2.5.2. Independent variables
The independent variables are those factors affecting the profitability of agricultural SMEs.
Age of the enterprise
The age of enterprises is measured by the number of years over which agricultural MSEs exist in the business until the data was collected. According to (Abraham, 2018), a long-existing business improves enterprises' financial performance. Enterprises, which stay for a long period, are expected to achieve economies of scale and generate high returns on the asset. Therefore, this variable is expected to have a positive effect on the profitability of agricultural MSEs.
Number of employees
It is a continuous variable defined as the total number of permanent employees working for the enterprise during the survey year. (Abraham, 2018) indicated that efficient use of the proper number of employees improves the financial performance of MSEs. As agricultural MSEs are labour-intensive, the larger number of employees would increase the production, growth, and profitability of enterprises. Hence, the number of employees is expected to have a positive influence on agricultural MSEs profitability.
Enterprise ownership structure
It is a dummy variable measured in terms of whether the enterprise is owned by an association or privately. It takes 1 if the enterprise is owned by a partnership /association/ and 0 otherwise. Concerning ownership structure, there are two opposite views concerning the effects on firm performance. (Dagmawit & Yishak, 2016; Shibia & Barako, 2017) showed that group ownership positively affects MSEs performance due to the ability to raise large capital to undertake the intended tasks of the enterprise, and boost risk-taking capacities (Bhaumik et al., 2016). Nevertheless, (Wolday, 2015) finding showed that cooperative owned enterprise has registered the lowest performance compared to other forms of ownership due to weak cohesiveness and lack of shared vision. Hence, the ownership structure is expected to have either positive or negative effects on the profitability of agricultural MSEs.
Education level of manager
It is a continuous variable measured in years of formal schooling of the enterprise manager attended. Entrepreneurship education can play a significant role in the establishment and survival of SMMEs (Chimucheka, 2017). Empirical evidence of (Abraham, 2018) suggested that the education level of managers increases the profitability of MSEs. Therefore, the education level of enterprise managers is hypothesized to influence the profitability of agricultural MSEs positively.
Number of training
It is a continuous variable, which refers to the number of formal training enterprises owners or employees have obtained since the startup of the business. Entrepreneurial skills and financial training enhance MSEs competitiveness, thereby improving their performance. Vocational training can help MSEs owners reduce technical inefficiency that influences the profitability of MSEs positively (Kelemu, 2018 ; Tekle et al., 2016). Therefore, the number of training is expected to have a positive effect on the profitability of agricultural MSEs.
Credit use
It is a dummy variable, which takes 1 if the enterprise used credit in their business operation and 0 otherwise. The use of credit in their business might have a positive or negative influence on the profitability of agricultural MSEs. Evidence from (Mamo, 2022) revealed that enterprises who accessed credit accumulated higher capital, high saving and created higher employment opportunities than enterprises who do not get credit access. Access to finance influenced positively and significantly influence MSMEs' performance (Abraham, 2018; Esubalew & Raghurama, 2020). The negative effect of credit use would be due to the high credit repayment burden in case of business failure. As a result, credit use might influence the profitability of agricultural MSEs either negatively or positively.
Financial Record-keeping
A dummy variable that takes a value of one if the enterprise keeps a financial record and zero otherwise. Recording the profits and losses help MSE to monitor the progress and to make adjustments to the operations of enterprises. The adoption of a formal record-keeping and financial control system improves MSEs' performance (Kaleleoul, 2016). Hence, this variable is expected to affect the profitability of agricultural MSEs positively.
Market access
This variable is measured as a dummy variable that takes one if enterprises have a secure product market, and zero otherwise. Availability of secure and sustainable market linkage is one of the decisive factors for the sustainability of MSEs, industry performance (Ebabu Engidaw, 2021) as well as the survival of micro-enterprises (Sohns & Diez, 2018). Therefore, this variable is hypothesized to influence the profitability of MSEs positively.
Access to inputs
A dummy variable that takes a value of one if MSEs have sufficient access to input (raw materials) and zero otherwise. The existence of raw materials nearby the enterprise premise can lower the cost and increase the profitability of the business. The findings of (Getnet, 2019) indicated that the availability of raw materials influences the development of small and microenterprises. Therefore, it is hypothesized to affect the profitability of agricultural SMEs positively.
Access to infrastructure
It is a dummy variable that takes a value 1 if the enterprises have basic infrastructure access and 0 otherwise. The availability of infrastructure (water, electricity, transport systems, telecommunication services etc.) influences the productivity and financial performance of agricultural MSEs which are mostly located outside of the main urban centre. The prospect of MSEs growth was high for those MSEs that have sufficient access to infrastructure (Haftom et al., 2014). Therefore, access to infrastructure is expected to influence the profitability of MSEs positively.
Working premises
It is a dummy variable that takes a value 1 if the enterprises have a convenient working premise and 0 otherwise. The working place is crucial for the successful and sustainable growth of enterprises because it is essential in creating access to resources and markets. Enterprises with secured and convenient land ownership as a working premise have a chance of increasing firm profit (Alene, 2020) and growing faster than their counterparts. As (Abraham, 2018), agricultural MSEs with sufficient premises in a proper location are more likely to have better financial performance than those who have no access to the premise. Hence, access to the working premise is expected to influence the profitability of agricultural MSEs positively.
Enterprise owners’ aspiration
It is a dummy variable that takes a value of 1 if more than half of the enterprises owners are ambitious to realize the growth and sustainability of their business and 0 otherwise. Owners’ aspirations are the key factors for the growth of enterprises as the primary motivation of youths to turn to entrepreneurship is the lack of other options to enter the labour market (Mühlböck et al., 2017). Evidence from (Mohammed, 2014) confirms that the motivation of operators positively affects the income and growth of MSEs. Therefore, owners’ aspiration is expected to positively determine the profitability of SMEs.
Frequency of extension contact
It is the number of times per year enterprises received technical guidance from extension agents during the survey year. The existence of frequent extension contacts improves the knowledge and information of enterprise operators’, which increases their business performance. Evidence showed that agricultural extension are playing a major role in the transfer of agricultural technologies, and the development of agricultural skills and knowledge (Altalb et al., 2015). Thus, the frequency of extension contact is hypothesized to influence the performance of MSEs positively.
Table 2
Description and hypothesis of explanatory variables
Variables | Definition of variables | Expected effect |
Age of the enterprise | Continuous (years) | +ve |
Number of employees | Continuous (number) | +ve |
Enterprise ownership structure | Dummy (1 if association or 0 otherwise.) | +/-ve |
Educational level of manger | Continuous (years) | +ve |
Number of training | Continuous (number) | +ve |
Credit use | Dummy (1 if credit user, 0 otherwise) | +/-ve |
Financial Record-keeping | Dummy (1 if enterprise keep financial records and 0 otherwise) | +ve |
Market access | Dummy (1 if enterprises have secured product market and 0 otherwise) | +ve |
Access to input | Dummy (1 if MSEs have sufficient access to inputs and 0 otherwise) | +ve |
Access to infrastructure | Dummy (1 if the enterprises have basic infrastructure access and 0 otherwise.) | +ve |
Working premise | Dummy (1 if the enterprises have a Sconvenient working premise and 0 otherwise). | +ve |
Owners’ aspiration | Dummy (1 if > 50% of owners’ aspire for growth and 0 otherwise). | +ve |
Frequency of extension contact | Continuous (number) | +ve |
Source: own summary |