Failure of Smes in Tanzania

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MZUMBE UNIVESITY
DAR ES SALAAM BUSINESS SCHOOL
MBA CORPORATE MANAGEMENT
TERM PAPER – JUNE 2012

COURSE TITLE:THEORIES OF ENTREPRENEURSHIP AND SMALL BUSINESS DEVELOPMENT

CODE:BUS 5042

QUESTION:There are arguments that despite the importance of SMEs in all economies, particularly in the less developing countries, the SME sector is met with reluctance both by the government as well as individuals in the sector. When SMEs fail, which is a very common phenomenon governments point fingers to SME entrepreneurs and vise versa. (I)With practical examples, make a critical discussion on the reasons for the failure of SMEs in Tanzania (II)Come up with possible solutions so that a vibrant SME sector in the economy is achieved AUTHER:Sophia Mjasiri Emesu

SUBMISSION DATE:15 June 2012
INTRODUCTION
Small and Medium-sized Enterprises (SMEs) play a major role in economic development through employment creation and income generation. SMEs are sometimes referred to as Micro, Small and Medium Enterprises (MSMEs). They cover nonfarm activities such as manufacturing, mining, commerce and services. There are different yardsticks of categorizing SMEs. Commonly used yardsticks are total number of employees, total investment and sales turnover. In the context of Tanzania, MSMEs are those enterprises engaging up to 4 people, in most cases family members, with capital amounting up to Tshs 5 million. Majority of MSMEs fall under the informal sector. SMEs are formalized undertakings engaging between 5 and 49employees, with capital investment from Tshs 5 million to Tshs 200 million. Medium enterprises employ between 50 and 99 people or use capital from Tshs 200 million to Tshs800 million. (URT, 2002) According to World Bank (2006); since Tanzania is characterized by low capital formation, SMEs are the best option to address this problem. SMEs tend to be more effective in utilization of local resources using simple and affordable technology. SMEs play fundamental role in utilizing and adding value to local resources. In addition, development of SMEs facilitates distribution of economic activities within the economy and foster equitable income distribution. It is estimated that about a third of the GDP originates for the SME sector. According to the informal sector survey of 1991, micro enterprises operating in the infomal sector alone consist of about 1.7 million businesses engaging about 3 million persons, which was about 20% of the Tanzanian labor force. Despite their importance in the economy of Tanzania, SMEs have been facing problems. This is due to the persistent culture that has not recognized the value of entrepreneurial initiative in improving lives of people. Other factors complex, bureaucratic and costly legal, regulatory and administrative environment where SMEs are at greater disadvantage than their counterparts that are larger in size. The high cost of compliance to regulations may discourage potential entrepreneurs from formaly setting up their businesses, while driving some existing enterprises out of business and those working for them to unemployment. Due to insufficient competition and inadequate information, banks are not willing to lend to SMEs. Legislation and regulation on collateral exclude movable assets as mortgages, thereby putting smaller businesses that own more of these assets into a disadvantaged position vompared to larger business

Causes of SME Failures in Tanzania
1. Characteristics of SMES
Some characteristics suggest that SMEs are yet to adopt some modern business standards and practices. For example, there is personal ownership and management of enterprises which makes SME owners unable to differentiate between their businesses and their personal properties and lives. Among other things, they employ relatives, friends and those in their networks of relations regardless to whether these are competent in business or not. They are also not used to account for the use of generated...
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