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This section of the study focuses on the introduction and background to the present study. The study focuses on the field of Entrepreneurship, innovation and motivated by the lack of knowledge on nexuses between manufacturing small and medium enterprises (SMEs) performance in terms of job creation and innovation adoption rub by these enterprises in Addis Ababa. Entrepreneurship is creating better value for the customers by exploring existing opportunities and performing credible activities than their rivals (Mwangi, 2011).   Possibly, this implies that the primary goals of manufacturing SMEs in Addis Abba in particular, whose objectives are generalizable to Ethiopia and the world at large. Cognizant to these broad objective policy makers, political leaders, researchers and businesspersons, in both emerging and advanced economies, have worked toward the advancement of economies through the identification of the appropriate strategies to reduce poverty and boost employment opportunities (Bruton, Ketchen & Ireland, 2013; Chukwuemeka, 2011; Barakatt & Sereke-Brhan, 2010; Nafukho & Muyia, 2010).  From a broader perspective, it is essential to identify appropriate strategies that consider SMEs operators as the major economic actors and that their entrepreneurial performances are leading to economic progress, and organizational sustainability and competitiveness both domestically and globally. The focus on organizational performance in conjunction with economic performance is important as it can contribute towards increased productivity, job creation, technological advancement and innovation (Haltiwanger, 2012).  

SMEs have been long credited to contribute to employment, innovation, competitiveness and solving particular problems locally and globally (Inoica, 2011). Indeed, SMEs are considered to be the pillar of modern economies in both developed and developing countries through achieving social, economic and political objectives by creating wealth and alleviating poverty (Nkwe, 2012). Similarly, too many scholars pointed out that creating highly competitive, sustainable and vibrant SMEs are significantly important for the contemporary knowledge and innovation driven economy (Demirbas, 2011; Kuada, 2014; Sileshi, 2014).

Based on the economic status of a given country, entrepreneurs are broadly classified in to two. These include growth- oriented entrepreneurs that are dominantly available in high –income countries while necessity/ opportunities entrepreneurs are mostly found in low-income countries (Kuada, 2015). The availabilities of growth-oriented entrepreneurs in advanced economies are due the presence of social welfare and greater job opportunities for the citizen. Thus, there is leaser need to establish business for sake of survival. On the contrary, survival entrepreneurs are common in under-developed economies since there are high unemployed labor, poor social welfare and possible labor market disadvantages (Chen and Yang, 2009; Kuada, 2015). In line with idea, there are several studies confirmed that there is no significantly impacting SMEs in economic growth and development in African countries over the past 30 years (Moses, 2015; UNIDO & UNCTAD, 2011).  Because many African countries political leaders and policies maker assumed that instead of privately owned enterprises, state owned enterprises were chosen in African countries due to its rapidly change the economy, eradicate poverty, stimulate growth and development, and speed up the early industrialization of the countries (Bewayo, 2012).

Congruent to the liberalization of many African countries in 1980s, Ethiopia undertook major economic policy reform in 1991 to follows open market economy. Since then, some firms started to flourish and operate in the country. Especially, the Federal and regional micro and small enterprises development framework establishment in 2005 facilitates SMEs generation in the country. As a result, 34.6 per cent of the firms are five and fewer years old, 42.5 per cent are between six and ten years old, and the remaining 22.9 per cent are more than 10 years old (Mulu and Mohnen, 2011). Thus, most SMEs in Ethiopia are very young.

The contemporary rapid globalization of business ideas across the globe forced SMEs to engage in competitive markets both locally and internationally (Mutalemwa, 2015). However, to mitigate their inherent resource and size disadvantages and stay competitive in the business environments, SMEs use different competitive strategies and tools when compared to their larger counter parts. One of these strategies that has been used is to maximize their competitiveness is by enhancing their innovation capabilities (Allocca & Kessler, 2006; Ertiirk & Cakar, 2010). SMEs with an innovation orientation are not only be more competitive but also has the potential to change the market structure as well as the distribution and production patterns of economies at large (Matear, Darroch & Johnston, 2012). Through innovation, they can possess distinctive competitive characteristics like quality, safety, high levels of productivity, efficiency, quality, strong adaptability, modern management, low costs and be successful in all or selective markets with high customer satisfaction and better performance (Ionica, 2011).

  1.2. Background Information

The Oxford Handbook of Iinnovation explained the idea of innovation as the application of inventions that has significant impacts on an organization, industries and societies.  In order to equip them with distinct capability, SMEs have used different dimensions of innovation as the basis of their competitive strategies and tools. Based on the effect levels, innovation categories include.  (i) Incremental innovation, which involves the addition of a certain distinctive features on the existing products, processes or services without completely altering the existing features. (ii) Radical innovation, which involves a complete change of the existing product, service, process or organization through developing a new by taking a big step either to offer a solution to massive problems or needs to make it completely different. (iii) Revolutionary innovation is the highest level of innovation, which comprises breakthrough ideas. It is more of typically related to discovery (McKeown, 2008). These innovation types are interrelated to each other in such a way that incremental innovation stimulates radical innovation that in turn stimulates radical innovation that can then facilitate the appearance of revolutionary innovation (Andadari & Nugroho, 2014).

Moreover, from a broader perspective, innovation is not merely a new product, new process or new technological approaches but can be extended to consider the creation of new market opportunities and new ways of organizing business (Okpara, 2007, Szirmai, 2011).

Similarly, OECD (2005) and Baregheh and Sambrook (2011) distinguished four types of innovation, these include:

• Product innovation: this is the introduction of a good or service that is new or characteristically much improved products properly fit to the proposed benefits of the customers.

• Process innovation: this is the installation of better techniques as new methods or procedures in order to deliver significantly improved services.

• Marketing innovation: this is the identification new market schemes that involve new product designing, packing, storing, advertising and new pricing strategy to properly market the products.

• Organizational innovation: this is the implementation of a new organizational method in the firm's business practices, workplace organization or external relations (OECD, 2005).

Myriad of studies in both developed and transition economy shows that previous competitive mechanisms such as low cost and price, quality, services, and flexibility are not sufficient to guarantee sustainable competitive performance in all markets of the current intense global competitive landscape (Liu, 2013; UNIDO & UNCTAD, 2011).  Currently, There is a continuous change in the business  environment  due to revolution in the inter-connectivity, rapid globalization and liberalization, and  speedily advancement of technologies (Lau, Baark & Sharif 2013; Raymond, St-Pierre, Uwizeyemungu & Le Dinh, 2014) and customers'  strong demand  for new product development (Bruch et al., 2014; Schrettle, Hinz, Scherrer-Rathje, & Friedli,  2014).  The time has come for new way of doing business, networking, and reliability, establishing effective technology and developing capability on innovation especially on flexible manufacturing sectors (Hung & Lin, 2014; Lau et al., 2013; Liu, 2013; Raymond et al., 2014; Yam, Tang & Lau, 2011).  For sustainable competitiveness in the global business SMEs needs new markets for new products. This can be achieved through innovation since it is a key driver of business achievements. The business successes obtained as the result of innovation include improved goods and services, strong market demand, achieved market expectations, and increased shareholders' wealth. Nowadays, developing dynamic manufacturing sectors enables the country to undertake effective innovation and creativities. Therefore, this study particularly focuses on Ethiopian manufacturing sectors since manufacturing is the main engine of economic growth and wealth creator for a country. It creates sustainable economy, encourage investments, create jobs and build nation (Agrawi, Dewangan & Sharman, 2015).


Generally, innovation is a tool that helps entrepreneurs to capture and utilize opportunities for their businesses effectively and efficiently (Weber, 2011). Innovation is further distinguished on the basis of extent (i.e. incremental, radical or revolutionary) and the focus (i.e. product, process, marketing or organization) thereof.

1.3. Innovation Performance Measure

 Global Innovation Index (GII) is an assessment run every year for the last seven years to capture facts on innovation performance of different countries and analyse the trends how innovation has been undertaking globally. More importantly, it serves as tool for action for decision makers to improve innovation performances of a country (Cornell University, INSEAD & WIPO, 2014). According to 2014 Global innovation Index report, the innovation performance of Sub-Saharan African countries is low because of low creative outputs like intangible assets, creative goods and services and online creativity. Institutions such as political, business and regulatory are poorly function to support innovation. In term of human capital including general, tertiary education research and development as prerequisite of innovation is poorly functioning implying that science, and technology capability is weak in Sub-Saharan countries. The general infrastructure, Information communication technology and ecological infrastructure that support innovation is poor to support innovation in such countries.  Business sophistication such as knowledge workers, innovation linkages and Knowledge absorption is less to support innovation. Market sophistication that includes credit facility, investment and trade and competition is weak. Knowledge and technology outputs including knowledge creation, knowledge impact and knowledge diffusion is low. Similarly, current innovation performance of Ethiopia is even lower than Sub- Saharan countries due to insignificant gross expenditure on research and development, low loaning capacity to the private sector, fewer scientific publications, weak industry university linkage, little exports volume and poor information communication technology(infrastructure to support innovation) and weak capacity building in science and technology (Dutta, 2011).

In line with weak innovation performances in Sub-Saharan Africa in general and Ethiopia in particular, a little is known about innovativeness of small firms and its effect on the performance of these enterprises on this continent.  Previous few studies focused mostly on the identification of determinants of innovation performances and the characteristics of innovativeness in informal sectors (Oyelaran-Oyeyinka, 2006; Robson, Haugh & Obeng, 2008; Van Dijk, 2002). The lack of empirical evidence is even more apparent when it comes to the effect of innovation activity on firm growth. Mahemba and de Bruijn (2003) reported only a weak association (r = ?) between innovativeness in small firms and growth in Tanzanian manufacturing sector.  Moreover, there are very few empirical studies concerning innovation adoption model peculiar to Small and Medium Enterprises (SMEs) found in developing countries (Lee, Yoon & Park, 2010). Thus, we still know little about the nexus between innovativeness and SMES job creation in Africa in general and Ethiopia in particular (Acquah, Robson & Haugh, 2012; Nichter & Goldmark, 2009).

Therefore, this empirical study is intended to fill lack of knowledge on the nexus of innovation and SMEs performance in developing countries particularly the employment growth in small and medium manufacturing enterprises found in Addis Ababa city administration.

1.4. Statement of the Problem

The promotion of SMEs as economic and social development tool is getting due attention in both developed and under-developed economy. Congruent to this notion, governments, donors, and businesspersons are applying different types of growth theories to promote entrepreneurship, enhance SMEs' growth and competitiveness in both domestic and global markets (Collins & Troilo, 2015). Since early 1931, there have been three leading theories to explain SMEs' growth and competitiveness. These include:  firstly, the law of proportionate growth (Gibrat, 1931). This theory explained that growth rate of a firm is independent of its size- size does not affect the growth of firms. However, scholars criticized this theory because of its impracticalities to current firm growth phenomenon. Several research finding proved that the size of a firm affects its growth, i.e. smaller firms grow faster than the larger counterparts because of their easy flexibility and lesser bureaucratic structure (Daunfeldt & Elert, 2011). Secondly, Resource -based theory (Penrose, 1959) which explains SMEs with   unique, valuable and non-imitative resources and/or distinctive capabilities can grow and survive. According to this theory firms with better access to resource can grow and likely to be larger company. Thirdly, Theory of ‘noisy' selection Jovanovic's (1982), the notion of this theory was that firm with enough resource may not grow because there are firms which are inefficient to utilize their resource and unable to grow and survive. This theory criticized the resource based growth theory in such way that having ample resource alone cannot guarantee the performance of the firm but the ability of management to manage these resources is needed for adequate growth and competitiveness of any business (Dumbu, 2014).  Thus, this theory focus on efficiencies of small business and these efficiencies come from their manager's capabilities. Even though the two firms have enough resources the one that has superior efficiency can grow to larger company than inefficient one. This theory also assumed that managers' capabilities were in born not acquired through time. As above other theories criticized, this theory also criticized for managers' only in born capabilities since manager's capability is both inborn and acquired through time.  Finally, Storey (1994) developed a comprehensive framework from different factors associated with SMEs growth and competitiveness. These factors broadly classified to entrepreneur characteristics, firm strategy and firm resources. More recently, this framework further refined  by Hitt, Ireland, Sirmon and Trahms( 2011) to include tools, techniques and concepts emanated from entrepreneurship and strategic management. Framework consists of leaders' capabilities (knowledge, information, experience and qualification), investment in research and development (R&D), innovation, networks, internationalization, organizational learning, the performance of senior management teams and governance. From this firm's growth framework components, innovation adoption/generation is one of the critical contributors for sustainable competitive advantage for SMEs in the current local and global markets (Yanadori & Cui, 2013). Thus, the accumulations of existing knowledge and talent as innovation capabilities are the foundation for SMEs to undertake different kinds of innovation adoptions (Forsman, 2011; Martín-de Castro, Delgado-Verde, Navas-López & Cruz-González, 2013).  These innovation capabilities enable SMEs to offer a better product, service, and or to become acquainted with a new technology enabling them to adapt the dynamic market environments, perform well and become a sustainedable operator for a long time (Brem & Voigt, 2009). This in turn leads them to grow and graduate to the large-scale enterprises status offering a range of outcomes such as new job creation in the industries, poverty reduction, wealth creation, fair income distribution and reduction in income disparities, economic liberalization and strongly competing in the global markets (Ayanda & Laraba, 2011).  

However, SMEs as being an engine of economic growth, development and a critical catalyst of innovation adoption performance, they need to examine their innovation adoption performance to bring a long-term success in all market performances. Rosil and Sidek (2013) argued that the fiery competition in the global market leads SMEs to carryout evaluation on their competitive position against their rivals through innovation.

So far, there are a number of studies carried out by different researchers and practitioners on the factors affecting innovation in the developed countries. Government, policy makers, donors and business organizations utilize these research findings to formulate their policies and strategies (Radas & Bozic, 2009). However, due to the socioeconomic structure and economic policies of the developing countries, the relevance of existing studies is questionable in a developing economy context.  There is little significantly impacting research on less developed countries, which examines the antecedents of innovation to formulate atypical model that shows the relation in a developing countries setup (Murat Ar & Baki, 2011).

Similarly, there is hardly any empirical evidence on the nexus between innovation adoption and SMEs job creation in African countries. The existing few studies in Africa mainly examined the determinants of innovative activities and the attributes of innovations in a fragmented manners (Robson, Haugh & Obeng, 2008, Oyelaran-Oyeyinka, 2006 and Van Dijk, 2002). The lack of empirical evidence is even more apparent when it comes to the effect of innovation activities on the SMEs performance. Thus, the level of innovation and SMEs' performance relation has not yet been empirically confirmed in Africa.  Furthermore, Rosli and Sidek (2013) confirmed that there has been a little attention paid to examine the impact of the different types of innovation adoption on the SMEs job creation in the developing countries situation. Little availability of study on nexus between SMEs' innovation adoption performances and job creation mainly due to most African countries undertook private/individual entrepreneurship lately. For example in 1980s there was dominantly state capitalism--state-owned enterprises (Jolly, 2009; Ziaul Hoq and Che Ha, 2009). Thus, most African countries SMEs are young inexperienced in both domestic and international markets.

Ethiopia, one of the sub-Saharan African countries has a relatively short history in SME development that goes back to 1991 when the transformation from the planned to a market economy started. Because of this, there were too few privately owned businesses in the country for a long time. The existing few SMEs are at the infancy stage and very young. Innovations of all types have not sufficiently practiced for a long time. However, due to changes in the economic policy and strategy, which enhance privatization and globalization, Ethiopia currently has given due attention to micro, small and medium enterprise establishment and development for the last two decades. Current open market economy allows large companies to come to Ethiopia to invest tremendously in special areas that need high capital and skilled work force, which is not covered by local business. Although, nowadays Ethiopia is undertaking open economic system and encouraging the establishment of small and medium enterprises, there is no significantly impacted study on the factor of innovation and its impacts on the business performance in the Ethiopian context (Hailemichael & Raju, 2015). Mulu (2009) studied the determinant of innovation only on informal enterprises (micro-enterprises). Similarly, Sileshi (2014) studied the barriers of innovation focusing on only the technological innovation in small and medium enterprises in Addis Ababa.

To conclude, there is a lack of comprehensive understanding on the antecedents of innovation adoption as result there is no innovation adoption framework that shows the relation between antecedents of innovation and innovation adoption in developing countries context. Though Ethiopia is showing a fast growing economy in the world, it is one of the ideal countries where the contribution of innovation for the growth of SMEs has not yet been explored. Furthermore, the typologies of interaction and the level of connection between innovation and SMEs have not yet been examined in Ethiopia. Therefore, the study is intended to contribute in resolving such scientific and policy gaps by examining the antecedents of innovation to draw innovation adoption framework and the link between innovation and business performance particularly on the employment growth in Addis Ababa city administration.

 1.5. Objectives

    1.5.1. General Objective

The main objective of the study is to investigate the antecedents of innovation in SMEs. The antecedents will be used to develop and test a conceptual framework that will be an enabling tool to measure innovation adoption in SMEs that operate in Addis Ababa. Furthermore, the interplay between innovation adoption and SME relative competitive performance will be examined.

   1.5.2.   Specific Objectives

More specifically, the study aims:

• To investigate the antecedents of innovation adoption in small and medium enterprises,

• To develop and test innovation adoption framework for small and medium enterprises (SMEs),

• To measure the relationship between innovation adoption and relative competitive performance of SMEs in terms of job creation.

  1.7. Rationale of the Study

Small and medium enterprises are one of the key driving forces of economic change in terms of employment, productivity and market structure change (Oke, Burke & Mayers, 2007). Ninety per cent of the total business in both developed and underdeveloped economies in the world is accounted for SMEs (Ogbo, 2012). Specifically, in industrialized world, most of the business constitute of SMEs (Oke et al, 2007). They have been contributed to the economy through creating wealth, alleviation of poverty and generation of potential entrepreneurs. However, the survival rate, the promotion to a large company and even their horizontal growth are dependent on their ability to carry out innovation adoption to adapt the dynamic market conditions. Innovation performances enhance the SMEs' competitiveness through upgrading product quality, improving the design and packing, integration in the global market, and maintaining the need and expectation of customers (Hana, 2013).

The rational for this research is, therefore, to formulate innovation adoption framework on the antecedents of innovation performance, and investigate the link between innovation and SMEs' performance in terms of employment. As mentioned above, SMEs is infant and young since Ethiopia had a closed market system for a long time before 1991. Young Ethiopian SMEs do not have sufficient and strong experience in innovation and have been unable to compete in the global market significantly. Therefore, this research will investigate the antecedents of innovation to draw innovation adoption framework in a comprehensive manner in the context of developing countries' innovation beliefs, norms, values and behaviour of entrepreneurs. Moreover, the research intended to examine the nexus between small and medium enterprise growth in terms of job creation and innovation performance.

 1.8. Significance of the Study

From the theoretical and empirical perspective, this study will have two major contributions to the horizon of academic knowledge. Primarily, unlike the perevious studies which focused on the identification of innovation antecedents on developed economiesy, this study focuses on identifying the antecedents of innovation in more holistic manner in the context of developing countries to develop innovation adoption framework showing the relationship between innovation antecedents and innovation. Secondly, this study is the first to show the impact or effects of innovation on SMEs' performance in terms of employment in the context of developing countries' beliefs, values, and norms and market behaviours, especially, in Ethiopia.  It examines the impact or effect of different types of innovations on employment growth by SMEs in Ethiopia. That means the existing findings in the literature that focused on developed economy will be extended in the context of developing countries.

From practical perspective, the findings of this study could be useful for policy makers, businesspersons and donors to identify the antecedents of innovation and the effects of innovation in job creation by small and medium enterprises in developing countries. This is particularly important in Ethiopia, where the country formulates and develops innovation policies aimed at enhancing sustainability and competitiveness of SMEs. Its major concern is to promote economic growth and sustainable development based on promoting the country from an unskilled labour-driven economy towards an innovation, knowledge and information driven economy.

Generally, from this study, new innovation adoption framework will be formulated on the relationship between antecedents of innovation and innovation adoption. New knowledge will be generated on nexus between innovation and firm growth in terms of job creation in the developing countries setup. These two new contributions will be properly identified, tested and documented. Moreover, the knowledge that will be gained from the study will be synthesized to provide answers to the key questions in relation to the antecedents of innovation and the effect of innovation on the firm growth in the developing countries.

  1.9.   Delimitation of the Study

As the name indicates, the delimitation of the study refers to the scope of research on which the study will focus on for different reasons. In line with this idea, the proposed study  is delimited to the context, constructs and theoretical perspective of employed by the study.  Firstly, it will be limited to the context of small and medium enterprises operating in Addis Ababa city administration. It will focus on Addis Ababa because there are ample SMEs operating on manufacturing in the city. Thus, there will not be any problem on data availability and gathering. Moreover, the government support to SMEs especially operating manufacturing manifold since the government assumes that by cultivating SMEs enable to generate large- scale companies.  More importantly, there is high unemployed labour force in Addis. The study will not be considering micro enterprises and large companies found in and outside Addis Ababa city Administration since some of the micro enterprises are not often registered. Therefore, it is difficult to target the population and to take the representative sample. SMEs outside Addis Ababa are,therefore, not included.  similarly, the study will examine only the antecedents and the effects of innovation on SMEs performance in term of employments. Any other aspects SMEs' performance measure, like profitability, market share, return on investment, and annual turnover as performance of SMEs will not be investigated in this study since it is difficult to get comprehensive financial records.

Moreover, the study will assess antecedents of innovation in terms of beliefs, norms, behaviours, socio-economic status and political objectives of the country to determine the difference clearly from developed nation.

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