Industrial clusters and social networks and their impact on the performance of micro- and small-scale enterprises: evidence from the handloom sector in Ethiopia

This study empirically investigates how clustering and social networks affect the performance of micro- and small-scale enterprises by looking at the evidence from Ethiopia. By contrasting the performance of clustered micro enterprises with that of dispersed ones, it was first shown that clustering significantly increases profit. The increase in profit from clustering is found to be higher in urban than rural areas. It is also found that regional specific factors determining clustering of micro enterprises are different in urban and rural areas. Second, it is empirically shown that clustering eases the financial constraints of micro enterprises by lowering the capital entry barrier through the reduction of the initial investment required to start a business. This effect is significantly larger for enterprises investing in districts with high capital market inefficiency. Third, the impact of clustering on the entry and exit decisions of farm households into and from non-farm enterprises is examined. Clustering significantly increases the likelihood of entry and enhances the survival of rural enterprises. The impact of entry and exit on household’s well-being is further investigated. Entry into non-farm enterprises significantly increases household’s income and boosts their food security status, while exit from non-farm enterprises is found to significantly reduce household’s income. Finally, the role of ethnic ties on the performance of micro enterprises is investigated. The empirical results show that ethnic ties affect the performance of producers negatively, which implies that the positive effect of ethnic ties, through the reduction of transaction costs arising from market imperfections, does not outweigh the negative effects of closed social networks.

Keywords: clustering, micro enterprises, industrialization, finance, entry, exit, well-being, ethnic ties, transaction cost, Africa, Ethiopia.