further, the government supports
new businesses connected to foreign markets by connecting them with big exporters. This new
business was given an option to supply its products to exporters so that the big exporters could sell
them to foreign markets in bulk. Otherwise the new business could not have exported its products
because of the cost factor. The package enhances this connection in two ways. First, it increases a
new business’ visibility through participation in bazaars organized by the government. As a result,
some buyers come to the production site or place orders over the phone. Second, the SMEs
Development Agency gives a support letter to a new business that works as an alternative for a
cash payment order (CPO) guarantee which is required for biding for orders. This increases a
business’ chances of winning bids. However, prior knowledge of the content of the policy package
moderates the extent of the benefits derived. A business with knowledge of the policy content act
on the possible benefits of the policy. The option of registering as a TOT payer or a VAT payer
provides an illustration. The founders of this case did not know the requirements and benefits of
both the options. As a result, they lost opportunities of connecting to a larger market. Please
provide a connection with previous lines.

Financial resources, formality, and market connections. The interaction between a small financial
capital with a new business and the existence informally operating competitors decreases its
chances of making initial market connections. The new business in the second case faced problems
selling its products to retailers. On the one hand, retailer bought its products on credit and held the
stock for long, and on the other hand there was high competition from informal producers. They
supplied the same products but at low prices. The informal businesses can afford low prices as
they incur less costs as compared to formal businesses. Taxes are added to the price making the
prices of products produced by formal businesses uncompetitive.

Learning from the two cases: Government policy, formality, and financial resources

I found that initial financial resources determined the extent of initial market connections for a
new business. New businesses with small initial financial resources were unable to compete with
large established firms and informal businesses. In the first case, competing with established large
firms was difficult as they bought the inputs directly from farmers. These established firms were
large and thus had lower unit costs. In contrast, the new small business bought inputs from retailers
at high prices. This made their products non-competitive in terms of pricing.

There are also many informal producers supplying the same product to the same market. But the
informal producers supply at low prices because of their low costs as they do not pay taxes and
incur no administrative costs. Informal producers produce the products in their residences and
distribute their products using the same retailers as the venture in the case study.

The two cases also make it clear that formal businesses are also competing with informal small
businesses for skilled employees as these informal businesses employ skilled workers paying them
high wages as compared to their formal counterparts. They can afford to pay more wages because
they do not pay taxes or incur other administrative costs. As a result, skilled workers leave the new
formal businesses to work with informal ones.

However, formality has some benefits as it enhances initial market connections. It is clear from
both the cases that new businesses formed under the SMEs development policy’s directives have
the possibility of early market connections. On the one hand, the government helps new businesses
in preparing a platform for connections with potential customers. The government organizes
bazaars, at least once every two months. The bazaars are intended to connect new small businesses
organized through support from the SMEs Development Agency with prospective customers. The
bazaars helped the businesses in the two cases in two ways. Firstly, they directly sold existing
products in the bazaars. Secondly, the new businesses distributed their business cards to people
participating in the bazaars. Some people who accessed information in the bazaar either came
directly to the production sites or ordered over the phone. In addition, the SMEs Development
Agency also gave support letters to the new businesses. These worked as legitimizing mechanisms
for the businesses and as a substitute for a cash payment order (CPO) guarantee required for biding.

The case studies also help understand that new businesses can register either as turnover tax (TOT)
payers, or value added tax (VAT) payers. However, compared with VAT payers, a business in the
TOT taxpayer category can participate in bids with less total sales value. Prior information about
the requirements and benefits of each category determine the possibility of using the market
opportunities provided under each category.

7.5. Lessons from this chapter

The purpose of this chapter was understanding how a new business develops initial market
connections. For a new business, success in the initial market is contingent on various conditions.
I found that prior knowledge about marketing practices among the founders in the food processing
industry enhanced their ability to search for customers and helped them in linking with retailers in
the same industry. One of the owners of the new business was working in a bakery so he was
tasked with selling and distribution of products in the new food processing business. Thus, his
prior knowledge equipped him with expertise in identifying possible buyers for the new business’
products. I also found that prior market knowledge enhanced the founder’s persuasive abilities.
From the food processing business case study it becomes clear that prior marketing experience
helped the new business navigate alternative mechanisms of connecting to the market. The founder
connected with initial customers by going around and searching for retailers to shelf its products.
The business started selling its products to retailers either on credit or in cash. Money for the
products sold on credit was claimed only after the retailers had sold the products to final
consumers. The business used different mechanisms for convincing retailers. It persuaded them by
making them taste the products, giving them samples, and personally communicating the good
quality of its products.
I also found that prior knowledge of government policies and regulations determined the extent of
a new business’ market connections. From the two empirical cases, I learnt that a new business
formed in line with the SMEs development policy’s directives have the possibility of making early
market connections. The government helps new businesses in preparing a platform by organizing
bazaars at least once every two months for new businesses to establish connections with potential
customers. In addition, registration as either a TOT payer or a VAT payer differentiates between
the possibility of the first sale and its amount. A business in the TOT taxpayer category can only
participate in a lower value bid than VAT payers. However, prior knowledge of the requirements
and benefits of each category determine the possibility of using the market opportunities available
under each category.
These findings extend prior scholarly arguments on how initial conditions effect a new business’
initial market connections (Bailey & Helfat, 2003; Boeker, 1997; Cooper et al., 1994; Gimeno et
al., 1997; Harris & Helfat, 1997; Mosakowski, 1993; Roberts & Berry, 1985; Schoonhoven et al.
1990).
I also found that the amount of initial financial capital determined the success of the initial
exchange. In both the empirical cases the businesses were challenged by their competitors’ low
costs and low prices. Therefore, it is identified that the size of the initial financial resources
determines the extent of initial market connections for a new business. New businesses with small
initial financial resources were unable to compete with large established firms and informal
businesses. In the first case, established large firms bought inputs directly from farmers for food
processing in larger quantities at lower unit costs. In contrast, the new small business bought inputs
from retailers at high prices per unit. This made the new business’ products more expensive. In
addition, there were many informal producers supplying the same product to the same market. But
the informal producers supplied these at low prices because they had low costs as they did not pay
taxes and had no administrative costs. Informal producers also produced the products in their
residences and had no rent costs. They distributed their products using the same supply chains as
the formal small business. These findings contribute to extant literature that relates a new business’
initial financial resources to its success in its initial market connections (Cooper et al., 1994;
Gimeno- Gascon & Woo, 1994; Schoonhoven et al.,1990).
I also found that strong social ties facilitated the visibility for a new business’ products. In the
food processing empirical case, I found that the business used retail shops owned by the founders’
relatives to display its products for promoting them to other buyers. This finding contributes to
existing literature on the role of the founders’ prior ties with industry actors such as buyers (Bailey
& Helfat, 2003; Boeker, 1997; Cooper et al., 1994; Granovetter, 1973; Harris & Helfat, 1997;
Mosakowski, 1993; Ruokolainen, 2005).

I found that founding entrepreneurs' knowing government officials helped new businesses access
information on government schemes that support new businesses through market linkages. This
extends the scholarly idea that using brokers also helps in accessing new markets (Hughes et al.,
2007; Kor & Misangyi, 2008; Mosey et al., 2006).
8. Findings, conclusions and implications, limitations, and
directions for future research

This chapter discusses the findings of the empirical chapters and elaborates on an integrative
framework of development for a new business in a developing economy. The chapter also gives
the conclusions and implications for future research. It concludes with a discussion of its
limitations and identifies directions for future research.

8.1. Findings and conclusions

This dissertation had the overall purpose of understanding the challenges that effect the
development of new businesses in a developing economy. It started with four research questions
and answered these in four empirical chapters. The four empirical chapters are independent but
include aspects of the process of developing a new business. The sequence of the empirical
chapters reflects a possible order of themes that help understand the process of a new business’
development. The focus of the first empirical chapter is understanding the challenges related to
phases of a new business’ development in a developing economy. While the second empirical
chapter deals with how a new business develops its product, it also focuses on how a new business
accesses and uses knowledge in developing its product. The third empirical chapter deals with how
a new business accesses resources as its development process unfolded. The fourth and final
empirical chapter investigates how a new business gets connected to its market.

The following sub-section discusses the overall findings of the four chapters and integrates them
to understand how a new business develops in Ethiopia (Figure 8.1).

8.2. Tension between the formality-informality of a new business and its

development
To understand how a new business develops in Ethiopia, it is important to understand how the new
business goes from informal activities to formal ones. While studies indicate that a significant
percentage of new businesses in a developing economy are informal (Fransen & Van Dijk, 2008),
my discussion focuses on how a new business operates as either the formal or informal economy.
Empirical evidence shows that the process of developing a new business starts either as a formal
business or as an informal one. This decision is affected by a new business’ initial resources, the
perceived costs, and the perceived benefits of being a formal business. A new business with low
prior resources becomes an informal business, while one with high initial resource endowments
becomes a formal one. Formality requires higher investments for fulfilling the standard defined by
the SMEs Development Agency. To operate formally, a new business needs to meet different legal
requirements including office facilities, operating technologies, product standards, and human
resource employment standards. The SMEs Development Agency ensures compliance during the
initial registration and subsequent follows up. A new business with enough initial resource
endowments, fulfils the requirements of operating as 1a formal business. Otherwise, the new
business operates informally. Moreover, the decision to operate either as a formal or informal
business is affected by the perceived extent of costs and benefits of formality. A new business
attaches both costs and benefits to its formalization. The costs included taxes and payments to
fulfill the minimum requirements in a specific industry. A new business considers all the benefits
of formality. The SMEs Development Agency provides support to a formal business including
land, financial loans, lease purchase of capital assets on a long-term payment, and training. The
beneficiaries of the support vary based on the type of business. A new business engaged in
activities in the government’s policy priorities gets more benefits. As a result, the new formalized
business receives different types and amounts of benefits. Thus, a new business that sees the
benefits of formality as being more than the costs of operating formally, starts and runs as a formal
business.

Even though an informal business is not able to use government support, it is developed with
support from the founder’s friends, family, and acquaintances (Butler & Robson, 2001;
Johannisson, 2004). These relationships help the business access resources. Also, a new business
establishes and maintains relationships with its buyers and suppliers. However, an informal
business is unable to sustain its development beyond a certain level. It needs to hide from
surveillance and control of the regulatory bodies. This situation reinforces an informal new
business’ decision of remaining informal small. The capital generated during its operations as an
informal business serve as initial capital for operating as a new formal business.

8.2.1. The role of the government’s support package and new business development in
Ethiopia
A new formal business is legally required to undertake some activities by the SMEs Development
Agency in Ethiopia. The business has to get a taxpayer identification number, a secure trade
license, a formalized agreement among its founders, and registration as a legal entity. Then, the
business has two options in Ethiopia: it can either became a user of the SMEs support package or
not. this decision depends on access to information about government policies, the extent of prior
endowments, and the extent of political affiliations.

When information about government policies is easily accessible, there is a higher possibility that
a new business will apply for government support. Ease of information access is enhanced by a
degree of information searching capacity of the new business and the extent of information
distribution by government agencies. In addition, a new business with less prior resource
endowments looks for more government support. A new business looks for support from the SMEs
Development Agency in the form of resources like land, operating premises, financial loan, lease
purchase of capital assets, and training. These resources help the new business overcome the
challenges it faces during the transition phase -- legitimacy building and survival orientation. So,
a new business with government support overcomes the problems connected with stakeholders
and the challenges to its survival better than the others.

Moreover, the extent of Ethiopian political affiliations affect the decision to use the government
support package. The SMEs development policy was perceived as a main political tool of the
governing party. It helped the party to implement its political ideology. As a result, those founders
of new businesses who are affiliated with the political ideology are more willing to use the support
package than those who are not. However, becoming a user of the package is not a guarantee of
getting resources and support for market access for small businesses. Factors like lobbying with
government officers, creating ties with officers, and understanding the specific contents of the
package has different effects on new small businesses. A new business that creates more
relationships, lobbies more with government officers, and understands the government’s policy
receives more support as compared to the other businesses.

8.2.2. Consequences of a new business becoming a user of the government’s support

package
The support given by the SMEs Development Agency effects the process of developing a new
business in different ways. This support helps a new business overcome its lack of resources in its
start-up stage. Most new businesses start operations with no or limited resources. They also face
challenges in connecting with customers and other relevant stakeholders. In line with literature
(Fichman & Levinthal, 1991; Stinchcombe, 1965), government support helps the new businesses
overcome the challenges related to the “liabilities of newness and smallness”.

A new business with low or no resources, aligns its product ideas choice with the government’s
priorities. The founders search for a product from among the government’s priority areas that
matches their prior experience. The process of developing a product in a new business with
government support starts with limited initial knowledge of the founder(s). The government’s
support enhances this search by encouraging the founders of new businesses to take a risk and try
products with customers. Additional knowledge is acquired through interactions with stakeholders
as a new business’ development unfolds. In addition, the government provides the business with
training on how to develop the product. Suppliers and customers contribute to the founders’
knowledge. This dissertation specifies the government’s moderating role in the form of support
while suppliers and the market contribute to the process of developing a product by a new small
business.

As a new business aligns more to government policies, it gets more resources, earns more
legitimacy, and establishes market connections faster. A new business formed under the SMEs
development policy’s directives has the possibility of early market connections. The government
facilitates connections between the new business and its potential customers. The government
organizes bazaars at least once every two months. The bazaars are intended to connect new
businesses to prospective customers. The bazaars help new businesses in two ways. Firstly, they
directly sold existing products in the bazaars. Secondly, the new businesses distribute their
business cards to people participating in the bazaars. In my cases, some people who accessed
information in the bazaar either came directly to the production sites or ordered over the phone.
The SMEs Development Agency also wrote support letters on behalf of the new business. These
letters worked as legitimizing mechanisms for the new businesses and as a substitute for a cash
payment order (CPO) guarantee required during biding.

However, an excessive reliance on government support has negative effects on the phase
transition-growth orientation. The legitimacy problem of a new business being supported by the
SMEs development policy re-emerges when the support stops. The Government of Ethiopia
supports a new business through government purchases. As part of the support package, the
government helps a new business to sell its products to projects run by the government directly.
To fulfill this, a new business needs to acquire material and human resources. This, in turn,
increases the need for internal differentiation and integration of its role structure. This results in a
large number of sections and management hierarchies. Once the sections are equipped with
material and human resources, the firm becomes larger. However, the government support is
provided only for five years. When the support stops, the new business has to deal with the
challenges of finding new customers. As a result, a new business faces major problems in
generating enough revenue to cover its costs. I call this the liability of early market scaffolding.
This is a challenge during the phase transition to growth orientation. It is a result of the
government’s supports to new small business during this phase transition to survival orientation.
The liability of early market scaffolding depends on the extent to which a business relies on
government purchases. If a new business has diversified its customer base, including individual
and private customers, it acquires knowledge about marketing in the industry during the phase
transition. Consequently, it minimizes the liability of early market base scaffolding during the
phase transition to growth orientation.

Informal, small, and no Phase transition- legitimacy Phase transition- Survival Phase transition-
government support building orientation Growth
(Formal, small, and orientation
government support)
Activities: Establish Activities: secure a taxpayer Activities: Managing
informal business; Collect identity number from Inland • Lobbying government liability of early
resources from friends, revenue; Secure trade license from officers market base
family, acquaintances; trade and industry office; • Create ties with scaffolding
Establish and maintain Formalize agreements among government officers
network with suppliers founders; Admission to SMEs • Review government
and buyers development support package policies
Condition:
Endowments: Human, Conditions:
financial, and social Perceived extent of costs and
capitals; physical benefits of formality; Extent of
resources prior endowments; Extent of
Intention: Market accessibility of information about
Opportunity driven or government policy; Extent of
necessity driven or prior endowment; Extent of
resource driven political affiliation

Figure 8.1. The process of developing a new business in a developing economy

8.3. Contributions of the dissertation
This dissertation focused on the process of developing a new business in Ethiopia. By elaborating
on the process, the dissertation developed insights that increases our understanding of the process
of developing a new business. It also elaborated on its theoretical contributions and offers
implications for managers and policymakers.

8.3.1. Theoretical contributions

The aim of this dissertation was creating a better understanding of how a new business develops.
Understanding how a business develops requires theorizing the process (Van de Ven & Poole,
1995). Whetten (1989, p. 492-493) shows that building a theory requires identifying concepts/
constructs/ variables, their relationships, the logic of specifying the concepts and their
relationships, and the temporal and contextual conditions under which the relationships work.
Accordingly, this dissertation focused on how a new business accesses resources, develops its
product, connects with the markets, and overcomes different challenges as its development process
unfolds in Ethiopia. This is represented in Figure 8.1. The following discussion focuses on the
what is highlighted in this figure.

Figure 8.1 shows that new businesses start with different levels of initial resource endowments and
intentions. The intentions are driven by perceived market opportunities, the availability of
resources, or the necessity to earn a living. A new business starts either as a formal or informal
activity. The decision to start either formally or informally is influenced by the perceived costs of
formality, and the extent of initial resource endowments. The perceived cost of formality
discourages starting a formal new business, but the extent of initial resource endowments
encourage starting a formal new business.

Once an informal new business is formed, it uses social ties to access resources and customers. It
needs to collect resources from the founder’s friends, family, and acquaintances. In addition, it
needs to create networks with buyers and suppliers. The informal businesses are unable to grow
beyond a certain limit and they need to prevent the surveillance by regulatory bodies. At this point,
they have two options: either remain small and informal or fulfill the requirements of formality to
operate as formal businesses. The new businesses become formal with the resources accumulated
while operating as informal businesses.
This dissertation contributes to two theoretical fields. Firstly, it contributes to the concept of
entrepreneurial bricolage (Bacq et al., 2015; Baker et al., 2003; Baker & Nelson, 2005; Davidsson
et al., 2017). Studies on entrepreneurial bricolage focus on ties with the market, suppliers, friends,
and family as a means of getting access to resources (Baker & Nelson, 2005; Davidsson et al.,
2017). My findings contribute to this discussion by showing that ties with government officials
are an important means of accessing resources. Social ties with government officials are an
instrument of resource acquisition.

In addition, prior research on the concept of entrepreneurial bricolage emphasizes the need for
combining resources for new purposes (Bacq et al., 2015; Baker et al., 2003; Baker & Nelson,
2005; Davidsson et al., 2017). My finding extends this concept by adding the configuration of
business activities as an instrument in the resource base. A new business accesses resources by
configuring different business activities. This configuration involves shifting between business
activities over time and undertaking different business activities concurrently. The shift between
business activities starts with activities that require no or low financial and human capital
investments. These business activities generate a moderate amount of revenue and help an
entrepreneur acquire business experience and social connections. The process continues as prior
business activities help later ones through a provision of resources. Moreover, a new venture
undertakes different activities in the same area and/or the same activities at different places to
increase access to resources. The venture sells different types of products or services so income
from one activity helps finance its other activities When a new business engages in various
activities it increases its learning of product, market or social capital. In addition, income from one
activity helps as an additional source of resources for the other activities.

Moreover, the dissertation contributes to effectuation (Sarasvathy, 2001; Sarasvathy & Dew,
2005). In this dissertation, I show the moderating role of government support while different
stakeholders perform activities in the process of developing a product by a new small business.
The business starts with little prior knowledge about the product. Additional knowledge is acquired
from interactions with stakeholders as the new business’ development unfolds. The government
provides the new business with training on how to develop its product. Suppliers and customers
contribute to the knowledge as well. For instance, suppliers offer training to entrepreneurs. The
continuous improvement of a new product is a result of interactions with stakeholders.
8.3.2. Practical contributions
The findings of this dissertation have important practical implications for entrepreneurs and
policymakers.

Managerial implications.

The findings have implications both for the founder(s) of a new business and government officials
of the SMEs development policy. With regard to the founders of new businesses, this dissertation
contributes to broadening their understanding of the decisions and activities that they need to take
as the new business development process unfolds. The findings show that a new business can start
either as a formal or informal activity with different types of challenges. A formal new business
may or may not apply for the SMEs Development Agency’s support package. Both decision paths
present different types of challenges for the founders. The progression in a new business’
development varies depending on the decisions and activities undertaken to overcome the
challenges. For instance a new business with low or no initial capital apply for support from SMEs
Development support to overcome their challenges related to resources.

The findings will also help government officials implementing the SMEs development policy and
strategy as they will inform them about the behavior of a new business. The findings suggest that
clearly communicating the contents of the policy will enhance its effectiveness. Lack of proper
communication distorts the process of supporting new businesses.

Implications for policy

The findings of this dissertation will help policymakers to take informed decisions on the contents
of the SMEs support package. The findings show that supporting a new business with suitable
inputs can help it overcome challenges during its phase transition to survival orientation. However,
the findings suggest that interventions such as creating market opportunities for a new business
negatively affect its development process. A new business has to invest so that it can supply its
products to its target market. A large amount of investments is required to fulfill market needs.
The new business has to buy capital assets and hire employees. Hence, the SMEs Development
Agency could consider putting in place different periods for the support that it provides. This
research shows that support lasts for a short period. As the support stops, the new business faces
challenges of managing the liability of early market scaffolding during the phase transition- growth
orientation It is related to investments made during prior phase, survival orientation. and finding
markets for its products.

8.4. Limitations and directions for future research

This dissertation was built on seven case studies. One of them was used as a case vignette in the
introductory chapter. The other six cases were used in the four empirical chapters. The cases were
selected based on their richness to help understand aspects of the process of developing a new
business. An interpretation of the six cases helped understand a contextualized view of the
development process of a new business in Ethiopia better. The cases served as base to extend
existing conceptualizations though they are limited to making empirical generalizations
(Eisenhardt & Graebner, 2007). Future research can improve knowledge through a broader use of
a multiple case study approach (Yin, 1994) and develop cross-sectional research (Creswell, 2003).

The empirical material was mainly collected from interviews with stakeholders in the new
businesses and supported by site observations. The quality of the empirical material depended on
the capacity of the interviewees to remember what had happened during the course of developing
their businesses. There was a possible loss of data because of limited memory of the interviewees.
Thus, future research can benefit by collecting of real time data as the process of a new business’
development unfolds (Langley, 1999).

As the knowledge generated in this dissertation is generated through interpretations of empirical

material, its findings are limited to my ability to interpret the empirical material. Each empirical
chapter is framed with a single theoretical perspective. This limits the interpretation of the
empirical material (Alvesson & Sköldberg, 2009; Creswell, 2003). Future research can contribute
through a triangulation of theoretical perspectives (Alvesson & Sköldberg, 2009; Gioia & Pitre,
1990).

Finally, the theoretical model of the process of developing a new business was developed based
the four empirical chapters. Not all constructs and their relationship were directly derived from
empirical evidence. Instead, they were gathered from the interpretations of the four empirical
chapters. So, the relationships need empirical validation.

Future studies addressing the specified gaps will enhance our understanding of the emphasis of the
title of this study “Challenges in Developing New Small Businesses”.
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Appendix- Sample of interview guide for interviews with different
stakeholders of a new business.
Addis Ababa University
College of Business and Economics
Department of Management
PhD Program
Interview Questions

This is to undertake a research on a new business development in a developing economy with an

overall purpose of understanding how a new business develops in an economy where the
government intervenes in the new business sector with industry development policies, and the
sector is composed of significant number of informal new businesses. The following are interview
questions used to collect empirical materials.
Part I: Questions addressed to selected new business
1. History
a. What is your personal background? What did you do prior to starting the venture?
(capturing education, training and prior work experience)

b. What is formal academic education you attended before you started the firm?
c. What are any trainings you had before you started the firm?
d. Did any of your family members have entrepreneurial experience? How did that influence
your intention to become an entrepreneur?

e. How did your intention to have your own company emerge? (i.e. understanding whether
first idea to be self-employed, then searching for idea; or opportunity seen first, then
decided to start company) When?

f. What was your business idea from the start?

g. How did this idea change since? What it is today?

 h. How did your surrounding (family, friends) react to your decision to become self-
employed?

i. Did you discuss the idea with anybody before starting? With whom, and what kind of
feedback did you get? Who originally participated in developing this idea?

j. Who supported you during starting of the firm (government, parents, family, friends,
relatives, community, local administration)?
k. Which were the most important activities in starting the venture and how were these
supported or hindered by different people and agencies (e.g. tax officers, regulations,
finding location…)

l. When was the firm officially created?

m. How was it created?
n. Which sources of financing did you obtain? For what? How did you obtain them?
o. Why did you start the firm?
p. Is the family involved in the business (i.e. as owners, co-workers)? How do you work
together?
q. Are other family members or relatives involved in another business? Which? Do you have
commercial ties? How do you collaborate?
2. Expansion
a. What have been the most important achievments since founding of your firm? (one by one)
b. What have been the most important challenges that the firm has faced since founding? (one
by one) How have you overcome them? (one by one).
c. What development/ growth phases the firm have been through since founding?
d. What are main activities done, resources required, and sources of resources during each
phase ?
e. What are roles of governement, regulations, laws, customers, suppliers, family, friends,
employees, residents around your business site in each expansion phase?
f. How do you compare current size of you firm with its size during establishment?
g. What improvements do you see with your firm periodically?
h. Do you plan expansions of your firm? Did your firm make any unplanned expansion? What
internal work required because of the expansions?
 i. How do you associate expansion of your firm to change in government policy, regulations,
government administration structure, and social norms and values?
j. Would tell me major actions you took to expand your firm (acquisitions, employing,
product development, market development, getting loan, getting support)?
k. What are major changes happened in your firm in past years?
l. How you see possibilities of business expansion in locality?
m. How do you see relocating your firm so that you can have wider premises?
n. How do see opening of new subsidiaries of your firm in different areas?
3. Market and suppliers
a. Who is your target customer? What characterizes this group?
b. ' How did you identify which customers to target when starting the business?
c. How did you identify which customers to target when developing/growing the business?
d. Where are your customers mainly located?

e. How do you maintain loyalty of your existing customers?

f. How do you increase consumption level of existing customers?
g. How do you increase number of your customers?
h. How do you reach your customers? How has that developed over time? (e.g.
advertising/marketing, word of mouth…)

i. How do you describe your customers' perception of you product and services as
compared with others?
j. How do you include your customers comments and suggestions in your
decisions/product, price, services, promotion, distributions /?
k. Who are your three most important customers? Why are they relevant (i.e. how big
percentage of your sales each represent? How do you interact with them? How often?
l. How did you establish the initial supplier’s relationship?
m. How do you describe your suppliers' perception of your product and services as compared
with others?
n. Where are your three most important suppliers located? Why are they relevant (i.e. how
big percentage of your supplies each represent? How do you interact with them? How
often?
 o. How do you include your suppliers’ comments and suggestions in your decisions?
4.Govenment, laws, rules, regulations and their enforcements/ regulatory pillar/
a. What kind of regulations affected you in starting your firm (favored/restrained)?
b. What kind of regulations affect the developments of your firm?
c. What actions you took to overcome the challenges of regulations/laws?
d. What changes do see in regulations since establishment of your firm?
e. What regulations, policies, or standards could affect your firm in the future?
f. How do you see the implementation of government policies and regulations that affect your
firm?
g. How should government support businesses like your firm? How it is working currently
for other firms? How it is working for you?
h. How do you describe the impact of dealing with regulations (Tax, winning government
contract, bribing, getting a license) affecting expansion of your firm? What specific
experiences you have in relation to this affecting your firm or other firms affected?
i. What experiences do you have of existing court system since the founding of your firm?
How it affected expansion of your firm?
5. Social values, norms, membership to association, and training taken /normative pillar.
a. How your friend and family view firm expansion? What they expect from you as
entrepreneur?
b. What about other business people and society residing in your locality? What they expect
from you as entrepreneur?
c. How your friends and family support your firm expansion?
d. Have any organizations (firms, or private or public institutions) supported the development
of your firm? Where are these organization located?
e. How have they supported your firm?
f. Do you have any collaborations with organizations located here?
g. What is the level of formality/ formal contract/ of the collaborations ?
h. How and why did you initiate these collaborations?
i. Who organize these collaborations?
j. How have your firm organized/participated in the collaborations?
k. What have your firm achieved via these collaborations?
 l. How often do you meet with other groups/institutions/firms?
m. How do you communicate with them?
n. How are these collaborations differ from other collaborations that you have experienced?
o. Do you belong to any trade/professional association and how you involve in the affairs of
the association?
p. How that involvement impacted (positive or negative) expansions of your firm?
q. Have you ever attended training and how it helped you to expand your firm?
Part II: Interview Questions to customers

1. Do you personally know the owner before you become customer to the firm?
2. When you become customer?
3. How you become customer?
4. How do you see the service / product of this firm as compared with other firms?
5. How do you deal to find remedy with the firm in case of product /service failure?
6. How do you see the firm include customers comments and suggestions in its
decisions/product, price, services, promotion, distributions?
7. Do you think that you shift to another firm? Why?
8. Do you see the firm is expanding? what do you think the reasons?

Part III: Interview Questions Employees

1. Do you personally know the owner before you become employee in the firm?
2. When did you join the firm?
3. How did you join the firm?
4. Did you work in another firm before you joined this firm?
5. How do you see your benefit being employed here as compared with your previous
experience in another firm? What about in comparison with your peers working in other
firms?
6. Do you see the firm is expanding? In what aspects? what do you think the reasons?
7. What is your future plan?

Part IV: Interview Questions to Suppliers

1. Do you personally know the owner before you become supplier to the firm?
 2. How and when your relationship with the firm is created in the first place?
3. How you describe your relationship with firm?
4. How you commonly conclude transitions with the firm?
5. What are the common financing methods of transactions with the firm?
6. How you commonly resolve any dispute with the firm?
7. How do see your chance of commenting on product/service of the firm?

Appendix- Sample of site visits and observations guide.

The following are issues of my focus while I observed the new businesses.

1. The physical location of the business, and arrangement of machines resources.

2. How the businesses locate and store the inputs and final outputs.
3. Interactions of workers of the new business with owner(s) of the business.
4. How the business interacts with customers.
5. How the owner(s) behaves on work area.